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.

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.

Baker McKenzie S.A.S.

Ave Calle 82
No 10- 62 piso 7
Bogot√°, D.C. 110221
Colombia

+57 1 634 1500

+57 1 376 2211

www.bakermckenzie.com
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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.

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