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3.2. Practical Aspects of Tax Residence

In Colombia, there is no management and control test, like in England or other jurisdictions. However, there is the place of effective management test according to article 12-1. This article states the following:

  • It is understood that the place of effective management of a company or entity is that where the business and management decisions, which are decisive and necessary to carry out the activities of the company as a whole, are taken.
  • To determine the place of effective management all facts and circumstances which are relevant need to be taken into account, in particular, the place where the senior executives and directors of the company or entity usually exercise their responsibilities and carry out the daily activities of the senior management of the company or entity.
  • A company or entity shall not be considered as national, for the simple fact that its board of directors meets in Colombian territory, or that its shareholders, partners, community members, subscribers or similar, being individuals, are Colombian residents.
  • It is understood that there is no place of effective management in Colombia for companies or entities that have issued bonds or shares of any type in the Colombian Stock Market and or in any stock market internationally recognized, according to the regulations issued by the tax authorities. This rule also applies to the subsidiaries of the company that fulfills the requirements herein mentioned. In any case the financial statements of the subsidiary and the company that issues the shares and / or bonds have to be consolidated.
  • It is understood that companies receiving 80% or more of their income sourced in the jurisdiction in which the company is incorporated do not have Colombia as its place of effective management. However, to determine such percentage, passive income will not be taken into account. The law considers as passive income, among others the following: royalties, interest and dividends received directly or through subsidiaries, when such dividends have their origin in companies in which a participation of 25% or less is held.
  • In the cases of fiscal auditing where the determination of the place of effective management is discussed, the decision on such a determination will be made by the Enforcement Committee of the DIAN (Dirección de Impuestos y Aduanas Nacionales,is the national tax and customs authority).
  • Unless otherwise specified, the terms "effective seat of administration "and "place of effective management" have the same meaning.

In order for companies and other entities to be considered as tax residents in Colombia, no minimum substance requirement exists and there is no need for a minimum number of resident directors.

The concept of place of effective management is new to Colombian tax law and, therefore, various issues such as impact of holding board meetings outside the country or through video-conference have not been discussed and settled by the tax authorities or the courts. However, during the discussions for the enactment of the law that introduced this criterion, the legislator stated that for purposes of interpreting the concept of place of effective management the Commentary of the OECD should be taken into account.