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May 3, 2024 Colombian Tax Authority issues ruling on limitation of expenses incurred abroad in cases of futures contracts and forward agreements Executive summary On 23 April 2024, the Colombian Tax Authority (DIAN) issued opinion No. 758, which addressed whether the deductibility of loss/expense generated by futures agreements that are reached with nonresident entities is subject to the 15% limitation applicable to expenses incurred abroad. In addition, Colombian Tax Authority noted that forward contracts and futures agreements have some common characteristics that allow them similar tax treatment, as they both are derivative instruments. Background Article 122 of the Colombian Tax Code provides that the deductibility of costs and expenses incurred abroad to generate Colombian source income, and which are not subject to Colombian income withholding tax, are limited to 15% of the taxpayer’s taxable income, before deducting such costs and expenses subject to the limitation. In general, it has been considered that when derivatives agreements are entered by nonresidents, the payment abroad does not correspond to a Colombian-source income and, therefore, it is not subject to income withholding tax. In October 2017, the DIAN issued opinion No. 28596, which concluded that expenses incurred abroad derived from a forward agreement are subject to the 15% limitation explained above, to the extent the expenses are related to the generation of Colombian-source income. Recently, a request for clarification of opinion No. 28596 urged the Tax Authority to conclude that expenses incurred abroad related with futures agreements are not subject to the 15% limitation. This clarification request was based on the following arguments provided by the petitioner:
Colombian Tax Authority’s position Under opinion No. 758 the DIAN concluded that expenses incurred abroad, derived from future agreements entered with nonresident entities, are not related to Colombian-source income; therefore, the deductibility of these expenses is not subject to the 15% limitation. In addition, Colombian Tax Authority concluded that forward agreements share some elements with futures contracts; thus, forward agreements may be subject to a similar tax treatment. In any case, the Colombian Tax Authority also emphasizes that the deductibility of the expense requires compliance with general deductibility requirements (among them, that the expenses must be related to the activity that generates taxable income and must be proportional and necessary with respect to the productive activity of the taxpayer). Considerations and effects Based on the opinion issued by the Colombian Tax Authority, it is important to analyze whether it may be possible that payments made abroad under derivative instruments may be claimed as an income tax deduction, not subject to the 15% limitation.
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