Tax treaty between France and Colombia: Finally entered into force!

Europe, LatAm

France has an extensive network of tax treaties in Latin America. However, Colombia was still a country with which France had no tax treaty entered into force, despite a tax treaty being signed back in 2015.

In France, ratification by French Parliament was voted during the year 2016. In Colombia, the procedure in Colombia to ratify a tax treaty is quite a long process: This procedure comprises four debates that must be fulfilled before the Senate and the House of Representatives. Then the tax treaty has to be validated by the Constitutional Court, which validates that the tax treaty complies with the Colombian Constitution.

The Constitutional court validated the tax treaty in December 2021, and the tax treaty has finally entered into force on January 1st, 2022.

One more year of patience will be necessary since, according to article 30 of the tax treaty, the provisions of the Convention shall have effect:

  1. in respect of taxes on income withheld at source, for amounts taxable after the calendar year in which the Convention enters into force; this means 1st January 2023
  2. in respect of taxes on income not withheld at source, for income relating to any calendar year or accounting year, as the case may be, beginning after the calendar year in which the Convention enters into force; this means accounting year starting on January 1st 2023

Basically, the tax treaty benefits withholding taxes applicable to dividends (reduced to 5% for a participation of at least 20%[1]), interest and royalties (10% instead of 20% under Colombian internal law). It is worth mentioning that fees for technical services are not included in the royalty definition, meaning that they would be considered business profits not subject to any withholding tax would apply in Colombia.

It is important to note that in contrast to other Double Taxation Agreements (also signed by Colombia under the OECD model), this one did not include within the definition of royalties the services provided by technical advisory, technical services and consultancy services. This means that, with the entry into force of this DTA, the most-favoured-nation clause contained in those DTA’s signed by Colombia, in which these services are currently included within the concept of royalties, will be activated[2].

Notwithstanding, the treaty includes services permanent establishment disposition aiming to tax the furnishing of services, including consultancy services, within the other State for more than 183 days during a 12 months period.

Regarding taxation of capital gains, in addition to the right for the source State to tax gains on shares of real estate companies, the tax treaty also provides the right of the source State to tax capital gains realised on substantial participation, which is defined as a 25% participation held by the seller alone or together with related persons, directly or indirectly. However, there is an exception when the transfer of these shares results from a reorganisation that benefits from a tax deferral in the State of the shareholder.

Finally, the tax treaty includes most of the modifications introduced by BEPS and translated into the MLI. Notably, it includes a general anti-abuse provision based on the principal purpose test in addition to the same provision inserted in the article’s dividends, interest and royalties, but also provide for an arbitration procedure if the mutual agreement procedure fails after 2 years.

Even if there has been an unusual delay between signature and entry into force, this tax treaty is more than welcome for French companies having investment or future projects in Colombia.

[1] In the case of Colombian dividends, the 5% rate will only apply if in addition to the 20% participation, dividends are paid out of profits taxed at the corporate level.

[2] Such as DTA signed with Mexico, Portugal, Czech Republic, and Canada.