Colombia issues new guidance on the taxation of permanent establishments and branches – By Carlos Subero, Senior Consultant, BaseFirma Colombia
On October 29, the Colombian government published Decree 1973, providing detailed rules on the attribution of income to a permanent establishment or branch of a multinational corporation.
According to the new guidance, foreign companies and entities must pay income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... on their income and occasional earnings in Colombia, regardless of whether they receive such income or occasional earnings directly or through branches or permanent establishments located in Colombia.
The new Colombia guidance defines as a permanent establishment a fixed place of business located in the country through which a foreign company or a natural person without residence in Colombia performs all or part of the group’s activities.
This concept includes, among others, branches of foreign companies, agencies, offices, factories, workshops, mines, quarries, oil and gas wells, or any other place of extraction or exploitation of natural resources.
In the aforementioned decree, modifications establish that the activity of taxpayers that do not have residency in Colombia or a permanent establishment or branch in Colombia will be attributed to the establishment or branch in accordance with the provisions of Colombian tax lawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public....
The new guidance replaces articles 1.2.1.14.1 and 1.2.1.14.7 of Chapter 14 of Title 1 of Part 2 of Book 1 of Decree 1625 of 2016, providing that the occasional income and profits attributable to a permanent establishment or branch in Colombia are those which the permanent establishment or branch could have obtained, in accordance with the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the..., as if it were a separate and independent company from that company whether said income and occasional profits comes from the operations between the permanent establishment or branch in Colombia with another company, or entity, or its internal operations with other parts of the same company of which it is a permanent establishment or branch.
The functions developed, the assets used, the personnel involved, and the risks assumed by the company through the permanent establishment or branch must be taken into consideration as well as other parts of the company that the permanent establishment or branch is part of, the guidance states.
In addition, permanent establishments of individuals, companies, or foreign entities of any nature, located in the country, will be taxed on income and occasional earnings of Colombian and foreign source that are attributable to it from the determination of liabilities, assets, income, capital, costs and expenses, in accordance with the arm’s length principleThe Arm’s Length Principle (ALP) is a cornerstone concept in international taxation and transfer pricing. It requires that transactions between related parties, such as subsidiaries or affiliates within a multinational enterprise (MNE), mirror those that would occur between independent entities under similar circumstances. This principle ensures that each entity within an MNE is compensated fairly and transparently, based on the....
This information should be supported in a study on the main functions, risks and assets of the enterprise, the guidance states.
In addition, in accordance with the modification of article 1.2.1.14.7, profits that correspond to income and occasional profits of national and foreign sources attributed to permanent establishments or branches in Colombia of non-resident natural persons or foreign companies and entities, can be transferred for the benefit of related companies abroad, and will be subject to income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... and complementary dividends or participation according to articles 48 and 49 of Colombia’s tax lawsTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public....
