Colombia- Withholding tax
Based on the tax regulations effective in January 2026, the "shortfall" you are seeing is almost certainly due to Colombian Withholding Taxes that the local affiliate is legally required to deduct before sending payment to the US.
Because there is no enforced Double Tax Treaty between the US and Colombia, the Colombian entity cannot pay the full invoice amount without deducting these taxes.
Here is the breakdown of why the payment is short and what you can do about it.
1. The Main Cause: Income Tax Withholding (Retención en la Fuente)
Colombia imposes a high withholding tax on payments sent abroad for services, specifically "technical services, technical assistance, and consulting."
The Rate: The standard rate is 20%.
2 Note: If the "administrative fee" is classified purely as management fees without a "technical" component, the rate could theoretically be higher (33%), but 20% is the most common rate applied to intercompany service charges.
The Mechanism: If you invoice $10,000, the Colombian entity must deduct $2,000 (20%) and pay it directly to the Colombian tax authority (DIAN). They remit the remaining $8,000 to the US entity.
Why it happens: Without a tax treaty to reduce this rate (like the US has with Canada or the UK), the full Colombian domestic rate applies.
2. Secondary Cause: Local Municipal Tax (ReteICA)
In addition to the national income tax, Colombian municipalities (like Bogotá, Medellín, or Cali) impose an Industry and Commerce Tax (ICA).
The Rate: This varies by city and activity but typically ranges between 0.414% and 1.104%.
The Impact: The Colombian entity may also be deducting this small percentage from the payment.
3. Other Potential Deductions
GMF (Financial Transaction Tax): Colombia has a 0.4% tax on financial transactions (4 x 1,000), usually borne by the payer, but sometimes it creates confusion in net calculations.
Bank/Wire Fees: Intermediary banks often deduct $15–$30 per transfer unless the instructions specify "OUR" (sender pays all fees) vs. "SHA" (shared) or "BEN" (beneficiary pays).
What You Should Do (Action Plan)
Since the money has likely been paid to the Colombian government on your behalf, it is not "lost," but you need documentation to recover the value.
Step 1: Request a Tax Certificate ("Certificado de Retención")
Ask your Colombian finance team for a Certificado de Retención en la Fuente.
This document proves that the "missing" money was paid as tax to DIAN.
Why you need it: You will need this evidence for the US entity's tax audit files.
Step 2: Claim a Foreign Tax Credit (FTC)
The US entity can generally claim the amount withheld as a Foreign Tax Credit on its US corporate income tax return (Form 1118).
Instead of treating the shortfall as a "bad debt" or "expense," you use it to reduce your US federal tax bill dollar-for-dollar.
Result: You effectively get the money back by paying less tax to the IRS.
This is the "worst-case scenario" in international tax, and your intuition is correct.
Because the income is US-sourced (since the work was performed in the US) but taxed in Colombia, you fall into a legislative gap.
While the tax paid to Colombia is technically "creditable" (it meets the definition of an income tax), you likely cannot use the credit to reduce your US tax bill in the current year because of the Foreign Tax Credit (FTC) Limitation.
Here is why this happens and what your options are.
The Problem: The "Sourcing" Mismatch
To claim a Foreign Tax Credit in the US, you must pass a mathematical test called the Section 904 Limitation:
Your Situation: Since you performed the services in the US, US tax law (IRC Section 861) classifies this revenue as US Source Income.
The Math: Your numerator (Foreign Source Income) for this specific invoice is $0.
The Result: Total US Tax $\times$ 0 = $0 Credit Allowed.
In normal circumstances, a Tax Treaty would fix this by saying, "If Colombia is allowed to tax this, the US will pretend the income is foreign-sourced so you can get the credit." Because there is no US-Colombia income tax treaty, there is no re-sourcing rule to save you.
Your Options (How to mitigate the damage)
Since you cannot claim the credit directly against this income, you have two main strategies:
Option A: "Cross-Crediting" (The Best Case)
Do you have other foreign-sourced income in the same "basket"?
The IRS divides income into baskets (mostly "General Category" for business profits).
2 If you have other income that is genuinely foreign-sourced (e.g., sales to Europe, royalties from Asia, or branch income) that was taxed at a low rate, you can "mix" them.
How it works: You use the "excess limitation" from your other foreign deals to absorb the Colombian tax credits.
If your company does business globally, check with your tax director about your "General Category Foreign Source Income" position.
Option B: The Deduction (The Fallback)
If you cannot use the credit (Option A) and you don't expect to have other foreign income in the future:
You can choose to deduct the Colombian taxes as a business expense (under IRC Section 164) rather than claiming a credit.
3 The Math:
Credit: Reduces tax dollar-for-dollar ($100 tax = $100 savings).
4 Deduction: Reduces taxable income ($100 tax
5 $\times$ 21% US Corp Rate = $21 savings).6
Verdict: You lose 79% of the value, but getting $0.21 on the dollar is better than $0.
Option C: Carry It Forward
If you can't use the credit now (Option A) but think you might have foreign income later:
You can file Form 1118 (Corporations) or 1116 (Individuals) to claim the credit and generate an "Excess Foreign Tax Credit."
7 You can carry this unused credit back 1 year or forward 10 years.
8 Strategy: If you land a contract next year where the work is actually performed abroad (generating Foreign Source Income), you can use these "banked" Colombian credits then.
Summary Recommendation
Stop the bleeding: Implement the "Reimbursement" separation for computers/travel immediately for all future invoices.
Check your baskets: Ask your tax team if you have "Excess Limitation" in the General Category basket from other countries.
If you are purely a US exporter: You likely have to take the Deduction (Option B) or bank the credit for 10 years hoping for future foreign income (Option C).
Step 3: Review the Intercompany Agreement
Check the contract between the US and Colombian entities regarding "Gross-Up" clauses.
Net of Tax: If the agreement says payments must be "net of all taxes," the Colombian entity must technically "gross up" the invoice (pay the tax on top of the invoice amount) so the US receives the full $10,000.
Warning: This is expensive for the Colombian entity because the tax base balloons (tax on tax), and the extra tax cost is often non-deductible in Colombia. Most multinationals prefer not to gross up and instead use the Foreign Tax Credit mechanism described in Step 2.
You are logically correct under general international tax principles (where income is sourced where the work is performed), but Colombian tax law has a specific "override" rule that traps these payments.
In Colombia, the physical location of the person doing the work does not matter for these specific types of services.
The "Deemed Source" Rule (The Trap)
Under the Colombian Tax Statute (specifically Article 24 and Article 408), the following services are deemed to be Colombian-sourced income if the beneficiary of the service is in Colombia, even if the work is performed entirely in the US:
Technical Services
Technical Assistance
Consulting
Because your invoice is for an "Administrative Fee," the Colombian tax authority (DIAN) almost certainly classifies this as Consulting or Management Fees.
The Consequence: The moment the Colombian entity receives the benefit of that work, it is legally treated as if the work was done in Bogotá. Therefore, the 20% withholding tax applies (or 33% if classified strictly as "Management Fees" without a technical component).
What about the Reimbursements (Computers, Business Trips)?
You mentioned the invoice also covers "amounts paid on behalf of Colombia entities" (e.g., computers, travel).
Ideally: Pure reimbursements (pass-through costs) should not be subject to withholding tax because they are not income; they are just a return of capital.
The Reality: If you invoiced these as a single line item or a lump sum without attaching the original third-party invoices (e.g., the receipt from Dell or the airline), DIAN presumes it is part of the service fee.
The Fix: To avoid tax on the computers and travel, you must execute a "Reimbursement of Expenses" procedure:
Separate these costs from the "Administrative Fee" on the invoice.
Attach copies of the original third-party invoices (not just your internal allocation spreadsheet).
Prove there is 0% markup on these specific items.
Summary of Your Position
Is it fair? No, because you did the work in the US.
Is it legal? Yes, under Colombian domestic law (which applies because there is no US-Colombia Tax Treaty to override it).
Recommendation:
If you can re-issue the invoice, separate the Reimbursements (computers/travel) from the Fees.
Line 1: Administrative Fee -> Withholding applies.
Line 2: Reimbursement (Pass-through cost) -> No Withholding (if supported by original receipts).
This could save you the 20% tax on the hardware and travel costs, essentially recovering that portion of the cash.
Here are the direct, official links to the regulations. You can copy and paste these into an email to your Colombian team to support your case.
1. The "Trap" (Why US work is taxed in Colombia)
This is the Article 24 of the Tax Statute (Estatuto Tributario). It defines "Income from National Source."
Look for: Numeral 8 (or Paragraph 8), which explicitly lists "Technical services, technical assistance, and consulting" as Colombian-sourced income even if performed from abroad.
Direct Link (Official Senate Secretariat):
http://www.secretariasenado.gov.co/senado/basedoc/estatuto_tributario.html#24
(Tip: Use Ctrl+F to search for "servicios técnicos" within the page)
2. The Rate (Why they deducted 20%)
This is Article 408, which sets the withholding tax tariffs for payments abroad.
Look for: The section stating that payments for consulting, technical services, and technical assistance are subject to a 20% rate.
Direct Link:
http://www.secretariasenado.gov.co/senado/basedoc/estatuto_tributario_pr016.html#408
3. The Defense (How to save the tax on Computers/Travel)
This is the DIAN ruling that confirms Reimbursements of Expenses (reembolso de gastos) are not subject to tax if proven correctly (no markup, backed by original receipts).
Reference: DIAN Concepto 1185 (September 2022) & Oficio 900366 (January 2021).
Direct Link (DIAN Legal Database):
https://normograma.dian.gov.co/dian/compilacion/docs/oficio_dian_900366_2021.htm
(See paragraph citing: "bajo un supuesto de reembolso de gastos... no causa la obligación de expedir factura... dado que no se origina en la venta de un bien")
Summary :
"According to DIAN Oficio 900366 (2021), if we separate the pass-through costs (computers/travel) and provide original third-party receipts, these specific amounts should be treated as Reimbursements and not subject to the Article 408 withholding tax."
The short answer is yes, the rules were the same.
If this happened in 2023, 2024, or 2025, the 20% withholding tax was legally required then, too. The "trap" I described (the Deemed Source rule) has been in place for several years, and the 20% rate was established by a tax reform back in 2019.
Here is the historical breakdown of why this happened to your past invoices and how the rules applied during those years.
1. The 20% Rate was Applicable (2020–Present)
The 20% withholding tax rate for "Consulting, Technical Services, and Technical Assistance" was established by Law 2010 of 2019 (effective January 1, 2020).
Before 2020: The rate fluctuated (it was 15% at one point), but for the relevant recent past, it has been 20%.
2023 Reform (Law 2277): While President Petro’s 2022 tax reform (effective Jan 1, 2023) increased taxes on dividends and individuals, it maintained the 20% rate for these cross-border services.
Verdict: The shortfall you saw on past payments was correct under the law at that time.
2. The "Reimbursement" Defense Existed (Since 2021)1
The strategy I shared with you—separating reimbursements (computers/travel) to avoid tax—was also valid in the past.
The Key Ruling: DIAN Oficio 900366, which confirms reimbursements are not income, was issued on January 21, 2021.
2 What this means: If you invoiced for computers or travel in 2022, 2023, or 2024 without separating them as "Reimbursements" (with attached receipts), the Colombian entity was legally forced to treat them as services and withhold 20%. It wasn't their mistake; it was a documentation issue.
3. Can you fix the past invoices?
Recovering money from past years (e.g., 2023 or 2024) is difficult and usually not worth the administrative cost for these reasons:
Closed Periods: The Colombian entity has likely already paid that withheld money to the government (DIAN) and filed their annual tax returns. Amending those returns is complex and invites audit risks.
US Tax Return: Your US entity has likely already filed its tax returns for those years. If you didn't claim the Foreign Tax Credit (FTC) for that withheld amount then, you would need to amend your US tax return (Form 1120-F or 1120) to get the benefit now.
Summary Table: Historical Rules
| Year | WHT Rate (Services) | Reimbursements Rule | Status of Your Shortfall |
| 2023 | 20% | Tax-free if documented correctly | Legally withheld (unless you claim FTC now) |
| 2024 | 20% | Tax-free if documented correctly | Legally withheld (unless you claim FTC now) |
| 2025 | 20% | Tax-free if documented correctly | Legally withheld (claim FTC on upcoming return) |
| 2026 | 20% | Tax-free if documented correctly | Actionable: Change invoicing now |
Recommendation:
Focus on 2025 and 2026.
For 2025: If you haven't filed your US taxes yet, ensure you get the Certificado de Retención from Colombia for all 2025 shortfalls so you can claim the credit.
For 2026: Change your invoicing format immediately to separate the reimbursements.
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