Colombia: Private Client (2nd edition)

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This country-specific Q&A provides an overview to tax laws and regulations that may occur in Colombia.

This Q&A is part of the global guide to Private Client. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/practice-areas/private-client-2nd-edition/

  1. Which factors bring an individual within the scope of tax on income and capital gains?

    Tax residents are subject to income tax and capital gains on worldwide basis. Non- residents are subject to income tax and capital gains only on Colombian sourced income and capital gains.

    • Residents:

      An individual becomes a tax resident when she/he remains in the country, continuously or discontinuously, for more than 183 calendar days during a period of 365 days.

      If the individual remains in the country continuously or discontinuously for 183 days during 2 consecutive fiscal years, the individual will become a tax resident after the second of the two consecutive years.

      Colombian citizens are considered tax residents if their family members (i.e., spouse or dependent children) are Colombian tax residents, or if 50 per cent or more of the individual’s income is Colombian sourced, or if 50 per cent or more of the individual's assets are managed or held in Colombia. A Colombian citizen is considered a tax resident in Colombia if she/he has tax residence in a tax haven.

      Colombian citizens are not deemed as tax residents in Colombia if 50 per cent or more of the individual's income is sourced in the juris¬diction of her/his domicile and 50 per cent or more of her/his assets are managed or possessed in the country in the jurisdiction of her/his domicile.

    • Non-residents:

      Non-residents are subject to income tax only on source income and they are only required to report income or assets located in Colombia.

      Colombian sourced income refers to income from activities undertaken within Colombian territory. The Colombian tax code refers to this as the provision of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the transfer takes place and the exploitation of tangible or intangible assets located inside the country.

  2. What are the taxes and rates of tax to which an individual is subject in respect of income and capital gains and, in relation to those taxes, when does the tax year start and end, and when must tax returns be submitted and tax paid?

    The fiscal year in Colombia is the same as the calendar year. The Colombian fiscal year starts on January 1st and ends December 31st of each year.

    • Non-residents:

      Non-residents are subject to tax at a 35% rate on Colombian sourced income and at 10% rate on Colombian sourced capital gains if the assets have been held for 2 years or more. They are only required to report assets located in Colombia.

    • Residents:

      Individual tax rates depends on income baskets and residence status. As of January 1st, 2019, the rates for each type of income are the following:

      Labour income, Capital Income and Non-labour income

      Pensions

      Dividends

      • 0% to 39% for residents.
      • 35% for non-residents.
      • 0% to 39% for residents.
      • 35% for non- residents.
      • 0%-15% for dividends paid out of taxed profits at the corporate level (for residents).
      • 7.5% for dividends paid out of taxed profits at the corporate level (for non-residents).
      • 33% for FY 2019, 32% for FY 2020, 31% for FY 2021, 30% as of FY 2022 plus 15% (for residents) or 7.5% (for non-residents) on the distributed net dividend (net of the 33%, 32%, 31% or 30% initial tax) if not taxed at the corporate level.

      The following exemptions, reliefs or deductions are available:

       

      Revenues not considered as income

      Mandatory health and pension contributions made by employees.

      Voluntary contributions to the individual savings scheme provided that:

      • The income does not annually exceed 2500 Tax Value Units (Approximately USD 26.000); or
      • The contributions do not annually exceed 25% of the annual labour income.

       

      Deductions

      Payments of interests derived from loans destined to housing purchase.

      Payment of pre-paid health services and health insurance payments.

      10% of all labour payments made to individuals who are dependent from the taxpayer (i.e., children who have not reached legal age, children who have reached legal age but are being financed in a recognised educational institution and children older than 23 years old who are dependent due to physical or psychological incapability).

      Exempt income

      Voluntary contributions to pension funds and AFC accounts (savings accounts for housing purchase) provided that:

      • The Income does not annually exceed 3.800 Tax Value Units (Approximately USD 41.600); or
      • The contributions do not annually exceed 30% of the annual labour income.

      The abovementioned tax benefits may be applied as long as they do not exceed 40% of the total income received or 5,040 tax value units (Approx. USD 60,000).

    • Capital gains

      For Colombian tax purposes, capital gains are those that are not obtained by a taxpayer as a result of the activities that she or he ordinar¬ily carries out. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:

      • Capital gains from the sale of fixed assets that have been owned by the taxpayer for a term of two or more years;
      • Profits obtained in the liquidation of legal entities, and that do not correspond to undistributed profits or reserves;
      • Gains resulting from estates, legacies and donations (gifts);
      • Prizes, awards, lotteries and gambling earnings; and
      • As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (Approx. USD 136.000).
  3. Are withholding taxes relevant to individuals and, if so, how, in what circumstances and at what rates do they apply?

    Yes. They are. As a mean to collect income taxes in advance, Colombian law estab¬lishes a system of income tax withholdings that requires every per¬son making payments to a taxpayer to withhold a certain percentage, depending on the income characterization being paid. For those who must file an income tax return, all amounts withheld or self-withheld are a prepayment of the final tax liability and as such are credited on their income tax return.

    The following payments made to individuals are subject to tax withholdings:

    Concept

    Rate

    Provision of services

    4% to 6%

    Fees/Commissions

    6%, 10% and 11%

    Salary

    Salary income tax withholdings are calculated based on the applicable taxation rate (0 to 39%) of the individual.

     

    Dividends

     

    • 7.5% if taxed at the corporate level.
    • 33% for FY 2019, 32% for FY 2020, 31% for FY 2021, 30% as of FY 2022 plus 15% (for residents) on the distributed net dividend (net of the 33%, 32%, 31% or 30% initial tax) if not taxed at the corporate level.

    Income tax withholding rates applicable to payments abroad (non-resident individuals not required to file an income tax return in Colombia) are as follows:

    Concept

    Rate

    General management fees

    33%

    Technical services, technical assistance, consulting services, royalties, leases, commissions, fees, software exploitation and, in general all services.

    20%

    Credits obtained abroad for a term of 1 year or more

    15%

  4. Is there a wealth tax and, if so, which factors bring an individual within the scope of that tax, at what rate or rates is it charged, and when must tax returns be submitted and tax paid?

    As of January 1st, 2019, a net worth tax for FYs 2019 to 2021 is triggered on the possession of a net worth as of January 1st, 2019 equal to or in excess of COP $5.000.000.000 (Approx. USD 1.539.000).

    This tax applies to individuals and foreign entities. In the case of resident individuals, this tax is based on worldwide assets and in the case of non-residents individuals and non-resident entities it is based on Colombian situs assets other than shares, accounts receivables and/or portfolio investments, for example real estate, aircrafts, yachts, boats, speedboats, art or oil and mining titles.

    The net worth tax rate is 1%.

  5. Is tax charged on death or on gifts by individuals and, if so, which factors cause the tax to apply, when must a tax return be submitted, and at what rate, by whom and when must the tax be paid?

    Inheritances, gifts and donations are subject to capital gains tax in Colombia. The transfer of any real estate involved will also trigger registry tax.

    Once an estate has covered all obligations, the inheritance is distributed among all heirs. Such distribution is subject to capital gains tax at a 10%. However, in some cases part of the inheritance may be considered as exempted income.

    Inheritances, gifts and donations are subject to capital gains tax regardless of the location of the assets if the individual is a Colombian tax resident. If the individual is not considered as a tax resident, only inheritances gifts and donations of Colombian source are subject to taxation in Colombia.

  6. Are tax reliefs available on gifts (either during the donor’s lifetime or on death) to a spouse, civil partner, or to any other relation, or of particular kinds of assets (e.g. business or agricultural assets), and how do any such reliefs apply?

    Inheritances, gifts and donations are subject to capital gains tax in Colombia at a 10% rate. The transfer of any real estate involved would also trigger registry tax (of approximately 1.5%).

    Generally, the applicable taxable base shall be the assets or rights’ cost basis as of 31 December of the previous year. The following income is considered as exempt for capital gains purposes:

    • The equivalent to 7,700 Tax Value Units (Approx. USD 90.000) of the deceased's urban property;
    • The equivalent to 7,700 Tax Value Units (Approx. USD 90.000) of the deceased's rural property excluding recreational housing;
    • The equivalent to 3,490 Tax Value Units (Approx. USD 40.000) of the value inherited by the deceased's surviving spouse and heirs;
    • 20% of assets or rights received by individuals not considered as heirs or surviving spouse;
    • 20% of assets or rights gifted or transferred by the deceased during their lifetime that were received gratuitously by a beneficiary without exceeding 2.290 Tax Value Units (Approx. USD 26.000); and
    • Books, clothing, personal belongings and furniture belonging to the deceased.
  7. Do the tax laws encourage gifts (either during the donor’s lifetime or on death) to a charity, public foundation or similar entity, and how do the relevant tax rules apply?

    Yes. 25% of the gifts made to entities of the special tax regime can be credited for income tax purposes. However, certain requisites must be met as explained below.

    The Colombian Tax Code establishes that non-profit corporations, foundations and associations are subject to a special tax regime with respect to income tax and complementary taxes provided always that they comply with the following conditions:

    • They are incorporated under Colombian law;
    • Their main purpose and resources are destined to health, sports, formal education, culture, scientific or technological, ecologi¬cal research, environmental protection or social development programmes;
    • Such activities are of general interest and may be freely accessed by the community.
    • Their capital contribution or surpluses cannot be distributed; and
    • Their surpluses are totally reinvested in the activity of its corporate purpose and such corporate purpose corresponds to the activities mentioned in the preceding clause.

    Entities that comply with the aforementioned requirements could be considered as entities of the special tax regime, with the Colombian Tax office’s approval.

  8. How is real property situated in the jurisdiction taxed, in particular where it is owned by an individual who has no connection with the jurisdiction other than ownership of property there?

    The following taxes apply to a non-resident individual’s real property:

    1. Property tax:

      Real estate held by an individual is subject to taxation at a municipal level at an applicable rate of 0.5 per cent to 1.6 per cent based on the valuation of the real state assets made by the municipalities where the asset is located.

    2. Transfer tax:

      Transfers of immovable property trigger transfer tax liability at a 1% rate, which is satisfied through withholding, and also notary fees and land registry taxes at 0.27% and 1.5% of the purchase price, respectively.

    3. Presumptive income tax:

      Presumptive income tax is equivalent to a percentage of the taxpayers net equity of the prior taxable year. Taxpayers shall only pay income tax under this system when the presumptive income basis is higher than the ordinary income. The net equity is determined by subtracting the liabilities from the gross equity (assets) owned by the taxpayer on the last day of the year or taxable period.

      Presumptive income corresponds to 1.5% for fiscal years 2019 and 2020 and as from 2021 it will be 0%.

      In relation to individuals, the base of presumptive income of the taxpayer is compared only with the general basket income.

    4. Net Worth Tax:

      As of January 1st, 2019, a net worth tax for FYs 2019 to 2021 is triggered on the possession of a net worth as of January 1st, 2019 equal to or in excess of COP $5.000.000.000 (Approx. USD 1.539.000).

      This tax applies to individuals and foreign entities. In the case of resident individuals, this tax is based on worldwide assets and in the case of non-residents individuals and non-resident entities it is based on Colombian situs assets other than shares, accounts receivables and/or portfolio investments, for example real estate, aircrafts, yachts, boats, speedboats, art or oil and mining titles.

      The Net Worth Tax rate is 1%.

  9. Are taxes other than those described above imposed on individuals and, if so, how do they apply?

    The following taxes are relevant to individuals in Colombia:

    1. Value Added Tax:

      VAT is levied on the sale or import of goods into the country and rendering ser-vices when the direct user or recipient is located in Colombia. Certain goods (livestock, certain fruits and vegetables, seeds and others) and services (catering services for companies, food preparation services, bar services) are excluded from VAT. The general rate is 19%, but there are certain goods and services subject to a 5% (cof¬fee, corn for industrial use, agricultural machinery, pre-paid medicine plans, security services and temporal services).

    2. Consumption tax:

      As from 2019, a national consumption tax is triggered on the sale of immovable property, different from rural properties destined to agricultural activities, new or used, whose value exceeds 26,800 Tax Value Units (Approx. USD 294.000). , including those made through assignments of fiduciary rights or funds that are not listed on the stock exchange.

    3. Industry and Commerce Tax:

      A municipal tax is triggered on revenues derived from the performance of industrial, service and commercial activities within a Colombian municipality at an applicable rate of 0.7 per cent to 1 per cent. The tax is triggered on gross income, excluding revenues for exports, proceeds from the sale of fixed assets, refunds, subsidies and withholdings.

    4. Income tax withholding:

      As a mean to collect income taxes in advance, Colombian law establishes a system of income tax withholdings that requires every per¬son making payments to a taxpayer to withhold a certain percentage, depending on the income characterization. For those who must file an income tax return, all amounts withheld or self-withheld are prepayment of the final tax liability and as such are credited on their return.

    5. Presumptive income tax:

      Presumptive income tax is equivalent to a percentage of the taxpayers net equity of the prior taxable year. Taxpayers shall only pay income tax under this system when the presumptive income basis is higher than the ordinary income. The net equity is determined by subtracting the liabilities from the gross equity (assets) owned by the taxpayer on the last day of the year or taxable period.

      Presumptive income corresponds to 1.5% for fiscal years 2019 and 2020 and as from 2021 it will be 0%.

      In relation to individuals, the base of presumptive income of the taxpayer is compared only with the general basket income.

  10. Is there an advantageous tax regime for individuals who have recently arrived in or are only partially connected with the jurisdiction?

    There is no preferential tax regime for individuals who have recently arrived or are only partially connected with the jurisdiction. However, individuals arriving or partially connected to the jurisdiction after January 1st, 2019 would not be subject to Net Worth Tax as the taxable event is triggered on January 1st, 2019.

  11. What steps might an individual be advised to consider before establishing residence in (or becoming otherwise connected for tax purposes with) the jurisdiction?

    This must be analysed on a case-by-case basis. It is always advisable to analyse the ultimate beneficial owner's (UBO) applicable tax rules according to the UBO's tax residence and the situs assets' tax rules.

  12. What are the main rules of succession, and what are the scope and effect of any rules of forced heirship?

    Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. Colombian resident heirs and foreign heirs have the same rights and, thus, are entitled to equal treatment in Colombian probate proceedings. The Civil Code forces the testator to assign certain compulsory portions, applicable to half of her/his estate even against her/his will.

    The following are the compulsory portions: (i) maintenance provided by law; (ii) the marital portion; (iii) the legitimate.

    1. Maintenance provided by law:

      A compulsory portion for the subsistence of the beneficiary in a way that corresponds to her/his standard of living. Individuals entitled to maintenance include the spouse and, descendants per stirpes, ancestors or, siblings. The amount of maintenance will be assessed by a judge.

    2. Marital portion:

      The marital portion is the portion of the estate that the law assigns to the surviving spouse or permanent partner lacking the necessary means for a subsistence. Taking into account the existence of any legitimate descendants, the widower or widow shall be counted among the children, and shall receive as the marital portion a share equivalent to the legitimate portion corresponding to the legitimate descendants.

    3. Legitimate portion:

      The legitimate is that part of the estate of a deceased that the law assigns to the legal heirs. The following are legal heirs: Children personally, or represented by their descendants; and ancestors. The legitimate is obtained by dividing half of the inheritance between all legitimate descendants and the widow or widower. The legal heirs converge to the succession and are excluded and represented according to the order and rules of the intestate succession.

      Should there be any legitimate heirs:

      The testator may, at her/his discretion, favour the descendant or descendants that she/he prefers assigning part of the estate in the proportion desired.

      Should there be no legitimate heirs:

      If there are no heirs entitled to inherit this part of the inheritance, it will increase the freely disposable portion as explained below.

    4. The Freely disposable portion:

      A testator may under Colombia law, dispose of a certain part of her/his wealth, up to half oh his estate. Should there be no descendants or beneficiaries, directly or by representation, entitled to inherit, the freely disposable portion will represent the entire estate.

  13. Is there a special regime for matrimonial property or the property of a civil partnership, and how does that regime affect succession?

    The general rule for marital property is the community of property regime. This is a regime that automatically comes into effect for all marriages and will remain so until the community of property is dissolved; either as result of a judicial decision, or as result of free will. In this regime, community property is commonly owned by the spouses. It is not similar to co-ownership because the spouses (joint owners) do not possess a share in the property, but are full owners of the community property.

    Colombian law also recognises ‘common law’ unions under ‘de facto marital union’ provisions. Opposite-sex couples that have cohabited together for at least two continuous years may request the declaration of the existence of de facto marital union. As of 2007, both opposite and same-sex couples who have cohabited together for at least two continuous years may request the declaration of the existence of de facto marital union. This declaration implies the presumption of the existence of a community of property regime (as applicable to married couples), and leads to the distribution of the common property. This declaration may be made by a family judge or by mutual consent of the couple before a notary public or a duly authorised conciliation centre.

    Upon the death of one of the spouses, the ‘marital portion’ is the portion of the estate that the law assigns to the surviving spouse or permanent partner lacking the necessary means for a congruent subsistence. Taking into account the existence of any legitimate descendants, the widower or widow will be counted among the children and receive as marital portion a share equivalent to the legitimate rigorous corresponding the legitimate descendants.

    The ‘legitimate’ is that part of the estate of a deceased individual that the law assigns to the legal heirs. The following are legal heirs: children (personally or represented by their descendants) and ancestors. The legitimate is obtained by dividing half of the inheritance between all legitimate descendants and the widow or widower. The legal heirs converge to the succession and are excluded and represented according to the order and rules of the intestate succession.

  14. What factors cause the succession law of the jurisdiction to apply on the death of an individual?

    The following factors cause Colombian succession law to apply on the death of an individual:

    1. The death of nationals or foreigners who die with their last residence in Colombia; and/or
    2. Colombian situs assets.
  15. How does the jurisdiction deal with conflict between its succession laws and those of another jurisdiction with which the deceased was connected or in which the deceased owned property?

    Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. However, Colombian courts will recognize the succession rights of Colombian heirs under forced heirship rules without considering the decedents last place of domicile. Furthermore, Colombian courts have also applied Colombian local law in respect of real personal property located in Colombian territory.

    Colombia is also a member of the treaty on International Civil Law promoted in Montevideo in 1889 which is currently enforceable in Colombia. The treaty seeks to provide uniformity to the solution of conflicts of law concerning successions. The treaty provides the following rules:

    • The validity of a will disposing of property is governed by the jurisdiction where the property is situated at the time of death. However, an executed will under the laws of any of the member states must be admitted in the other member jurisdiction.
    • The law of the situs of the property is applicable for any rules of inheritance, heirship rules and validity of the wills and generally any matter concerning the succession and wills.
    • In the event of conflict on succession laws, the treaty shall prevail.
  16. In what circumstances should an individual make a Will, what are the consequences of dying without having made a Will, and what are the formal requirements for making a Will?

    Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. For this reason, there are no specific rules and procedures governing intestacy in Colombia (unlike many common law jurisdictions).

    Notwithstanding the above, if the individual is subject to forced heirships rules in accordance with Colombian law, by executing a Will, a person may freely dispose half of her/his estate. The Civil Code forces the testator to assign some compulsory portions that will be assigned when the testator did not make them, even against his or her will.

    Foreigners whose only connection to Colombia is real property, may elaborate a Will in her/his preferred jurisdiction. Under Colombian law, a foreign Will is considered to be valid if it complies with the requirements of each country and is granted by public deed.

  17. How is the estate of a deceased individual administered and who is responsible for collecting in assets, paying debts, and distributing to beneficiaries?

    Under Colombian law, an estate executor is designated to administer the assets and insure the fulfillment of the deceased’s last will. The estate executor must accept such designation; however, if an executor is not designated, the heirs are in charge of administering the estate.

    The estate executor is required to hold the estate assets under deposit. When the inventory and appraisals of the estate are final, the administrator may sell the deceased’s assets to cover any debts or payment of any taxes and fees.

    The result constitutes the net estate available for partition between heirs, which must be performed in accordance with the rules on forced heirship and half of the estate that may be freely assigned by will.

  18. Do the laws of your jurisdiction allow individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth and, if so, which structures are most commonly or advantageously used?

    Yes, Colombian law allows individuals to create trusts, private foundations, family companies, family partnerships or similar structures to hold, administer and regulate succession to private family wealth. Several precisions must be made:

    • Civil law

      Colombian civil law does not provide rules on common law trusts or private foundations. However, Colombian law sets out rules on civil and commercial local trust agreements whereby a settlor transfers the property or adminis¬tration of certain assets to a trustee in exchange for fiduciary rights. The trustee is responsible for managing such assets or transferring them to a third party to carry out the purpose determined in the local trust agreement, either for the benefit of the settlor or a third party. The local trusts should not be confused with the Anglo-Saxon or common law trust.

      Local trusts are commonly used in Colombia as instruments to administer properties or businesses with a specific purpose or to grant guaranties or collaterals, considering that trustees are professional regulated entities.

    • Foreign structures

      There are no civil or commercial regulations regarding the establishment of foreign trusts and private foundations,. However, foreign entities are recognized by Colombian law and tax authorities and may be used as structures to administer private family wealth and circumvent forced heirship rules in Colombia. However, anti-abuse rules have to be observed.

  19. How is any such structure constituted, what are the main rules that govern it, and what requirements are there for registration with or disclosure to any authority or regulator?

    • Domestic trusts:

      In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.

      Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries have to include such profits in their own income tax returns for that same year and pay the relevant taxes.

      The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.

      Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.

      Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.

    • Foreign structures:

      There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.

      Colombian tax residents are subject to income tax based on their worldwide source income. Therefore any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate. As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (approx. USD 136.000).

      If a trust/foundation is revocable and controlled by the settlor, then it would be considered as a CFC under Colombian law. Hence, net profits derived from passive income obtained by the trust/foundation shall be recognized immediately in proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon receipt of profits. Which means, no tax deferral would be applicable in this case.

      Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.

      Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.

      If the underlying assets of an irrevocable and discretionary trust/foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This, without any consideration of the trust/foundation's irrevocable and discretionary character.

  20. What information is required to be made available to the public regarding such structures and the ultimate beneficial ownership or control of such structures or of private assets generally?

    Financial entities are required to identify and report to the Colombian tax authorities the ultimate beneficial ownership in accordance with the Laundering Assets Risk Management and Terrorism System (SARLAFT) standards. This, provided that a non-resident has direct or indirect ownership and control of more than 25% of the shares of a resident entity, local trusts and mutual funds. This information is not available to the public.

  21. How are such structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    • Domestic trusts:

      In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.

      Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries have to include such profits in their own income tax returns for that same year and pay the relevant taxes.

      The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.

      Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.

      Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.

    • Foreign structures:

      There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.

      Colombian tax residents are subject to income tax based on their worldwide source income. Therefore any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate. As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (approx. USD 136.000).

      If a trust/foundation is revocable and controlled by the settlor, then it would be considered as a CFC under Colombian law. Hence, net profits derived from passive income obtained by the trust/foundation shall be recognized immediately in proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon receipt of profits. Which means, no tax deferral would be applicable in this case.

      Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.

      Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.

      If the underlying assets of an irrevocable and discretionary trust/foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This, without any consideration of the trust/foundation's irrevocable and discretionary character.

  22. Are foreign trusts, private foundations etc recognised?

    There are no civil or commercial regulations regarding the establishment of common law trusts or private foundations in Colombia. However, common law trusts are recognised by Colombian law and tax authorities.

  23. How are such foreign structures and their settlors, founders, trustees, directors and beneficiaries treated for tax purposes?

    • Domestic trusts

      In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.

      Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, trusts must determine their profits annually and the beneficiaries have to include such profits in their own income tax returns for that same year and pay the relevant taxes.

      The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.

      Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.

      Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.

    • Foreign structures

      There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.

      Colombian tax residents are subject to income tax based on their worldwide source income. Therefore any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate. As from FY 2019, life insurance indemnities are taxed as capital gains, only on the amount that exceeds 12.500 Tax Value Units (approx. USD 136.000).

      If a trust/foundation is revocable and controlled by the settlor, then it would be considered as a CFC under Colombian law. Hence, net profits derived from passive income obtained by the trust/foundation shall be recognized immediately in proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon receipt of profits. Which means, no tax deferral would be applicable in this case.

      Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.

      Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.

      If the underlying assets of an irrevocable and discretionary trust/foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor. This, without any consideration of the trust/foundation's irrevocable and discretionary character.

  24. To what extent can trusts, private foundations etc be used to shelter assets from the creditors of a settlor or beneficiary of the structure?

    • In case of Colombian situs assets:

      In structuring asset transfers, whether or not gratuitously made, attention should be paid to Colombian civil and commercial regulations:

      1. Trusts: The Commercial Code includes a provision whereby the assets of a trust negotiation cannot be pursued by the creditors, unless the debts are prior to the constitution of the trust. The creditors of the beneficiary of the trust can only pursue the financial yields the assets report. The execution of a trust with fraud can be challenged by the interested creditors.
      2. Specific assets and income: Colombian law stated immunity from seizure to some assets as follows: (i) property assigned as family housing ; (ii) the legal minimum salary except the 50% to provide food rents or pay debts to cooperatives; (iii) the excess over the minimum salary is only seized in one-fifth; (iv) pension payments receive the same treatment as the salary; (v) individual pension savings.
      3. Marital property: Under Colombian law, individuals have the freedom to dispose of their state without limitation during their lifetime. However, the disposition of certain assets may require the approval of the other spouse under Colombian marital rules.
    • In case of foreign assets:
      1. Individuals may place assets held in their own names into trusts, private foundations, etc. in order to designate them or their proceeds to a specific purpose or persons. The assets placed into a properly structured trust, private foundation, etc. form an estate separate from the assets of the settlor, so as to avoid such assets being requested by creditors.
      2. Attention should be paid to foreign creditor rules when establishing a foreign structure.
  25. What provision can be made to hold and manage assets for minor children and grandchildren?

    • Foreign tools

      Foreign entities such as trusts and private foundations may be used to hold and manage assets for minor children and grandchildren that may be transferred once a specific condition is met.

    • Domestic tools
    • Local trusts may also be used to hold and manage assets for minor children and grandchildren that may be transferred once a specific condition is met (e.g. legal age).

    • Typical arrangements under Colombian law

      Colombian family law grants the parents of a child usufruct over the property of the child, save for some exceptions, such as the assets acquired by the child because of his or her work, or received by the child as a result of an inheritance, legacy or gifts. In addition, Colombian family law grants the parents a right to manage the property of their children, except for the assets acquired by the child because of his or her work.

      Once a child becomes of legal age, and the parental powers over a child terminate, the parents are required to give full account of and hand over the property to the child. Parents are liable for any damage or reduction in the property of the child administered by them resulting from their negligence or wilful misconduct. They must therefore act in a careful and faithful manner. The administration of the child’s prop¬erty by the parents can be subject to review by the authorities. Apart from establishing specific regulations regarding the administration of the property, authorities may, as an ultimate measure, appoint a legal guardian for the administration of the child’s property.

  26. Are individuals advised to create documents or take other steps in view of their possible mental incapacity and, if so, what are the main features of the advisable arrangements?

    Under Colombian law, any individual is subject to legal rights and obli¬gations except for individuals declared incapable by a judge after a medical evaluation and due process.

    An individual may be declared incapable by means of a voluntary interdiction whereby a judge declares that an individual is unfit to exercise his or her rights and obligations. Once the individual has been declared incapable to handle his or her own affairs, the judge will designate a guardian to take care of the individual’s affairs.

    In anticipation of a mental incapacity, an individual may implement contractual arrangements or structures to protect her/his assets making sure there is enough evidence showing that the individual is capable at that moment.

  27. What forms of charitable trust, charitable company, or philanthropic foundation are commonly established by individuals, and how is this done?

    In Colombia, charitable projects are usually carried out with foundations in Colombia. Foundations are characterised as the union of assets dedicated to a social benefit activity.

    Foundations are incorporated either through a private document or a deed of foundation, with compliance of requirements established by law. These must be registered before the chamber of commerce of the entity’s domicile. The governor of the corresponding jurisdiction (or the mayor, in the case of Bogota) exercises surveillance and control over foundations. Specific documents must also be filed before these entities.

  28. What important legislative changes do you anticipate so far as they affect your advice to private clients?

    Freedom of disposition of estate on death:

    With the entry into force of Law 1934 of 2018, as of 1 January 2019 a person may freely dispose of half of their estate without being subject to forced heirship rules.

    Colombian Tax Reform:
    As of January 1st, 2019, with the entry into force of Law 1949 of 2018, the main aspects affecting private clients are:

    Taxable income:
    Resident individuals are subject to Colombian income tax on their worldwide income and capital gains. Individuals are subject to a basket system, where income is categorized in different types of schedules:

    1) General basket: Labour income, capital income and non-labour income;

    2) Pensions;

    3) Dividends and participations.

    Taxable income is calculated independently in each basket and the applicable rates are the following:
    The progressive income tax rates to resident individuals increased as follows:

    Income per year

    Applicable marginal tax rate

    0 to 1090 Tax Value Units (Approx. USD 0 to 11.200).

    0%

    1090 to 1700 Tax Value Units (Approx. USD 11.200 to 18.000).

    19%

    1700 to 4100 Tax Value Units (Approx. USD 18.000 to 43.000).

    28%

    4100 to 8670 Tax Value Units (Approx. USD 43.000 to 92.000).

    33%

    8670 to 18970 Tax Value Units (Approx. USD 92.000 to 200.000).

    35%

    18970 to 31000 Tax Value Units (Approx. USD 200.000 to 305.000).

    37%

    31000 Tax Value Units onwards (Approx. USD 305.000 onwards).

    39%

    Net Worth Tax:

    As of January 1st, 2019, a net worth tax for FYs 2019 to 2021 is triggered on the possession of a net worth as of January 1st, 2019 equal to or in excess of COP $5.000.000.000 (Approx. USD 1.539.000).
    This tax applies to individuals and foreign entities. In the case of resident individuals, this tax is based on worldwide assets and in the case of non-residents individuals and non-resident entities it is based on Colombian situs assets other than shares, accounts receivables and/or portfolio investments, for example real estate, aircrafts, yachts, boats, speedboats, art or oil and mining titles.
    The net worth tax rate is 1%.

    Normalization tax:

    Law 1943 of 2018 established a new mechanism allowing taxpayers to include any omitted assets without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the omitted assets ("Normalization Tax").

    In order to benefit from the Normalization Tax the following requirements must be met:

    1. The minimum taxable base of the normalization tax is the historical cost basis of the foreign omitted assets.
    2. The additional tax would apply at a 13% rate if reported, liquidated and payed only in September 25th, 2019.
    3. If the reported assets held abroad are re-invested in the country, the taxable base shall be 50% of the value of the omitted assets. Assets would have to be repatriated before December 31st, 2019 and must be held in Colombia for at least two years.
    4. If the assets are normalized and reported at their fair market value, the taxable base shall be 50% of the value of the omitted assets value.

    Foreign private foundations, foreign trusts, insurances with a material savings component, investment funds or any other fiduciary business abroad must be reported at cost basis of the underlying assets. Normalized assets must be included in all applicable tax returns for FY 2019 onwards.

    Criminal Liability

    Law 1943 of 2018 reinforced the mechanisms for combating tax evasion by establishing:

    • Taxpayers who fraudulently omit assets or include inexistent costs or expenses in an amount exceeding USD 1.274.122 will be subject to prison time without any possibility of extinguishing criminal liability. Prison time would vary between 2 and 9 years.
    • Taxpayers having the intent to defraud the Colombian Tax Administration by omitting assets, including inexistent costs or expenses, or obtaining tax benefits that are not applicable, would be subject to criminal liability. Prison time would vary depending on the amount of the liable tax amount due not exceeding 7.5 years.
    • The criminal action can only be undertaken at the request of the tax office director. When there is a reasonable interpretation of the applicable law, the tax office is restrained from initiating a criminal investigation, as long as the information of the taxpayer is complete and real.