Spain-Colombia treaty: practical MLI application three years on

Context

The Spain-Colombia DTA entered into force in 2008 and was amended by the Multilateral Instrument (MLI) in 2022. The most relevant clauses are the Principal Purpose Test (PPT) and the simplified Limitation on Benefits (S-LOB) rule, both targeting treaty shopping.

How DIAN is applying the PPT

Colombia's tax authority has begun challenging Spanish holding structures with thin substance. Observed criteria:

• Effective employees in Spain (minimum 2-3 with decision-making functions).
• Own office or exclusive coworking.
• Investment committee meeting physically in Spain.
• Documented decisions (minutes) with real economic analysis.

Practical cases

1. Residual ETVE holding (no substance): denial of 0% reduced withholding on dividends; application of internal 7.5% rate.
2. ETVE with proven substance: 0% acceptance under DTA, subject to Colombian 10% dividend tax.
3. ETVE-Luxembourg structures: high PPT risk, especially if dividend flow passes through a Luxembourg IP holding.

Recommendation

ETVEs remain efficient, but the substance standard has risen. Colombian groups with Spanish holdings must review operational support annually and maintain documentary file (employment contracts, board minutes, lease agreements). The cost of failing to do so is retroactive loss of treaty benefit.