Colorado expands its list of “tax haven” jurisdictions and imposes new add-backs for foreign income deductions — changes take effect January 1, 2026

Recent Update: What’s New

• In a special legislative session in August 2025, Colorado passed HB 25B-1002, which was signed into law on August 28, 2025.
• Under the new statute, for income tax years commencing on or after January 1, 2026:
  1. New jurisdictions added to the Colorado “tax haven” (foreign jurisdiction) list:
     • Hong Kong
     • Republic of Ireland
     • Liechtenstein
     • Netherlands
     • Singapore
  2. Corporations incorporated in these jurisdictions (or in other listed tax havens) become presumptively treated as foreign entities for tax-avoidance purposes and may be required to be included in Colorado combined filing, unless they rebut via economic substance or other proofs.
  3. The law decouples Colorado from the federal Foreign-Derived Deduction Eligible Income (FDDEI) deduction (the successor to FDII) by requiring an add-back into Colorado taxable income for the amount claimed under the federal deduction.
• These changes are part of Colorado’s response to the federal “One Big Beautiful Bill Act” (“OBBBA” / H.R. 1) and its impact on state conformity.
• The expected revenue impact is nontrivial. For example, the decoupling of FDDEI, the expanded tax haven inclusion, and other combined reporting adjustments are expected to generate tens to hundreds of millions of dollars in additional state revenue over the next few years.

Existing Tax Haven List & Mechanisms

• Before 2025, Colorado already had a list of approximately 40+ jurisdictions (e.g., Cayman Islands, Bermuda, Panama, etc.) that were presumed to be tax havens for state tax purposes.
• A taxpayer could rebut the presumption by demonstrating economic substance, i.e., that the foreign entity has a real business purpose beyond tax avoidance.
• Also, Colorado historically conformed to certain federal deductions (like FDII) and allowed certain deductions for foreign dividend income under state tax rules, albeit with limitations to prevent abuse.

Challenges & Motivations for Reform

• As multinational corporations became more sophisticated, shifting income to low-tax jurisdictions, states with “water’s-edge + limited inclusion” regimes faced revenue leakage.
• Further, federal changes under OBBBA (i.e., expanded deductions, bonus depreciation, etc.) shifted more incentive for states to revisit conformity and add-back provisions.
• The special session reforms were intended to push back on these pressures and shore up Colorado’s tax base.

Implications & Considerations

• For Corporations with Foreign Affiliates
  • Those with affiliates in Hong Kong, Ireland, Singapore, the Netherlands, or Liechtenstein must evaluate whether their presence triggers Colorado inclusion under the new presumption.
  • Taxpayers should examine whether their foreign operations satisfy economic substance or business purpose tests, to rebut the presumption.
  • The FDDEI add-back means certain international sales-related deductions will no longer reduce Colorado taxable income.

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