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17 January 2019 Colombia signs tax treaty with Japan On 19 December 2018, the Governments of Colombia and Japan signed a Treaty to Avoid Double Taxation (DTT). Aligned with the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) initiatives, the DTT’s Preamble provides that its purpose is to avoid double taxation without creating opportunities for no taxation or reduced taxation through treaty shopping, as well as to further develop Colombia and Japan’s economic relationship and enhance their cooperation in tax matters. The DTT includes a rule that disallows its application to transparent entities (unless the income is treated as income of a resident of the contracting state under the tax law of such contracting state). In addition, the DTT includes a “savings clause” to ensure that the treaty does not prevent the application of the domestic tax rules of a contracting state in relation to its own residents (with certain exceptions). When a person, other than an individual, is resident in both Colombia and Japan (i.e., a dual resident entity), both competent authorities will determine, by a mutual agreement procedure, the contracting state in which the person is deemed to be a resident. In the absence of such an agreement, the person should not be entitled to the benefits of the DTT. Additionally, the DTT includes BEPS permanent establishment (PE) recommendations, such as an anti-fragmentation clause and the expanded definition of “agency PE.” The DTT also makes all the specific activities exceptions subject to the preparatory or auxiliary requirement. The DTT includes a Principal Purpose Test clause, as well as a Limitation on Benefits (LOB) provision. The LOB focuses on the benefits related to Articles 7(5) (distributions of PEs), 10 (dividends), 11 (interest), 12 (royalties), and 13 (capital gains). In addition, the DTT includes an anti-abuse rule for PEs situated in other jurisdictions.
Distributions made by a Colombian PE to its home office in Japan will be subject to taxation in Colombia at a rate of 15%, if the distribution is from profits that were not subject to taxation at the level of the Colombian PE, or 5% in other cases. Under the DTT, payments derived from the provision of technical assistance, consultancy and technical services are not deemed as royalties, as was the case with previous treaties into which Colombia entered with other jurisdictions. The capital gains resulting from the sale of shares, interests in a partnership or participations in a trust will be taxed in the source country as follows:
No capital gains taxation will apply under this rule to shares or interests that are traded on a recognized stock exchange, provided the taxpayer and related persons own 5% or less of the class of shares or interests. A recognized pension fund will not be subject to capital gains tax in the source country. The DTT contains a special provision for silent partnerships. Under the provision, any income derived by a silent partner from a silent partnership, or another similar contract, may be taxed in the source country, according to its domestic laws, provided that such income arises in the source country and is deductible in computing the taxable income of the payer in that country. Before the DTT can enter into force, Colombia’s Congress must first approve a law to adopt it. After the Colombian Congress approves the law, it will send the DTT to the Constitutional Court for a constitutional review. Once the DTT is approved, the countries will exchange diplomatic notes, reporting that they have completed their internal approval procedures. Ernst & Young S.A.S., Bogotá
Ernst & Young, LLP, Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific
Document ID: 2019-5083 | ||||||||||||||||||||||||||||
