Executive summary

In Decision No. 28267 of 12 February 2026, the Council of State (the highest court for tax matters in Colombia) established several relevant criteria for taxpayers making cross-border payments for intragroup services.

In particular, the Council of State (Court) addressed two key issues: (1) the need to sufficiently evidence the effective rendering of the service, and (2) strict application of Article 124 of the Colombian Tax Code with respect to payments made to the parent company or head office for management and direction services, emphasizing that without withholding tax, the expense is not deductible, even if the transaction is subject to the transfer pricing regime.

Evidence of the rendering of services: A substantive analysis

The Court decision reinforces a critical message in tax audit proceedings involving intragroup payments: it is not sufficient to submit the contract, invoices and general descriptions of the service. The taxpayer must demonstrate, through appropriate and sufficient supporting documentation, that the service was actually rendered during the audited period. Additionally, the Court considers it necessary to prove that the service generated an identifiable and quantifiable benefit that justifies the expense.

Accordingly, the Court held that a contract, by itself, does not constitute evidence of execution. Other elements are required to demonstrate the rendering of the service, such as deliverables, results, reports, minutes, management reports or similar documentation that verifies the reality of the service, its scope, the period in which services were performed and the beneficiary.

Practical effect

If companies do not have a robust probatory basis that allows the reconstruction of services rendered, the risk that the expense will not be deductible, and penalties may accrue, increases significantly. In this regard, it is important to clarify that there is no fixed probatory threshold applicable to these charges. Nevertheless, the arm's-length principle provides that:

The Arm's Length Principle shall be understood as one under which a transaction between related parties complies with the conditions that would have been used in comparable transactions with or between independent parties.

(Article 260-2 of the Colombian Tax Code)

The term "conditions" does not have a purely quantitative scope (price, rate, margin); rather, it also encompasses a qualitative dimension (payment terms and requirements). Therefore, the requirement to evidence the rendering of services is nothing more than an alignment with the arm's-length principle.

Withholding tax: Cross-border payments to parent company

The Court's decision also clarifies that withholding payments made to a parent company or head office for management and direction services (and, in general, payments subject to withholding tax) operate as an essential requirement for the deductibility of the expense. If the taxpayer fails to apply the corresponding withholding tax, the payment is not deductible for income tax purposes.

Importantly, the Court reaffirms a strict interpretation of Article 124 of the Colombian Tax Code — deductibility is conditional upon compliance with the duty to withhold. The fact that the transaction has been analyzed or reported under the transfer pricing regime does not cure the failure to apply withholding tax on the payments made.

From a practical standpoint, this means that transfer pricing analysis and withholding tax are independent discussions. Compliance with transfer pricing rules does not correct or mitigate noncompliance arising from the failure to apply withholding tax when it was mandatory.

Taxpayers must also note that the terms "management and direction" cannot be considered synonymous with "administrative expenses." Generally speaking, administrative services tend to be more transactional or back-office oriented, whereas management and direction typically involve strategic functions.

Practical effect

When making cross-border payments to foreign related parties, taxpayers must clearly identify whether the services being paid for qualify as management and direction services or as administrative services, as the applicable withholding tax differs between the two. This definition must be fully consistent across all supporting and generated documentation, including:

• Contracts: Certain "framework agreements" are common in multinational groups. Note that these agreements may be drafted under different legal perspectives; therefore, it may be appropriate to customize them, i.e., to apply concepts within the context of Colombian practice.
• Form 350: Withholding tax and reporting determined in Form 350 must be considered.
• Functional transfer pricing analysis: This document, which constitutes the taxpayer's first line of defense, must clearly describe the assets, functions and risks, allowing a clear conclusion as to the category applicable to the payment made.
• Economic analysis: The set of comparables must be consistent with the classification assigned to the transaction, whether it is strategic or transactional in nature.
• Transfer pricing informative return: The code under which the transaction is reported is not a minor issue, as in practice the National Tax Authority has initiated audit plans based on this classification. Therefore, to support such classification, it must be properly documented.
• Magnetic media (electronic reporting) information: Consistency must exist not only in quantitative data but also in qualitative descriptions.

As observed, although this judgment reiterates legal issues previously raised, when analyzed in conjunction with the National Tax Authority's most recent audit campaigns, it generates additional protocols for tax year-end closing processes.

Affected taxpayers should consider undertaking comprehensive and preventive reviews to support intragroup payments, including by (1) analyzing evidentiary support by type of service and (2) verifying and reviewing withholding taxes applied to outbound payments.