October 20, 2021
Double tax treaty concluded between Colombia and Italy will be effective January 1, 2022
The treaty includes provisions for permanent establishments that are aligned with OECD Model 2017, a mutual agreement procedure when an entity has double tax residence, and reduced withholding tax rates for dividends, interest and royalties.
On October 6, Colombia and Italy completed the exchange of letters procedure, confirming that they concluded their domestic procedures for ratifying the double tax treaty (DTT) signed between both countries (approved in Colombia by Law 2004 of 2019). As per the provisions of the DTT, it will be effective January 1, 2022.
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 in the DTT.
The DTT expressly includes pension and severance funds as tax residents for purposes of the DTT.
For legal entities with double tax residence, the DTT requires the tax authorities of both countries to carry out a mutual agreement procedure (MAP) to determine which State the entity should be deemed to be a resident of for purposes of the DTT. The MAP will consider the entity's place of effective management, place of incorporation and any other relevant factor. In the absence of an agreement, the entity will not be entitled to the treaty benefits.
Permanent establishment (PE)
The provisions of the DTT are aligned with OECD Model 2017 (including the existence of an agent PE when it plays an important role in the conclusion of contracts, among other things). The DTT includes separate rules for PEs and fixed bases (regarding independent personal services), following the United Nations Model of Tax Convention.
Taxing passive income
The DTT includes various withholding tax rates, depending on who the beneficial owner is, as follows:
(i) This includes distributions / dividends out of profits that were not subject to taxation in Colombia at the corporate/branch level.
(ii) The definition of royalties includes payments for the use of industrial, commercial and scientific equipment. The protocol of the DTT, however, states that technical assistance, consulting and technical services will be deemed as business profits or independent professional services rather than royalties. Therefore, in the absence of a PE/ fixed base in Colombia, payments for these services generally would not be taxed in Colombia.
Capital gains on the transfer of shares (and other entities)
Gains derived from the sale of shares in a company or comparable interests, such as an interest in a partnership or a trust, may be taxed in Colombia as follows:
In the event that the transferor is a pension fund, the tax will be limited to 5%.
The DTT adopts a principal purpose clause (i.e., principal purpose test) under which the benefits of the DTT will not be granted 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. The treaty benefits, however, may be granted if the taxpayer establishes that granting the benefits in these circumstances would be in accordance with the object and purpose of the relevant provisions of the DTT.