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The treaty includes rules for when a permanent establishment (PE) is triggered as a result of the provision of services and exploration or exploitation of natural resources. It also has rules for the taxation of passive income and profits from the sale of shares.
On 10 February 2022, Colombia and Luxembourg signed a double tax treaty (DTT), aimed at reducing taxation on transactions and investments between both countries, without creating opportunities for non-taxation, including treaty shopping.
Residence
Recognized pension funds may be considered residents under the DTT. In addition, collective investment vehicles treated as a legal entity for tax purposes in the country of incorporation will be considered tax residents of that country and the beneficial owners of the item of income received under the DTT.
For dual resident entities, the DTT requires tax residency to be determined under a mutual agreement procedure. In the absence of an agreement, the entity will not be entitled to the DTT’s benefits.
Permanent establishment
The DTT includes an anti-contract-splitting rule for construction activities and services. Under these rules, a PE will be triggered if activities are carried out for a period or periods totaling more than 183 days for construction, and more than 120 days for services, in 12 months. The DTT includes a separate rule for independent personal services (including professional services), under which a contracting state will have a taxable fixed base. If the independent or professional personal services are carried out for more than 120 days in 12 months, a taxable fixed base will be triggered.
The DTT includes a special rule for the exploration and exploitation of natural resources (including the operation of substantial equipment), under which a PE is triggered in the contracting state where the activities are carried out for a period or periods exceeding 120 days in 12 months.
Following the guidelines of the Organisation for Economic Co-operation and Development’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 may be considered complementary functions that are part of a cohesive business operation.
The DTT establishes that, subject to the agency PE rules, if an insurance enterprise of a contracting state collects premiums in the other contracting state, or insures risks located in that territory through a person, the enterprise should be deemed to have a PE in the other contracting state. This provision does not cover re-insurance premiums. The DTT, however, states that re-insurance premiums will be taxable in Colombia, even in the absence of a PE.
Taxation of passive income
Under the DTT, the following withholding tax rates will apply to passive income:
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Income type |
Applicable tax rates |
When the rate applies |
|---|---|---|
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The beneficial owner is a recognized pension fund. |
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Dividends (i) (ii) |
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The beneficial owner is a company (not a partnership) that holds directly 20% or more of the capital of the company paying the dividends over 365 days, including the day of the dividend payment (the 365-day period does not take into account changes of ownership that result from a corporate reorganization). |
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All other cases
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Interest |
0% |
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Technical services, technical assistance, consulting, and management services (iii) |
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The beneficial owner is a resident of the other contracting state. |
Distributions of profits from a PE/branch to its home office will be treated as dividends for purposes of the DTT.
DTT does not reduce the so-called Colombian “recapture tax,” which applies to the distribution of profits that were not subject to tax at the level of the company or the Colombian PE. Currently, the recapture tax is usually 35%.
Following Article 12A of the United Nations Model, the definition of technical services under this article excludes payments made: (i) to employees of the person making the payment; (ii) for teaching in, or teaching by, an educational institution; or (iii) by an individual for the personal use of services.
Taxation on sale of shares
Gains from the sale of shares, interests in a partnership or participations in a trust 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 is derived, directly or indirectly, at any time during the 365 days before the transaction, from movable or immovable property located in Colombia |
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10% |
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 a company resident in the source state (excludes gains derived directly from a tax-free corporate reorganization (merger or demerger) and gains obtained by a recognized pension fund) |
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Not applicable |
All other cases |
For indirect transfers of shares, the DTT’s rules do not prohibit the contracting states from applying their domestic legislation, which could potentially mean that the source country’s domestic rates would still apply to indirect transfers of shares.
Taxation of capital
The DTT includes rules for the taxation of capital, which specify the items of capital that are subject to tax in the residence state, and the items of capital that may be subject to taxation in both contracting states.
For Colombia, the DTT does not include a tax on capital / equity; currently, Colombia does not have that type of tax but has had one in the past.
Other relevant provisions
Anti-abuse clause: The DTT includes a principal purpose test under which the benefits of the DTT will not apply unless it is established that granting the DTT benefits to the taxpayer would be in accordance with the object and purpose of the relevant DTT provisions.
Arbitration for mutual agreement procedures: Under the DTT, a person may request an arbitration procedure, if the person requested a mutual agreement procedure and the competent authorities are unable to reach an agreement within two years of the date on which all the required information was provided. This provision will not apply if the issue has already been decided by a court or administrative tribunal of either of the contracting states.
Entry into force: The DTT will enter into force on the date the last notification is received, indicating the internal legislative procedures have been fulfilled. The DTT generally will be effective on January 1 of the year following the year in which the DTT entered into force.
Summary
On 10 February 2022, Colombia and Luxembourg signed a double tax treaty, which includes rules for when a permanent establishment is triggered as a result of the provision of services and exploration or exploitation of natural resources. It also has rules for the taxation of passive income and profits from the sale of shares.