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:

1. Futures contracts are agreements that are independent from the underlying asset covered.
2. Futures contracts should be deemed sales agreement, rather than service agreements.
3. Income and expenses derived from futures are deemed to be foreign income or expense when futures are listed in a foreign stock or futures exchange.
4. Because income derived from futures is deemed to be foreign-source income, any expenses incurred abroad should not be subject to the 15% limitation, as they are related to foreign-source income.

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.