How to avoid double taxation between Colombia and Spain?

Before you know how avoid double taxation between Colombia and Spain, we should know when double taxation occurs between two countries. Keep reading if you want to know everything you need.Within this scope, two types of double taxation are distinguished: 

• On the one hand, there can be a legal double taxation. This happens when the same income, from the same taxpayer, is taxed in two or more countries, either due to a dual residency conflict, in which a subject must pay taxes on his or her worldwide income in both states; or either because the subject resides in one country and is, in turn, obliged to pay taxes on income that comes from another country. 
• On the other hand, the economic double taxation arises from the levy of two or more taxes on the same income.

The most common way of eliminate international legal double taxation, is by applying the article 31 of the Corporate Tax Law. This article is related to the deduction to avoid international double taxation, which allows us to deduct in the full amount all or part (up to our effective corporate tax rate) of the taxes paid abroad.

At UR Global we offer the service of Tax Optimization annually to each of the 400 clients we manage. In addition to managing many, performing specific international tax optimization services. We do business consulting for optimize fully compliance with tax obligations. Likewise, a Convention to avoid double taxation (CDI) is an international agreement signed between two or more countries, through which the situation is foreseen that the same income may be subject to tax, for the same taxable event, in the different countries. The Agreement agrees, among other aspects, which of them will have the tax sovereignty to tax said income, which can occur both in the country of residence and in the country of the source of the income. In this way, there could be certain tax benefits, such as the reduction or even exemption of the withholding rate to be applied at source.

Currently, Spain has 94 double taxation agreements in force signed with countries such as Mexico, Colombia, Portugal, Chile and Brazil. These agreements make it possible to reduce the local tax rates that the income generated in said countries generates. At the same time, as provided in the first section of article 96 of the Spanish Constitution, “Validly concluded international treaties, once officially published in Spain, will form part of the internal legislation.”

Likewise, Spain is a member country of the OECD (Organization for Economic Cooperation and Development) and, therefore, is subscribed to the “Model Tax Agreement on Income and Assets” of this organization. For this reason, Spain has the power to formulate reservations of rights and make objections to certain interpretations related to the double taxation agreements.

Colombia It is a country that has 11 CDI in force with different countries, in addition to three more in the process of coming into force. Among them, are those subscribed with Spain, Portugal, Mexico and Chile. 

Also, it is worth highlighting Decision No. 578, which consists of an agreement executed between the Member Countries of the Andean Community, with the purpose of eliminating double taxation on the activities of natural and legal persons domiciled in said countries. In the Colombian case, there are a series of peculiarities when formulating its international agreements that differentiate it from the rest.

The Andean country is also a member state of the OECD and has the power to formulate reservations of rights on the interpretations of the OECD in relation to the Agreements to avoid Double Taxation. Thus, it is worth highlighting position 7.2 that Colombia makes to article 12 of the CDI on fees and royalties, in which “the right is reserved to include in the definition of fees the payments received for the provision of technical assistance, technical services and consulting services”, being subject to withholding. as in the case of Brazil, but unlike other surrounding countries.

In relation to Software as a Service (SaaS), the DIAN (National Tax and Customs Directorate) understands that it is software that “allows the client to use the cloud provider’s applications that run on a cloud computing infrastructure. The applications are accessible from several client devices through a thin client interface.” 

On the one hand, if we are faced with a computer application that is considered a technical service because it is not automated (application of art or technique by an operator, advisory nature…), it would not meet all the requirements of Cloud Computing or cloud computing. Therefore, it would be necessary to practice a 20% withholding at source, or, if a agreed double taxation, 10-15%. It would also be taxed by Sales Tax (VAT) at 19% of the value of the transaction. 

On the other hand, if we are dealing with a computer application that is completely automated (does not contain characteristic elements of the technical service), it is not subject to withholding at source and, in addition, would be exempt from VAT.

If you still have doubts, contact us, as specialists in tax optimization in Colombia, we will resolve all your concerns.