Colombia

In Colombia, the customary costs and expenses of a business are generally acceptable as deductible expenditure for CIT purposes, provided they are necessary, proportional, have a cause-effect relationship with the income producing activity, and have been realised during the relevant tax year under the accrual method of accounting. Examples of common (and not so common) deductions include the items below.

Depreciation

Assets held as of 2016 and previous years

Assets acquired and reported as of 31 December 2016 will be depreciated following the fiscally accepted methodologies for 2016 and previous years. In regard to those assets, the normal estimated useful lives are as follows:

The acceptable methods for depreciation are:

• Straight-line: The straight-line method is the easiest and most commonly used method of depreciation by companies; it is calculated by dividing the value of the asset by the asset's useful life.
• Declining-balance: This method takes into consideration an accelerated rate of depreciation and is useful for those assets in which a higher value is lost during the beginning years of usage. Under the declining-balance tax depreciation method, in no case will a residual value lower than 10% of the asset’s cost be allowed nor will accelerated depreciation based on additional shifts be deductible.
• Any other method of recognised value in accordance with the opinion of the tax authorities.

Depreciation rates can be increased by 25% for each additional eight-hour shift of asset use (and pro rata for fractions thereof). When tax depreciation exceeds book depreciation, the taxpayer is required to establish a reserve equivalent to 70% of the difference. Recapture of depreciation on the sale of depreciated property is taxable for CIT.

Assets acquired since 2017 onwards

For assets acquired after 31 December 2016, IFRS rules apply. In accordance, such assets will be depreciated in consideration with the effective benefits that are expected to be obtained. Under IFRS rules, equipment will not only be seen as a whole; instead, each part of it could be recognised as unique, and its depreciation may vary as well.

Note that for fiscal purposes, both regulations (depreciation for 2016 and IFRS) will be valid at the same time depending on whether the asset was acquired in FY 2016 or FY 2017 onwards. Therefore, depreciation outstanding balances of fixed assets held as of 31 December 2016 must be depreciated during the lifespan of the asset using one of the accounting methodologies applicable before the tax bill enactment (please see Assets held during 2016 and previous years above).

For assets acquired from 2017 onwards, the depreciation rules under IFRS are accepted. For income tax purposes, taxpayers obligated to have accounting books are allowed to deduct the reasonable depreciation quantities recognised for assets used in businesses or activities yielding income during the taxable period. Nevertheless, the deduction for depreciation of assets is limited to the following percentages:

Note that depreciation rates can be increased by 25% for each additional 16 hour shift of asset use.

To the extent that accounting depreciation is higher than the limits established in the law, it will generate a difference that can still be deducted after the asset’s useful life. However, this additional deduction is limited to the thresholds previously exposed.

Amortisation of intangible assets

As a general rule, taxpayers can amortise, for CIT purposes, the cost of any acquired intangible asset over a period of five years using the straight-line method. The factor allowed per year as deductible is 20% of the fiscal cost.

Amortisation is available for intangible assets complying with the following requirements:

• The asset has a defined useful life.
• The asset can be properly identified and measured in accordance with the accounting methodology (i.e. IFRS).
• The asset acquisition generated taxable income complying with the commercial appraisal for its seller, whether Colombian resident or foreign.

Acquisition of intangible assets between related parties is not subject to amortisation, unless transfer pricing rules apply

Goodwill

Goodwill pending balances generated before 1 January 2017 will be deductible for CIT purposes, provided they are related to the business activity or income-producing activity and its loss of value can be proved. Goodwill must be amortised using the straight-line methodology within five years from 1 January 2017 onwards.

Goodwill generated from 2017 onwards will not be deductible for CIT purposes. Goodwill has been acknowledged as an intangible asset when formed or created by the enterprise. However, its tax basis will be zero.

Goodwill on share purchases

Goodwill on share purchases cannot be deducted via amortisation from 2017 onwards.

Start-up expenses

Start-up expenses are deductible for CIT purposes, provided they are necessary, reasonable, and have been realised during the relevant tax year under the accrual method of accounting.

Interest expenses

Taxpayers are generally entitled to deduct any interest paid to financial institutions or to third parties, provided certain requirements are met.

The Colombian Tax Regime has incorporated thin capitalisation rules (see Thin capitalisation in the Group taxation section).

Bad debt

Bad debt is deductible for CIT purposes, provided the debt is originated as a result of the development of an income-producing activity and complies with the quantities accepted by the regulation. Additionally, debts incurred between related parties, associated individuals, or between entities and its shareholders will not be allowed as deductible bad debts.

Provision of bad debt credits and provision of risk ratios generated during the taxable year by entities subject to surveillance of the Financial Superintendence can be deducted for CIT purposes. Additionally, provisions generated during the taxable year regarding assets received via payment in kind and leasing agreements to be developed in accordance with the current laws will be deductible.

Nevertheless, no deduction will be allowed for bad debt if:

• they exceed the limits required by law and the corresponding regulation in regard to entities subject to inspection and surveillance of the Financial Superintendence, or
• bad debt provisions were created willingly, even if suggested by the Financial Superintendence. Bear in mind that these provisions are mandatory for financial institutions.

Charitable contributions

Donations and charitable expenses are creditable instead of deductible. To allow the credit, the taxpayer must be able to prove that the donation or charitable expense was made to certain institutions that belong to the special income tax regime (i.e. entities dedicated to development of health, education, culture, religion, sports, scientific and technological research, ecology and the protection of the environment, or to social development programs of general interest).

Expenses incurred abroad

As a general rule, the deduction of expenses incurred abroad for yielding national-source income is limited to 15% of the taxpayer’s net income, when such expenses were not subject to WHT (i.e. foreign-source income not subject to tax in Colombia). The following exceptions are applicable: 

• Payments where the WHT is mandatory and was applied.
• Expenses generating foreign-source income in accordance with Section 25 of the Colombian Tax Code.
• Payments or accruals performed in the acquisition of movable goods.
• Payments or accruals performed complying with a legal burden, such as payments for custom certification services.
• Interests upon credits granted to Colombian resident taxpayers by credit multilateral organisations, which act of establishment has been approved by Colombia, remains in force, and an income tax exception has been granted for the multilateral organisation.
• DTT relief may be available.

Fines and penalties

Fines and penalties are not deductible for CIT purposes.

Taxes

Taxpayers can deduct 100% of the taxes, surcharges, and contributions at year of accrual, as long as they are related with the commercial activity of the taxpayer, including affiliation quotas paid to guilds.

It is possible to deduct 50% of the financial transactions tax, even for those cases where there is no nexus between the economic activity of the taxpayer and the economic fact triggering the tax.

Special deductible items

Colombian income tax laws have established certain special deductible items, which include the following: 

• 100% of fixed assets acquisition costs are available as a tax amortisation or depreciation base.
• 25% of the investments made for the control and improvement of the environment are creditable against income tax liability.

Deductibility limitation 

The following special deductions, exempt income, and tax discounts cannot exceed 3% of the net taxable income (before deducting them):

• Contributions to employee education.
• Financing of workers' studies.
• Recruitment of workers who were victims of violence.
• Expenses for the conservation of goods of cultural interest.
• Investments in public entertainment infrastructure.
• Profits distributed in shares to workers.
• Investments in control, conservation, and improvement of the environment.
• Tax grants.

Net operating losses

Net tax losses generated from 2017 onwards can be carried forward within the following 12-year period. Recovery of tax loss is uncertain for long-time projects.

Net tax losses generated through the end of 2016 and previous years can be carried forward without limitation. The value of such losses must be adjusted for inflation as of 31 December 2016, as no further adjustments are allowed.

In order to find out the total value of losses generated before 31 December 2016 that can be carried forward, a simple calculation must be made. In this calculation, income tax for equality (CREE) tax losses and CIT losses will be merged to define the final value to be carried forward (Section 123 of Law 1819 of 2016 explains further considerations in this regard).

Be advised that no tax loss is allowed in the sale of assets between related parties. Additionally, capital losses cannot be offset against ordinary income.

Payments to foreign related parties

Royalties and similar charges

Royalties and the costs of exploitation or acquisition of all kinds of intangible property that are charged by foreign related parties are allowable as CIT deduction, provided that the corresponding WHT is collected at generally 20% (10% in the case of most DTTs). Other types of payments are subject to the general rules for expenses incurred abroad.

Royalties recognised to non-resident (or FTZ-located) related parties are not deductible if connected with an intangible formed in Colombia. Additionally, royalties paid for finished products are non-deductible.

Management overhead expenses

Management overhead expenses paid to a foreign related party (e.g. the parent company) are deductible, provided they meet the arm’s-length test under transfer pricing regulations and provided the management services are duly substantiated and are specifically related to the income-producing activity of the local subsidiary that pays them.

These expenses must also be carefully documented such that the local subsidiary can provide evidence to the authority of the fact that they are specifically related to its Colombian operations (i.e. to the planning and direction of the operations, the setting and implementation of management controls, the measurement of progress made toward specific business goals, the related financial results, etc.). Regardless of whether these services are supplied outside or inside Colombia, a 33% WHT is also required to ensure deductibility.

Interest

Interest and related financial costs (including foreign exchange losses) paid to foreign related parties are deductible, provided they meet the arm’s-length test under transfer pricing regulations and the thin capitalisation rules (see the Group taxation section).

Furthermore, interest and the related financial costs paid on short-term financing relating to imports of merchandise and raw materials directly supplied by foreign related parties are also deductible for CIT purposes. Interest paid or accrued to a non-resident triggers WHT over the payment or accrual at a rate of 20%. However, this rate can be reduced to 15% if the maturity term of the loan is equal to or higher than one year.

Financial and non-financial institutions registered with the Colombian Central Bank are permitted to extend loans into Colombia. For further information, see Interest income in the Income determination section.