Tax benefits for the production and sale of renewable energies

"Consecrates (...) the exemption from income tax on income derived from the sale of geothermal energy or from the seas".

Law 788 of 2002, in its article 18, added article 207-2 of the Tax Statute (ET) establishing that the sale of electric energy generated based on wind resources, biomass or agricultural residues, carried out only by generating companies and provided that certain requirements are met, such as that they process, obtain and sell certificates of carbon dioxide emission, obtain and sell certificates of carbon dioxide emission, and that they are not subject to income tax, for a term of fifteen (15) years, and that they are not subject to income tax, The sale of electricity generated based on wind, biomass or agricultural residues, carried out only by generating companies and provided that certain requirements were met, such as obtaining and selling carbon dioxide emission certificates, in accordance with the terms of the Kyoto Protocol, and that at least 50% of the resources obtained from the sale of such certificates were invested in social benefit works in the region where the generator operates.

This norm was regulated by Decree 2755 of 2003, which established what should be understood by "Carbon dioxide emission certificate", "Generating company", as well as what should be understood by electric energy generated based on wind resources, biomass and agricultural residues. It also established the requirements for the exemption.

Years later, in May 2014, Law 1715 was issued, which regulated "the integration of non-conventional renewable energies to the national energy system". Among the purposes of the law, established in its article 2 (e), was to "stimulate investment, research and development for the production and use of energy from non-conventional energy sources -Fnce- (...) through the establishment of tax, tariff or accounting incentives and other mechanisms that stimulate the development of such sources in Colombia". And it was thus that said law, in its article 11, established that "those obliged to declare income (sic) who directly make investments in this sense [research, development and investment in the field of production and use of energy from Fnce] shall be entitled to reduce annually from their income, for the 5 years following the taxable year in which they have made the investment, fifty percent (50%) of the total value of the investment made". Such investment must have been certified by the Ministry of Environment and its deduction may not exceed 50% of the taxpayer's net income determined before subtracting the value thereof.

In Decree 2143 of November 2015, the Ministry of Mines and Energy established the parameters to access the benefits referred to in Law 1715 of 2014, noting, in addition to the above, that i) the limitations on costs and deductions provided in Article 177-1 of the ET must be observed; ii) the effective ownership of the investments subject to the benefit must be verified; iii) taxpayers obliged to keep accounting records may, concurrently to the deduction of 50% of the investment, depreciate or amortize (as the case may be) in an accelerated manner the investment in the year in which it is made up to a global annual rate of 20%, subject to modification prior notification to the Dian before filing the income tax return of the year in which the change is made.

Pursuant to Decree 2143 of 2015, the benefits provided in the referred law will also apply when the investment is made through financial leasing, provided that an irrevocable purchase option is agreed which, in case of not becoming effective, the tax benefit taken shall be taxed as special net income for recovery of deductions. The same treatment (income for recovery of deductions) will apply to contracts entered into by virtue of Fnce investments that have been subject to the benefit and have been annulled, rescinded or terminated subsequently, as well as to those assets that are disposed of before completing the depreciation or amortization period. Likewise, the aforementioned special deductions will not be applicable when the investment is made through leaseback or lease back contracts or any other modality that does not imply the final transfer of the asset, as well as in those assets disposed of and reacquired by the same taxpayer.

Regarding VAT, Article 12 of Law 1715 of 2014 excluded from such tax, services, machinery and other equipment associated with the production and use of energy from non-conventional sources, as well as those related to "the measurement and evaluation of potential resources". This exclusion was subject to regulation by the Ministry of the Environment and it was done through Decree 2143 of November 2015 of the Ministry of Mines and Energy and Resolution 45 of February 2016 of the Mining-Energy Planning Unit (UPME) in which the goods and services excluded in the development of the activity described herein were listed.

The recent Tax Reform (Law 1819 of 2016) repealed article 207-2 of the ET as from the taxable year 2018, however, it incorporated the treatment provided therein in article 235-2 of said regulatory body. Thus, the new regulation enshrines, in addition to the provisions of article 207-2 of the ET, the exemption from income tax on income derived from the sale of geothermal energy or from the seas and, as an additional requirement noted that "The investment that entitles the benefit will be made in accordance with the proportion of affectation of each municipality for the construction and operation of the generating plant".