a. How the Use of One or More Independent Contractors Creates a Permanent Establishment in Country and the Ramifications
The Colombian Tax Code provides a statutory definition of permanent establishment, which mainly includes the OECD Model Tax Convention’s definition of Article 5. In addition to the statutory provision, the tax treaty permanent establishment definition applies when they exist. Colombia has a growing network of Double Taxation Agreements, including treaties concluded with: India, Czech Republic, Korea, Mexico, Chile, Switzerland, Canada, Portugal, France and the United Kingdom (however the last two treaties are not yet in force).
The analysis of whether a permanent establishment may arise in Colombia as a consequence of the engagement of one or more individuals in the country mainly depends on whether the individual hired in Colombia can be considered to be a dependent agent, who habitually exercises an authority to conclude contracts in the name of its foreign contracting party. In this case, a permanent establishment of the foreign employer will arise in Colombia under the terms of the dependent agent rule, even if the foreign employer does not have a fixed place of business in the country.
However, consistent with the OECD Model, the Colombian statutory provision includes some exceptions to the existence of a permanent establishment, namely if the dependent agent has no authority to negotiate substantial elements of an agreement or to legally bind the foreign entity within Colombia. If the employee will not have the legal capacity to bind the foreign entity, this should significantly mitigate the permanent establishment risk from a dependent agent point of view.
Currently there are no judicial precedents, which we know of, declaring the existence of a permanent establishment in Colombia under the dependent agent rule.