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The financing transactions market was one that suffered several impacts from the modifications introduced to the tax regime through Law 2010 of 2019 (“the “Tax Reform of 2019”), impacting foreign lenders and Colombian debtors in tax aspects.
Moreover, on January 1st, 2022 the Double Taxation Agreement between France and Colombia (“DTA”), which was executed on June 2015, approved by the Colombian Congress in October 2020 and declared constitutional on December 9th, 2021, entered into force. The DTA aims to strengthen the economic relations between both nations as well as promoting the attraction of foreign direct investment.
In this newsletter we hereby present some relevant aspects included both in the Tax Reform of 2019 as well in the DTA for foreign lenders, particularly those from France, to consider when granting loans to Colombian companies.
- Withholding tax
Both the Tax Reform of 2019 and the DTA provide differential rates for withholding tax depending on the type of financing granted, as follows:
| Taxable Event | Withholding tax rate | |
| Tax Reform of 2019 1 | DTA 2 | |
| Payments or credited amounts to an account related to interests, others from the ones mentioned below | 20% of the face value of the payment or amount credited | 10% of the gross amount of interests. The DTA defines the term “interest” as: (i) income from debts of any nature, secured or unsecured by mortgage or with a provision including the right to participate in the debtor’s profits; (ii) income related from government securities; and (iii) income from bonds or debentures, including premiums and prizes related thereto 3 . |
| Payments or credited amounts to an account related to financial returns made to non-Colombian residents, resulting from loans obtained abroad with a term of at least of one (1) year. | 15% over the payments’ value that corresponds to interests or financial costs | |
| 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 are not established 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 of at least of eight (8) years for the financing of PPP (Law 1508 of 2012). | 5% of the payments or account deposits’ value. | |
2. Foreign source income
Article 84 of the Tax Reform of 2019, which amended article 25 of the Tax Code, provides that 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) companies under the surveillance of the Colombian Superintendence of Companies under a prudential regulation regime and whose exclusive corporate purpose is granting loans, and its indebtedness is used to develop its corporate purpose, will not generate Colombian source income as they will be considered foreign source income- ingresos no considerados de fuente nacional.
Thus, since these loans are not taxable in Colombia, capital and interests will not be subject to withholding tax.
The DTA does not include provisions in this regard.
3. GMF
As provided in article 99 of the Tax Reform of 2019, external loans disbursed by non-Colombian residents in local currency are not subject to the tax on financial movements (GMF), if such loans are disbursed directly to the borrower.
If the disbursement is made to a third party, loans will only be exempt from the GMF whenever the debtor/borrower uses the proceeds for purchasing of housing units, vehicles, or fixed assets.
4. Interest deductibility- thin cap restriction
Article 63 of the Tax Reform of 2019 established that the debt interests of a specific taxable period are deductible for the borrowers from their income tax balance if they fulfill all the legal requirements. Furthermore, said article provides that whenever the debt originating the interests is executed, directly or indirectly, within and between local or foreign companies under common ownership, accrued interests’ deduction will only occur whenever the total average value of the debts in the specific taxable period does not exceed 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 purposes of the interest deduction, whenever the indebtedness is not entered into between economically associated companies, the income taxpayer shall demonstrate before the National Tax Authority (DIAN) by means of certificate issued under oath by the national or foreign lender, that the loan does not correspond to an indebtedness operation entered into within associates through a security, back-to-back guaranty, or any other operation in which associate acts as lender.
- The limit included in this legal provision for the deduction of interests resulting from loans entered into between economically associated companies 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 companies engaged in factoring activities under Decree 2669 of 2012, as long as said activities are not provided in more than a 50% rate to economically associated companies; (iii) to companies on a non-productive phase; and (iv) to financing of transport infrastructure and public services projects, if 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 may seem more restrictive, we believe that this represents a huge step for Colombian borrowers’ indebtedness capacity in comparison with the previous limitations included in the previous regime. Despite the ratio is more restrictive, it is only limited for indebtedness operations entered into between economically associated companies. This means that the thin capitalization was removed for the rest of the operations.
Lastly, it is important to mention Article 64 of the Tax Reform of 2019 that added a letter c) to Article 124-1 of the Colombian Tax Code, allowing the deduction of interests and other financial expenses attributable to permanent establishments if the relevant payments were subject to the withholding tax.
