Global Tax Alert (News from Americas Tax Center) | 13 January 2014

Colombia issues regulation on effective place of management for companies and foreign entities

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Colombia's Ministry of Finance and Public Credit has issued Decree 3028 (27 December 2013), regulating the concept of effective place of management for companies and foreign entities. This is an important change in the Colombian tax system, which traditionally followed the concept of incorporation of the company or legal entity in Colombia to determine the tax consequences in the country.

The decree establishes that, when a company has its effective place of management in Colombia, it will be considered as a national and will be treated as similar to a Colombian entity. The same tax rate applicable to a Colombian entity will apply and the company will be subject to the same tax obligations.

Article 12-1 of the Tax Statute, incorporated in Colombia by Law 1607 of 2012, defines “effective place of management” as:

The place in which the company makes business and necessary management decisions to carry out the company's activities as a whole. To determine the effective place of management, all the relevant facts and circumstances should be taken into account, especially those related to the places in which the senior executives and administrators of the company or entity usually exercise their responsibilities and carry out the company or entity's upper management daily activities.

The decree also establishes that, when the effective place of management is located in Colombia, it must be declared. In this regards, this provision accepts the following:

  • The effective place of management may be determined by the taxpayer's tax identification registration (RUT)
  • For companies with a branch in Colombia, the effective place of management may be recognized through an update in the branch's RUT, thus, maintaining the existing taxpayer identification number
  • For tax year 2013, the consequences of the effective place of management rule applies beginning on the date of registration in the RUT as a company or national entity

The decree provides an exception to the declarative principle. The declarative principle will not apply in cases of tax abuse under the regulations and existing judicial precedents.

When an effective place of management in Colombia is established, the foreign entity will be obligated to keep accounting records in accordance with the Colombian regulation in force.

Additionally, the decree includes a specific provision related to accounting for revenues that would be generated by the reversal of a deferred tax credit generated by profits that were derived from the equity method and taxed in Colombia. The reversal of the deferred tax credits will be generated on the parent company when the subsidiaries acquire Colombian nationality through establishing an effective place of management in Colombia.

In this sense, to determine dividends that are not taxed under Article 49 of the Tax Statute, the taxpayer should add the dividends or shares of other national companies that have the character of untaxed income as a result of accounting for the reversal of a deferred tax credit, recognizing the effect of being treated as a national company.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Ltda., Bogotá, Colombia
  • Ricardo Ruiz
    +57 1 484 7537
  • Clara Ines Inés Ramírez
    +57 1 484 7337
  • Andrés Amaya
    +57 1 484 7000

EYG no. CM4098