In Colombia, tax resident individuals and local entities are subject to income tax on their worldwide income and capital gains, besides they are required to report their worldwide net assets.
Meanwhile non-resident individuals and entities domiciled abroad are subject to income tax only on their Colombian-sourced income and capital gains and should report the net assets located in the country (For details on the tax residency rules applicable in Colombia, see 7.1 Requirements for Domicile, Residency and Citizenship).
Colombian-sourced income includes 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 or structures may also trigger income tax or capital gains in Colombia.
Ordinary income vs presumptive income
Income tax in Colombia is determined based on the taxpayer's taxable income (ie, Ordinary system calculation: revenues minus costs and deductions) or presumptive income.
Presumptive income 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 taxable income under ordinary system. In the case of resident individuals, presumptive income should be compared to the general basket income only (basket system is explained below).
Presumptive income for fiscal year (FY) 2020 is equivalent to 0.5% of the taxpayer's net equity of the prior taxable period. As of FY 2021 the applicable rate will be 0%.
Income tax rate
Tax resident individuals are subject to progressive income tax rates ranging from 0% to 39%.
Dividends income is subject to specific income tax rates between 0% and 10% provided these are paid out profits already taxed at the corporate level (ie, the entity making the dividend distribution already paid taxes in Colombia upon the corresponding profits).
In the event dividends are paid out of profits that were no taxed at the corporate level these will be subject first, to the general tax rate applicable to local entities and, second, subject to the referred 0%-10% rates upon a net amount reduced in the general income tax.
Income tax derived by non-residents is generally collected through a tax withholding mechanism (at a 20% general rate, with some specific exceptions described in the Tax Withholding subsection below), the filing of an income tax return or by a combination of both.
The applicable collection mechanism depends on the income tax characterisation and whether the appropriate tax withholding was applied, as explained further in.
The income tax rate applicable to non-resident individuals liable to file an income tax return in Colombia is 35%.
Dividends paid out of profits taxed at the corporate level will be subject to a 10% tax rate. In the event dividends are paid out of profits that were no taxed at the corporate level these will be subject first, to the general tax rate applicable to local entities and, second, the 10% tax indicated above is applied once the general income tax has been reduced.
The general income tax rate applicable to Colombian entities is 32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards.
Dividends paid to Colombian entities out of profits already taxed are subject to a 7.5% income tax rate. In the event dividends are paid out of profits not-taxed these will be subject first, to the general tax rate applicable to local entities and, second, the dividend tax of 7.5% indicated above applies once the general income tax rate is reduced.
The estimated effective tax rate for dividends out of untaxed profits is 37.10% for FY 2020, 36.18% for FY 2021 and 36.18% for FY 2022 onwards.
As in the case of non-resident individuals, income tax derived by foreign entities is generally collected through a tax withholding mechanism, the filing of an income tax return or by a combination of both.
The general income tax rate applicable to foreign entities liable to file an income tax return in Colombia is the same applicable to Colombian entities.
In the case of dividends, the rules described for non-resident individuals are also applicable to foreign entities.
Determination of the taxable income (special rules)
Basket system applicable to resident individuals
Resident individuals are subject to a basket system, where income is characterised in different baskets with the following determination rules:
The above mentioned tax benefits are applicable as long as they do not exceed 40% of the individuals annual income limited to 5.040 Tax Units (approximately USD49,000).
In this case, the dividend tax of 10% indicated above applies once the general income tax rate is reduced.
Tax withholdings mechanism applicable to non-resident individuals and foreign entities
Payments to foreign entities and/or non-resident individuals are generally subject to tax withholdings according to their nature as follows:
If Colombian sourced payments are not subject to income tax withholdings, the foreign entity or individual will be required to file an income tax return in Colombia. On the contrary, if income tax withholdings are applied in its entirety, this will be the final tax liability.
Tax treatment of payments made abroad may change if a Double Taxation Treaty applies. Therefore, analysis should be carried out on a case-by-case basis.
Currently Colombia has 11 enforceable Double Taxation Treaties: with the Andean Community of Nations (Bolivia, Ecuador and Peru), Canada, Czech Republic, Chile, Spain, South Korea, Switzerland, India, Portugal, Mexico and United Kingdom.
Controlled foreign companies - CFC Regime
Colombian income taxpayers are required to report within their income tax returns passive income earned through controlled foreign corporations (CFCs).
Any entity being controlled by one or more tax residents in Colombia (subordinated or related parties) and not being deemed as domiciled/residents in Colombia, may be deemed to be a CFC for tax purposes. In order to determine the existence of control, the definition of subordinates entities and foreign related parties applicable for transfer pricing purposes must be observed. Note that there is a presumption of control when the entity is in a tax haven.
Once the entity is deemed to be a CFC, any individual or entity with a direct or indirect participation of 10% or more in the capital stock or results of the CFC must include in their income tax return the income, costs and expenses related to the passive activities carried out by the CFC and pay taxes on it. If the CFC’s passive income represents 80% or more of its total income, it is presumed that all income, costs and deductions would be considered as passive and therefore would be subject to the CFC regime. If the CFC’s active income represents 80% or more of its total income, it is presumed that all income, costs and deductions would be considered as active and therefore would not be subject to the CFC regime.
Passive income is considered as income derived from:
CFCs net profits from passive income must be recognised in proportions equivalent to the taxpayer's participation in the CFCs' capital or profits on accrual basis and not cash basis.
Capital gains are defined as extraordinary income that is not related to the activities typically carried out by the taxpayer. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:
Distributions made by foreign trustees, private interest foundations or other similar fiduciary arrangements to Colombian tax residents are considered as gifts subject to capital gains tax.
The tax rate applicable to capital gains is 10%. 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.
The following extraordinary income is considered as exempted for capital gains purposes:
Net Worth Tax
As of 1 January 2020, a net worth tax for FYs 2020 to 2021 is triggered on the possession of a net worth as of 1 January 2020 equal to or in excess of COP5 billion. (approximately USD1.3 million).
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 foreign 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 2020 and 2021.
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 2020 as follows:
Assets that are subject to the Normalisation tax (explained in the following subsection) will also integrate the net worth tax base. However, if the assets are reported at fair market value and are reinvested in the country on a permanent basis (for at least two years), the value integrating the taxable base may be reduced by up to 50%.
Normalisation Tax – Amnesty
Law 2010 of 2019 reintroduced a mechanism allowing taxpayers to include any omitted assets or excluding any inexistent liabilities without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the omitted assets or inexistent liabilities ("normalisation tax").
In order to benefit from the normalisation tax, the following requirements must be observed:
Deadline to file and pay the normalisation tax is 25 September 2020.
Normalised assets/liabilities must be considered in all applicable tax returns as from FY 2020 onwards.
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.
Financial transactions tax
Financial Transactions Tax is imposed on any transaction whereby funds held by a Colombian entity in Colombian bank accounts are disposed of (eg, debits on bank accounts). The taxable base is the amount of funds withdrawn. The applicable rate is 0.4% and it is withheld and collected by the financial entities through which the transactions are conducted. This tax is generally levied upon all financial transactions.
On average, Colombia has a tax reform every two years. This situation leads to great uncertainty and taxpayers are obliged to review their structures regularly. Due to a fear of tax uncertainty, taxpayers usually consider implementing estate-planning structures located in jurisdictions with greater legal stability or an enforceable investment protection treaty with Colombia.
Given that COVID-19 has affected global travel and immigration, on April 2020, a ruling request was sent to the Colombian Tax Office requesting the suspension of the day count to obtain tax residency in Colombia.
The Colombian Tax Office initially issued Ruling No 612 of 2020 stating that tax residence rules were not suspended due to the health emergency. The Tax Office reconsidered this position through Ruling No 902285 of 2020, by mentioning that tax residence rules are not suspended, however individuals should consider the tie-breaking rules provided in enforceable tax treaties with Colombia and Force Majeure and fortuitous events regulated in Article 64 of the Colombian Civil Code.
Due to the COVID-19 outbreak, the Colombian government introduced various measures to counter the economic effects of the pandemic. Measures include postponing dates for the filing and payment of certain tax returns, temporally eliminating import tariffs on medical supplies, reduction of the VAT rates for specific medical equipment and the reduction of VAT rates for mobile and internet services. Local governments (eg, Bogotá) also introduced measures such as postponing filing dates for the payment of vehicular taxes and industry and commerce tax.
The following measures adopted by the Colombian government are relevant for individuals:
A temporary tax with progressive tax rates ranging from 15% to 20% was introduced for government officials, government contractors and pensioners with monthly salaries, income or pensions exceeding COP 10 million (approximately USD2.700). This tax applies from 1 May 2020, to 21 July 2020.
Solidarity tax was declared unconstitutional in August 2020 by the Constitutional Court. Resources collected for this concept would be creditable to the FY 2020 income tax due.
Payroll contributions made by employees and employers where reduced from 16% to 3%. Accordingly, the employer will assume 2.25% and employee pays the remaining amount. This benefit applied for May and June 2020 but was declared unconstitutional on 23 July 2020 by the Constitutional Court.
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. On 28 April 2020, Colombia officially became the 37th OECD member country.
Colombia's main efforts for the achievement of tax transparency and global reporting requirements are the following:
Exchange of Information
Colombia has 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 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
Taxpayers 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 an individual has direct or indirect ownership and control of more than 5% of a resident entity, local trusts and mutual funds or has direct or indirect control over the latter considering transfer pricing rules. This information is not available to the public.
Rules Against Tax Haven Practices
The national government enacted Decree 1966 of 2014 and Decree 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 2010 of 2019 reintroduced a mechanism allowing taxpayers to include any omitted assets or exclude any inexistent liability without having to pay income tax on the resulting equity increase, but instead by paying an additional tax on the referred assets/liabilities (normalisation Tax).
The additional tax applies at a 15% rate. normalisation tax should be liquidated, declared and payed on September 25, 2020. Normalised assets and liabilities must be considered in all applicable tax returns as from FY 2020 onwards.
Article 869 of the Colombian Tax Code established a tax anti-abuse rule. This rule allows the Colombian Tax Office to re-characterise or reconfigure any operations or series of operations that may constitute abuse for tax purposes and disregard its effect.
A conduct is considered abusive if:
Most of Colombian companies are family-owned. These companies are usually founded and managed by a matriarch/patriarch. Other family members carry out other high management roles in the company. In most cases, the matriarch/patriarch is unwilling to turn over wealth and grant control to younger generations until their 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 their 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 allowing 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 the 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 their estate even against her or his will.
The compulsory portions are:
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.
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 portion corresponding to the descendants.
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. This 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 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
A testator may dispose of a certain part of their wealth, up to half of their estate. Should there be no descendants or beneficiaries, directly or by representation, entitled to inherit, the freely disposable portion will represent the entire estate. Otherwise, the Colombian state through the Colombian Family Welfare Institute will inherit the entire state.
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 either because of death, judicial decision or as result of free will. In this regime, the spouses commonly own community property. 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.
Certain assets acquired by any of the spouses before marriage are considered as individual assets. However, any income, profits or increases in assets value derived from the individual property (including income generated by assets transferred to the foundations and trusts) are part of the community property.
The right of a spouse to unilaterally dispose of assets is unlimited. A spouse is entitled to dispose of personal property and the assets of the community of property as they see fit. However, other dispositions may require, as a rule, the approval of the other spouse. This would be the case with real estate property.
Colombian law respects both prenuptial and postnuptial agreements and must be granted by public deed. In the case of foreign agreements, the latter are recognised if they are dully notarised and apostilled.
The cost basis of property transferred during an individual's lifetime is the registered value of the legal act including attributable costs. On the contrary, the cost basis of property transferred at death is the cost basis declared by the deceased as of December 31st of the previous year.
From a tax perspective, there are no mechanisms available to help 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 should 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.
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 comments must made:
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.
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 Tax Units (approximately USD122,000).
Reporting of Assets
Assets held by a trust/foundation (which is revocable and directed) are understood to be held directly by the unconditioned beneficiaries or by the settlor/founder 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 settlor must report the latter. 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 trusts/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.
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.
There are no civil or commercial regulations regarding the establishment of foreign trusts and private foundations. However, foreign entities are recognised and respected 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.
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 local 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 their 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.
In the event beneficiaries are not subject to any condition for benefit from the assets or income in a foreign trust or private interest foundation, they will be required to report their "participation" in the structure for all tax purposes as further explained in 3.4 Exercising Control over Irrevocable Planning Vehicles.
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 (CFC)
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 was directly received by them.
In Colombia, there are no civil or commercial regulations regarding the establishment of irrevocable foreign trusts, private foundations and/or similar entities. 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.
Concerning irrevocable trusts, foundations or similar entities, the most recent tax reform (Law 2010 of 2019) introduced new reporting tax regulations. As a result, if the underlying assets of an irrevocable and discretionary foundation cannot be attributed to the beneficiaries, the settlor, contributor or originator must report the latter. This, without any consideration of the structure's irrevocable and discretionary character.
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 also 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 local 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.
In Colombia, a testator only has an unlimited right of disposal over one half of their estate that corresponds to the freely disposable portion. The testator may decide 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/structures may be implemented when forced heirship rules do not meet the wishes or needs of the testator or their family. The latter by legally allowing assets to be passed down to intended beneficiaries successfully and circumventing Colombian forced heirship rules.
Partial Interest an Entity Transferred During Life
If a partial interest is transferred during lifetime, it is presumed that the fair market value of the interest cannot be lower than its cost basis and it net asset value (valor intrínseco) increased by 30%.
If the partial interest being transferred is received as consequence of gift, the value of the interest is its cost basis.
Partial Interest in an Entity 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, regulations introduced by 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 said 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. Said 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, the possession of rights held in foreign trusts, private interest foundations or other similar fiduciary arrangements had to be reported for normalisation tax purposes.
Article 263 CTC
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 beneficiaries not subject to any condition in a foreign trust or private interest foundation, or 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 beneficiaries are conditioned and only have an expectation, and the settlor or founder of an irrevocable and discretionary trust or foundation irrevocably grants all economical and disposition rights to an independent third party.
Tax Ruling No 34071
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:
However, 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 settlor, contributor or originator must report the latter. 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 prior guidelines (whereby were considered as taxpayers holding unreported assets. This situation had led to serious questionings from taxpayers who acted in good faith and resulted in the filing of various lawsuits.
After close review by the Colombian Constitutional Court, on 26 October 2019, the tax reform introduced by Law 1943 of 2019 was declared unconstitutional. The Court made this decision based on various procedural mistakes made during the discussions held in Congress. In order to mitigate any fiscal impact, the Court gave the Colombian Government until the end of 31 December 2019 the possibility to file a new tax bill, otherwise, the tax rules that were applicable before the enactment of Law 1943 of 2019 would once again come into force.
Considering this short time frame, the Colombian government filed a new tax bill. Based on previous discussions with both taxpayers and academics, it was expected that rules for the reporting of irrevocable and discretionary trusts would be modified. However, these rules were left untouched and were once again introduced by Law 2010 of 2019.
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 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:
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 to invest and hold assets outside Colombian territory without the need of obtaining further permits or authorisations. However, said tax residents and local entities must comply with all tax and foreign exchange reporting regulations.
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.
From a tax perspective, Article 869-2 of the Colombian Tax Code (CTC), allows the Colombian Tax Office (CTO) to pierce the corporate veil of any entity used by its shareholders, partners, directors or administrators to commit tax abusive conducts under Article 869 mentioned earlier in 1.3 Transparency and Increased Global Reporting.
The CTO may also obtain information regarding UBO's using the following mechanisms:
There are no specific laws that encourage fiduciaries to invest assets prudently. However, and as mentioned in 6.1 Prevalence of Corporate Fiduciaries, 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.
Generally, 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 or pension funds are involved.
It is understood that a foreigner is a resident in Colombia when they are the holder of a residence visa.
An individual is a 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.
Colombian nationals are considered as tax residents if:
Colombian individuals who meet the above-mentioned requirements will not be considered tax residents if:
Tax residence has acquired particular relevance due to the recent COVID-19 pandemic as the Colombian government suspended international travel until August 2020. Accordingly, many non-tax residents will likely obtain tax residence in Colombia by remaining in Colombian more than 183 days.
Given that COVID-19 has affected global travel and immigration: in April 2020, a ruling request was sent to the Colombian Tax Office requesting the suspension of the day count to obtain tax residency in Colombia.
The Colombian Tax Office initially issued Ruling No 612 of 2020 stating that tax residence rules were not suspended due to the health emergency. The Tax Office reconsidered this position through Ruling No 902285 of 2020, by mentioning that tax residence rules are not suspended, however individuals should consider the following aspects:
Latin American or Caribbean citizens by birth may obtain Colombian citizenship if they are domiciled in Colombia for a term of one year. Spanish citizens may obtain Colombian citizenship if they are domiciled in Colombia for a term of two years.
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.
Due to the COVID-19 pandemic, the process for obtaining Colombian citizenship has been delayed as physical presence is required to obtain citizenship before the local mayor's or governor's office.
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 specific conditions are met.
Individuals with limited capacity to handle their own affairs are deemed as capable under Colombian law provided that one of the following legal mechanisms are used:
Due to the increase of life expectancy in Colombia, the Colombian government created an expert commission (Comisión de Reforma de Protección a la Vejez) with the purpose of hearing put different groups of interest in Colombia by using public consultation. The objective is the implementation of a new pension bill seeking to improve coverage and equity in the Colombian pension system.
The implementation of a new pension bill has been put on hold due to public scrutiny and massive public manifestations that occurred by the end of 2019 requesting to maintain current pension requirements. Moreover, due to the COVID-19 pandemic, a public pension reform this year is not expected this year.
There is no legal distinction for natural, adopted or born out of wedlock children in terms of estate and succession planning. In accordance Law 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, 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:
Further this this, there is an annual registration requirement. The entity must file a yearly online request to continue benefiting from the special tax regimen. Otherwise, they will be subject to the general corporate income tax rate (32% for FY 2020, 31% for FY 2021 and 30% from FY 2022 onwards).
Of the gifts made to entities of the special tax regime, 25% 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 exempt, if the funds are destined directly or indirectly for programmes that develop the entity's social purpose and meritorious activities. Any excess benefits or surpluses that are not reinvested in programmes that develop the entity's social purpose are deemed as taxable for the next fiscal year.
During the last decade, Colombia has introduced numerous tax rules relating to the taxation of individuals and the implementation of information exchange mechanisms (eg, the Foreign Account Tax Compliance Act (FATCA), the Common Reporting Standard (CRS), and the Asset Laundering and Terrorist Financing Risk Management System (Sistema de Administración del Riesgo de Lavado de Activos y de la Financiación del Terrorismo or SARLAFT)) leading to a greater transparency. These developments (among others) have shown Colombia's willingness to adopt OECD legal recommendations and standards and have led to Colombia officially becoming the 37th member country of the OECD.
From a private wealth law perspective, these developments have also increased the demand for wealth management services in Colombia as individuals seek to remain compliant while ensuring the protection and successful transfer of wealth. Furthermore, the recent tax reforms adopted by Colombia have created new challenges for private clients who wish to maintain and create family wealth by introducing higher taxation rates for individuals on both income and net worth.
Colombian companies are usually closely held and managed; the involvement of both local and international entities can be used to ensure a successful transition of wealth. Achieving this requires the analysis of various alternatives taking into account forced succession rules and an outdated international private law system.
Another layer of complexity is created by the country's constant changes to its own tax legislation (on average every two years). This legal uncertainty has led to the implementation of structures involving jurisdictions with greater legal stability or enforceable protection investment treaties with Colombia and ultimately the relocation of individuals.
The most recent notable trends and legal developments affecting private clients in Colombia in 2020 are summarised below.
Newly Introduced Tax Reform (Law 2010 of 2019)
After close review by the Colombian Constitutional Court, in October 2019 the tax reform introduced by Law 1943 of 2019 was declared unconstitutional. The Court issued this ruling based on various legislative mistakes during its enactment. To mitigate any fiscal impact, the Court allowed the Colombian government to file and enact a new tax bill before 31 December 2019. Otherwise, the tax rules applicable before the enactment of Law 1943 would once again become enforceable as of 1 January 2020.
Considering this short period, the Colombian government filed a new tax bill maintaining the majority of the elements introduced by the previous law, leading to the enactment of Law 2010 of 2019 on 27 December 2019. Note, however, that any tax events consolidated by taxpayers under Law 1943 remain valid.
Up-and-Coming Tax Reform
On 17 June 2020 a team of international tax experts were appointed by the Colombian Government to review the existing taxation system and propose a new tax reform with the objective of maintaining efficient tax benefits, reactivating the economy, creating new jobs, encouraging entrepreneurship, and company and tax formalisation. The final report must be presented by the end of 2021. Accordingly, we expect to have another tax reform that will likely impact individuals' taxation by the end of 2022.
COVID-19 Measures Concerning Individuals
Due to the COVID-19 outbreak, the Colombian government has introduced measures to alleviate the economic hardship created by the pandemic. The most significant of these measures for individuals are set out below.
A "solidarity tax" for government officials, government contractors and individuals with pensions exceeding certain thresholds has been introduced and will last until the end of July 2020. The tax is progressive with rates ranging from 15% to 20%.
Solidarity tax was declared unconstitutional by the Constitutional Court in August 2020.
Reduction of payroll contributions
Payroll contributions were reduced for both employees and employers in April and May 2020 from 16% to 3% (2.25% paid by the employer and 0.75% by the employee). However, on 23 July 2020 the Constitutional Court declared this benefit unconstitutional.
Local governments (eg, Bogotá) also introduced measures for individuals postponing filing dates for the payment of vehicular taxes and industry and commerce tax.
Income tax, net worth tax and normalisation tax due dates for individuals have remained unchanged.
Tax Residency in the COVID-19 Era
As the COVID-19 pandemic also led to international travel restrictions, many non-tax residents will likely obtain tax residence by remaining in Colombia more than 183 days.
Based on OECD recommendations, on April 2020, a ruling request was filed before the Colombian Tax Office (CTO) requesting the suspension of the day count to obtain tax residency in Colombia.
The CTO initially concluded that tax residency rules were not suspended due to the health emergency; however, it later reconsidered this position by establishing that individuals may request that the CTO analyse their case individually. This analysis should consider:
2020 Normalisation Tax (Tax Amnesty)
On 26 September 2019 the Colombian Tax Office announced that 5,400 Colombian citizens with unreported assets and liabilities abroad filed and payed the 2019 Normalisation Tax, resulting in the collection of COP1.1 billion, exceeding the established collection goal by 115%.
Based on this success, Law 2010 of 2019 reintroduced the normalisation tax for 2020, allowing taxpayers to include any unreported assets without having to pay income tax and penalties on the resulting equity increase but instead by paying an additional tax on the omitted assets.
This new normalisation tax maintains the majority of the elements of the previous tax with the exception of an increased tax rate of 15% (instead of 13%). If the assets are reinvested in the country for at least two years, the effective tax rate will be reduced to 7.5%. The deadline for filing and payment is 25 September 2020.
2020 Net Worth Tax
Due to the declaration of the unconstitutionality of Law 1943 of 2019, a net worth tax was reintroduced for FY 2020–21. This tax is triggered on the possession of a net worth, as of 1 January 2020, equal to or in excess of COP5 billion (approximately USD1.37 million). The applicable rate is 1%.
This tax applies to both resident/non-resident individuals and foreign entities as follows:
• Resident individuals – calculated on worldwide assets.
• Non-resident individuals/entities – calculated on Colombian situs assets, other than shares, accounts receivable and/or portfolio investments.
If the taxable event is reached after 1 January 2020, this tax will not be applicable.
Taxation/Tax Report of Foreign Trusts, Foundations and Other Similar Entities
Before the enactment of Law 1943 of 2018, regulations regarding the taxation/tax report of trusts were poorly controlled. However, the CTO determined the main aspects to be considered by Colombian taxpayers acting as settlors, contributors or beneficiaries. Contributors assigning assets to a revocable trust were required to report assets held by the trust and declare them at cost basis. Conversely, contributors assigning assets to discretionary and irrevocable trusts were not required to report those assets in Colombia.
With the enactment of Law 1943 of 2019 (and subsequently Law 2010 of 2019), new guidelines regarding the taxation of foreign trusts, foundations and similar entities were introduced. As a result, if the underlying assets of a foreign trust/foundation are not controlled or cannot be unconditionally disposed by the beneficiaries, it will be the settlor, contributor or originator who must report them for all Colombian tax purposes. This, without any consideration of the structure's irrevocable and discretionary character.
Based on the above, taxpayers who acted in good faith and followed the CTO's guidelines were considered as taxpayers holding unreported assets. This situation has led to serious questioning from taxpayers who acted in good faith, and the filing of various lawsuits. However, these rules remain enforceable.
Exchange of Information between Colombia and Panama
After more than two years of negotiations, on 7 July 2020, Panama included Colombia as one of the jurisdictions included in the automatic exchange of tax and financial information based on the Common Reporting Standard (CRS). This will allow the automatic exchange of financial information, for tax purposes, of Colombian taxpayers with accounts and investments in Panama. The exchange of information will start during the second semester of 2020.
Double Taxation Treaty between Colombia and the United Kingdom
On 13 December 2019, Colombia and the United Kingdom exchanged notes, informing each other that they have completed the respective internal processes for the ratification of the Double Taxation Convention. The treaty is enforceable as of 1 January 2020.