On November 4, 2016 the UK Revenue & Customs issued a press release announcing that on November 2, 2016 the United Kingdom of Great Britain and Northern Ireland and the Republic of Colombia signed a Convention for the Elimination of Double Taxation with respect to Taxes on Income and on Capital Gains and the Prevention of Tax Evasion and Avoidance (Hereafter: the DTA).
Although the DTA has been signed, it has not entered into force yet. For the DTA to enter into force, the respective ratification procedures have to have been finalized in both countries.
Below we will discuss a selection of provisions included in the DTA of which we think they might interest our readers.
Taxes covered
Based on Article 2, Paragraph 3 of the DTA (“Taxes Covered”), the existing taxes to which the Convention shall apply are in particular:
a) in the case of Colombia:
(i) impuesto sobre la renta y complementarios (income tax and its complementary taxes);
(ii) impuesto sobre la renta para la equidad - CREE (CREE pro equity income tax);
b) in the case of the United Kingdom:
(i) the income tax;
(ii) the corporation tax; and
(iii) the capital gains tax.
Article 2, Paragraph 4 subsequently arranges that the DTA shall apply also to any identical or substantially similar taxes that are imposed after the date of signature of the Convention in addition to, or in place of, the existing taxes.
Residency
With respect to the residency of a person other than an individual, Article 4, Paragraph 3 of the DTA (“Resident”) arranges that where by reason of the provisions of paragraph 1 a person other than an individual is a resident of both Contracting States, then the competent authorities of the Contracting States shall endeavour to determine by mutual agreement the Contracting State of which that person shall be deemed to be a resident for the purposes of this Convention. In the absence of a mutual agreement by the competent authorities of the Contracting States, the person shall not be considered a resident of either Contracting State for the purposes of claiming any benefits provided by the Convention, except those provided by Articles 21 (“Elimination of Double Taxation”), 23 (“Non-discrimination”) and 24 (“Mutual Agreement Procedure”).
Permanent establishment
Article 5, Paragraph 3 of the DTA (“Permanent Establishment”) arranges that a building site or construction or installation project constitutes a permanent establishment only if it lasts more than six months.
Article 5, Paragraph 5 arranges that Article 5, Paragraph 4 of the DTA (Paragraph 4 relates to activities of a preparatory or auxiliary character) shall not apply to a fixed place of business that is used or maintained by an enterprise if the same enterprise or a closely related enterprise carries on business activities at the same place or at another place in the same Contracting State and
a) that place or other place constitutes a permanent establishment for the enterprise or the closely related enterprise under the provisions of this Article, or
b) the overall activity resulting from the combination of the activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, is not of a preparatory or auxiliary character, provided that the business activities carried on by the two enterprises at the same place, or by the same enterprise or closely related enterprises at the two places, constitute complementary functions that are part of a cohesive business operation.
Article 5, Paragraph 6 subsequently arranges that for the purposes of paragraph 5, a person is closely related to an enterprise if, based on all the relevant facts and circumstances, one has control of the other or both are under the control of the same persons or enterprises. In any case, a person shall be considered to be closely related to an enterprise if one possesses directly or indirectly more than 50 per cent of the beneficial interest in the other (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company) or if another person possesses directly or indirectly more than 50 per cent of the beneficial interest (or, in the case of a company, more than 50 per cent of the aggregate vote and value of the company’s shares or of the beneficial equity interest in the company) in the person and the enterprise.
Article 5, Paragraph 7 subsequently arranges that notwithstanding the provisions of paragraphs 1, 2 and 3, where an enterprise of a Contracting State performs services in the other Contracting State
a) through an individual who is present in that other State for a period or periods exceeding in the aggregate 183 days in any twelve month period, and more than 50 per cent of the gross revenues attributable to active business activities of the enterprise during this period or periods are derived from the services performed in that other State through that individual, or
b) for a period or periods exceeding in the aggregate 183 days in any twelve month period, and these services are performed for the same project or for connected projects through one or more individuals who are present and performing such services in that other State
the activities carried on in that other State in performing these services shall be deemed to be carried on through a permanent establishment of the enterprise situated in that other State, unless these services are limited to those mentioned in paragraph 4 which, if performed through a fixed place of business, would not make this fixed place of business a permanent establishment under the provisions of that paragraph. For the purposes of this paragraph, services performed by an individual on behalf of one enterprise shall not be considered to be performed by another enterprise through that individual unless that other enterprise supervises, directs or controls the manner in which these services are performed by the individual.
For the purposes of Paragraph 7, where an enterprise of a Contracting State that is performing services in the other Contracting State is, during a period of time, associated with another enterprise that performs substantially similar services in that other State for the same project or connected projects through one or more individuals who, during that period, are present and performing such services in the State, the first mentioned enterprise shall be deemed, during that period of time, to be performing services in the other State for that same project or for connected projects through these individuals. For the purpose of the preceding sentence, an enterprise shall be associated with another enterprise if one is controlled directly or indirectly by the other, or both are controlled directly or indirectly by the same persons, regardless of whether or not these persons are residents of one of the Contracting States.
With respect to business profits to be attributed to a permanent establishments Article 7, Paragraph 3 of the DTA (“Business Profits”) contains a so-called appropriate adjustment clause.
Immovable property
Article 6, Paragraph 1 of the DTA (“Income from Immovable Property”) arranges that income derived by a resident of a Contracting State from immovable property (including income from agriculture or forestry) situated in the other Contracting State may be taxed in that other State.
With respect to immovable property Article 13, Paragraph 1 of the DTA (“Capital Gains") arranges that gains derived by a resident of a Contracting State from the alienation of immovable property referred to in Article 6 and situated in the other Contracting State may be taxed in that other State.
Article 13, Paragraph 2 of the DTA subsequently arranges that gains derived by a resident of a Contracting State from the alienation of shares, other than shares in which there is substantial and regular trading on a Recognized Stock Exchange, or comparable interests, deriving more than 50 per cent of their value directly or indirectly from immovable property situated in the other Contracting State may be taxed in that other State.
Associated enterprises
Article 9, Paragraph 2 of the DTA (“Associated Enterprises”) contains a so-called appropriate adjustment clause.
Dividends
If the beneficial owner of the dividends is a resident of the other Contracting State, Article 10, Paragraph 2 of the DTA (“Dividends”) maximizes the withholding tax a Source State is allowed to withhold over dividends to:
a) 0 per cent of the gross amount of the dividends if the beneficial owner is a pension scheme or fund or in the case of Colombia a mandatory pension fund;
b) 5 per cent of the gross amount of the dividends if the beneficial owner is a company which holds directly at least 20 per cent of the capital of the company paying the dividends;
c) 15 per cent of the gross amount of the dividends in all other cases.
Article 10, Paragraph 3 subsequently arranges that the provisions of paragraph 2 shall not apply:
a) to dividends paid by a company resident of Colombia out of profits that have not been subject to tax on income at the level of the company according to the laws of Colombia; or
b) where profits of a resident of the United Kingdom attributable to a permanent establishment in Colombia have not been subject to tax in Colombia according to the laws of Colombia, and such profits, upon transfer out of Colombia, are treated as dividend equivalents according to the laws of Colombia.
Instead, such dividends or dividend equivalents may be taxed in Colombia at a rate not exceeding 15 per cent of the gross amount of the dividends or the dividend equivalents.
Interest
If the beneficial owner of the interest is a resident of the other Contracting State, Article 11, Paragraph 2 of the DTA (“Interest”) maximizes the withholding tax a Source State is allowed to withhold over such interest to 10 per cent of the gross amount of the interest.
Royalties
If the beneficial owner of the royalties is a resident of the other Contracting State, Article 12, Paragraph 2 of the DTA (“Royalties”) maximizes the withholding tax a Source State is allowed to withhold over such royalties to 10 per cent of the gross amount of the royalties.
Capital gains
Article 13, Paragraph 5 of the DTA (“Capital Gains”) arranges that subject to Article 13 Paragraph 2 (See above under Immovable property), gains derived by a resident of a Contracting State from the alienation of shares or other rights representing the capital of a company that is a resident of the other Contracting State may be taxed in that other Contracting State where the resident of the first mentioned Contracting State owned, at any time within the twelve month period preceding the alienation, 10 per cent or more of the capital of that company, but the tax so charged shall not exceed 10 per cent of the net amount of such gains. However, this paragraph does not apply to gains derived from the alienation or exchange of shares in the framework of a tax-free reorganisation of a company, a merger, a division or a similar operation.
Principal Purpose Test
Article 22 of the DTA (“Miscellaneous Provisions”) contains an anti-abuse clause in the form of a Principal Purpose Test.
Other
Furthermore the DTA contains a.o. provisions regarding a Mutual Agreement Procedure (Article 24), regarding the Exchange of Information (Article 25) and regarding the Assistance in Collection of Taxes (Article 26).
Click here to be forwarded to the text of the DTA as available on the website of the UK Government.
Are you looking for other DTAs? Then check our section DTAs & TIEAs, a very efficient way to locate numerous DTAs.
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