Colombia US Tax Treaty: Rules for Individuals & Businesses

An income tax treaty between the United States and Colombia is not currently in force. While the two nations have engaged in negotiations, a comprehensive agreement to prevent the double taxation of income has not been finalized and ratified. Existing agreements, like the Tax Information Exchange Agreement (TIEA) and an agreement for the Foreign Account Tax Compliance Act (FATCA), facilitate sharing taxpayer information to combat tax evasion but do not provide the tax-reducing benefits of a formal treaty.

The absence of a treaty means individuals and businesses with cross-border financial activities are subject to the full statutory tax laws of both countries. This environment can create a higher risk of double taxation, where the same income is taxed by both the U.S. and Colombia. Understanding the domestic tax laws of each country is the primary way to manage tax obligations.

Determining Treaty Eligibility

Because no income tax treaty is in effect between the United States and Colombia, the detailed residency rules and “tie-breaker” tests found in such agreements do not apply. Instead, an individual’s or company’s liability for tax is determined solely by the domestic laws of each country.

For tax purposes in the United States, an individual is considered a resident if they meet either the “green card test” or the “substantial presence test.” The substantial presence test involves a formula based on the number of days a person is physically present in the U.S. over a three-year period. For Colombia, residency is established if an individual is present in the country for more than 183 days in any 365-day period.

Without treaty tie-breaker rules, it is possible for an individual to be considered a tax resident of both countries simultaneously under their respective domestic laws. This “dual resident” status can lead to worldwide income being taxed by both the U.S. and Colombia, making it necessary to rely on unilateral relief provisions, like foreign tax credits, to mitigate double taxation.

Impact on Personal Income Taxation

The lack of a tax treaty directly affects the taxation of personal income flowing between the U.S. and Colombia, as treaty benefits like reduced withholding tax rates are not available. Any such payments are subject to the full statutory withholding tax rates of the source country. For example, U.S.-source dividends paid to a Colombian resident are subject to a 30% U.S. withholding tax, rather than a lower rate of 5% or 15% that a treaty might provide.

Interest payments from U.S. sources to a Colombian resident face the same 30% statutory withholding tax. From the other direction, Colombia imposes its own withholding taxes on payments to non-residents. Payments for royalties, technical services, and consulting from Colombia to a U.S. resident are subject to a 20% withholding tax, a rate not reduced by any treaty.

Regarding capital gains, each country applies its own domestic rules. The U.S. generally does not tax capital gains of non-residents on personal property, like stock in U.S. companies, unless it is connected to a U.S. trade or business. However, gains from the sale of U.S. real property interests are subject to U.S. tax under the Foreign Investment in Real Property Tax Act (FIRPTA). Pensions and social security are also taxed based on each country’s domestic laws.

Impact on Business Income Taxation

For businesses, a consequence of not having a tax treaty is the absence of a “Permanent Establishment” (PE) threshold for taxation. A PE article in a treaty sets a high bar for when a foreign company’s business profits can be taxed in another country, typically requiring a fixed place of business. Without a treaty, a much lower level of activity can trigger a tax liability.

In the United States, a Colombian company can be subject to U.S. income tax if it is “engaged in a trade or business in the United States” (ETBUS). This is a less stringent standard than the PE concept and can be met through regular and continuous economic activity, even without a fixed office. If a Colombian enterprise is ETBUS, its income that is “effectively connected” with that business is taxed at standard U.S. corporate rates.

This lower threshold increases the risk that a Colombian company’s activities in the U.S. could create a taxable presence. Activities such as having dependent agents who regularly conclude contracts on the company’s behalf could lead to a tax obligation.

The Limitation on Benefits Provision

The Limitation on Benefits (LOB) article is a standard feature of modern U.S. tax treaties. Its purpose is to prevent “treaty shopping,” a practice where residents of a third country structure their investments through a company in a treaty country to gain access to that treaty’s benefits. The LOB provision sets forth a series of objective tests that a resident of a treaty country must meet to prove a sufficient connection to that country.

Because there is no income tax treaty between the United States and Colombia, there is no LOB provision to consider. The concept is irrelevant to U.S.-Colombia cross-border transactions since there are no treaty benefits to claim. All residents and non-residents are simply subject to the full domestic tax regimes of each country.

Claiming Treaty Benefits and Avoiding Double Taxation

Procedural forms associated with claiming treaty benefits, while still potentially required, serve a different purpose in this context. For example, a Colombian resident receiving U.S.-source income would still provide a Form W-8BEN to the U.S. payer. However, the form would be used to certify their foreign status for withholding purposes, not to claim a reduced rate of tax under a treaty article.

U.S. taxpayers are required to file Form 8833, Treaty-Based Return Position Disclosure, if they take the position that a U.S. tax treaty overrules or modifies a provision of the Internal Revenue Code. Since there is no treaty with Colombia, there is no basis for filing this form in relation to Colombian income. The form is not applicable to transactions between the two countries.

The primary mechanism for mitigating double taxation in the absence of a treaty is the foreign tax credit (FTC). This is a unilateral form of relief provided by a country’s domestic law. A U.S. resident who pays income tax to Colombia on their Colombian-source income can claim a credit for those taxes on their U.S. federal income tax return, subject to certain limitations. This credit directly reduces their U.S. tax liability.