On 29 May 2020, the Government of Colombia has issued Decree 761 of 2020, through which the thin capitalization rule established in article 118-1 of the Tax Statute is modified. The decree was substantially ratified by the Law 2010 of 2019 as Law 1943 was declared unconstitutional. The thin capitalization rules apply a debt to equity ratio of 2:1 taking into account debt transactions involving related local and foreign parties. Interest expenses related to debt exceeding the ratio may not be deductible for tax purposes.

The procedure for determining non-deductible or capitalizable interest was established through the Decree:

• the maximum amount of indebtedness that generates deductible capitalizable interests will be determined by taking the liquid equity determined on 31 December of the immediately taxable year and multiplying it by two;
• excess indebtedness will be determined by taking the maximum amount of indebtedness, determined in accordance with the law and subtracting the average total amount of debts with economic associates;
• the proportion of non-deductible or capitalizable interests will be determined by requesting excess indebtedness for the average total amount of debts with economic related parties;
• the non-deductible or capitalizable interest of the respective taxable period will be determined by applying the proportion of non-deductible or capitalizable interest to the total interest paid or credited to the account during the fiscal year or period determined; and
• interest that is not capitalized may not be treated as deductible or as cost in the income tax declaration and complementary in any taxable period.