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January 13, 2022
Colombia-France double tax treaty entered into force on 1 January 2022
The treaty includes special rules for determining the existence of a permanent establishment (PE) (for services and the exploration or exploitation of natural resources), and reduced withholding tax rates for dividends, interest and royalties. Most of the provisions will apply from 1 January 2023.
On 23 December 2021, Colombia and France completed the exchange-of-letters procedure, confirming that they concluded their domestic procedures for ratifying the double tax treaty (DTT) signed by both countries (approved in Colombia by Law 2061 of 2020). The DTT entered into force on 1 January 2022; per the DTT, most of its provisions (including those that reduce income tax withholding in the State of source) will be effective as of 1 January 2023.
The DTT aims to eliminate double taxation on income without creating opportunities for non-taxation or reduced taxation through tax evasion or avoidance (including through treaty-shopping arrangements).
This Tax Alert highlights some of the rules contained in the DTT.
For France, the DTT will consider a partnership, group of persons, or any other similar entity a resident, if: (i) it has its place of effective management in France; (ii) it is subject to taxation in France; and (iii) all of its quota-holders, shareholders or members, under domestic tax law, are subject to taxation in France on the profits derived from the partnership, group of persons, or other similar entity.
To determine the existence of a service PE in Colombia for a French tax resident, the computation of the 183-day period must take into account the activities developed by related companies when those activities relate to the same project for which the French tax resident provides services in Colombia.
The DTT also establishes a special PE rule for specialized activities involving the exploration and exploitation of natural resources. Under this rule, a PE is deemed to exist if the activities are carried out for a period or periods that exceed 60 days within a 12-month period, unless the activities are considered auxiliary or preparatory for purposes of the DTT.
Income from immovable property
The DTT characterizes income from immovable property as income derived from any kind of use or lease of shares, quotas or other rights in a company, trust, or other entity that grants the right to use or enjoy immovable property located in Colombia, provided the property is owned by the company, trust or entity. Income from immovable property can be taxed without limitation in the country of source.
Taxation of passive income
The DTT will limit taxation in Colombia as follows:
(i) The reduced dividend withholding rate in the DTT will not apply when (1) the beneficial owner of the dividends holds, directly or indirectly, more than 10% of the capital of the Colombian company, (2) the beneficial owner receives dividends out of untaxed income or untaxed gains from real estate located in Colombia, and (3) the Colombian entity annually distributes the majority of the income or gains.
(ii) This includes distributions of profits or dividends out of profits that were not subject to taxation in Colombia at the level of a branch or company, respectively.
(iii) In several cases, interest may be subject to a 0% rate under the DTT.
(iv) The definition of royalties does not include technical assistance, consulting, and technical services. In the absence of a PE in Colombia, payments derived from those services generally would not be taxed in Colombia.
Capital gains on the transfer of shares
Gains derived from the transfer of shares, quotas or rights in a company will be taxed in Colombia as follows:
The DTT adopts a principal purpose test under which a taxpayer will not qualify for the DTT benefits for an item of income or capital if it is reasonable to conclude that the principal purpose of an arrangement or transaction was to obtain treaty benefits for the tax resident or a related party.
Likewise, treaty benefits will be denied when the income recipient is not the beneficial owner of the income, and the arrangement or transaction resulted in a lower tax burden for the beneficial owner than the tax burden that would have applied had the income been directly received by the beneficial owner. The treaty benefits, however, may be granted if the Tax Authorities of both contracting states conclude that granting the benefits in these circumstances would be in accordance with the purpose of the DTT, considering the specific facts and circumstances.
For additional information with respect to this Alert, please contact the following:
Ernst & Young S.A.S. Bogota
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United States), French Tax Desk, 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