Tuesday, 26 July 2016

Colombia issues guidance on application of thin cap rules

A ruling issued by Colombia’s tax authorities (DIAN) on 25 May 2016 and that is effective as from that date clarifies the application of the thin capitalization rules and the scope of the term “interest” for purposes of the regime.
The thin cap rules limit the deductibility of interest expense when the total amount of interest-bearing debt during the tax year exceeds a 3:1 debt-to-equity ratio (4:1 for certain entities). The interest deduction restriction does not apply to transactions of financial institutions or where the taxpayer is under the control and supervision of the superintendence of finance.
According to the DIAN ruling, the thin cap rules apply to the total average amount of domestic and foreign loans, regardless of whether the loan is from a related or an unrelated party. The ruling also confirms that thin capitalization exists where (1) there is any discernible disproportion between the capital relationship of responsibility and the level of risk the company assumes to carry out its social purpose, and (2) the company’s total average amount of interestbearing debt exceeds three times the liquid equity of the immediately preceding year.
It should be noted that the DIAN ruling does not address the circumstances in which the transfer pricing regime applies because a loan between related parties does not carry interest or the interest is below an arm’s length rate, or cases in which the thin cap rules do not apply because the interest concerned is payable on a loan or credit security with a term of eight years or more granted for purposes of financing infrastructure projects under the Public-Private Partnership scheme.
Source: Deloitte