Colombia’s tax authorities (DIAN) released new guidance in January 2024 (Tax Opinion 42), in which they clarify the place of effective management (PoEM) rules, specifically with respect to foreign companies. The scope of the PoEM rules was broadened in the 2022 tax reform to include the place where management decisions relating to day-to-day commercial activities are made and the place where management typically exercises authority over the company’s affairs.
The DIAN’s opinion states that a foreign company with its PoEM in Colombia during a taxable year will be considered a domestic company for the entire year. Once a company is deemed to be a resident of Colombia, it is subject to tax in Colombia on income derived from both domestic and foreign sources. The company also will be required to fulfil all tax obligations applicable to domestic companies, such as filing an annual income tax return for the relevant taxable year. This conclusion is based on article 12-1 of the Tax Code, which does not specify a minimum duration for a company or entity to be present in Colombia to be considered a domestic company.
To determine if a nonresident has a PoEM in Colombia, it is necessary to analyse the facts and circumstances that demonstrate that Colombia is the place where (i) commercial and management decisions are made to conduct day-to-day activities; and (ii) the directors carry out their activities and the day-to-day activities of the company are performed.
If a nonresident company mistakenly determines that it has a PoEM in Colombia for a taxable year and corrects the designation in the tax registry, the entity will not be considered a domestic company for the entire taxable year. If the tax registry is not updated, the tax authorities may impose a penalty of USD 12 per day for delaying the update. In any case, the nonresident should request cancellation of the tax registration.
Martha Reyes
BDO in Colombia