I. Free Trade Zones in Colombia

In our previous column we referred to the vehicles of indirect access to foreign markets, delving into the Trading Companies, particularly the International Trading Companies in Colombia.     

In this opportunity, we will approach the analysis of Free Trade Zones in Colombia, as direct access vehicles, with special mention of their tax treatment, considering that recently Decree 278 of 2021 was issued, through which the National Government aims to promote electronic commerce with the creation of Free Trade Zones 4.0.

Under this thread, the first thing to note is that under Article 1 of Law 1004 of 2005, Free Trade Zones in Colombia are defined as the geographical area delimited within the national territory, where industrial activities of goods and services, or commercial activities are developed, under a special tax, customs and foreign trade regulations.

Free Trade Zones may be general permanent, in which several companies operate under the Free Trade Regime, or special permanent, in which a particular company requests the declaration to operate as a Free Trade Zone.

The companies of the different economic lines can operate as Free Trade Zones, and the term of the declaration of existence will be up to 30 years, which can be extended for an equal term.

Users in Free Trade Zones are classified as Operator User, which is the administrator of the industrial park, and in a related manner exercises control over the entry and exit of goods in the special geographic area, Industrial User of Goods, Industrial Users of Services and Commercial Users. 

In the Free Trade Zones the extraterritoriality principle is applied, by virtue of which, the goods that enter from the rest of the world are understood to be located outside the national territory, so that the generating fact of an import is not configured, and therefore the substantial obligation to liquidate and pay customs duties (Tariff and VAT) does not arise.

Likewise, the Free Trade Zones are subject to the exclusivity principle, consisting in the fact that the activities of the qualified users must be developed from within the special geographical area, except for those expressly authorized by law, among which today are the service activities.

II. Tax Treatment of Free Trade Zones

In tax matters, Colombian legislation establishes a specific treatment for income tax and sales tax - VAT.

a. Income Tax

Article 240-1 of the Colombian Tax Statute establishes an income tax rate of 20% for the Operating User and Industrial Users.

Commercial Users must pay the general income tax rate, basically because they are not subject to the exclusivity principle.

For those Free Trade Zone Users who have signed a legal stability contract, under the repealed Law 963 of 2005, in which the income rate has been stabilized, the rate in force at the time of signing the contract shall be applied for the term of the contract.

b. VAT on exports

Article 481 of the Tax Statute provides those tangible goods exported, as well as raw materials, parts, inputs and finished goods sold from the national customs territory to Industrial Users of goods or services of Free Trade Zone, or among them, shall be treated as exempt from VAT, if they are necessary for the development of the corporate purpose of such users.

Thus, if the goods are not necessary for the development of the corporate purpose of the Qualified User, the general VAT treatment must be applied, i.e., the sale must be treated as taxed, unless the product has an exempt or excluded treatment.

Note that the exempt treatment applies to goods, and therefore does not cover services; however, this must be differentiated from the VAT treatment for the export of services, which, if the legal requirements are met, nothing prevents the exempt treatment to be applied to the operations.

In this regard, it should be noted that at the international level the General Agreement on Trade in Services or GATS, contemplates the ways for the development of exports of services, which stands as an international instrument of the member countries, including Colombia.

c. VAT on imports

In the case of imports, as mentioned above, the entry of goods from the rest of the world into Free Trade Zones is not considered an import, and therefore does not give rise to the liquidation and payment of customs duties (Tariff and VAT).

However, if the goods enter from the Free Trade Zone to the rest of the national customs territory - NCT, the generating fact of the import is configured, with the consequent obligation to present the import declaration in which the corresponding customs taxes must be liquidated and paid.

In accordance with the provisions of article 459 of the Tax Statute, if the goods are manufactured with national components definitively exported or definitively introduced, or with imported raw material, the taxable base in the import from the Free Trade Zone to the rest of the TAN must include the value of all production costs and expenses, discounting the value of the raw materials and services on which VAT has already been paid.

Now, when the importer is the buyer or customer in the NCT, the taxable base of the import declaration will be the value of the invoice plus duties.

When the goods produced are exempt or excluded from VAT, the exit from the Free Trade Zone to the national customs territory will be perfected with the Goods Movement Form and the Integration Certificate.

Regarding services rendered from abroad, it is appropriate to mention that Colombia, based on the recommendations of the OECD, included them within its VAT generating events, enshrined in Article 420 of the Tax Statute, so that to date the principle of taxation at destination is applied, as occurs in the case of imports of goods.

III. Conclusions

E-commerce, given the important advances that have arisen with the fourth industrial revolution, today occupies a leading role in the development of world trade in goods and services.

Colombia, through the recently issued Decree 278, connects the Free Trade Zone Regime with electronic commerce, allowing Industrial Users to submit to the regime of postal traffic and express shipments the goods entered or produced in Free Trade Zone.

It also stimulates service export activities based on new technologies.

Undoubtedly, this normative advance places Colombia as one of the reference countries in terms of Free Trade Zone legislation, since it is in line with international standards, thus achieving that national and foreign investor find in the country an environment of legal certainty, accompanied by very favorable tax and foreign trade conditions for the development of industrial projects of goods and services.

Best regards.

Erwin