Buying a Franchise in Colombia: Check the Tax Implications

A franchise proposal may seem straightforward until the phrase ‘plus taxes’ appears. Before joining a franchise network in Colombia, check how each payment will be treated and who will fulfil the tax obligations. This is not about memorising tax rates: it is about ensuring that the contract, invoices and budget all tell the same story.

1. Separate tax obligations from the commercial agreement

Colombia has no specific law comprehensively governing franchise agreements. A franchise agreement is a contract without a dedicated statutory framework, governed by its agreed terms and the general provisions of the Commercial Code and Civil Code. For tax purposes, the Colombian Tax Statute and applicable local rules must be reviewed, alongside other relevant legislation.

The absence of a dedicated franchise law does not mean there are no tax obligations. Nor does it allow the parties to change, through the contract, who is legally responsible to the tax authorities. They can, however, agree how certain financial costs will be shared, within the limits of the law.

Franchisees remain independent businesses. You should therefore not assume that the franchisor’s accountant will file your tax returns or that the tax treatment applying to the franchisor will automatically apply to you.

Before signing, commission an accountant to carry out a review based on your business activity, municipality, operating arrangements and the circumstances of the payment recipients. Your solicitor or legal adviser should check that the findings are consistent with the contract’s financial clauses.

2. Identify which charges include VAT and how they are invoiced

Do not assess the investment as a single figure. The initial franchise fee, trade mark licence, technical assistance, equipment and products may each require a different analysis. The commercial label given to a charge does not, on its own, determine its tax treatment: what matters is what you are actually paying for.

Prepare a table with these columns:

• Item: the goods, service or right you receive.
• Supplier: who issues the invoice and where they are based.
• Price: whether it includes taxes or is quoted before tax.
• Tax treatment: what the accountant needs to confirm.
• Supporting documentation: the invoice, contract or other required document.
• Payment date: when the money will leave your account.

Request a sample invoice for each recurring charge, without any confidential third-party information. If the offer states ‘fee plus VAT’, ask for the budget to show the price and applicable tax separately.

You should also distinguish between cash outlay and final cost. The fact that tax may be recoverable, subject to legal requirements, does not mean it disappears from your cash flow when you pay the invoice. Failing to budget for that outflow can leave an apparently fully funded opening short of cash.

3. Review withholding taxes and overseas payments

Withholding tax is not necessarily an extra charge on top of the price. It is a tax collection mechanism which, where applicable, requires you to deduct an amount from the payment and fulfil obligations to the tax authorities. Whether it applies depends on the type of payment, the parties involved and the rules in force.

Pay particular attention if the contract promises the franchisor an amount ‘net of tax’. This wording may pass an additional cost to the franchisee so that the recipient receives a specified sum after withholding taxes.

For example, agreeing a price subject to statutory withholding is not the same as guaranteeing that the recipient will receive that amount net. Ask for a worked calculation of both arrangements before accepting either.

If the franchisor is based in another country, request a specific assessment. This should examine the nature of the payment, withholding taxes, any potential VAT liability and, where relevant, double taxation treaties. The existence of a treaty does not automatically remove all taxes or all documentation requirements.

Specify who will provide tax residence certificates or other necessary supporting documents, and how far in advance.

4. Check the obligations at your business location

As well as payments to the franchisor, review the taxes arising from your own business activity. Income tax, VAT where applicable, and the industry and commerce tax — known as ICA — must be assessed against the business’s specific circumstances. ICA is a municipal or district tax: do not simply copy the obligations of an outlet in another city without checking them.

Before signing, ask your accountant for a compliance calendar and an estimate of tax-related cash outflows. Include electronic invoicing and updates to Colombia’s Single Tax Register (RUT) where required. Do not choose a tax regime solely because another franchisee uses it.

Practical conclusion: do not approve a proposal that shows only ‘before tax’ figures. Insist on a tax breakdown reviewed by an accountant and a contract consistent with it. That way, you will know how much you must pay, what you must withhold and which obligations remain yours as an independent business owner.