Tax Update: Council of State annuls temporal requirement for certification in interest deductions for debts with non-related parties (Thin capitalization rule).
Background:
On July 31st, 2025, the Council of State (Fourth Section) issued a judgment regarding the legality of certain excerpts from Article 1.2.1.18.64 of Decree 1625 of 2016 (Tax Regulatory Decree), as amended by Decree 761 of 2020, which regulates the procedure for the deduction of interest in thin capitalization scenarios, specifically in credit operations involving non-related parties.
Highlights of the Decision:
Partial Nullification:
The regulatory requirement that “the debtor must have the certification prior to the due date for filing the income and complementary tax return for the taxable year subject to deduction or capitalization” was annulled.
The Council of State held that this temporal requirement constitutes an overreach of regulatory authority, as the law does not establish a specific deadline for obtaining the certification, requiring only that the taxpayer be able to demonstrate to the DIAN that their debt is not with related parties.
Requirement to Keep Certification Available:
The obligation remains that “the certification must be available when requested by the Tax Administration.”
This is considered consistent with the law and reaffirms DIAN’s audit powers but does not impose any deadline prior to the tax return’s due date.
Reasons for the Decision:
• Paragraph 1 of Article 118-1 of the Tax Code requires certification solely to prove, upon DIAN’s request, that the transaction was not conducted with related parties.
• It is not admissible to require certification to be obtained before filing the tax return, as the law does not stipulate nor impose such restrictions; doing so could be disproportionate or represent an unnecessary obstacle for taxpayers.
• The temporal requirement contained in the decree was unnecessary and unreasonable, impacting access to the fiscal benefit authorized by law.
Impact for Companies and Taxpayers:
• A formal hurdle is removed for interest deduction under undercapitalization rules, facilitating tax compliance.
• The obligation to hold the proper non-related party certification remains, but only upon request by the tax authority and without a peremptory deadline.
Compliance Recommendations:
• Review internal policies and procedures concerning interest deduction and supporting documentation for debt transactions.
• Ensure that certifications can be obtained and maintained, but without the pressure of acquiring them before statutory tax return deadlines.
• Stay alert for future regulations or rulings from the Tax Authority in light of this ruling.
Abolished:
Requirement to obtain certification prior to the due date for filing the tax return.
Uphold:
General obligation to have the certification available when requested by DIAN.
For further information, tailored analysis, or assistance in analysis or adapting your tax policies in line with this new precedent, please consult your trusted advisor.
Legal Reference:
Single-instance judgment, Council of State, Fourth Section, Case File 11001-03-27-000-2024-00012-00 (July 31, 2025).
Relevant regulations: Art. 1.2.1.18.64 Decree 1625/2016; Art. 118-1 Tax Code.
This document is an informative summary and does not constitute specific legal advice.The content of this newsletter is merely informative, that´s why it cannot be used under any circumstances as advice on the matter described in it. If you need advice on any of the aspects discussed, our team of professionals will be willing to assist you.
