The application of DTT to IT rules in Colombia is a novel situation
The Colombian indirect transfers (IT) rules are established in Law 2010 of 2019. Under such rules, the indirect disposal of assets and shares located in Colombia, through the transfer by any means of shares, participations or rights in non-resident entities, is taxed in Colombia, as if the Colombian underlying assets were directly transferred. Some exceptions and thresholds apply.
Decree 1103 of August 10 2020 regulated several elements of the IT rules, and included a reference that enforceable double tax treaties (DTT) subscribed by Colombia (including the Andean Community – CAN tax treaty), should take precedence in determining the taxability of IT. This ratified the view of several tax advisors on the applicability of Colombian DTT to IT.
From the perspective of the DTT Model Conventions (MC) of both the OECD and the UN, capital gains on the transfer of shares could be subject to tax on the source country, if the entity being transferred derives its value, directly or indirectly, in more than 50% from immovable property located in the source country, what is known as a ‘land rich entity’ (Article 13(4) of the OECD and UN MC). This rule does not qualify the residence of the entity being transferred. Therefore, Article 13(4) of the MC allows taxation in the source country due to IT which involve a land rich, non-resident entity.
On the other hand, the UN MC provides an additional rule allowing taxation in the source country, if the transferor of the shares owns certain percentage (to be determined in the negations of each DTT) of the capital of the company transferred (Article 13(5) of the UN MC). However, this rule establishes that what is being transferred should be the shares of an entity resident in the source country. Based on its wording, it has been considered that Article 13(5) would not allow the source country to tax an IT, as it would not cover the transfer of a non-resident entity.
Assessing Colombian double tax treaties
Multiple approaches in relation to the capital gains article can be found when reviewing Colombian DTT.
Generally speaking, almost all Colombian DTT include a similar provision to Article 13(4), which in principle, would allow Colombia to tax the IT of Colombian assets via the transfer of non-resident land rich entities. However, it is important to consider that a couple of the DTT include specific cases in which the transfer of land rich entities are not taxed in the source country, such as the transfer of shares traded in a recognised stock exchange market, under certain requirements (e.g. DTT with Japan, UAE, and the UK). In addition, the wording of some DTT could be used to argue that the source country (Colombia) could tax transfers of Colombian resident land rich entities, but not the transfer of non-resident, land rich entities (e.g. DTT with Chile, Mexico, South Korea and Switzerland).
In many of the Colombian DTT, provisions similar to Article 13(5) of the UN MC are found. Depending on the specific drafting, to be reviewed in each case, it could be argued that such rules would not allow Colombia to tax an IT, as it is being considered for the Article 13(5) of the UN MC.
In addition, there are certain Colombian DTT that, prima facie, seems to indicate that all sort of transfers of shares could be subject to taxation in Colombia. However, in certain instances, it could be argued that this general rule of taxation is in principle applicable for direct transfers, and not to IT (e.g. DTT with India and Czech Republic).
Finally, there is the particular case of the CAN tax treaty which provides, in Article 12(b), that the transfer of shares is taxed only in the country in which the shares were issued. This generally refers to the country of residence of the entity being transferred. Thus, it seems that an IT of Colombian assets, via the transfer of the shares of an entity located in another country of the CAN, would be taxed in that country (and exempted in Colombia).
The application of DTT to IT rules in Colombia is a novel situation that is still in development. There is not enough relevant guidance, yet there is an expectation for significant action in the near future. Careful review of the facts and circumstances, and how they relate to the specific rules in each DTT, are recommended to determine the potential application in every case. Moreover, as many of the IT would be required to make tax filings, it can be assumed that the Colombian tax authorities would be keeping such transactions under its radar.
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