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Thin capitalization in Colombia: the 2:1 related party debt limit on interest deductions

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Last verified: 2026-10-26 · Status: Stable

Interest on loans from related parties, directly or through intermediaries, is deductible only while average related party debt stays within twice the borrower's net equity at the end of the prior year. Unrelated loans need a sworn creditor certificate showing they are not back to back. Regulated financial entities, some factoring companies, pre operating businesses and infrastructure project vehicles are outside the rule, and all related party loans must also be on arm's length terms.

USD figures use the TRM of COP 3,158.43 per US dollar, valid 24 to 26 October 2026, from the official TRM series certified by the Superintendencia Financiera and published on datos.gov.co. UVT amounts use the 2026 UVT of COP 52,374 (DIAN Resolución 000238 de 2025). Conversions are for orientation only.

Key facts

Related party interest bearing debt to prior year net equity, above which interest is not deductible2:1 ratioEstatuto Tributario art. 118-1, as of 2026-10-26 · in force
Debts counted for thin capitalizationRelated party debts, direct or through intermediaries, and back to back loans Estatuto Tributario art. 118-1 par. 1 and 2, as of 2026-10-26 · in force
Withholding on interest on foreign loans of one year or more15 %Estatuto Tributario art. 408, as of 2026-10-26 · in force
UVT for 202652374 COPDIAN Resolución 000238 de 2025, as of 2026-10-26 · in force
TRM used for USD conversions (valid 24 to 26 October 2026)3158.43 COP per USDOfficial TRM series, Superintendencia Financiera de Colombia, as of 2026-10-24 · in force

The rule

1. Interest on debts is deductible if the general requirements are met. Where interest bearing debts are owed directly or indirectly to related parties, Colombian or foreign, interest is deductible only while the average amount of those debts during the year does not exceed twice the taxpayer's net equity at 31 December of the prior year; the proportion of interest above that limit is not deductible.
Example: Net equity of COP 2,000,000,000 at 31 December 2025 allows average related party debt of COP 4,000,000,000 in 2026. With average related party debt of COP 6,000,000,000 and interest of COP 600,000,000, one third (COP 200,000,000) is not deductible. / About US$633,226 of equity supports about US$1,266,452 of related party debt; in the example about US$63,323 of interest is disallowed.Estatuto Tributario (Decreto 624 de 1989), as amended by Ley 2010 de 2019 art. 63, Art. 118-1, first to third paragraphs, 2019-12-27 official text · verified 2026-10-26
2. The debts counted are interest bearing debts, including those owed to related parties through unrelated intermediaries in Colombia or abroad. For other debts the taxpayer must be able to show DIAN, through a sworn certificate from the creditor, that the loan is not a back to back, guaranteed or similar arrangement in which a related party is in substance the lender; anyone who helps disguise the real creditor is jointly liable for the resulting taxes, penalties and interest.Estatuto Tributario, as amended by Ley 2010 de 2019 art. 63, Art. 118-1, par. 1 and par. 2, 2019-12-27 official text · verified 2026-10-26
3. The limit does not apply to entities supervised by the Superintendencia Financiera, to factoring companies under Decreto 2669 de 2012 that provide no more than 50 percent of their services to related parties, to businesses in an unproductive (pre operating) period, or to financing of transport or public utility infrastructure projects carried out by special purpose companies or vehicles.Estatuto Tributario, as amended by Ley 2010 de 2019 art. 63, Art. 118-1, par. 3, 4 and 5, 2019-12-27 official text · verified 2026-10-26
4. Separately from the 2:1 test, related party loans must be on arm's length terms (principal, term, rating, guarantees, debtor solvency and rate); if not, interest is not deductible and the loan is treated as equity, with payments treated as dividends.Estatuto Tributario, as amended by Ley 1607 de 2012 art. 114, Art. 260-4, num. 1 lit. a, 2012-12-26 official text · verified 2026-10-26
5. Interest paid to a foreign lender bears withholding of 15 percent on loans of one year or more and 20 percent on shorter loans, and is deductible only if that withholding was applied.
Example: Interest of COP 300,000,000 on a three year loan from the foreign parent: COP 45,000,000 withheld. / About US$94,984 of interest: about US$14,248 withheld.Estatuto Tributario, art. 408 as amended by Ley 2010 de 2019 art. 98; art. 121, Art. 408, first and third paragraphs; art. 121, 2019-12-27 official text · verified 2026-10-26
ItemCOPApprox. USD
Net equity at 31 December 20252,000,000,000US$633,226
Limit: 2 x net equity4,000,000,000US$1,266,452
Average related party debt in 20266,000,000,000US$1,899,678
Related party interest paid in 2026 (10 percent)600,000,000US$189,968
Non deductible share: (6,000 minus 4,000) / 6,000 = one third200,000,000US$63,323
Extra income tax at 35 percent on the disallowed interest70,000,000US$22,163
Withholding on the interest at 15 percent (loan of one year or more), due on all of it90,000,000US$28,495

Thin capitalization test for tax year 2026, at the TRM of COP 3,158.43

Worked example

  • A foreign parent that funds its Colombian subsidiary with COP 6,000,000,000 of loans against COP 2,000,000,000 of equity loses the deduction for one third of the interest; capitalising COP 1,000,000,000 of the loan before the year end would raise next year's limit only, because the test uses equity at 31 December of the prior year.

Step by step

  1. Measure net equity at 31 December of the prior year: that sets the whole year's limit.
  2. Track the average balance of related party interest bearing debt during the year, including back to back and guaranteed loans.
  3. Obtain the sworn creditor certificate for third party loans (art. 118-1 par. 1).
  4. Price the loan at arm's length and document it in the transfer pricing file (art. 260-4).
  5. Withhold 15 or 20 percent on interest paid abroad (art. 408) and register the foreign loan with the central bank before disbursement (see fx/fx-and-capital-controls).

Common traps

  • Loans from banks guaranteed by the parent count as related party debt (art. 118-1 par. 1 and 2).
  • The limit uses prior year equity, so a new company with little equity at the prior year end has little room in its first full year.
  • Even within the 2:1 limit, non arm's length terms turn the loan into equity and the interest into dividends (art. 260-4).
  • Disallowed interest still bears the withholding on payment to the foreign lender.

Sources

Related pages

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