Article 401-3 of the Tax Statute establishes that a 20% withholding tax must be applied to payments arising from indemnities derived from a labor or regulatory relationship, as long as the employee earns more than 10 legal monthly minimum wages, currently 204 UVT.

Consequently, if the indemnity is paid to a worker with income equal to or lower than 204 UVT (COP $7,264,000 for the year 2020), it is not subject to withholding tax, since the regulation did not establish a withholding percentage for such cases. The DIAN acknowledged this situation through Ruling No. 30573 of November 2015.

To determine whether withholding tax applies to the indemnity, the amount of the 204 UVT must correspond to taxable payments. That is, the total labor income is taken—regardless of its designation—non-taxable income or non-taxable gains are subtracted, and the resulting base is compared with the 204 UVT threshold. If this subtotal exceeds that value, a 20% withholding rate will apply to the indemnity.

It should be noted that the indemnity subject to withholding may be reduced by the 25% exempt income provided in item 10 of Article 206, without the monthly UVT limit applicable to exempt labor income, since this limitation applies only to payments with a monthly nature.

However, in determining the taxable base, the limitation set forth in item 2 of Article 388 of the Tax Statute must be considered:

“The deductions referred to in Article 387 of the Tax Statute and the income that the law expressly provides as exempt. In any case, the total sum of deductions and exempt income may not exceed forty percent (40%) of the result of subtracting from the payment or credit the income that is not taxable nor constitutes capital gain. This limitation shall not apply in the case of pension payments for retirement, disability, old age, survivors, occupational risk, substitute indemnities for pensions, and refunds of pension savings.”

For a better understanding of the taxable base subject to withholding on labor indemnities, the calculation would be as follows:

1. Total taxable income received in the month (direct or indirect)
2. Less: income not constituting taxable income
3. Result: compare with the 204 UVT threshold
4. Less: 25% exempt income (without the limit in item 10 of Article 206, but subject to the 40% of net income or 5,400 UVT annually, item 2 of Article 388)
5. Equals: Taxable base to which the 20% rate is applied