The new Zese tax regime

Law 1955 of 2019 (National Development Plan Law), in its Article 268, created a special tax regime for the departments of La Guajira, Norte de Santander and Arauca (Special Economic and Social Zones -Zese-), in order to attract national and foreign investment and "contribute to the improvement of the living conditions of its population and the generation of employment". According to this regulation, the effects of this regime are extended to capital cities whose unemployment rates during the last five years have been higher than 14%.

The benefits of this regime for the commercial companies that join it are substantial; their income tax rate will be 0% during the five years counted as from the incorporation of the company (for new companies) or counted as from the date the existing company joins it, and 50% of the income tax rate for the following five years. In total, there would be ten years of tax benefit that could begin to be counted as from the year 2020 given that, since these are period tax rules, their application would be from the tax period following the one in which they are enacted. Likewise, the company benefiting from the regime will see an increase in its cash flow because the withholding tax withheld at source will be proportional to the income tax rate.

In order to be eligible for the Zese regime, companies must demonstrate a 15% increase in direct employment generated (i.e., employees hired under labor contracts related to the main economic activity), based on the average number of employees hired during the last two years, and such increase must be maintained during the period of validity of the benefit.

Likewise, certain documents and certifications must be sent each year to prove compliance with the legal requirements to access the benefit and it will only apply to companies engaged in industrial, agricultural or commercial activities, thus excluding other activities (including the provision of services) from the tax benefit.

Decree 2112 of November 24, 2019 regulated the aforementioned Article 268, clarifying and regulating several important matters, namely: (i) establishing that this regime would also be applicable to the cities of Armenia and Quibdó, due to their historical average unemployment rate; (ii) establishing that the tax benefit would be applicable for those taxpayers that develop their main economic activities in the territory of the Zese when most of their income comes from these, regardless of whether those also perform secondary activities outside the Zese; iii) defining what exactly is understood by industrial, agricultural and commercial activities; iv) determining the specific conditions necessary for new and pre-existing companies to benefit from the Zese tax regime; v) determining the information to be provided annually in order to keep the tax benefit; and vi) clearly establishing the events in which the tax benefit would not be applied or would be lost.