1. Tax effects of portfolio write-offs

Article 80 of Decree 187 of 1975 states that, for the deduction of debts that are clearly uncollectible or worthless to be valid, the following requirements must be met:

• The obligation must have been incurred with just cause and for valuable consideration.
• It must have been taken into account when computing taxable income in previous years, or it must involve credits that generated declared income.
• It must have been written off in the taxable year by crediting the uncollectible account and directly charging it to profit and loss.
• The obligation must exist at the time of the write-off.
• There must be reasons to consider it clearly uncollectible or worthless.

Regarding the last point, Article 79 of the same decree defines:

“Debts that are clearly uncollectible or worthless are those whose collection is not feasible due to the insolvency of debtors and guarantors, lack of collateral, or any other cause that allows them to be considered currently lost, in accordance with sound commercial practice.”

In practice, a statement from the attorney responsible for collections is required, certifying unsuccessful collection efforts and declaring uncollectibility, in order to write off the portfolio and treat the write-off as a deduction. The DIAN may request evidence of the collection actions.

2. Tax effects of losses on portfolio sales

The Council of State classifies tax losses into three types:

1. Operational losses: higher costs and expenses than income in the income-producing activity (Art. 147 Tax Code).
2. Capital losses: on fixed assets used in the business, occurring due to force majeure (Art. 148 Tax Code).
3. Losses on asset disposal: when an asset is sold for less than its tax cost (Art. 90 Tax Code).

The loss on the sale of a portfolio is governed by Article 90 of the Tax Code and is deductible as long as the sale price does not differ by more than 25% from its fair market value.

3. Tax effects of income from portfolio recovery

Income from the recovery of portfolio is taxable under the Income Tax if the provision expense was deducted in previous years, according to Article 195 of the Tax Code:

“The recovery of amounts granted in one or more years constitutes taxable income... up to the amount recovered.”

For the Industry and Commerce Tax, this income is not taxable because it does not arise from the provision of a service, and for VAT it is reported as non-taxable income.