Colombia: The Colombian Supreme Administrative Court Endorses the Inclusion of Loss-Making Comparables

At ALS Transfer Pricing, we conduct thorough and technically sound analyses to support your related-party transactions in Colombia and throughout Latin America. Our team has access to advanced databases and rigorous methodologies that allow us to identify reliable comparables and build robust benchmarks in the face of automatic or simplified challenges from tax authorities. Below we discuss a key recent Colombian court ruling that reaffirms the need for in-depth, well-founded analysis.

On December 5, 2024, the Colombian Supreme Administrative Court (Ruling 25803) issued a landmark decision on the inclusion of loss-making companies in transfer pricing analyses, officially published on February 4, 2025. The ruling represents a strong step toward aligning Colombian practice with international OECD principles, particularly regarding the treatment of comparables with negative results.

What Did the Supreme Court Rule?

The case involved the Colombian tax authority (DIAN), which had rejected certain comparables presented by the taxpayer on the grounds that these companies had recorded losses in some of the years analyzed. According to DIAN, the mere presence of a negative result justified the automatic exclusion of that comparable from the final set, without the need for deeper analysis.

The Court, however, rejected this approach. It ruled that the existence of losses does not necessarily imply a lack of comparability, unless it is demonstrated that such losses are recurrent, structural, or reflect an economic situation materially different from that of the taxpayer.

The Court emphasized that a comparability analysis must take multiple factors into account: functions performed, assets used, risks assumed, and market conditions, among others. The fact that a comparable company posted a loss in one year does not by itself invalidate its usefulness, provided there is reasonable comparability on other grounds.

It also noted that losses may result from extraordinary, cyclical, or temporary circumstances — such as a market downturn, one-off cost increases, or heavy investment in innovation — and do not automatically disqualify a company from being considered comparable.

This reasoning introduces a more flexible and substantively economic approach aligned with international standards, reinforcing the tax authority’s responsibility to technically and functionally justify any exclusion of comparables, rather than relying on simple quantitative or automatic criteria.

What Do the OECD Guidelines Say?

This ruling is directly supported by the OECD Transfer Pricing Guidelines. Specifically, Chapter III (Comparability Analysis), paragraphs 3.64 to 3.66, address the treatment of loss-making companies:

Losses are not an automatic exclusion criterion and must be assessed in context. A loss arising from, for example, a market penetration strategy or R&D investment may still be compatible with a comparable profile if other conditions remain similar.

• In cases of recurring losses over multiple years, this may indicate that the company operates in significantly different economic conditions, potentially justifying exclusion. Nevertheless, the standard remains functional and economic evidence, not the mere number of loss years.

• Paragraph 3.65 also recognizes that cyclical industries or economic downturns can explain losses. In such cases, analyses should consider adjustments or explanatory elements that preserve or restore comparability.

The Colombian ruling reinforces this exact view: the goal is not to apply mechanical filters, but to build robust, technically supported analyses that withstand functional and market-based scrutiny.

Practical Implications

This judicial precedent has important implications for multinational groups operating in Colombia:

• It eliminates the automatic exclusion of comparables with a single year of losses, increasing the technical strength of local analyses.

• It reinforces the principle of substantive comparability, focused on functions, assets, and risks assumed.

• DIAN and other authorities must justify any exclusion of comparables with sound economic arguments, not rigid or generic criteria.

• Taxpayers are also permitted to propose reasonable adjustments to enhance comparability, in line with OECD practices.

At ALS TP, we continuously monitor regulatory and judicial developments, especially decisions like this one that open the door to more consistent practices aligned with international standards. Our commitment is to provide our clients with solid, up-to-date, and strategic technical support in the face of an increasingly demanding and globalized tax environment.