The income tax treaty between Colombia and Japan entered into force on 4 September 2022. The treaty, signed 19 December 2018, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Colombian income tax and its complementary taxes (impuesto sobre la renta y complementarios) and covers Japanese income tax, corporation tax, special income tax for reconstruction, and the local corporation tax.

Residence

If a person other than an individual is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, such person will not be entitled to any relief or exemption from tax provided by the treaty.

Service PE

The treaty includes the provision that a permanent establishment (PE) will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel when the activities continue for a period or periods aggregating more than 183 days within any 12-month period. For determining whether the 183-day threshold is exceeded, connected activities of associated enterprises in a Contracting State will be considered.

Repatriated PE Profits

Article 7 (Business Profits) includes the provision that nothing in the treaty prevents Colombia from imposing tax on profits attributable to a PE of an enterprise of Japan situated in Colombia when the profits are transferred outside of Colombia and the profits so transferred are treated as income from shares by the taxation laws of Colombia. The rate of tax may not exceed:

• 15% of the amount of the profits if they have not been taxed in Colombia before the transfer; and
• 5% in all other cases.

Withholding Tax Rates

• Dividends -
  • 5% if the beneficial owner is a company that has directly or indirectly owned at least 20% of the voting power of the paying company throughout a period of six months that includes the date on which entitlement to the dividends is determined;
  • otherwise, 10% in general, with an exemption provided if the beneficial owner is a recognized pension fund;
  • notwithstanding the above, dividends may be taxed at a rate of up to 15% in the Contracting State of which the company paying the dividends is a resident according to the laws of that Contracting State, where:
    • in the case of the dividends paid by a company that is a resident of Colombia, the dividends are paid out of profits that have not been subject to tax on income at the level of that company in Colombia; or
    • in the case of the dividends paid by a company that is a resident of Japan, the dividends are deductible in computing the taxable income of that company in Japan
• Interest - 10%, with an exemption where:
  • the beneficial owner is either Contracting State;
  • the beneficial owner is a resident of a Contracting State, and the debt-claims are guaranteed, insured, or indirectly financed by that State;
  • the beneficial owner is: (i) a financial institution, provided that such interest is paid by a financial institution that is a resident of the other State; or (ii) a bank, in respect of debt-claims granted for a period of at least three years;
  • the beneficial owner is a pension fund; or
  • the interest is paid with respect to debt-claims arising as a part of the sale on credit of equipment or merchandise
• Royalties - 2% for royalties for the use or right to use industrial, commercial, or scientific equipment; otherwise, 10%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

• Gains from the alienation of immovable property situated in the other State;
• Gains from the alienation of any property, other than immovable property, forming part of the business property of a permanent establishment in the other State;
• Gains from the alienation of shares or comparable interests if, at any time during the 365 days preceding the alienation, the shares or comparable interests derived at least 50% of their value directly or indirectly from immovable situated in the other State, with an exemption if the shares or comparable interests are traded on a recognized stock exchange and the alienator and related parties own 5% or less of the class of such shares or comparable interests; and
• Gains from the alienation of shares, comparable interests, or other rights representing the capital of a company resident in the other State if, at any time during the 365 days preceding the alienation, the shares, comparable interests, or other rights represented 10% or more of the capital of the company, although the tax rate may not exceed 10% and an exemption applies where the gains are the result of a reorganization or the gains are derived by a recognized pension fund.

Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.

Silent Partnership

Article 20 (Silent Partnership) provides that any income derived by a silent partner that is a resident of a Contracting State in respect of a silent partnership (Tokumei Kumiai, in the case of Japan) contract or another similar contract may be taxed in the other Contracting State according to the laws of that other State, provided that such income arises in that other State and is deductible in computing the taxable income of the payer in that other State.

Double Taxation Relief

Both countries apply the credit method for the elimination of double taxation.

Entitlement to Benefits

Article 28 (Entitlement to Benefits) includes substantial provisions regarding a resident's entitlement to benefits under the treaty. This includes that a resident of a Contracting State will only be entitled to benefits provided under paragraph 5 of Article 7 (Business Profits) concerning Colombian taxation of PE profits, and Articles 10 (Dividends), 11 (Interest), 12 (Royalties), and 13 (Capital Gains) if the resident is a qualified person (as defined in the treaty). However, if a resident is not a qualified person, the benefits may still apply if certain conditions are met, which includes where an "active conduct of business" test is met, subject to certain activity restrictions, and where the resident demonstrates to the satisfaction of the competent authority that neither its establishment, acquisition or maintenance, nor the conduct of its operations, had as one of its principal purposes the obtaining of such benefits.

Article 28 also includes provisions to limit benefits where income of a resident of a Contracting State is attributed to a permanent establishment in a third state, and:

• The income is exempt from tax in that Contracting State; and
• The rate of tax in the third state is less than 60% of the tax that would be imposed in that Contracting State had the income not been attributed to the permanent establishment.

This restriction will not apply, however, if the income is derived in connection with or is incidental to the active conduct of a business carried on through the permanent establishment, other than the business of making, managing or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively.

And lastly, Article 28 includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.

Effective Date

The treaty generally applies from 1 January 2023, although Articles 25 (Exchange of Information) and 26 (Assistance in the Collection of Taxes) apply from the date of the treaty's entry into force.