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.