Group taxation or group consolidation is not allowed for CIT purposes in Colombia.
In Colombia, transfer pricing rules are applicable to the transactions performed by local taxpayers with foreign related parties, related parties located in Colombian FTZs, and any party in a non-cooperative jurisdiction or place of null or minimum taxation (known also as ‘tax havens’, see Tax havens in the Corporate residence section). Thus, for CIT purposes, Colombian taxpayers must determine their income, costs, expenses, assets, and liabilities on the basis of prices and profit margins used in comparable transactions entered into with or between independent or unrelated parties.
In general terms, the rules related to comparability criteria, supporting documents, and advanced pricing agreements (APAs) follow OECD transfer pricing standards and in 2017 documentation requirements were updated with Base Erosion and Profit Shifting (BEPS) Action 13 and as from 2017 onward consist of an Informative Return, Local File, Master File, and Country-by-Country (CbC) Report or Notification. Local rules introduce a wide definition of ‘related companies’ for transfer pricing purposes, including subordination and individual or joint control exercised by a foreign parent company or by individuals located in Colombia or abroad.
Local File, Master File, and Informative Return Compliance
The materiality threshold is: (i) the gross equity (assets) of the local taxpayer on 31 December of each year equal to or higher than the equivalent to TVU 100,000 (approximately USD 897,000 in FY 2023) or (ii) the gross income obtained by the local taxpayer in a given year equal to or higher than the equivalent to TVU 61,000 (approximately USD 550,000 in FY 2023). Preparation and filing of the Informative Return is required for all transactions and preparation and filing of a Local File and Master File are required for transactions exceeding TVU 45,000 (approximately USD 405,000 in FY 2023). The materiality threshold is not applicable when engaging into transactions with tax havens, and the transaction threshold is reduced to TVU 10,000 (approximately USD 89,700 FY 2023).
There are applicable penalties depending on the nature of the omission; all penalties impose costly burdens for the taxpayer, and they are designed to be higher than the compliance costs. Rejection of cost and expenses may apply if expense transactions are not documented.
Country-by-country (CbC) reporting
Colombia implemented the CbC Report since 2016 and its requirements are the same as those proposed by the OECD. It is also a signatory of the Multilateral Competent Authority Agreement on the exchange of CbC Reports.
The local materiality threshold is income of the previous year of TVU 81,000,000 (approximately USD 727,276,595 in FY 2023).
All entities resident in Colombia belonging to a multinational group must notify to the DIAN if it is the controlling or designated entity. If not, the taxpayer must notify if the parent complies with the CbC Report and the identity and tax residence of the reporting entity.
Thin capitalisation rules now only apply to direct or indirect related-party interest bearing debt (before 2019, related and unrelated debt would be in scope) while the ratio is reduced to 2 to 1 (previously 3 to 1). Back-to-back transactions, as well as endorsement transactions through third parties, may be subject to further scrutiny by the tax authorities.
Thin capitalisation rules do not apply to businesses in unproductive phases, factoring enterprises (if less than 50% of the operation is done with related parties), infrastructure projects carried out by special purpose entities, and entities subject to the surveillance of the Superintendence of Finance.
Controlled foreign companies (CFCs)
An entity will be considered a CFC if it is controlled by a Colombian entity and also considered as a non-resident for tax purposes in Colombia.
Requirements to be considered a CFC:
- To be controlled by Colombian residents under the following terms:
- If considered a subsidiary, according to local legislation. The considerations to be fulfilled to acknowledge a company as a subsidiary are included in the transfer pricing rules; such regulations are applicable for CFC purposes.
- If it is a foreign economical related party, according to local legislation and transfer pricing regulations.
- The CFC has no fiscal residency in Colombia.
Investment vehicles are considered as CFCs in Colombia.
CFC rules will apply fully if the controlled entity is located in a tax haven. This consideration is set as a legal presumption.
If a CFC is proven to be controlled by Colombian tax residents, these will be obligated to comply with these rules if they directly or indirectly own shares equal to or higher than 10% of the entity’s equity or its results.
Dividends, interests, rental income, gains from assets that generate passive income, technical services, etc. will be considered as passive income.
It is presumed that in case the passive income from the CFC represents 80% or more of its total income, all of the CFC income, costs, and deductions are passive income. While, if the CFC obtains active income and it represents 80% or more of the total income obtained by the CFC, it is presumed that 100% of the income, expenses, and deductions of the CFC are connected with the generation of such active income.