Private Wealth 2019 Comparisons

Last Updated August 13, 2019

Law and Practice

Authors



Baker McKenzie S.A.S. has more than 6,000 lawyers and 77 offices worldwide. Led by Rodrigo Castillo Cottin, the firm's wealth management practice is highly renowned for its high level of expertise working with sophisticated clients in complex multi-jurisdictional reorganisation of assets and tax structures for family groups that lead the most important companies in the country. The firm develops global wealth management strategies that account for all of the applicable tax compliance requirements and commercial issues, which is a benefit given to clients that no other law firm in the country can offer. The firm is the only one with the infrastructure and international connection and co-ordination to offer an international coverage.

In Colombia, residents are subject to income tax on their worldwide income and capital gains, while non-residents are subject to income tax in Colombia only on sourced income and capital gains.

Sourced income is income arising from the rendering of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the title transfer takes place and the exploitation of tangible or intangible assets located inside the country.

Concerning the indirect transfer of assets, income obtained by the transfer of entities or assets in Colombia through the transfer of shares, participations or rights in foreign entities may also be subject to income tax or capital gains.

Income and capital gains tax derived by non-residents is collected through withholding mechanisms, the filing of an income tax return or by a combination of these two. The applicable collection mechanism depends on the income tax characterisation and whether the appropriate withholding is applied, as explained below.

Income Tax

Income tax in Colombia is determined based on the taxpayer's taxable income or presumptive income tax.

Presumptive income tax is equivalent to a percentage of the taxpayer's net equity of the prior taxable year. Taxpayers are only required to pay income tax under this system when the presumptive income basis is higher than the ordinary income.

Presumptive income tax has an applicable rate of 1.5% for fiscal years (FYs) 2019 and 2020. As of 2021, the applicable rate will be 0%. In relation to individuals, the base of presumptive income of the taxpayer is compared only with the general basket income.

Residents

Resident entities

The income tax rate applicable to resident entities is 33% for FY 2019, 32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards.

Dividends paid to national entities are subject to income tax as follows.

  • Dividends distributed to national entities paid out of profits taxed at the corporate level are subject to dividend tax at a 7.5% rate.
  • Dividends distributed to national entities paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate. In this case, the dividend tax of 7.5% indicated above is applied once this tax has been reduced. The effective tax rate for dividends paid out of profits that are not taxed at the corporate level is 38.03% for FY 2019, 37.10% for FY 2020, 36.18% for FY 2021 and 36.18% for FY 2020 onwards.

Resident individuals

Resident individuals are subject to a basket system, where income is characterised in different schedules. Taxable income is determined independently in each basket and the applicable rates are the following.

  • General basket: labour income, capital income and non-labour income (with progressive rates that range from 0 to 39%). The following exemptions, reliefs or deductions are available for resident individuals.
      1. Revenues not considered as taxable income: mandatory health and pension contributions, prepaid health insurance payments and voluntary contributions to the individual's savings scheme provided that (i) income does not exceed 2,500 tax units (approximately USD25,000 for 2019). Contributions do not exceed 25% of the annual earned income.
      2. Deductions: 10% of all labour payments made to individuals who are dependent to the taxpayer (eg, minors) and voluntary pension fund contributions and AFC accounts (accounts for housing purchases).
      3. Exempt income: income not exceeding 3,800 tax units (TU) and social security contributions not exceeding 30% of the annual labour income. The above-mentioned tax benefits are applicable as long as they do not exceed 40% of the total income received or 5,040 TU.
  • Pensions: pensions not exceeding 1,000 TU per month are exempt. Any amounts exceeding the mentioned amount will be subject to progressive rates that range from 0 to 39%.
  • Dividends: dividends paid to resident individuals by resident entities out of taxed profits at the corporate level are subject to income tax as follows.
      1. Dividends distributed to resident individuals paid out of profits taxed at the corporate level not exceeding 300 TU are subject to dividend tax at a 0% rate.
      2. Dividends distributed to resident individuals paid out of profits taxed at the corporate level exceeding 300 TU are subject to dividend tax at a 15% rate.
      3. Dividends paid out of untaxed profits at the corporate level are taxed at the general corporate income tax rate, depending on the period in which they are paid or accrued, in which case the income tax withholding of 15% is applied once this tax has been determined. The same rate applies to dividends received from foreign companies and entities.

Controlled foreign companies - CFC Regime

Colombian income taxpayers are obliged to include on their income tax return passive income realised through controlled foreign corporations (CFCs). A CFC's net profits from passive income must be recognised in proportions equivalent to the participation in the CFC's capital or profits on accrual basis and not on cash basis.

Non-residents

Non-resident entities

The income tax rate applicable to non-resident entities liable for filing an income tax return is 33% for FY 2019, 32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards.

Income tax derived by dividends paid to non-resident entities is collected through a withholding mechanism as explained below.

Non-resident individuals

The income tax rate applicable to non-resident individuals liable for filing an income tax return is 35%.

Income tax derived by dividends paid to non-resident entities is collected through a withholding mechanism as explained below.

Withholdings

Income tax withholdings applicable to payments made to foreign entities and/or individuals are as follows.

  • Direction or management fees paid directly or indirectly to parent companies or home offices: 33%.
  • Technical services, technical assistances or consulting services, rendered in Colombia and from abroad: 20%.
  • Interests, fees, rental income, royalties, exploitation of software, services and, in general, all personal services compensations deemed as Colombian source income: 20%.
  • Interests when loans are granted for one year or more: 15%.
  • Capital gains: 10%.
  • Dividends distributed from a Colombian entity to a foreign entity or non-resident individual are taxed as follows, and the tax is 100% collected through a withholding mechanism.
      1. Dividends distributed to foreign entities or foreign individuals paid out of profits taxed at the corporate level are subject to dividend tax at a 7.5% rate.
      2. Dividends distributed to foreign companies or foreign individuals paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate. In this case, the dividend tax of 7.5% indicated above is applied once this tax has been reduced.

This dividend treatment may change if a double tax convention applies. Therefore, the dividend analysis should be carried out on a case-by-case basis.

Capital Gains

General aspects

Capital gains are defined as extraordinary gains that are not obtained by a taxpayer because of the activities that an individual carries out. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:

  • gains from the direct or indirect 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 inheritances, legacies and donations (gifts);
  • prizes, awards, lotteries and gambling earnings; and
  • life insurance indemnities are taxed as capital gains, but only on the amount that exceeds 12,500 TU.

Distributions made by foreign trustees, private interest foundations or other similar fiduciary arrangements to Colombian tax residents are considered as gifts and as such are taxed as capital gains.

The tax rate applicable to capital gains is 10%. In the disposition of fixed assets, the capital gains treatment applies only if the assets have been held for two years or more. As an exception, gains from lotteries, draws and gambling are subject to a flat rate of 20%.

Generally, the taxable base is the assets' or rights' registered value as of December 31st of the previous year.

Exemptions

The following extraordinary income is considered as exempted for capital gains purposes:

  • deceased's urban property – 7,700 TU;
  • deceased's rural property excluding recreational housing – 7,700 TU;
  • value inherited by the deceased's surviving spouse and heirs – 3,490 TU;
  • assets or rights received by individuals not considered as heirs or surviving spouse – 20% of the assets or rights value;
  • assets or rights gifted or transferred by the deceased during their lifetime that were received gratuitously by a beneficiary – 20% of the assets or rights value without exceeding 2,292 TU; and
  • any books, clothing, personal belongings and furniture belonging to the deceased – 100% of the assets value.

Net Worth Tax

As of 1 January 2019, a net worth tax for FYs 2019 to 2021 is triggered on the possession of a net worth as of 1 January 2019 equal to or in excess of COP5,000,000,000.

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-resident individuals and entities it is based on Colombia situs assets other than shares, accounts receivables and/or portfolio investments; for example, real estate, aircraft, yachts, boats, speedboats, art or oil mining titles.

The taxable base is the value of the taxpayer's net equity as of January 1st of FYs 2019, 2020 and 2021.

It must also be taken into account that regardless of the fluctuations of the taxpayer's net worth, the taxable base will be determined based on the net worth of the taxpayer as of 1 January 2019 as follows:

  • if the taxable base determined for 2020 and 2021 is higher than that determined for 2019, the taxable base for any of those periods will be limited to the taxable base of 2019 increased by 25% of the inflation of the previous period; and
  • if the taxable base determined for 2020 and 2021 is lower than that determined for 2019, the taxable base for any of those periods shall be reduced to the taxable base of 2019 increased by 25% of the inflation of the previous year.

Additionally, assets that are subject to the new Normalisation Tax (as explained below) introduced by Law 1943 of 2018 will also integrate the taxable base. However, if the assets are reported at fair market value and are reinvested in the country on a permanent basis, the value integrating the taxable base may be reduced by up to 50%.

Normalisation Tax - Amnesty 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 (Normalisation Tax).

In order to benefit from the Normalisation Tax, the following requirements must be observed.

  • The minimum taxable base is the historical cost basis of the foreign omitted assets.
  • The additional tax would apply at a 13% rate if reported, liquidated and paid only on 25 September 2019.
  • If the reported assets held abroad are reinvested in the country, the taxable base shall be 50% of the omitted assets' fair market value. Assets would have to be repatriated before 31 December 2019 and must be held in Colombia for at least two years.
  • Foreign private foundations, foreign trust, insurances with a material savings component, investment funds or any other fiduciary business abroad must be reported considering the underlying assets cost basis.

The deadline to file and pay the Normalisation Tax is 25 September 2019.

Normalised assets must be included in all applicable tax returns for FY 2019 and onwards.

Other Taxes

The following taxes are also relevant to individual clients, estates and foundations.

Value-added Tax (VAT)

VAT is triggered on the import of goods into the country and rendering services 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% rate (coffee, corn for industrial use, agricultural machinery, prepaid medicine plans, security services and temporal services).

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 to 1%. The tax is triggered on gross income, excluding revenues for exports, proceeds from the sale of fixed assets, refunds, subsidies and withholdings.

National consumption tax on real estate

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 TU. Some exceptions may apply (assignments of fiduciary rights or funds that are not listed on the stock exchange).

This tax is not applicable to disposals of properties destined to the execution social housing projects. The applicable rate is 2% and the taxable base is the entire sale price.

Colombia has a tax reform every two years. This situation leads to great uncertainty and taxpayers are obliged to review their structure regularly. Due to a fear of future tax uncertainty, taxpayers usually consider implementing estate-planning structures located in jurisdictions with greater legal stability or connected with jurisdictions with an enforceable investment protection treaty with Colombia.

Transfer Tax

There is no transfer tax in Colombia; however, the net gain on the sale of assets is taxed as income or capital gains. The net gain on the sale of fixed assets (assets that are not transferred during taxpayers' ordinary course of business) held for two years or more is considered as a capital gain subject to capital gains tax at a rate of 10%. If the fixed asset is held for less than two years, the gain is treated as taxable income subject to income tax rates as follows: (i) for resident individuals, at income tax progressive rates (0%-39%); and (ii) for non-resident individuals, at 35%.

Transfer of Immovable Property

The transfer of immovable property is also subject to notary fees and registry taxes at 0.3% and 1.5% (including notary fees) of the purchase price, respectively.

As of 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 TU, including those made through assignments of fiduciary rights or funds that are not listed on the stock exchange.

In relation to real estate, a price lower than the cost basis, the cadastral appraisal or the self-appraisal is not accepted, without prejudice of a higher commercial value. When the price agreed by the parties differs significantly from the Fair Market Value (FMV), the Colombian Tax Office may reject it and determine an FMV according to the characteristics, conditions and status of the assets. A significant difference in the price occurs when the consideration differs by 15% or more from the FMV.

Estate Taxes

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' registered value as of December 31st of the previous year.

Regarding any real or perceived abuses/loopholes on tax laws, the Organisation for Economic Co-operation and Development (OECD) has praised Colombia for its high level of commitment to the international standard for transparency and exchange of information. After an assessment of the domestic legal framework by the OECD, Colombia obtained an overall rating of Compliant, due to its legal provisions on financial information and widening network of treaties on exchange of information.

On 25 May 2018, OECD countries agreed to invite Colombia to join the OECD as the 37th member of the organisation after being subject to in-depth reviews by 23 OECD committees and the introduction of major reforms seeking to align its legislation on taxation, anti-bribery, trade and labour issues, among others, to OECD standards. Colombia's main efforts for the achievement of tax transparency and global reporting are as follows.

Exchange of Information

Colombia has also entered into several agreements for the exchange of tax information. For a list of countries with which Colombia has agreed to share information under the Common Reporting Standard (CRS), go to the OECD website. In accordance to the Colombian Tax Office, USA and 36 other countries exchanged tax information on 29 September 2017 and 62 countries in 2018.

FATCA

In relation to the exchange of information, the Colombian and US government have an enforceable Intergovernmental Agreement Model 1 (IGA), within the framework of Law 1666 of 2013, which made the Foreign Account Tax Compliance Act (FATCA) mandatory for Colombian financial institutions and taxpayers. The IGA was implemented in 2015 by means of Resolution 60 of 2015 issued by the Colombian Tax Office.

Ultimate Beneficial Ownership

Financial entities are required to identify and report to the Colombian Tax Office the ultimate beneficial owner 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 20% of a resident entity, local trusts and mutual funds. This information is not available to the public.

Rules Against Tax Haven Practices

The national government enacted Decrees 1966 of 2014 and 2095 of 2014, which established the official list of the jurisdictions that are deemed as low tax jurisdictions for Colombian tax purposes.

Andorra, Antigua and Barbuda, Cayman Islands, British Virgin Islands, Isle of Man, Hong Kong, Andorra, Lebanon and Bahamas, amongst others, were included in the official list.

The Colombian government may review and modify the list of low tax jurisdictions pursuant to the criteria contemplated in Article 260-7 of the Colombian Tax Code to determine if the current jurisdictions may be excluded or if there are additional jurisdictions to be included. This list has not been recently updated.

Voluntary Disclosure (Normalisation 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 (Normalisation Tax).

The additional tax would apply at a 13% rate if reported, liquidated and paid only on 25 September 2019. Normalised assets must be included in all applicable tax returns for FY 2019 and onwards.

The majority of Colombian companies are family-owned. These companies are usually founded and managed by the patriarch. Other family members usually carry out other high management roles in the companies. In most cases, the patriarch is unwilling to turn over wealth and grant control to younger generations until her or his passing, or until they are no longer capable of handling the company's affairs.

As Colombia has forced heirship rules forcing the testator to assign certain compulsory portions, applicable to half of her or his estate, even against their will, Colombian families have grown increasingly concerned on implementing estate and succession planning solutions to ensure a successful turnover of wealth and allow the family estate to increase in value over time.

Colombian families have become increasingly global. This situation has created various challenges when transferring wealth to family members as Colombian rules on forced heirship are mandatory and apply to the estate of all individuals (both national and foreign) whose last residence was Colombia.

This transfer of wealth may provide various challenges from a tax and estate planning perspective, when several jurisdictions are involved. The latter, as Colombian courts usually apply local law in respect of real personal property located in Colombian territory.

Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (national and foreign) whose last place of domicile is Colombia.

Colombian and foreign heirs have the same rights and are entitled to equal treatment in Colombian probate proceedings. The Colombian Civil Code forces the testator to assign certain compulsory portions, applicable to half of her or his estate even against her or his will.

The compulsory portions are (i) maintenance provided by law, (ii) marital portion and (iii) the legitimate portion.

Maintenance Provided by Law

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

Marital Portion

The marital portion corresponds to a part of the estate assigned by law to the surviving spouse or permanent partner lacking the necessary means for a subsistence. Taking into account the existence of any legitimate descendants, the surviving spouse or partner will be included among the deceased's children and shall receive a marital portion corresponding to a share of the estate equal to the portion corresponding to the legitimate descendants.

Legitimate Portion

The legitimate portion corresponds to a part of the estate assigned by law to the legal heirs. Legal heirs are the deceased's children acting personally, or represented by their descendants or ancestors.

The legitimate portion is obtained by dividing half of the inheritance between all legitimate descendants and the surviving spouse or permanent partner.

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 or his discretion, favour the descendant or descendant that she or 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.

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

The general rule for marital property is the community of property regime, which automatically comes into effect for all marriages and remains so until the community of property is dissolved.

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 owners of the community property.

Colombian law also recognises 'common law' unions under 'de facto' marital union provisions. Opposite or same-sex couples that have cohabited together for at least two continuous years may request the declaration of existence of a 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 is made before a judge or by mutual consent of the couple before a notary public or duly authorised conciliation centre.

Upon the death of one of the spouses, the 'marital portion' of the estate is assigned by law to the surviving spouse or permanent partner lacking the means for a congruent subsistence. Taking into account the existence of any legitimate descendants, the widower or widow will be included among the children and receive as a marital portion a share equivalent to the portioncorresponding to the legitimate share of the descendants.

The cost basis of immovable property varies depending on the following rules. The cost basis of property transferred during an individual's lifetime will be the value of the legal act including any direct attributable costs, as well as any improvements on the property. On the contrary, the cost basis of property transferred at death shall be the property's cost basis declared by the deceased as of December 31st of the previous year.

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 commentsmust be made.

Civil Law

Colombian civil law does not provide rules on common law trusts or private foundations. However, there are rules on civil and commercial local trust agreements whereby a settlor transfers the property or administration of certain assets to a trustee in exchange for fiduciary rights.

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 recognised by Colombian law and tax authorities, and may be used as structures to administer private wealth and circumvent forced heirship rules in Colombia. Anti-abuse rules must be observed.

From a tax perspective, there are no mechanisms that allow the transfer of assets to younger generations tax-free. As a rule, inheritances or legacies are considered as capital gain taxes at a 10% rate. However, certain structures may be used to obtain tax deferral or reduce the taxable base. This would be analysed on a case-by-case basis.

Colombia has no regulations concerning the transfer of digital assets. Access to digital assets such as email accounts or cryptocurrency belonging to a deceased whose last place of domicile is Colombia is usually regulated by foreign regulations (due to the absence of regulations in Colombia) dealing with this type of situation.

Local Trusts

Colombian civil law does not provide rules on common law trusts. However, Colombian law sets out rules on civil and commercial local trust agreements whereby a settlor transfers the property or administration 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. 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.

Common Law Trusts or Foreign Foundations¬

There are no civil or commercial regulations regarding the establishment of common law trusts or foreign foundations in Colombia. However, common law trusts are recognised in the Colombian Tax Code. The following requirements have to be observed.

Distributions made by a foreign trust or foundation

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 amounts that exceed 12,500 TU.

Reporting of assets

Assets held by a trust/foundation (which is revocable and directed) are understood to be held directly by the settlor and must be reported for all tax purposes as part of her or his own net worth.

If the underlying assets of an irrevocable and discretionary 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.

Reporting of income

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

Accordingly, Colombian tax residents must report on their income tax returns the passive income realised by the trust/foundation, considering the nature and characteristics of said income.

Civil Law

Colombian civil law does not provide rules on common law trusts or private foundations. However, there are rules on civil and commercial local trust agreements whereby a settlor transfers the property or administration of certain assets to a trustee in exchange for fiduciary rights.

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 recognised by Colombian law and tax authorities, and may be used as structures to administer private wealth and circumvent forced heirship rules in Colombia. Anti-abuse rules must be observed.

Local Trusts

In Colombia, only those companies duly authorised by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer local trust services and act as trustees. Such entities are subject to supervision and special regulations.

Colombian tax law treats local trusts as flow-through entities for tax purposes. Thus, a trust must determine its 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.

Title to the assets that an individual contributes to the trust fund must pass to the trust (exceptions apply) or such assets would have to be declared by the individual as part of her or 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, she or he is required to report such rights for Colombian income tax purposes.

Foreign Structures

If a beneficiary or the donor of a trust, foundation or similar entity also serves as a fiduciary in Colombia, the following rules must be observed.

Place of effective management

Entities incorporated in accordance with Colombian Law, or having their main domicile in Colombia, or entities whose 'place of effective management' (PEM) is located in Colombia are considered Colombian residents for tax purposes.

If the beneficiary or donor of a trust, foundation or similar entity serves as a fiduciary and is located in Colombian territory, a PEM would be triggered as the entity would be effectively administered in Colombia.

Controlled Foreign Corporation

If the trustee is located in Colombia and has control over the capital or economic rights over the trust, foundation or similar entity then the individual would have to report in its income tax any passive income of the CFC, as if it were directly received by them.

In Colombia there are no civil or commercial regulations regarding the establishment of irrevocable foreign trusts and private foundations. However, foreign entities have been recognised by Colombian tax authorities and may be used as structures to administer private wealth and circumvent forced heirship rules in Colombia.

Over the last decade, Colombia has implemented various anti-abuse rules forcing settlors and beneficiaries to report any irrevocable structures due to the exchange of tax information with more than 65 jurisdictions, ultimate beneficiary reporting rules, place of effective management rules, controlled foreign companies' rules and the recognition of low taxation jurisdiction.

Furthermore, regarding the use of irrevocable and discretionary trusts, the most recent tax reform (Law 1943 of 2018) provided that (i) the beneficiaries must report the trusts or the foundations, if they are not subject to conditions; and (ii) if the beneficiaries are subject to conditions then the settlor or founder must report the trust or the foundation for all tax purposes.

When implementing irrevocable trusts, foundations or similar entities, anti-abuse rules should be observed. This means that both the irrevocability and discretional character of the structure should be real and can be easily proven to the Colombian Tax Office.

The most popular method for asset protection planning is the incorporation of a separate vehicle from the individual's personal estate, providing asset protection from third parties or creditors.

Individuals may place assets held in their own names into a local trust in order to designate them or their proceeds to a specific purpose or persons. The assets placed into a properly structured trust form an estate separate from the assets of the settlor.

In structuring asset transfers, whether or not gratuitously made, attention should be paid to Colombia's creditor protection laws. The Colombian Commercial and Civil Codes include specific rules on the enforcement of a revocation action (acción revocatoria) against the unjustified actions performed by debtors prior to the request of a treaty process, a mandatory liquidation process or a restructure process.

Further asset protection can be obtained through an enforceable investment agreement with the following jurisdictions.

  • Bilateral investment treaties: China, Spain, Switzerland, Peru, India, the United Kingdom and Northern Ireland, the Pacific Alliance (Colombia, Chile, Mexico and Peru), Japan and India.
  • Free trade agreements (investment chapters): Canada, Chile, the European Free Trade Association (Switzerland, Liechtenstein, Iceland and Norway), Costa Rica, the EU, Mexico, the North Triangle (Guatemala, El Salvador and Honduras), South Korea and the USA.

In Colombia, a testator only has an unlimited right of disposal over one half of her or his estate that corresponds to the freely disposable portion. The testator may decide upon the beneficiary of the assets comprising the remaining half of the estate, but must respect the compulsory portion that corresponds to his or her heirs.

Certain corporate arrangements (national or foreign) such as life insurance policies and the use of foreign or national legal entities may be implemented when forced heirship rules do not meet the wishes or needs of the testator or his family. The latter by legally allowing assets to be passed down to intended beneficiaries successfully and circumventing Colombian forced heirship rules.

Partial Interest in an Entity Transferred during Lifetime

If a partial interest is transferred during lifetime, it is presumed that the fair market value of the interest cannot be lower than its intrinsic value increased by 30%.

If the partial interest being transferred is received as consequence of gift, the value of the interest is at cost basis.

Partial Interest in an Entity is Transferred after Death

On the contrary, if a partial interest is transferred at death, any amount received as consequence of an estate, legacy, donation or conjugal portion is considered as a capital gain subject to capital gains tax at a 10% rate. The value of the interest is its cost basis.

Regarding estates, trusts, foundations and similar entities, recent regulations introduced by the most recent tax reform (Law 1943 of 2018) have been widely criticised and subject to the filing of lawsuits by failing to acknowledge the legality and validity of the actions of Colombian taxpayers before the entry into force of this law.

Private interest foundations and foreign trusts were not subject to tax regulations in Colombia until 2012, with the entry into force of Article 103 of Law 1607. The article established that distributions made by foreign trustees, private interest foundations or other similar fiduciary arrangements to Colombian residents are considered capital gains taxed at a 10% rate on the gross distributed amount.

Subsequently, by means of Article 37 of Law 1739 of 2014, it was established that the possession of rights held in foreign trusts, private interest foundations or other similar fiduciary arrangements had to be reported for normalisation tax purposes.

As set forth by Article 263 of the Colombian Tax Code (CTC), it is understood by possession, the economic benefit whether potential or real, of any asset in benefit of the taxpayer. It is presumed that whoever has legal tittle as owner has for its own the economic benefits of the assets.

The above-mentioned article would only apply for (i) beneficiaries not subject to any condition in a foreign trust or private interest foundation, or (ii) a settlor or founder of a trust of private interest foundation of a revocable and non-discretionary nature.

On the contrary, no possession can be established if (i) beneficiaries are conditioned and only have an expectation, and (ii) the settlor or founder of an irrevocable and discretionary trust or foundation irrevocably grants all economical and disposition rights to an independent third party.

Moreover, this interpretation was confirmed by the Colombian Tax Office throughout tax ruling No 34071 of 20 December 2017, which determined the main aspects to be considered by a taxpayer as settlor, contributor and designated third party of a trust: (i) the contributor assigning assets to a revocable trust must file the foreign assets return and has the obligation to report them in its income tax returns at cost basis as provided by the CTC, and (ii) the contributor assigning the assets to an irrevocable trust must report the assets in its income tax returns and in any other applicable tax return, if it possesses the economic benefits according to Article 263, CTC.

On the other hand, for income tax purposes, Article 882 of the Colombian Tax Code (introduced by Law 1819 of 2016) determined that any income realised by a foreign entity whose place of effective management is located in Colombia had to be reported.

With the entry into force of Law 1943 of 2018, these guidelines took a massive turn by establishing that if the underlying assets of an irrevocable and discretionary foundation cannot be attributed to the beneficiaries, the latter must be reported by the settlor, contributor or originator. This, without any consideration of the structure's irrevocable and discretionary character.

Based on the above, as of 1 January 2019, taxpayers who acted in good faith and followed the Tax Office's guidelines are now considered as taxpayers holding unreported assets. This situation had led to serious questionings from taxpayers who acted in good faith.

The above-mentioned situations led to the filing of various lawsuits requesting the annulment of the Normalisation Tax by considering that it holds no consideration for previous rules that were enforceable at the time and grants these new rules a retroactive effect. The reality is that the Constitutional Court may not admit many of the lawsuits.

Compensation for aggrieved parties in wealth disputes or disputes involving trusts, foundations or similar entities will imply civil liability (torts) in Colombia. Requesting compensation for damages is usually carried out before Colombian courts, which will determine the type of damage and amount of compensation.

Local Trusts

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

Only those companies duly authorised by the Colombian financial authority (Superintendencia Financiera de Colombia, or SFC) may offer trust services and act as trustees. Such entities are subject to supervision and special regulations.

Colombian law sets forth a number of legal duties for trustees, which cannot be delegated on third parties or waived. These include the following:

  • the duty to carry out trustee activities in a diligent manner;
  • segregation of assets;
  • assets in trust must be managed in accordance with the trust agreement;
  • a trustee must act on behalf of and for the benefit of the beneficiaries; a trustee must consult the SFC when in doubt of its duties or when it deems necessary acting against the instructions set forth in the trust agreement;
  • best efforts in maximising the trust's profitability;
  • upon the trust's termination, the trustee must transfer assets to the final beneficiary set forth in the agreement; and
  • a trustee must report accounts at least every six months.

Foreign Trusts

Regarding the use of corporate fiduciaries or other professional fiduciaries, there are no civil or commercial regulations establishing a higher standard of conduct or additional supervision or regulations.

Colombian law authorises individuals residing in Colombia and legal entities created under the laws of Colombia (ie, a 'resident of Colombia') to invest and hold assets outside Colombian territory without the need of obtaining further permits or authorisations. However, said residents of Colombia must comply with foreign exchange regulations.

Piercing of the Corporate Veil

In Colombia, the piercing of the corporate veil has been developed by case law and seeks to identify the individuals or legal persons who are beneficiaries of the legal entity. However, this procedure must be ordered by a judge and is not common on a day-to-day basis.

Local Trusts

The Colombian Commercial Code includes a provision whereby the assets of a trust negotiation cannot be pursued by the creditors, unless 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.

There are no specific laws that encourage fiduciaries to invest assets prudently. However, current regulations set forth a number of legal duties for trustees to invest and maintain their assets that cannot be delegated to third parties or waived. These include the following:

  • the duty to carry out trustee activities in a diligent manner;
  • segregation of assets;
  • assets in trust must be managed in accordance with the trust agreement;
  • a trustee must act on behalf of and for the benefit of the beneficiaries; a trustee must consult the SFC when in doubt of its duties or when it deems necessary acting against the instructions set forth in the trust agreement;
  • best efforts in maximising the trust's profitability;
  • upon the trust's termination, the trustee must transfer assets to the final beneficiary set forth in the agreement; and
  • a trustee must report accounts at least every six months.

As a general rule, parties involved in a fiducial agreement will determine the risks and limitations in the investment of assets. Colombian law does not require the diversification of assets or the application of modern portfolio theory. Certain exceptions may apply if government assets are involved.

Residency

It is understood that a foreigner is a resident in Colombia when he or she is the holder of a residence visa. A person acquires tax residence in Colombia if he or she, whether Colombian or foreigner, remains in the country, continuously or discontinuously, for more than 183 calendar days in any period of 365 days. When the discontinuous permanence of more than 183 days occurs between two taxable periods, the individual would be considered a resident as of the second taxable period.

Concerning Colombian nationals, other rules to determine residency will apply (eg, family and location of assets) and must be analysed on a case-by-case basis. 

Citizenship

Latin American or Caribbean citizens by birth may obtain Colombian citizenship provided that they are domiciled in Colombia for a term of one year.

Foreigners who are not Latin American, from the Caribbean or Spanish nationals may obtain Colombian citizenship provided that they are domiciled in Colombia for a term of five years counted from the visa's date of expedition. This term may be reduced to two years if the individual is married to a Colombian national or has Colombian children.

Latin American or Caribbean citizens by birth may obtain Colombian citizenship provided that they are domiciled in Colombia for a term of one year.

Foreigners who are not Latin American, from the Caribbean or Spanish nationals may obtain Colombian citizenship provided that they are domiciled in Colombia for a term of five years counted from the visa's date of expedition. This term may be reduced to two years if the individual is married to a Colombian national or has Colombian children.

Foreign Tools

Foreign entities such as trusts and private foundations may be used to hold and manage assets for minor children or adults with disabilities 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 (eg, legal age).

Under Colombian law, any individual is subject to legal rights and obligations except for individuals deemed to be incapable by a Colombian 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 unfit to handle his or her own affairs, the judge will designate a guardian to take care of the individual's affairs.

Due to the increase in life expectancy in Colombia, the Colombian government has created an expert commission (Comisión de Reforma de Protección a la Vejez) with the purpose of hearing out different groups of interests within the Colombian population. The objective is the implementation of a new pension bill seeking to improve the coverage and equity in the Colombian pension system.

As part of the bill's incentives to help families and individuals to prepare financially, the government is currently evaluating the possibility of subsidising pensions saving schemes.

This situation has also led the Colombian government to consider increasing the legal age (which is currently 57 years for women and 62 for men).

There is no legal distinction between natural and adopted children in terms of estate and succession planning. In accordance with Law 29/1982, natural and adopted children have the same rights and obligations. This would also be the case for posthumously conceived children.

A progressive recognition of legal rights for same-sex couples has taken place through case law. Currently, same-sex couples can constitute de facto marital unions and even formalise their union before a judge or notary public and have the same pension, social security, property, and inheritance and adoption rights as heterosexual couples. The latest legal development took place with Ruling SU-214/2016, whereby the Constitutional Court accepted same-sex marriages.

The Colombian Tax Code established that non-profit corporations, foundations and associations are subject to a special tax regimen with respect to income tax (20% rate) and complementary taxes provided that they always comply with the following conditions:

  • they are incorporated under Colombian law;
  • their main purpose and resources are destined to health, formal sports education, culture, scientific or technological, ecological 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.

25% of the gifts made to entities of the special tax regime can be credited for income tax purposes. However, the above-mentioned requisites must be met.

Entities approved by the Colombian Tax Office as eligible for the special tax regime are subject to income tax at a 20% rate. However, any income surplus is considered as exempt, provided that the funds are destined directly or indirectly for programmes that develop the entity's social purpose and meritorious activities. Any excess benefits or surplus that are not reinvested in programmes that develop the entity's social purpose are deemed as taxable for the next fiscal year.

Baker McKenzie S.A.S.

Ave Calle 82
No 10- 62 piso 7
Bogotá, D.C. 110221
Colombia

+57 1 634 1500

+57 1 376 2211

www.bakermckenzie.com
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Law and Practice in Colombia

Authors



Baker McKenzie S.A.S. has more than 6,000 lawyers and 77 offices worldwide. Led by Rodrigo Castillo Cottin, the firm's wealth management practice is highly renowned for its high level of expertise working with sophisticated clients in complex multi-jurisdictional reorganisation of assets and tax structures for family groups that lead the most important companies in the country. The firm develops global wealth management strategies that account for all of the applicable tax compliance requirements and commercial issues, which is a benefit given to clients that no other law firm in the country can offer. The firm is the only one with the infrastructure and international connection and co-ordination to offer an international coverage.