Global Daily Tax Update

 Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

June 10, 2020
2020-5857

Colombian Tax Authority clarifies profits distributed by Colombian branch to its home office in Spain are not dividends

The Colombian Tax Authority issued Official Tax Opinion No. 370 of 2020, which clarifies that profits distributed from a Colombian branch to its home office in Spain should not be considered “dividends” under the tax treaty between Colombia and Spain. Instead, such distribution should be considered a “business profit,” covered by Article 7 of the tax treaty, and generally not subject to taxation in Colombia.

Background

Colombia and Spain signed a treaty to prevent double taxation, which entered into force in 2008. Under Article 10 of the treaty, “dividends” are deemed as “income from shares (…) or other corporate rights which are subject to the same taxation treatment as income from shares by the laws of the State.” Initially, this definition did not include profit distributions made by branches to their home offices abroad. However, since the 2012 Colombian tax reform, profits distributed by branches to their foreign home offices are included within the definition of dividends and subject to dividend tax under Colombian domestic rules. Because of the change made in the tax reform, there was confusion as to how the domestic tax law affected the application of the treaty.

Tax Opinion No. 370 of 2020

In Tax Opinion No. 370, the tax authority determined that, based on the wording of Article 10 of the treaty, dividends require the existence of a “corporate right,” which does not exist between a branch and its home office, because the former is merely an extension of the latter. Hence, there cannot be a dividend distribution within the same legal entity.

Therefore, profits distributed by a branch in Colombia to its home office in Spain should be categorized as “business profits” (Article 7 of the tax treaty), which are generally not subject to tax in Colombia.

Taxpayers should be aware that the rules regarding branch distributions vary among the tax treaties subscribed by Colombia, so the treatment of those distributions should be determined on a case-by-case basis.

_____________________________________________________________________________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young S.A.S., Bogotá
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young Abogados, Latin America Business Center, Madrid
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

ATTACHMENT

 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2022, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct