March 31, 2022
Colombia and Luxembourg sign double tax treaty
The treaty includes rules for when a permanent establishment (PE) is triggered as a result of the provision of services and exploration or exploitation of natural resources. It also has rules for the taxation of passive income and profits from the sale of shares.
On 10 February 2022, Colombia and Luxembourg signed a double tax treaty (DTT), aimed at reducing taxation on transactions and investments between both countries, without creating opportunities for non-taxation, including treaty shopping.
Recognized pension funds may be considered residents under the DTT. In addition, collective investment vehicles treated as a legal entity for tax purposes in the country of incorporation will be considered tax residents of that country and the beneficial owners of the item of income received under the DTT.
For dual resident entities, the DTT requires tax residency to be determined under a mutual agreement procedure. In the absence of an agreement, the entity will not be entitled to the DTT’s benefits.
The DTT includes an anti-contract-splitting rule for construction activities and services. Under these rules, a PE will be triggered if activities are carried out for a period or periods totaling more than 183 days for construction, and more than 120 days for services, in 12 months. The DTT includes a separate rule for independent personal services (including professional services), under which a contracting state will have a taxable fixed base. If the independent or professional personal services are carried out for more than 120 days in 12 months, a taxable fixed base will be triggered.
The DTT includes a special rule for the exploration and exploitation of natural resources (including the operation of substantial equipment), under which a PE is triggered in the contracting state where the activities are carried out for a period or periods exceeding 120 days in 12 months.
Following the guidelines of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) plan, the DTT broadens the agency PE concept to include scenarios in which the agent habitually plays a main role in the conclusion of contracts. Furthermore, the DTT provides an “anti-fragmentation clause” for preparatory or auxiliary activities, meaning those activities may be considered complementary functions that are part of a cohesive business operation.
The DTT establishes that, subject to the agency PE rules, if an insurance enterprise of a contracting state collects premiums in the other contracting state, or insures risks located in that territory through a person, the enterprise should be deemed to have a PE in the other contracting state. This provision does not cover re-insurance premiums. The DTT, however, states that re-insurance premiums will be taxable in Colombia, even in the absence of a PE.
Taxation of passive income
Under the DTT, the following withholding tax rates will apply to passive income:
Taxation on sale of shares
Gains from the sale of shares, interests in a partnership or participations in a trust will be taxed in the source state as follows:
For indirect transfers of shares, the DTT’s rules do not prohibit the contracting states from applying their domestic legislation, which could potentially mean that the source country’s domestic rates would still apply to indirect transfers of shares.
Taxation of capital
The DTT includes rules for the taxation of capital, which specify the items of capital that are subject to tax in the residence state, and the items of capital that may be subject to taxation in both contracting states.
For Colombia, the DTT does not include a tax on capital / equity; currently, Colombia does not have that type of tax but has had one in the past.
Other relevant provisions
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), Luxembourg 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