According to article 118-1 of the Tax Code, taxpayers can only deduct interests accrued on debts, whose total average amount during the respective tax period, do not exceed the result of multiplying by three the net equity determined as on 31 December of the previous year. Consequently, interests that exceed the above-mentioned limit shall not be deductible for income tax purposes34. Decree 3027 of 2013, which regulates article 118-1 of the Tax Code, established that the debt total average amount shall be determined by calculating the following items:
- Debts' permanency. This concept refers to the number of calendar days in which the debt remained in tax taxpayer's equity during the respective tax year. The day in which the debt was paid must not be taken into account in this calculation. For debts acquired in previous taxable periods, the entry day will be 1 January of the respective taxable year.
- Base: It is the value over which interests are assessed.
- Debt expressed in weighted terms: It is the result of multiplying the debt's permanency by the base.
- Total amount of debt expressed in weighted terms: It is the sum of the taxpayer’s debts expressed in weighted terms.
- Debt total average amount: It is the result of dividing the total amount of debt expressed in weighted terms by the number of calendar days of the respective taxable year.
When partial payments are made, the identification of the above mentioned items must be done for each part of balance pending to be paid, as if they were independent debts.
For determining the interests that are not deductible, the following items must be determined:
- Maximum amount of debt generating deductible interests: It must be determined by multiplying the net equity by three (3).
- Excess of debt: It must be determined by subtracting the "maximum amount of debt generating deductible interests" from the "debt total average amount".
- Proportion of non-deductible interests: It must be determined by dividing the excess of debt by the total average amount of debt.35
- Non-deductible interests of the taxable period: It must be determined by applying the proportion of non-deductible interest to the total amount of interests paid in the respective period.
Finally, thin capitalization rules are not applicable to: (i) income taxpayers monitored and controlled by the Financial Superintendence of Colombia; (ii) income taxpayers which carry factoring activities in the terms specified in Decree 2669 of 2012; (iii) the financing of infrastructure projects of public services, provided that the projects are run by companies, entities or special purpose vehicles36. However, said rules do apply to the suppliers of the companies, entities or special purpose vehicles on charge of the infrastructure project; and (iv) , thin capitalization rules are not applicable in the taxable year in which the entity was set up.
In accordance with article 15 of Act 1739 of 2014, as from taxable year 2015, said rules also apply for Income Tax for Equity – CREE purposes.
34The Colombian Constitutional Court in Judgments C-665 of 2014 and C-622 of 2015, confirmed that said rule is in accordance with the Constitution of Colombia.
35This provision was modified by Decree No. 627 of 2014.
36According to the rulings of the tax administration, thin capitalization rules do not apply to the financing of infrastructure projects related to public transportation as long as their nature is stable and permanent. (Ruling No. 50283 of 2013)