Taxation of dividends received from abroad (Part 1)

It is well known that law 1819 of 2016 introduced in our tax legislation the dividend tax. What is not well known is the impact that such tax may have on certain types of dividends. The purpose of this article is to study the effect that the dividend tax has on dividends received from abroad, and which are received by Colombian tax residents, whether they are individuals or legal entities. Due to the length of this article, it will be published in two parts; in the first part there will be an analysis of the supranational norms that regulate the subject and in the second part there will be an analysis of the national norms that do the same.

In order to study this phenomenon, a hierarchical normative analysis must be carried out, that is to say, the analysis must begin by analyzing what is established by the norms of higher rank and then by those of lower rank. For this specific case, the superior norm is the supranational law (Decision 578 of the Andean Community of Nations -CAN-) and the treaties to avoid double taxation. In relation to the latter, it is clear that they take precedence over domestic law by the theory of moderate monism, a theory accepted by the Constitutional Court in Ruling C-383/2008 which indicates that, although these are approved through an ordinary rule, being a rule of international law adopted by Colombia, it applies in preference over domestic rules governing the same subject.

Thus, whenever a Colombian tax resident receives a dividend from a company that has its tax residence in a country of the CAN or in a country with which Colombia has signed a treaty to avoid double taxation, the rules established therein shall be applied in preference.

CAN Decision 578 establishes, in its Article 11, that dividends and participations can only be taxed by the member country where the company that distributes them is domiciled; never on the head of the receiving company or investor or those who are partners or shareholders of the latter. Likewise, the dividend received from a company of the CAN may be redistributed in Colombia to the partners of the company as an income not constituting income or occasional gain -INCRGO-, without prejudice, obviously, to the tax on dividends (art. 49 of the E.T.).

In turn, the treaties to avoid double taxation subscribed by Colombia, which follow the treaty model created by the OECD, indicate, in article 10, that the dividends paid by a company of a State hiring a resident of another Contracting State, may be subject to taxation, both of the receiving State and of the payer, but in the case of the latter such taxation must not exceed 5% to 15%, depending on whether certain requirements of minimum capital ownership in the companies are met.

Based on this model, countries such as Chile, Spain, Switzerland and Mexico, within their agreements to avoid double taxation subscribed with Colombia, have established that if the dividend of a company resident in a contracting country is paid to a resident of the other contracting country, it will not be taxed if the final beneficiary of the payment has at least a percentage equivalent to 20% of the capital of the company paying the dividend (this percentage applies for the agreements with Spain and Switzerland, while for Chile a percentage of 25% applies and for Mexico it is enough to have a share of the company paying the dividend).

These considerations cover, in summary form, the supranational rules governing this phenomenon.