Tax benefits for the Orange Economy

Bill number 203 of 2018 "whereby tax incentives are created for companies specialized in the development of information technologies, those dedicated to creative industries and other provisions are enacted" is currently pending in the House of Representatives.

This project opens the doors for Colombia to finally become a pole of industrial development in terms of creative industries and information technology. Although Law 1834 of 2017 (Orange Law) was issued in order to develop, promote, encourage, incentivize and protect creative industries and created the National Council of the Orange Economy (Cnen), it did not establish any tax incentive for the development of these activities.

This is why the bill has as a fundamental pillar the establishment of two exempted incomes, applicable only to micro and small companies (those whose total assets do not exceed 5,000 Smlmv and that in the previous year have received total gross income, from the activity, less than or equal to 5,000 Smlmv), which will have a term of duration of 20 years, and will have other associated tax benefits.

The first exempt income is that generated by micro and small companies specialized in information technologies (software development, mobile applications and/or hardware), which start their economic activity (understood, for the purposes of this Law, as being registered in the commercial registry of the Chamber of Commerce) within 10 years 2/2 following the effective date of this Law.

The activities that will allow the generation of this exempt income are the design, development, production, sale, commercialization or licensing of new information technologies developed in Colombia, as well as the exploitation of physical or intangible computer resources developed in the country from the provision from the national territory of big data, hosting and cloud computing services.

In order for this exempt income to be applicable, the new technology developed or exploited must be covered by a new patent registered before the competent authority and must have a minimum content of scientific and/or technological research certified by the National Council of Tax Benefits in Science, Technology and Innovation.

The second exempted income, also established for 20 years, is applicable to micro and small companies that start their activity within 10 years from the effective date of the Law and whose exclusive corporate purpose is the creative industries (creation, production and commercialization of goods and services based on intangible contents of cultural nature, and/or those that generate protection within the framework of copyrights, made in Colombia).

In order for this exemption to apply, the content must be registered before the competent authority and must have a minimum content of national production certified by the Cnen. The associated tax benefits will be that: (i) the exempt income will not generate taxable income for the shareholders of the companies and therefore may be transferred to them without taxation; and (ii) they will be subject to the presumptive income system as from the taxable year in which their income is no longer considered exempt and will not be subject to withholding at source, which will have a positive effect on their cash flow.