Council of State clarifies the use of credit balances in income tax and VAT

In its ruling of June 12, 2025 (Ref. 28875), the Council of State established that income tax credits cannot be split; they must be applied in full to the following year or requested in full as a refund or offset, but not both. On the other hand, in sales tax (VAT), it is possible to divide the credit balance between allocation and refund, since the applicable rule expressly provides for this possibility. 

The Fourth Section of the Council of State, in a ruling dated June 12, 2025 (File No. 28875), ruled on the possibility of dividing a credit balance in income between allocation to the following year and a request for a refund or compensation.

In the case under review, a taxpayer initially requested a refund of a credit balance in income tax. Subsequently, when correcting his return, the balance increased and he allocated the higher value to the following year. The DIAN rejected this partial allocation, considering that it is not feasible to combine different mechanisms for treating the same balance, i.e., it is not possible to partially request a refund and, at the same time, allocate the remaining value. This position was supported by the Council of State, which interpreted that, in accordance with Article 13 of Decree 2277 of 2012, the allocation must be made for the total value of the credit balance, without allowing any fractions.

For example, if a taxpayer has a credit balance of $100 million in income, they must choose between applying the $100 million to the following year or requesting a refund for the total amount. They cannot apply $60 million and claim a refund for the remaining $40 million.

However, the same ruling clarifies that the treatment of VAT credit balances is different. In this case, Article 13 of Decree 2277 allows for partial application of the balance. This means that taxpayers can request a refund or compensation for part of the credit balance and apply the remaining balance.

This decision clarifies the criteria for income tax, imposing a rule that requires taxpayers to choose between full allocation or full refund of the credit balance, without the possibility of dividing it. In contrast, for VAT purposes, taxpayers do have this option and can apply part of the credit balance through allocation and request a refund or compensation for the remaining amount, which gives them greater flexibility in managing their credit balances.