1. Increase in Dividend Taxation and Excessive Aggregate Burden on Income Tax
One of the most concerning elements of the tax reform is the increase in dividend taxation, which impacts both domestic and foreign investors. Despite the Government’s repeated statements about the need to reduce the corporate income tax rate, the reform keeps it at 35%, increases the withholding tax on dividends, adds surtaxes and sector-specific rates, and introduces additional levies. The result is that the consolidated company, shareholder tax burden rises to levels where the marginal curve turns downward, meaning that instead of generating more revenue, collections could fall.
For Colombian resident individuals, the tax rate on dividends would rise to as much as 41%, depending on income brackets, while for foreign investors the withholding on dividends would stand at 30%. In practice, after paying 35% at the corporate level, shareholders could face an effective combined tax rate of around 54.5% on distributed profits. In certain sectors, such as financial services and natural resource extraction, where surtaxes apply, the consolidated burden could reach 65%.
On top of this, the reform adds a new 1% tax on gross revenues from hydrocarbons, pushing the effective burden in that sector above 70%. This not only discourages foreign investment but also directly affects the valuation of Ecopetrol, the country’s most important state-owned company.
From a comparative perspective, the scheme is clearly unfavorable. In most Latin American countries, the combined corporate and dividend tax rate rarely exceeds 45%. For instance, Mexico’s combined rate is 37% (30% + 10%), Chile’s is 44.4% (27% + 23.9%), and Costa Rica’s is 40.5% (30% + 15%).
In the broader international context, and within the OECD in particular, Colombia would move into the group of countries with the highest consolidated income tax burden worldwide. This inevitably undermines foreign investment, economic recovery, and job creation, and paradoxically reduces overall tax revenue, since the system’s taxable capacity weakens.
The decline in foreign direct investment is particularly relevant. Global investors benchmark jurisdictions before committing capital, and Colombia’s higher tax burden compared to regional peers represents a clear disincentive. These dynamic risks diverting investment toward more competitive economies, with the loss of opportunities for growth and employment.
At RSL, we believe it is essential to rethink tax policy with competitiveness in mind. A reasonable goal would be to keep the combined corporate and dividend tax rate at no more than 35%, in line with international standards. This approach would not only align Colombia with global best practices but also strengthen its ability to attract productive capital.
2. Wealth Tax with Confiscatory Impact
The bill expands the taxable event of the wealth tax to include net worth held as of January 1 of each year, starting from a threshold of 40,000 UVT (for 2025: COP 1,991,960,000), with a progressive schedule ranging from 0.5% to 5% annually, including intermediate brackets (1%, 2%, 3%, and a maximum of 5%). The legislative framework confirms that the tax base is net worth (assets minus liabilities). In practice, this is a recurring levy imposed directly on wealth accumulated over the years,built from profits that have already been taxed—without regard to the taxpayer’s income flows or real capacity to pay. At higher brackets, the tax can equal or even exceed the nominal return of an average portfolio.
At these levels, the economic outcome is that, in the best scenario, taxpayers must sell assets or take on debt to pay the tax. The consequence is the erosion of the future tax base due to the reduction of capital or the flight of capital and human talent to other jurisdictions. As designed, the levy resembles a property tax with a confiscatory impact, violating the principles of fairness and equity in taxation.
The examples make this clear. A conservative portfolio generating a nominal return of 4%, when taxed at 3% under the wealth tax, drops to a 1% return before income tax. If annual inflation of 6% is considered, the real return is -5%. In scenarios where dividend taxes or additional levies are also applied, net returns fall even further into negative territory. At the 5% bracket, even diversified portfolios in equities, bonds, and real estate—normally yielding between 5% and 7% are left with real returns close to zero or negative. In such cases, the tax not only consumes income but directly erodes capital, a defining feature of confiscatory taxation.
In conclusion, as currently designed, the proposed wealth tax becomes confiscatory at higher brackets, contrary to constitutional principles of justice, equity, and progressivity, and incompatible with a tax policy aimed at fostering investment, competitiveness, and economic growth. Its elimination and replacement with less distortive measures focused on broadening the base, eliminating inefficient exemptions, and reducing aggregate rates would be more consistent with the technical recommendations of the 2021 Expert Commission on Tax Benefits. Such an approach would better serve both fiscal sustainability and the national economic interest, rather than deepening a levy that depletes taxpayers and the country alike.
3. Restriction on the Preferential Capital Gains Tax Rate
The bill redefines capital gains taxation on the sale of fixed assets only gains on assets held for four (4) years or more would retain the preferential rate. Consequently, if an asset has been held for less than four years, the gain would no longer qualify as capital gains and instead be treated as ordinary taxable income (subject to general rates that can reach up to 41%).
From a tax and economic perspective, this measure is counterproductive. First, it disregards the issue of economic double taxation, since fixed assets are acquired with income that has already been taxed; taxing their sale as ordinary income (if held for fewer than four years) intensifies this double taxation.
Second, the rule creates a “lock-in effect,” as the higher tax burden on sales before four years discourages the efficient turnover of assets. Companies are incentivized to retain suboptimal assets to avoid being penalized with the general rate, reducing productivity and delaying capital reallocation. It also discourages formal transactions, increases informality, and promotes avoidance or evasion strategies such as deferred-sale agreements, informal transfers, and underreporting of prices. Experience shows that such dynamics reduce tax revenue—as demonstrated when the capital gains rate was reduced from 35% to 10%, which increased collections instead of lowering them. Sectors with short investment cycles (technology, agriculture with equipment renewal, transportation) are especially affected, since the four-year requirement raises the cost of modernization by treating early asset disposals as ordinary income.
The public policy implications are also negative. In terms of neutrality, taxation should be indifferent to when it is convenient to rotate an asset, except for a reasonable minimum holding period of one or two years to confirm its status as a fixed asset. Imposing a four-year requirement to qualify for the capital gains rate only increases transactional friction and openly reinforces an anti-investment policy. Instead of encouraging liquidity and formalization, the rule undermines them.
In conclusion, the four-year holding requirement to access the preferential capital gains rate constitutes a regressive measure in terms of efficiency, as it blocks capital mobility, fuels informality, and contradicts the objectives of investment and productivity. The provision on “movable assets” adds a serious legislative drafting flaw that threatens to exclude part of the productive sector. The responsible course is to simplify and correct adopt gradual relief based on holding period, allow deferral when reinvested in productive assets, apply inflation indexation, and provide a clear definition of fixed assets. Only by doing so can formalization be promoted, incentives aligned, and the investment climate strengthened in line with the needs of the Colombian economy.
4. Withholding Tax System: Pressure on Cash Flow and Liquidity
The reform introduces significant changes to the withholding tax system, particularly affecting individuals. Article 383 of the Tax Code is amended to establish a withholding table with a marginal rate of up to 41%, applicable to both employment income and pensions (subject to the exemption cap provided in Article 206 of the Code), as well as to income from independent services when the taxpayer does not opt to deduct costs and expenses.
For the latter, the bill introduces a mechanism of “monthly payments,” shifting the calculation of withholding to the monthly value of the contract rather than actual payments, thereby increasing pressure on cash flow. In addition, Article 385 is amended to require that payments for periods shorter than 30 days be annualized, which artificially inflates the withholding base. Although the law includes a transition regime and allows taxpayers to voluntarily apply the new table before its effective date, this does not address the underlying problem. It simply accelerates the burden for taxpayers—in other words, the State finances itself through them.
The operational result of this framework is a combination of higher marginal rates, annualization rules, and monthly payments that expand the base ex ante and concentrate withholding, thereby weakening the liquidity of both individuals and companies. Even the automatic refund mechanism for excess balances—limited to taxpayers who derive more than 80% of their income from labor—proves insufficient and untimely, as it sets a ninety-day deadline that is of little practical use for addressing immediate liquidity needs.
The economic effects are equally concerning. First, the system functions as a forced loan to the Treasury, raising working capital requirements, increasing the cost of bank financing, and reducing reinvestment capacity. Second, the withholding mechanism disregards true progressivity, since the monthly table does not reflect the annual tax base adjusted for deductions, dependents, or costs, leading to systematic over-withholding that is only corrected when filing the annual return. Third, the complexity of rules such as annualization for periods under 30 days and monthly payments increases litigation, errors, and administrative costs. Finally, at the macroeconomic level, higher withholding reduces household disposable income, depresses consumption, and limits business investment capacity, thereby amplifying the economic slowdown.
By contrast, technical analysts recommend the opposite approach: reforming the withholding system to improve business liquidity and household consumption, encourage reinvestment, and reduce litigation. The emphasis should be on calibrating withholding to the expected tax liability rather than on systematic over-withholding, as well as enabling timely tax offsets and streamlining refund processes. Raising withholding rates, annualizing the base, and concentrating the burden only deepen illiquidity and raise the cost of capital, ultimately discouraging both investment and employment.
5. Critical Conclusion: An Anti-Investment Reform
As currently designed, the reform is plainly anti-investment. A comprehensive assessment shows how the combination of fiscal measures raises the cost of capital, erodes economic agents’ confidence, and slows the efficient reallocation of resources. On one front, the consolidated burden on distributed profits becomes excessive: the 35% corporate income tax is compounded by higher dividend taxation (up to 41% for individuals and 30% for non-residents), along with additional sector-specific surtaxes that are clearly detrimental.
On another front, the wealth tax—ranging from 0.5% to 5% on net worth from 40,000 UVT—operates as an annual levy on the stock of wealth which, at the upper brackets, can equal or exceed the nominal returns of prudent portfolios, inducing decapitalization and capital flight. Added to this are rules that restrict asset mobility by penalizing disposals within four years, and a more aggressive withholding system that concentrates collections and aggravates illiquidity. The combined message is contractionary: pressure is applied both to flows and stocks—on profit distributions and on capital turnover—thereby raising the cost of investment and deepening the economic slowdown.
From a market-signaling perspective, the implications are equally negative. Simultaneous, highly onerous changes across multiple fronts convey regulatory unpredictability, which increases the country risk premium and the discount rate required by investors. The higher cost of asset rotation and the liquidity squeeze caused by withholding delay technological modernization and productive restructuring, undermining trend productivity. Moreover, harsher taxation of dividends and strategic sectors weakens the capital market, reduces demand for local equities, and depresses the valuations of systemically important companies, including Ecopetrol.
Legally, the risk is evident. A wealth tax of up to 5% on net worth presents serious constitutional defects for disregarding the principles of ability to pay, proportionality, and the prohibition on confiscatory taxation. A wave of mass litigation and constitutional challenges is foreseeable, heightening legal uncertainty and putting expected revenues at risk. Far from reinforcing fiscal stability, the rule opens a new front of tax conflict that further discourages investment.
The alternative roadmap should aim for a pro-investment and fiscally viable design. This entails reducing the combined corporate-plus-dividend tax burden to a maximum of 35%; eliminating the wealth tax for individuals or, if it is to remain, introducing anti-confiscation caps, higher thresholds, and exclusions for productive assets and retirement savings. Instead of penalizing asset rotation with a four-year threshold, a tapered relief by holding period (taper relief) or deferral conditioned on reinvestment in real fixed assets should apply. The withholding system should be redesigned to track the actual tax due, with real-time multi-tax offsets and expedited refunds. Finally, financing should come from broader, less distortive bases—such as rationalizing VAT exclusions, pruning inefficient tax benefits, and reviewing ICA and GMF, together with clear transition rules that strengthen legal certainty.
In conclusion, the reform fails to meet the goals of economic reactivation and investment attraction. On the contrary, it drains cash flow, penalizes profitability, and hinders capital mobility. Colombia needs precisely the opposite: liquidity, neutrality, stability, and competitiveness.
By:
Jose Andrés Romero
jose.romero@romerosl.com