Some ef­fects of Colom­bia’s Tax Re­form for for­eign lenders and the Colom­bi­an bor­row­ers

Law 1943 of 2018 (Ley de Financiamiento)- Colombia’s last tax reform (the “Tax Reform”), modified, among others, some of the tax legal provisions applicable to the financial market. Regarding the abovementioned, we hereby bring up some of the amendments introduced by the Tax Reform focusing on the effects for foreign lenders and the Colombian borrowers:  

1. Article 86 of the Tax Reform sets differential rates for the withholding tax, according to different possible forms of financing. Said rates can be summarized as follows:

Taxable event

Withholding tax rate

Payments or account deposits of interests, different from the ones mentioned below

20% of payments or account deposits’ nominal value.

Payments or account deposits of financial returns made to non-Colombian residents, resulting from loans obtained off-shore with a term which is at least of one (1) year

15% over the payments’ value corresponding to interest or financial cost.

Payments of interests or financial costs of the lease rate, resulting from lease agreements entered into directly or through leasing companies with foreign companies who do not have a domicile in Colombia  

15% over the payments’ value corresponding to interest or financial cost.

 

 

Payments resulting from lease agreements related to vessels, helicopters and/or aerodynes, as well as their parts, entered into directly or through leasing companies, with foreign companies who do not have a domicile in Colombia

1% over the Payments account deposits’ gross value

Payments of financial returns or interests made to non-Colombian residents, resulting from credits or credit securities with a term which is at least of eight (8) years for the financing of PPP (Law 1508 of 2012)   

5% of the payments or account deposits’ value

2. According to article 74 of the Tax Reform, under which article 25 of the  Colombian Tax Code was amended, the loans that are denominated and/or disbursed  in local or foreign currency granted by non-Colombian residents to (i) financial corporations, (ii) financial cooperatives, (iii) commercial financing companies, (iv) banks, (v) Bancoldex, (vi) Finagro, (vii) Findeter and (viii) the companies that are under surveillance of the Colombian Superintendence of Corporations under a prudential regulation regime and whose exclusive social purpose is the granting of credits and whose indebtedness is used to develop its social purpose, will not generate Colombian source income. Consequently, since these loans do not generate a Colombian source income, said loans and their corresponding interests are not subject to withholding tax. 

3. According to article 87 of the Tax Reform, the external loans that are disbursed by non-Colombian residents in local currency are not subject to the tax on financial movements (GMF), provided that these loans are directly disbursed to the debtor/borrower. In case the disbursement is made to a third party different from the debtor/borrower, said disbursement will only be exempt from the tax on financial movements (GMF) whenever the debtor/borrower uses the proceeds for the purchasing of housing units, vehicles or fixed assets.

4. Article 55 of the Tax Reform established that the debt interests of a specific taxable period are deductible for the debtors/borrowers from their income tax balance, provided that they fulfill all the legal requirements. Besides, this legal provision states that whenever the debt that originates said interests is entered into directly or indirectly for national or foreign economic associates, accrued interests’ deduction can only take place whenever the total average amount of the debts in the specific taxable period, is not exceeded by the result of multiplying by two (2) the income taxpayer’s net worth as of December 31 of the immediately preceding taxable period; the interests’ amount in excess of the aforementioned limit are not deductible. 

  • For the purpose of the interests’ deduction, whenever the indebtedness is not entered into for economic associates the income taxpayer shall demonstrate before the National Tax and Customs Department (DIAN) and throughout a certificate issued under oath by the national or foreign lender, that the loan does not correspond to an indebtedness operation entered into with economic associates through a guarantee, back-to-back or any other operation in which said associates act as lenders.
  • The limit included in this legal provision for the deduction of interests resulting from loans entered into for economic associates, is not applicable, among others, in the following cases: (i) To income taxpayer entities that are under inspection and surveillance of the Colombian Superintendence of Finance, (ii) To those who are engaged into factoring activities under the terms of Decree 2669 of 2012, as long as said factoring activities  are not provided in more than a 50% rate to economic associates, (iii) to companies on a non-productive phase, and  (iv) to the transport infrastructure and public utilities projects financings, provided that said projects are managed by special purpose corporations, entities or vehicles. Even though the ratio established by Law 1607 of 2012  was reduced (from 1/3 to 1/2), which seems more restrictive, we believe that this represents a huge step for the Colombian debtors/borrowers borrowing capacity in comparison with the previous limitations included in Law 1607 of 2012 because, despite the ratio is more restrictive, it is only limited for indebtedness operations entered into for national or foreign economic associates. This means that the thin capitalization restriction was removed for the rest of the operations.

5. Article 56 of the Tax Reform added a letter c) to Section 124-1 of the Colombian Tax Code, allowing to deduct the interests and other financial expenses attributable to permanent establishments if the relevant payments were subject to the withholding tax. This new provision clarifies the tax authority’s position on the conditions that interests, and financial expenses of permanent establishments should meet in order to be considered as deductible for Colombian income tax purposes. Bear in mind that according to the Colombian tax authority rulings issued as of 2018, this kind of expenses were deductible under article 122 of the Colombian Tax Code.

For further assessment on these matters please contact our Partners Daniel Rodríguez Bravo and Natalia Guerrero, who lead the Banking & Finance and Tax Law Areas of the Firm respectively.

Authors

Natalia Guerrero
Natalia Guerrero
Partner
Bogotá
Daniel Rodríguez
Daniel Rodríguez, LL.M.
Partner
Bogotá – Siete 77
Laura Roldán
Laura Roldán
Associate
Bogotá – Siete 77