Colombia: Income tax treaty with the UK | KPMG | GLOBAL

Colombia: Income tax treaty with the UK

Colombia: Income tax treaty with the UK

Representatives of the governments of Colombia and the United Kingdom on 2 November 2016 signed an income tax treaty for the avoidance of double taxation.

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The Colombia-United Kingdom income tax treaty [PDF 406 KB] will enter into force once the respective ratification procedures of both countries are completed. The treaty includes measures that generally adopt certain recommendations made under the OECD's base erosion and profit shifting (BEPS) project—specifically, rules on the treatment of permanent establishments (PE).

Colombian taxes covered

The treaty with the UK covers the two current Colombian corporate income taxes—the “traditional” corporate income tax and the CREE (the CREE is the Spanish acronym for the “equity income tax”), even though repeal of the CREE is part of a tax reform bill currently being considered by the Colombian legislature. 

Overview

Other provisions in the income tax treaty concern the following:

  • Permanent establishment (Article 5).  Article 5 adopts the BEPS-recommended restrictions limiting PE avoidance, such as enhanced requirements that would be needed to qualify for the specific PE exclusions (e.g., preparatory and auxiliary thresholds, and conditions necessary to meet the storage facilities exception) and the anti-fragmentation rule, which looks to prevent abuses stemming from the separation of the activities of a cohesive business operation across separate entities. 
  • Taxes covered (Article 2). The treaty covers the taxation of different items of income—Income from Immovable Property (Article 6), Business Profits (Article 7), Shipping and Air Transport (Article 8), Associated Enterprises (Article 9), Dividends (Article 10), Interest (Article 11), Royalties (Article 12), Capital Gains (Article 13), Employment (Article 14), Director´s Fees (Article 15), Entertainers and Sportspersons (Article 16), Pensions (Article 17), Government Services (Article 18), Students (Article 19), and Other Income (Article 20).
  • Methods for relieving double taxation (Article 21). The treaty provides rules regarding available foreign tax credits, deductions, and exemptions available to taxpayers to reduce taxes imposed by the signatory countries, with due regard to limitations imposed by internal law. 
  • Miscellaneous provisions (Article 22). This provision includes a “principal purpose test” to limit the availability of treaty benefits when a principal purpose of the arrangement or transaction is to benefit from the treaty. Article 22 also limits treaty benefits when the income or gain is taxed only by reference to the amount effectively received in a signatory country, as opposed to the full amount of income. 
  • Mutual agreement procedure (Article 24).  This measure allows taxpayers to seek MAP relief from the relevant tax authorities in situations when a particular tax is not covered by or goes against treaty rules. 
  • Exchange of information (Article 25). This provision harmonizes the exchange of relevant tax information between the relevant tax authorities with internal law. 
  • Assistance in the collection of taxes (Article 26).  Article 26 provides rules regarding the cooperation in the collection of revenue claims. The tax authority that receives the collection request would enforce the collection in accordance to its own laws as if it were its own taxes. 

Withholding tax rates

Colombian inbound investment eligible for treaty benefits would benefit from preferential withholding tax rates. The treaty withholding tax rates for the most common items of income generated by investors are:  

  • Dividends.  Colombia does not currently tax dividends. However, the pending tax reform bill would introduce a new 10% withholding tax on dividends distributed to non-resident shareholders. The treaty would limit the withholding tax to 0% for certain pension funds, and 5% if the beneficial owner holds directly at least 20% of the capital of the Colombian company.
  • Interest.  The treaty withholding tax rate is 10%.  Currently, Colombia applies a withholding tax rate of 14% or 33% The tax reform bill would impose a 15% rate across the board. 
  • Royalties.  The treaty imposes a 10% rate. The Colombian tax would apply to a general 15% rate. Currently, withholding tax is applied at a 33% rate.
  • Capital gains.  Colombian tax on long-term capital gains would remain at 10% for both corporations and non-residents; the tax reform bill would not modify this rate. The treaty withholding tax rate is also 10%.

 

For more information, contact a tax professional with KPMG’s Latin America Markets practice or with the KPMG member firm in Colombia:

Devon Bodoh | +1 (202) 533 5681 | dbodoh@kpmg.com

Alfonso A-Pallete | +1 (305) 913 2789 | apallete@kpmg.com

Eric Thompson | +57 (1) 618 8122 | ericthompson@kpmg.com

Vincente Torres | +57 (1) 618 8000 | vjtorres@kpmg.com

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