Colombian Tax Flash
(i) Ratification notes of DTT with Spain were exchanged by both
governments last 23 of July; thus it will enter into force on
October 23, 2008 and will be applicable in 2009; DTTs with Chile
and Switzerland are being discussed at Congress. The texts of DTTs
with Canada and Mexico are already agreed and signatures by
governments are pending; negotiation with Germany has already
begun. Countries with which Colombia will seek negotiations for a
DTT are Venezuela, the United Kingdom, the Netherlands, the United
States of America, France, Japan, Italy, China and Belgium; such
countries are included in the negotiation agenda designed by
government in March of 2007. India has also put forward its
interest, and its request is currently under study by the
authorities.
(ii) Prior to the exchange of ratification notes, the
Constitutional Court issued decision C-383 dated April 23, by which
it has declared the validity of the Law 1082 of 2006, which
approved DTT with Spain. The Court stated that DTTs are aligned
with the goals of the State and, in general, that the articles of
DTT with Spain are adjusted to the Constitution. This decision is
an important precedent for the analysis of subsequent DTT, since
they all require a Constitutional Court favorable decision about
their constitutionality prior to the exchange of ratification
notes.
Decision 578 of the Andean Community. Recent
developments.
By means of recent rulings, Colombian tax authorities have
clarified how to interpret Andean Community rules to avoid double
taxation regarding services, dividends and labor payments.
(i) Ruling 44126 of May 2, 2008. Under article 14 of Decision 578,
corporate benefits for technical services, technical assistance and
consulting are taxed in the member country in which such benefits
are produced. By applying article 14, Colombian tax authorities
stated that income received by Colombians for services exported to
other member countries that were subject to taxation in such
country and are tax exempted in Colombia considering that under
article 3 of Decision 578 income taxed in one country cannot be
taxed in other member country; this ruling does not clarify the
meaning of corporate benefits which has been a controversial issue.
The ruling also stated that regulations issued by Andean Community
are directly applicable in Colombia and have a preemption
effect.
(ii) Ruling 44634 of May 6, 2008 makes clear that purpose of
article 11 of Decision 578 is that dividends obtained by a company
of an other member country that are not taxed in Colombia, when
later distributed as dividends, have to be distributed as non
taxable dividends for the shareholders or partners. This benefit is
limited to dividends paid to shareholders or partners residents in
a member country; for shareholders or partners that are not
residents of an Andean Community country Decision 578 does not
apply and thus dividends received will be taxed. This ruling also
mentions direct application and preemption of Andean Community
regulations based on decisions of the Andean Community Justice
Tribunal and the Colombian Constitutional Court.
(iii) Ruling 52813 of May 20, 2008. According to article 13 of
Decision 578, labor income is only taxed in the country in which
the employee renders his personal services (e.g. Ecuador),
regardless of the country of residence of the employer (e.g.
Colombia). Ruling 54399 of June 3, 2008, states that if an employer
pays salary for services rendered in another Andean Community
country, such payment will not be taxed in Colombia and will not be
subject to withholding taxes in the country. The same ruling, when
referring to a case not involving Andean Community regulations,
stated that in case of payments made by Colombian employers for
services rendered abroad by an employee, such services are not
subject to withholding taxes, regardless of the possible tax
obligation that the employee may have in Colombia.
Special deduction for the acquisition of productive fixed
assets.
Ruling 46320 of May 8, 2008. Special deduction does not apply
for the mere acquisition of a productive asset. For the 40%
deduction to apply it is required that the asset has been
effectively used to produce income during the taxable year. Such
income will grant the right to the deduction.
This ruling does not analyze special situations in which the asset
cannot be used during the taxable year; it just refers to the
general rule. Nevertheless, it is clear that there are situations
under which even if the productive asset is not used in the taxable
period, it still gives the right to the deduction, i.e. assets
acquired in preoperative stages or assets that are being
constructed. In such cases it is required that assets, once in
operative stage or finalized the construction, are used in the
productive activities.
Taxation for foreign entities
In our previous issue (for previous issues of the Colombian Tax
Flash please visit our web page www.lewinywills.com) we mentioned
Council of State Decision dated April 27, 2008 by which tax
authorities' Ruling 85384 of November 18, 2005 was declared
null. Such ruling stated that foreign companies are obliged to
declare and pay taxes for their asset possessed in Colombia even if
such assets do not produce income. According to the Council of
State Decision foreign companies that do not receive Colombia
source income or capital gains are not taxpayers and do not have to
file income tax return, even if they possess assets in the
country.
Based on Council of State Decision, Ruling 058297 of June 13, 2008
stated that income tax returns filed by foreign companies following
the ruling declared null (i.e. Ruling 85384) do not produce any tax
effects. Thus the refund of any payment made can be requested
within a term of five years.
Technical assistance. Written contracts as evidence.
Technical assistance contracts must be carefully reviewed in
order to be assured that they reflect the intentions of the parties
and to include any details with relevant tax effects, since their
content is a fundamental piece of evidence in any related judicial
process.
A recent ruling by the Council of State (i.e. Decision of May 8,
2008, file No. 15707) reinforced this piece of advice, which was
addressed on our issue of last January. In said ruling, the High
Court used a precedent in which in a similar case it invoked the
technical assistance contract to state that, contrary to the
positions of the tax authorities, and according to the contract,
the payments for the technical assistance constitute a deductible
expense of the correspondent year with no effect on future taxable
years and is exclusively related to income producing activities.
The contract was fundamental to prove the nature of the expense and
thus for the favorable decision for the taxpayer.
Local stamps
Local stamp duties are known for their important effect on
raising taxation rates without any control, since local authorities
have broad faculties to determine their elements, including their
taxable events. However, two recent decisions by the Council of
State show an interest in limiting the reach of local stamps,
interest that will hopefully be maintained facing analysis of
existing and future local stamps.
(i) Local regulations issued by Departmental Assembly of Atlantico
were provisionally suspended (i.e. suspended until a final decision
about their legality is issued), based on the fact that such
regulations are taxing events that were already subject to Real
Estate Property tax or to Industry and Trade Tax (Decision of May
8, 2008, file No. 16989). In addition, local stamps are taxing
events already taxed and thus are increasing the tax rates that
have a legal limit.
(ii) By means of a Decision issued by the Administrative Tribunal
of Meta, confirmed by the Council of State (i.e. Decision of May 8,
2008, file No. 15245) regional regulation that created a stamp duty
over acts that were already subject to registration tax were
declared null, considering that it is forbidden to local
authorities to tax events or industries already taxed by law.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.