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Colombia Clarifies Tax Treatment of Default Interest Under Tax Treaty with South Korea — Orbitax Tax News & Alerts

Colombia's National Tax Authority (DIAN) recently issued a ruling concerning the treatment of default (penalty) interest payable by a Colombian entity to a Korean entity under the 2010 Colombia-South Korea tax treaty. The ruling clarifies that default (penalty) interest is not considered "interest" for the purpose of Article 11 (Interest) of the treaty, and therefore the withholding tax provisions of Article 11 do not apply. It is further clarified that default (penalty) interest is not considered business profit since such income is not received by a company as a result of its activities and, therefore, is not covered by Article 7 (Business Profits). Considering that default (penalty) interest is not otherwise dealt with by specific provisions of the treaty, the income falls under Article 21 (Other Income), which provides that such other income is taxable only in the State of residence of the income recipient. As such, in the case of default (penalty) interest payable by a Colombian entity to a Korean entity, the interest income is taxable only in South Korea.