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Colombia Renewables: Final Regulations for Tax Deduction
Final regulations expanding investment tax deduction for renewable energy projects.
BY MARIA-LETICIA OSSA DAZA
AND JORGE H. KAMINE
Last year, the Colombian Congress implemented critical reforms to the investment tax deduction and other tax incentives for business investments in non-conventional renewable energy, energy efficiency and demand-response projects that were first introduced by Law 1715 of 2014 (“Law 1715”). In June 2020, the Ministry of Finance issued final tax regulations (Regulation Number 829 of 2020 (“Regulation 829”)) to clarify the scope of the incentives and provide greater legal certainty to developers, investors and other players in the sector.
The Congress enacted Law 1715 in 2014 to encourage energy generation from non-conventional renewable sources, diversify Colombia’s electricity generation matrix to ensure reliability of the electric supply and avoid future blackouts caused by disruptions to hydroelectric generating potential due to climate and weather changes affecting rainfall and water availability in the country.
As noted above, Law 1715, together with the subsequent amendments passed in 2019 and Regulation 829, provides certain tax benefits for investments in non-conventional renewable energy, and also enables the participation of new players in the electricity generation market, known as self-generators and co-generators, which are expected to increase competition in the market and create a number of new business opportunities. Since the adoption in 2014 of Law 1715, more than 570 non-conventional renewable projects have been registered with the competent authorities. Of those projects, 519 are solar projects and 141 are being registered directly by industrial players. Colombia’s government is looking to achieve 2,500 MW of installed capacity (or 10 percent of the country’s generating capacity) from non-conventional renewable sources by 2022. Regulation 829 and other recent reforms and regulations reinforce that the development of non-conventional renewable energy generation and related industries is a priority for the Colombian government.
The following provides a brief description of the incentives covered under Regulation 829 that may be available starting in 2020:
Investment tax deduction (“ITD”)
Under Law 1715 and Regulation 829, taxpayers can receive a deduction for corporate income tax (“CIT”) purposes of up to 50 percent of the total amount invested in: (i) new projects; (ii) plant expansion projects; and (iii) research & development in connection with non-conventional renewable energy sources. Note that, in each case, whether an investment qualifies for the ITD will be subject to analyses with respect to additional criteria and other specific factors.
The ITD may be taken by a taxpayer that (i) files an income tax return in Colombia and (ii) generates energy from non-conventional renewable sources for supply to third parties or for self-consumption (“Taxpayer”), subject to the satisfaction of further requirements under Regulation 829 and applicable law. The extent to which a Taxpayer must directly own and operate generating assets remains subject to further review of the applicable regulations and regulatory framework by Colombian tax counsel. The outcome of these determinations, among others, may expand the range of financing structures available to developers, investors and businesses interested in non-conventional renewable energy assets in Colombia. For example, finance leases with irrevocable purchase options may complement certain features of the ITD, provided that the Taxpayer recognizes the asset for accounting and CIT tax purposes and subject to a number of additional tax and other considerations.
Under Regulation 829, all or a portion of the available ITD may be taken starting in the tax year during which the project enters its operating stage through any of the following 15 tax years. Previously, the ITD was available for five tax years counting from the year the investment was made. The amount of the ITD taken in a given tax year cannot exceed 50 percent of the Taxpayer’s ordinary income (taking into account allowable costs and deductions) for such year. Thus, the ITD may be claimed up front as long as the 50% limit is not exceeded.
Accelerated depreciation on machinery, equipment and other assets acquired or built by the taxpayer
For purposes of determining CIT liability, the Taxpayer will be entitled to deduct up to 20 percent of the tax basis of the assets (i.e., cost of acquisition) as a depreciation deduction, which could be claimed over five years rather than the deductions more typically allowed for machinery and equipment of 2 percent –10 percent taken over 10–20 years. Note that Taxpayers may claim both the ITD and accelerated depreciation provided they satisfy certain conditions.
Value added tax (“VAT”) exemption
Purchases of assets or services will be exempt from VAT as long as such assets or services are attributable to the construction, operation or expansion of qualifying projects, or to research and development subject to certain additional requirements. This tax incentive would not apply to energy efficiency or demand-response projects
Customs duties relief
Equipment and machinery imported to Colombia that will be used in the construction of qualifying non-conventional renewable energy projects will be eligible for zero-rated tariffs. Note that, in order to qualify for such treatment, the imported equipment and machinery cannot also be available from domestic manufacturers, but for non-conventional renewable energy projects, Colombian alternatives are generally not available.
Conclusion
The tax incentives discussed herein may provide opportunities to support the development of non-conventional renewable energy in Colombia using a range of investment and financing structures potentially involving features such as finance leases and pass-through legal arrangements, among others. Given Colombia’s extensive regulation of its energy market aimed at ensuring the quality and coverage of service, as well as the complexity of its tax code and roles played by local governmental authorities, the evaluation of these opportunities will require careful consideration on a case-by-case basis from various regulatory, local and international tax and other perspectives, which should be analyzed further by local counsel.
Maria-Leticia Ossa Daza heads the Latin American Practice at Willkie, where she is a partner in the Corporate & Financial Services Department. Jorge Kamine is a partner in the Corporate & Financial Services Department and a member of the Latin America Practice group.
Matthew Vitorla, Julián Uribe Umaña and Gabriela Montoya Jurado also contributed to this overview. Matthew Vitorla is an associate in the Corporate & Financial Services Department and a member of the Latin America Practice group. Gabriela Montoya Jurado is a licensed lawyer in Colombia who earned an LL.M from New York University School of Law, and Julián Uribe Umaña is a licensed lawyer in Colombia who earned an LL.M from Georgetown University Law Center. Both Montoya and Uribe are currently visiting attorneys at Willkie.
The overview is based on a client alert from Willkie. Republished with permission.
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