Regulation of the thin capitalization rule

The Colombian Government recently issued Decree 761 of 2020, regulating the thin capitalization rule set forth in Article 118-1 of the Colombian Tax Code (CTC). Among other measures, the Decree:

1. Specified the definitions of: i) Guarantee, ii) Back-to-back, iii) secured creditor, iv) infrastructure of public services and transport, iv) economic-related parties; and, v) net assets.

2. Established the procedures to determine: i) the total average amount of the debts contracted, directly or indirectly, in favor of national or foreign economic-related parties; and, ii) the non-deductible or capitalizable interests for the respective taxable period.

3. Reiterated that in order for the deductions or capitalization of interests to be feasible, the requirements for the deductions established in Article 107 of the CTC must be met, such as the cause-effect link with the income-producing activity, the proportionality and the necessity factors, all of which must be evaluated with commercial criteria.

4. Established that the certificate that the creditor must issue to the debtor, for each taxable year, must contain at least the following information:

i) date and place of issuance;

ii) identification of the parties involved in the loan: name, ID number and country of domicile or tax residence;

iii) amount of the credit;

iv) credit term;

v) interest rate;

vi) an express indication that:

• The credits do not correspond to secured indebtedness operations between related entities through a guarantee, back-to-back, or
• In case of related parties, the credits do not correspond to indebtedness operations secured by a guarantee, in which the economic-related party is the secured creditor; or to any other operation in which substantially such related entities act as creditors.

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Author: Juan Fernando Díaz I [email protected] I Tax Law