The term “permanent establishment” is not expressly defined by Commerce Law. However, article 474 of the Commerce Code lists certain activities that are regarded as “permanent”. About this list, the Superintendence of Corporations has interpreted that not only the activities listed therein are to be regarded as permanent, but that there are other activities that may imply some permanence in its performance.
In this order, each case is different, and thus, it is in a case basis that the Colombian Law determines if a foreign company has a permanent activity in the territory, and consequently, whether it should incorporated a legal entity in Colombia, such as a branch.
Given the above, there are certain facts that help to settle on whether an activity can be classified as a permanent. The Superintendence of Corporations has said that stability, perseverance, durability and immutability are characteristics that define a permanent activity and the necessity of a branch within the country. In addition, the structure and the means that are used to pursue the said activity, comes as an important matter to decide if the company has a permanent activity.
The concept of permanent establishment was incorporated by Act 1607 of 2012
Law 1607 of 2012 introduced in the national legal tax system the notion of permanent establishment as taxpayer of income tax in Colombia, in general terms, it is established that when foreign companies carry out their business activities in Colombia through a fixed place of business, it will be considered that they have a permanent establishment in the country, that can be subject to taxation in Colombia.
In addition, according to the mentioned law, when a person, other than an independent agent, acts on behalf of a foreign company, and customarily has or exercises in the national territory powers that authorize him to conclude acts or agreements that are binding for the company, it
will be considered that said company has a PE in Colombia, in respect to any activity that such person carries out for the foreign company, unless the activities of that person are of a preparatory or auxiliary nature.
It will also be considered that a resident abroad has a permanent establishment, when he acts in the national territory through an individual or legal person who is an independent agent, if the latter does not act within the ordinary framework of his activity. For this purpose the activities of this person correspond to any of the following assumptions:
a) Perform all or almost all of their activities on behalf of the foreign company, such as, i.e. mostly exercise activities economically correspond to the abroad-resident and not to their own activities.
b) Carry out transactions with the abroad-resident, subject to conditions regarding their commercial and financial relations which differ from them that would have established or agreed between independent enterprises. That is, whenever prices or amounts of considerations are used different from those that unrelated parties would have used in comparable operations.
The above does not apply when the activity carried out by this company has an exclusively auxiliary or preparatory nature, so it is not understood that a foreign company has a PE in the Colombia.
It is important to highlight that the notion of PE is just relevant for tax effects and does not generate in any case the obligation to incorporate a branch, subsidiary or filial in the country. Indeed, what is concluded from the rule mentioned before, is that the configuration of a PE by a foreign company, only generates a formal tax obligation of filing the income tax and
complementary returns as a taxpayer, but does not create the obligation to incorporate an investment vehicle in the country.
That said, regarding the effective exposure to pay taxes in the country, the Tax Code must be analyzed because it provides expressly that “non-resident individuals, companies, and foreign companies that have a branch or a permanent establishment in the country, depending on the case, will be subject of income tax for its incomes and capital gains considered of national source, that are attributable to the permanent establishment or branch office, (…)”. It is important to mention that according to the tax code, it can only be considered as income of national source the one that comes from the sale of goods that at the moment of the sale are in the national territory, the provision of tangible and intangible assets inside the country, and the provision of services in the territory, permanent or temporary, with or without its own establishment.
Then, the national source income received by the PE in Colombia will be taxed with the income tax and the income tax for equality – CREE. Consequently, the PE must fulfill an income tax and CREE return for the national source income received in the taxable year. Those returns have to discriminate the cost and expenses for the activities of the PE, which are determinate by an study that takes into account the functions, assets, employees and risks assumed by the company through the branch or permanent establishment and other parts of the company that the establishment or branch are part of for obtaining capital gains and incomes.
In accordance with current tax legislation, in Colombia PEs are considered subjects of taxation for its national source income that are attributable to the PE, and are obliged to comply with the following tax obligations:
* Obtain a RUT: The PE must obtain a RUT before the DIAN
* Obtain a RIT: There is no regulation issued by the Authority’s tax district of Bogotá, which regulates the form and the procedure to be followed for purposes of registration at RIT.
* Study for the allocation of revenues and capital gains: For purposes of determining the assets, liabilities, capital, income, costs and expenses which are attributable to the PE should make a study of attribution.
* Keep accounts for the PE:The PE must bear his own accounting, in which record their national income, expenses and costs related to these
* Fulfill the income tax return and CREE tax returns for the correspondent taxable year: The PE must fulfill an income tax return and a CREE tax return on the deadlines set by law for that purpose.
* Regarding the value added tax (VAT) and the industry and commerce tax (ICT):The PE will be responsible for these taxes, since is part of the operations that cause them.
* Withholding tax on income and self-withholding of CREE: The PE will be responsible for and withholding agent for income tax withholding and self-withholding of CREE
Tax authorities issue guidance on attribution of profits to a PE
Colombia’s tax authorities published a ruling dated 3 September 2015 that addresses some issues regarding the application of the rules for the attribution of profits to a permanent establishment (PE) in Colombia.
The ruling explains that, in accordance with guidance issued in 2013, PEs and branches of foreign companies in Colombia must conduct an analysis to support the profits attributed to the PE or branch. The analysis must be carried out in accordance with the arm’s length principle, and must describe the PE or branch’s functions, assets and staff, as well as the risks assumed by the foreign head office through the PE or branch. An analysis must be prepared and submitted to the tax administration for each fiscal year, regardless of whether the PE or branch carries out
activities or transactions with related parties during the fiscal year. PEs or branches that are required to file a transfer pricing study with the tax administration may submit the profit attribution analysis with the transfer pricing study.
The PE or branch must retain the analysis for five years (counted starting from 1 January of the year following the year in which the analysis was carried out). The tax authorities may request a copy of the analysis for purposes of verifying the accuracy of the information.
Mr. Jiménez received his Colombia law J.D. from Universidad del Rosario (2004) and LL.M degrees from Universidad del Rosario in Colombia in Colombian taxation (2006), Universidad del Externado in Colombia in custom law (2007) and University of Florida in the United States of America in international taxation (2009). Finally, he did a Master in Business Administration (MBA) in Universidad de los Andes (2013). He has experience in the fields of Business Tax, International Tax, Tax Management Consulting and M&A. email@example.com
This publication contains general information only and it is none a professional advice. Before making any decision or taking any action that may affect your business, you should consult a qualified professional adviser. The author is not responsible for any los whatsoever sustained by any person who relies in this publication.