Contributed By Baker McKenzie S.A.S.
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.
Ave Calle 82
No 10- 62 piso 7
Bogotá, D.C. 110221
+57 1 634 1500
+57 1 376 2211www.bakermckenzie.com