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December 7, 2021

Colombia and Uruguay sign double tax treaty

The treaty includes reduced withholding tax rates on passive income, permanent establishment rules and rules for taxing capital gains.

On 19 November 2021, the governments of Colombia and Uruguay signed a double tax treaty (DTT). The DTT includes provisions that may reduce taxation on transactions and investments between both countries.

Principal purpose test and anti-abuse rules

In line with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, the preamble of the DTT states that its purpose is to eliminate double taxation on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including treaty shopping). In addition, the DTT includes an anti-abuse clause that contains limitation-of-benefits rules, a principal purpose test clause, and provisions to prevent abuses through triangular transactions that involve permanent establishments (PEs)/branches, located in jurisdictions other than Colombia and Uruguay.

Permanent establishment

Under the DTT, a construction PE will exist if the project lasts more than 90 days, which is a lower period than that provided by the OECD Model Tax Convention. A service PE will exist if services are rendered for more than 120 days.

Additionally, the DTT broadens the scope of the agency PE to include situations in which the agent habitually plays the principal role in concluding contracts that are routinely completed without material modifications by the enterprise. The DTT also establishes that all exceptions for specific activities must meet the requirement of being preparatory or auxiliary. Following the BEPS guidelines, the DTT establishes anti-fragmentation rules for preparatory or auxiliary activities. In addition, the DTT includes special provisions that may lead insurance companies to generate a PE in the Contracting State where they collect premiums or where the risks they insure are located.

Taxation on passive income

The DTT includes reduced withholding tax rates for certain items of passive income as follows:

Type of income

Withholding tax




The beneficial owner is a recognized pension fund.


·       The beneficial owner is a company that holds (directly or indirectly) at least 20% of the voting rights for at least 12 months.


Any other case in which the beneficial owner is resident in the other Contracting State.



  • The debtor or recipient is the other Contracting State (a subdivision or local authority) or the Central Bank, or interest on loans has been granted, approved, guaranteed, or reinsured by any of the above entities.

  • The beneficial owner is a financial entity of a Contracting State and is paid by a financial entity of the other State.

  • The beneficial owner is a recognized pension fund.


Any other cases when the beneficial owner is a resident of the other State.



The beneficial owner is a resident of the other State and receives royalties.

Fees for certain services


For technical services, management, consulting, or technical assistance, the beneficial owner of the fee is a resident of the other Contracting State.


Management and administration payments are made between related parties.

The definition of dividends includes profit allocations made by PEs (including branches) to their home offices that are treated under local regulations as dividends (as in Colombia). Dividend distributions made out of profits that were not taxed at the corporate/PE level may be taxed in the Contracting State where the distributing company is a resident or the PE is located. This provision applies to dividends distributed out of profits that were not subject to taxation in Colombia (according to Article 49 of the Colombian Tax Code) and are subject to the so-called recapture tax.

Capital gains (transfer of shares or participations)

Capital gains derived from the transfer of shares or participations in an entity or trust will be taxed in the source State as described below:

Income tax treatment in the country of source


No limitation (gain is taxed per domestic rules)

Gain from a transfer of shares (not shares that are substantially and regularly traded in a recognized stock exchange) or other comparable interest is taxed, if, at any time, during the 365 days preceding the transfer, such shares or comparable interest derived more than 50% of their value, directly or indirectly, from real estate property located in the State of source.


Other cases

The DTT states that income derived from the transfer of rights that directly or indirectly grants the owner the right to use real estate located in the other Contracting State (e.g., Colombia) may be taxed without limitation in such Contracting State (Colombia).

Additionally, the DTT provisions cannot prevent a Contracting State from taxing indirect transfers of assets in accordance with its domestic law, when the value of the assets located in the Contracting State represent more than 50% of the total value of the assets held by the transferred entity.

Wealth tax

Although the DTT includes wealth tax provisions, those provisions will not be effective unless both countries impose a wealth tax (currently, Colombia does not have a wealth tax). In addition, the benefits included in the DTT for wealth tax purposes are focused on ships and aircraft engaged in international traffic. The DTT also provides for the possibility that the wealth tax paid in a Contracting State may be claimed as a tax credit against the wealth tax levied in the State of Residence.

Approval process

For the DTT to enter into force, the Colombian Congress must approve it through a law. Subsequently, the Constitutional Court must review the constitutionality of the law. Once the internal approval procedures are fulfilled, the countries will proceed with the exchange-of-letters procedure to confirm they concluded their domestic procedures for ratifying the DTT.


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

Ernst & Young S.A.S. Bogota

EY Uruguay, Montevideo

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 America Business Center, London

Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific


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