Sign up for tax alert emails    GTNU homepage    Tax newsroom    Email document    Print document    Download document

August 16, 2021
2021-5870

Colombia's highest tax court annuls official opinion that denied deductibility of interest on loans used to acquire shares

The Council of State's interpretation of the general requirements for interest deductibility may allow taxpayers to claim deductions for interest expense on loans used to acquire shares. These deductions were previously denied under the Colombian Tax Authority's interpretation of the requirements. To claim those deductions, however, taxpayers will need to demonstrate compliance with the general deductibility requirements based on the specific facts and circumstances of their case.

On 29 July 2021, Colombia's Council of State (the highest tax court)annulled an opinion by the Colombian Tax Authority (Official Opinion No. 005739 of 2019) that denied income tax deductions for interest on loans used to acquire shares in a company. In the opinion, the Colombian Tax Authority also concluded that the same treatment would apply if the target company subsequently merged into the acquirer (which held the debt for the loan).

Background

Colombian corporations may generally deduct, for corporate tax purposes, expenses that are incurred during the tax year and: (i) are necessary expenses, (ii) have a cause-effect relationship with the corporations' income-producing activity, and (iii) are proportionate or reasonable.

In Official Opinion No. 005739 of 2019, the Colombian Tax Authority concluded that interest expense on a loan used to acquire shares in a company did not meet the general requirements for deductibility. In reaching this conclusion, the Tax Authority noted that interest expense could not qualify as necessary to a share acquisition. Additionally, it noted that the interest could not have a cause-effect relationship with the taxpayer's income-producing activity but did not specify the specific scenario in which the cause-effect relationship requirement was not met.

The opinion was challenged before the Council of State on the grounds that the Tax Authority's interpretation violated Colombian law by denying interest deductions for loans used to acquire shares without analyzing in detail whether the general deductibility requirements were met.

Analysis

The Council of State noted that Colombian law does not generally restrict or limit deductions for interest on loans used to acquire shares; as long as the general deductibility requirements are met, the interest expense is deductible for income tax purposes.

Disagreeing with tax authorities, the Council concluded that a cause-and-effect relationship could exist between a taxpayer's interest expense and its income-producing activity even though none of the income from its business is related to the interest expense.

To make that determination, however, the Council of State concluded that it is necessary to consider the facts and circumstances of the taxpayer's situation, particularly the reasons for the share acquisition and how that acquisition relates to the taxpayer's business. In support of this conclusion, the Council of State cited a case in which a taxpayer's interest expense met the deductibility requirements based on the taxpayer's specific facts and circumstances (the acquisition of the shares involved an expansion of the taxpayer's income-producing activity).2

Finally, the Council of State stated that the same facts-and-circumstances analysis would apply if the target company subsequently merges into the acquirer (which held the loan).

Implications

The Council's decision rejects a narrow interpretation of the deductibility rules for taxpayers that purchase shares using loans. By introducing a facts-and-circumstances-based approach, the Council allows for a broader interpretation of the requirements. This interpretation may make it easier for taxpayers to claim interest expense deductions, provided they can demonstrate compliance with the general deductibility requirements. In developing their arguments, taxpayers may want to consider other rules affecting interest deductibility, such as thin capitalization, transfer pricing, nexus with non-taxable dividends and anti-abuse rules, as well as the general deductibility requirements.

_____________________________________________

For additional information with respect to this Alert, please contact the following:

Ernst & Young S.A.S. Bogota

Ernst & Young LLP (United States), Latin American Business Center, New York

Ernst & Young Abogados, Latin America Business Center, Madrid

Ernst & Young LLP (United Kingdom), Latin America Business Center, London

Ernst & Young Tax Co., Latin America Business Center, Japan & Asia Pacific

 _____________________________________________

Endnotes

  1. Council of State, Decision No. 25346 of July 29, 2021 (Case No. 11001-03-27-000-2020-0017-00).
  2. Council of State, Decision No. 21329 of November 26, 2020 (case No. 25000-23-37-000-2013-00443-01).
 
 

The information contained herein is general in nature and is not intended, and should not be construed, as legal, accounting or tax advice or opinion provided by Ernst & Young LLP to the reader. The reader also is cautioned that this material may not be applicable to, or suitable for, the reader's specific circumstances or needs, and may require consideration of non-tax and other tax factors if any action is to be contemplated. The reader should contact his or her Ernst & Young LLP or other tax professional prior to taking any action based upon this information. Ernst & Young LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

 

Copyright © 2024, Ernst & Young LLP.

 

All rights reserved. No part of this document may be reproduced, retransmitted or otherwise redistributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP.

 

Any U.S. tax advice contained herein was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

 

"EY" refers to the global organisation, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.

 

Privacy  |  Cookies  |  BCR  |  Legal  |  Global Code of Conduct