In Colombia the withholding tax rate for dividends or participations paid to non-residents is at 10% of the value of the payment. For many of those affected, this caused astonishment and unrest, as taxes on dividends were previously not paid in Colombia.
With the introduction of Law 1819 in 2016, which was modified in Article 51 of Law 2010 of 2019, the receipt of dividends by shareholders or participants of Colombian companies was, for the first time, considered a taxable event. Colombia chose a system of withholding at source on payments or credits on account made to the non-resident partner or participant.
Giovanny Tellez, Legal Advisor, ECOVIS Colombia SAS, Bogotá, ColombiaBusinesses not resident in Colombia must pay withholding tax on dividends.
Who Must Pay Withholding Tax on Dividends
The 10% rate is applicable when there is no Double Taxation Avoidance Agreement (DTAA) in place. Where there is a DTAA, the applicable rate would be the one established in the agreement and the withholding may even be reduced to 0%, depending on the residence and nature of the beneficiary.
In Colombia, resources distributed by branches or permanent establishments to the main company are treated in the same way as dividends. Therefore, when distributing profits, a Colombian branch of a non-resident company must withhold 10% at source if there is no DTAA.
It is also relevant to verify if the company or entity distributing the dividends has paid taxes on its profits. If not, it is possible that the withholding is increased up to the amount of the tax not paid by the company distributing the profits, explain the Ecovis experts.
This usually occurs with income that is exempt for the partnership, but which cannot be distributed as “income not constitutive of income or occasional gain” in favour of the partners. In this case, the 10% withholding would be applied once the deduction of the unpaid tax is made on behalf of the partnership, as established in Articles 48 and 49 of the Colombian Tax Statute.
For further information please contact:
Giovanny Tellez, Legal Advisor, ECOVIS Colombia SAS, Bogotá, Colombia