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.
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.
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.
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.
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:
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
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.
Both countries apply the credit method for the elimination of double taxation.
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:
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.
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.