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Colombia: National Tax Authority rules on deductibility of payments made to tax haven jurisdictions

In a recently published ruling (Ruling No. 31855 of 26 May 2014), the National Tax Authority (Dirección de Impuestos y Aduanas Nacionales – DIAN) pronounced on the interpretation of articles 124-2 and 260-7 of the Colombian Tax Code (TC) concerning the deductibility of payments made to tax haven jurisdictions. Details of the ruling are summarized as follows:

  • According to article 124-2 of the TC, payments made to tax haven jurisdictions are not considered deductible costs or expenses for the Colombian taxpayer, unless the corresponding withholding income tax has been applied
  • Article 124-2 of the TC provides that Colombian taxpayers who carry out transactions resulting in payments to tax haven jurisdictions shall document and support the details of the functions performed, assets used, risks assumed and the costs and expenses incurred by the person resident in the tax haven jurisdiction for carrying out the activities that generated the payments. Otherwise, the payments made by the Colombian taxpayer will not be deductible for income tax purposes
  • Article 260-7 of the TC allows the deduction of payments made to tax haven jurisdictions as long as the conditions established in that provision are complied with, in order to demonstrate the reality and transparency of the transaction. However, this provision does not exempt the payer from the obligation to apply the corresponding withholding income tax on the payment made if the law has established that obligation on the specific payment
  • When the law has established a mandatory withholding income tax on a payment, besides the conditions established in article 260-7 of the TC, the corresponding withholding income tax must be applied for the payment made to the tax haven jurisdiction to be deductible for the Colombian payer

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