The treaty includes rules for when a permanent establishment (PE) is triggered as a result of the provision of services and offshore activities. It also has rules for the taxation of passive income and profits from the sale of shares. The treaty must be ratified by both countries before it will enter into force.
On 16 February 2022, Colombia and the Kingdom of the Netherlands signed a double tax treaty (DTT). The DTT aims to reduce taxation on transactions and investments between both countries, without creating opportunities for non-taxation, tax evasion or tax avoidance, including treaty shopping.
According to the DTT’s protocol, the DTT will be interpreted in light of the commentaries to the Model Tax Convention on Income and Capital of the Organisation for Economic Cooperation and Development (OECD) and the United Nations’ Model Double Taxation Convention between Developed and Developing Countries, as they may be read from time to time. The interpretation will take into account the observations and positions that both countries have expressed on those model conventions.
The DTT includes a service PE clause and an anti-contract-splitting rule for construction activities and services. Under the service PE clause, a PE will be triggered if activities are carried out for a period or periods totaling more than 183 days in 12 months. The DTT also includes a special provision for offshore activities carried out by companies from one state (e.g., the Netherlands) in the territorial sea or any area adjacent to the territorial sea in which the other contracting state (e.g., Colombia) exercises its sovereign rights. Under this rule, companies will be considered to have a PE in the state where they carry out the activities, unless the activities are carried out for a period or periods of less than 30 days in 12 months.
Following the guidelines of the OECD’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 should be considered complementary functions that are part of a cohesive business operation.
The DTT’s protocol includes a most-favored nation clause. The clause is triggered if (1) the Netherlands subsequently concludes a tax treaty with another jurisdiction, and (2) the furnishing of services for a period or periods of 183 days or less triggers a PE under the subsequent treaty. The new threshold will then also apply to the Colombia-Netherlands DTT beginning on the date the tax treaty between the Netherlands and the other jurisdiction enters into force.
According to the DTT, Colombia reserves the right to apply a 1% withholding tax on assigned reinsurance premiums.
Taxation of passive income
The following tax rates will apply in the source State:
|Applicable tax rates|
When the rate applies
* The DTT does not prevent Colombia from imposing tax on dividends paid by a company resident in Colombia or a PE in Colombia, out of profits that have not been subject to taxation at the company or PE level (this is the so-called recapture tax).
** The definition of royalties does not include technical services, technical assistance or consulting. Therefore, income from these services will be considered business benefits, in accordance with Article 7 of the DTT.
Taxation on the sale of shares
Gains from the sale of shares or rights in a company will be taxed in the source state as follows:
Applicable tax rate
When the rate applies
Source country’s domestic rates
When 50% or more of the value of the shares or comparable interest (such as interest in partnerships or trusts) is derived, directly or indirectly, at any time during the 365 days before the transaction, from the commercial value of real estate located in the source state (excludes shares that are substantially and regularly traded on a recognized stock exchange)
If the transferor of the shares has owned, at any time within the 365 days before the transaction, 20% or more of the capital of the company resident in the source state (excludes gains derived from the disposal of shares occurring within the framework of a reorganization, a merger, a division or a similar operation)
All other cases
The DTT provides an anti-abuse rule that includes a limitation of benefits clause, a principal purpose test clause and a special rule for triangulations through a PE situated in a third jurisdiction (i.e., an enterprise of a contracting state derives income from the source state, which attributes such item of income to a PE in a third jurisdiction).
Mutual agreement and arbitration procedure
Under the DTT, a person may request an arbitration procedure if the person requested a mutual agreement procedure (MAP) on the application and interpretation of Article 7 (business profits) or 9 (associated companies) and the competent authorities are unable to reach an agreement within two years of the MAP request.
The DTT may apply to parties or countries that are in the Kingdom of the Netherlands and not located in Europe. The DTT will apply only if the parties or countries impose substantially similar taxes (in form and rate).
For the DTT to enter into force, the Colombian Congress must approve it as a law. Subsequently, the Constitutional Court must review the constitutionality of the law. In the Netherlands, the DTT will be submitted to the Council of State for advice and must subsequently be approved by Parliament. Once these procedures are completed, the countries will exchange the corresponding diplomatic notes, reporting that they have completed the required internal procedures.
The DTT will enter into force on the last day of the month following the month in which the last notification is received. The provisions of the DTT will apply as of 1 January of the year following its entry into force.
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), Nethlerlands 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