Colombia dividend tax: 20% or 5%

Two identical companies own two identical Colombian subsidiaries. Both subsidiaries distribute the same dividend out of the same taxed profits. The Canadian parent receives it after 5 per cent Colombian tax. The US parent receives it after 20 per cent. Nothing about the businesses differs. What differs is that Colombia has a tax treaty with Canada and none at all with the United States.

The domestic rate is 20 per cent

Article 245 of the Colombian Tax Statute sets the rate on dividends received by foreign companies without a principal domicile in Colombia, by non-resident individuals, and by estates of non-resident decedents. Article 4 of Ley 2277 de 2022 rewrote it to read veinte por ciento (20%), doubling the previous 10 per cent with effect from 2023.

Paragraph 2 of the same article provides that the tax is collected by withholding on the gross amount paid or credited. For the non-resident this is final. There is no Colombian return to file and no mechanism to recover a portion later.

A warning on sourcing, because it catches people. The widely used Función Pública compilation of the Tax Statute still displays article 245 at 10 per cent, while citing article 4 of Ley 2277 de 2022 as the amending provision — it names the amendment without applying it. Anyone quoting that page will understate the rate by half. The Senate's own compilation of the law carries the correct text.

And it is 48 per cent if the profits were never taxed

Paragraph 1 of article 245 deals with distributions out of profits that would have been taxable had they been distributed to a Colombian company — profits that escaped corporate tax through an exemption or by exceeding the untaxed ceiling in article 49. Those distributions first bear the corporate rate under article 240, and only then does the 20 per cent apply to what remains.

On a distribution of 100: the corporate charge takes 35, leaving 65; the 20 per cent then takes 13. Total 48.

This is the number that surprises finance teams who have modelled 20 per cent and then discover that the Colombian entity's distributable reserves include exempt income. The composition of the reserve matters as much as its size.

One further nuance worth checking on any legacy structure: article 246-1 restricts the entire dividend-tax regime to profits generated from tax year 2017 onward. Pre-2017 retained earnings distribute outside it. For a subsidiary incorporated in the 1990s or 2000s that has accumulated earnings for decades, the order in which reserves are distributed is a live planning question.

Why the Canadian number is 5 per cent

The convention between Colombia and Canada was signed in Lima on 21 November 2008, approved by Ley 1459 de 2011, upheld by the Constitutional Court in Sentencia C-295 of 2012, and entered into force on 12 June 2012. It has applied to Colombian income taxes since 1 January 2013 and remains listed as in force on DIAN's register of treaties.

Article 10(2) caps the Colombian tax where the recipient is the beneficial owner and resident in Canada:

5 per cent where the beneficial owner is a company controlling, directly or indirectly, at least 10 per cent of the voting shares of the payer. 15 per cent in every other case.

Three features of that test are more generous than most of Colombia's other conventions. The threshold is 10 per cent rather than 25, it is measured on voting shares, and it accepts indirect control. There is no minimum holding period.

The protocol adds a provision that matters in exactly the situation described above. Where the Colombian company has not paid corporate tax on the profits being distributed — because of an exemption or because the untaxed ceiling was exceeded — paragraph 1(e) permits Colombia to tax the dividend at 15 per cent if the beneficial owner is resident in Canada. Against a domestic alternative that reaches 48 per cent, that is a substantial difference.

Article 10(6) separately caps any branch-profits-type additional tax at 5 per cent, and article 10(4) disapplies the caps where the shareholding is effectively connected to a Colombian permanent establishment of the recipient — in which case article 7 governs instead.

There is no US treaty. Not pending — absent

DIAN's official register of agreements to eliminate double taxation lists twenty entries. Several appear marked no vigente — signed but not yet in force, including the Netherlands, Luxembourg, the United Arab Emirates, Brazil and Uruguay. The United States does not appear at all, in either category.

This is worth stating precisely because it is frequently misdescribed. There is no convention awaiting ratification, no signed text sitting with the US Senate, no instrument in the pipeline. The last verifiable public statement about negotiations dates from 2021.

What does exist between the two countries is information exchange, not rate relief. A tax information exchange agreement was signed in Bogotá on 30 March 2001 and approved by Ley 1666 de 2013. A Model 1 FATCA intergovernmental agreement has been in force since 27 August 2015. Colombia is also a full participant in the OECD common reporting standard, and excludes the United States from its list of reportable jurisdictions precisely because the bilateral FATCA channel already exists.

The practical position for a US group is therefore the least favourable available: full visibility of the structure to both revenue authorities, and no reduction whatsoever on the dividend.

The obvious idea, and why it usually fails

The obvious response is to interpose a Canadian holding company between the US parent and the Colombian subsidiary. It is obvious enough that the treaty anticipates it.

Article 26(1) of the convention is a main-purpose test aimed specifically at the dividend, interest and royalty articles. It disapplies them where obtaining their benefits was one of the principal purposes of any person connected with the creation or assignment of the shares or rights.

Article 26(3) goes further and is the provision most likely to be raised. It denies the convention altogether to a company resident in one contracting state that is beneficially owned or controlled, directly or indirectly, by persons who are not residents of that state, where the tax it actually bears there is substantially lower than it would have been had the shares been held by resident individuals. A Canadian entity inserted by a US group, holding little else, sits squarely in the language.

Both caps in article 10(2) are in any event conditioned on the recipient being the beneficial owner of the dividend. That is a substantive test about who genuinely enjoys the income, not a documentary formality.

Domestically, article 869 of the Tax Statute allows DIAN to recharacterise transactions constituting tax abuse and to disregard their effects. The definition turns on artificial arrangements executed without apparent economic or commercial purpose — expressly independent of any additional subjective intent — and the statute lists as an indicium a tax benefit disproportionate to the economic risks actually assumed.

There is one structural point here that is genuinely counter-intuitive and worth knowing. Colombia signed the OECD multilateral instrument on 7 June 2017 but has never deposited its instrument of ratification, and the OECD depositary list confirms it remains a bare signatory. The multilateral instrument therefore modifies none of Colombia's treaties. There is no grafted principal purposes test, no simplified limitation on benefits, no modified preamble. Each convention operates on its own original text — which, for Canada, means article 26 and beneficial ownership, and nothing beyond them.

That cuts both ways. It means the anti-abuse architecture is narrower than practitioners accustomed to post-MLI treaties may assume. It also means the analysis must be done on the 2008 text rather than on a modern template.

What a US group can actually do

Begin with the composition of the distributable reserve. The difference between 20 per cent and 48 per cent turns on whether the underlying profits bore Colombian corporate tax. That is a matter of record, it is knowable in advance, and the sequence of distributions can be planned around it.

Check whether pre-2017 earnings remain in the entity. Article 246-1 keeps them outside the dividend-tax regime entirely.

Revisit the choice between branch and subsidiary — and note that the calculus changed this year. Article 246 taxes distributions from a Colombian permanent establishment on the same 20 per cent and 48 per cent basis. Separately, emergency legislation issued in March 2026 extended Colombia's wealth tax to permanent establishments and branches of foreign entities holding net assets above 200,000 UVT, requiring an arm's-length attribution study to fix the taxable base. Branch structures became more expensive in 2026, quite apart from the dividend question.

Where a genuine Canadian operating presence already exists within the group — real functions, real people, real decisions taken there — the treaty position is available on its own merits and should be documented as such rather than constructed after the fact.

And model the downside. A tax reform bill filed with the Chamber of Representatives on 20 July 2026 would raise the article 245 and article 246 rates from 20 to 30 per cent. It is a bill, not law. It requires four debates and was filed eighteen days before a change of government. It may not survive. But if it does, the gap between a US and a Canadian shareholder widens from fifteen points to twenty-five, and any structure whose economics depend on the current rate deserves stress-testing now rather than after the fact.