Key Tax Concepts and Second Category Income Explained

Key Tax Definitions

Income Earned

Income earned refers to revenue to which an individual or entity has a legal right, regardless of whether it has been physically received or is currently due. It represents a credit to their title.

Income Received

Income received is revenue that has physically entered the assets or estate of an individual or entity.

Minimum Presumed Income

Minimum presumed income is a statutory amount of income attributed to a taxpayer that is not subject to any deductions.

Effective Capital

Effective capital represents the total assets of an entity, excluding values that do not represent actual investments. This includes intangible, nominal, transient, and order accounts.

Partnership Company

A Partnership Company refers to companies of every kind, with the sole exclusion of anonymous (or limited liability) companies.

Calendar Year

A Calendar Year is a 12-month period that concludes on December 31st.

Business Year

A Business Year is typically a 12-month period ending on December 31st or June 30th. For a taxpayer's first year of operation, or when there's an authorized change in the balance sheet date, the period covered by the financial year is determined by the rules outlined in subsections 7 and 8 of Article 16 of the Tax Code.

Tax Year

A Tax Year is the period for which taxes are calculated and paid, either as a single payment or in installments.

Understanding the Second Category Single Tax

Exemptions from Second Category Single Tax

Individuals and entities generally exempt from the Second Category Single Tax include:

• Diplomats
• Officials of international organizations
• Foreign athletes
• Workers on Easter Island
• Sale of services abroad

Individuals Subject to Second Category Tax

Types of individuals typically subject to the Second Category Tax status include:

• Dependent workers and pensioners
• Professionals or employers
• Taxi drivers

Monthly Exemption Limit for Second Category Tax

The monthly tax exemption limit for the Second Category applies to income that does not exceed 13.5 UTM (Monthly Tax Units).

Mandatory Filing for Second Category Single Tax

Workers are required to file a return for the Second Category Single Tax if, throughout the calendar year or for part of it, they have simultaneously received income from more than one employer, boss, or authorized payer, and their total income exceeds 13.5 UTM.

Calculating Taxable Income for Second Category Professionals

Taxable income for Second Category Professionals can be calculated in two ways:

• The basis is the annual gross revenue collected, deducting necessary expenses incurred to produce such income during the business year. Both revenue and expenses must be updated to December 31st of the current year, according to the variations experienced by the Consumer Price Index (CPI).
• Alternatively, a deduction of 30% of presumed expenses can be applied to the gross income received, with a ceiling of 15 UTM.