Taxpayers should continue to follow the progress of the treaty as it includes new tax treatment for various transactions between Colombia and Italy.

The Government of Colombia and Italy signed a Treaty to Avoid Double Taxation (DTT) on January 26, 2018. The DTT includes new regulations that are intended to reduce the tax burden on transactions that take place between these jurisdictions. Specifically, the DTT's preamble expressly provides that the purpose of the DTT is to avoid double taxation without creating opportunities for no taxation or reduced taxation through treaty shopping.

When a person other than an individual is resident in both Colombia and Italy (i.e., a dual resident entity), both competent authorities will determine by mutual agreement the contracting state in which the person is deemed to be a resident. The DTT expressly includes pension and severance funds as tax residents.

Additionally, the DTT contains BEPS permanent establishment (PE) recommendations, such as an anti-fragmentation clause and the expanded definition of "agency PE." The DTT also makes all of the specific activities exceptions subject to the preparatory or auxiliary requirement.

Under the DTT, payments derived from the provision of technical assistance, consultancy and technical services are not deemed as royalties. According to the DTT's protocol, such services will be covered by the treatment granted to business profits and independent professional services.

In addition, the DTT includes a principal purpose test clause.

Under the DTT, the following withholding tax (WHT) rates will apply to passive income:

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:

In the event that the transferor is a pension fund, the capital gains tax will be limited to 5% of the profit.

The DTT establishes that the treatment provided in Article 8 (navigation and international air transport) of the DTT will prevail over the Treaty to Avoid Double Taxation on Income and Assets Derived From the Exercise of Maritime and Air Navigation of International Transport adopted by Colombia through Law 14 of 1981.

Before the DTT can enter into force, Colombia's Congress must first approve a law to adopt it. After Congress approves the law, Congress 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 process.

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