In Colombia, tax resident individuals and local entities are subject to income tax on their worldwide income and capital gains. They are also 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 in Colombia.

Income Tax

Ordinary income vs presumptive income

Income tax in Colombia is determined based on the taxpayer’s taxable income (ie, using the ordinary system calculation: revenues minus costs and deductions) or presumptive income.

Presumptive income is equivalent to a percentage of the taxpayer’s net equity in 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 the ordinary system. In the case of resident individuals, presumptive income should be compared to the general basket income only (as explained below).

Presumptive income as from FY 2023 is equivalent to 0% of the taxpayer’s net equity of the prior taxable period.

Income tax rate

Resident individuals

Tax resident individuals are subject to progressive income tax rates ranging from 0% to 39%.

Non-resident individuals

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 withholdings mechanism applicable to non-resident individuals and foreign entities subsection), 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.

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 20% tax rate. In the event dividends are paid out of profits that were not taxed at the corporate level, these will be subject first to the general tax rate applicable to local entities and second to the 20% tax indicated above. This is applied once the general income tax has been reduced.

Colombian entities

The general income tax rate applicable to Colombian entities is 35%.

Dividends paid to Colombian entities out of profits already taxed are subject to a 10% income tax rate. In the event dividends are paid out of untaxed profits, these will be subject first to the general tax rate applicable to local entities and second to the dividend tax of 10% indicated above, which applies upon the net dividend amount once the general income tax rate has been applied.

The estimated effective tax rate for dividends derived from untaxed profits is 41.50% for FY 2023 onwards.

Foreign entities

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 that applies to Colombian entities (35%).

In the case of dividends, the rules described for non-resident individuals are also applicable to foreign entities.

Determination of 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:

General basket – this includes labour income, capital income and non-labour income. The following exemptions, reliefs or deductions are available for determining taxable income in this basket:

• Revenues deemed as non-taxable income:
1. mandatory social security contributions; and
2. voluntary contributions to the individual’s pension saving scheme without exceeding 25% of the individual’s annual income limited to 2,500 Tax Units (approximately USD24,844).
• Deductions:
1. 10% of labour payments made to individuals with dependants not exceeding 32 Tax Units (approximately USD318) and voluntary pensions fund contributions; and
2. prepaid health insurance payments not exceeding 16 Tax Units (approximately USD159).
• Exempted income:
1. 25% of the total amount of labour income, not exceeding 790 Tax Units per year (approximately USD7,851); and
2. voluntary pension funds and AFC accounts (income exclusively used for housing purchases) contributions not exceeding 30% of the individual’s annual income, limited to 3,800 Tax Units (approximately USD37,763).

The above-mentioned tax benefits are applicable if they do not exceed 40% of the individual’s annual income limited to 1,340 Tax Units (approximately USD13,317).

Pensions basket – pensions not exceeding 1,000 Tax Units (approximately USD9,937) are exempted. Any amount exceeding this amount will be subject to income tax at the general progressive tax rates.

Dividends basket – dividends are taxed at the general progressive income tax rates. For dividends paid out of untaxed profits at the corporate level, these will be subject to the general tax rate applicable to local entities, depending on the period in which they are paid or accrued. The progressive income tax rates will apply once the entity's income tax rate is reduced.

In addition, the following special tax withholding rules must be observed:

• dividends not exceeding an amount of 1,090 Tax Units (approximately USD10,832) are subject to tax withholding at a 0% rate; and
• dividends exceeding 1,090 Tax Units (approximately USD10,832) are subject to tax withholding at a 15% rate.

Individuals are also able to apply a 19% marginal tax credit upon their dividends' taxable income exceeding 1,090 Tax Units (approximately USD10,832) within their annual income tax return.

Tax withholding 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:

• Direction or management fees paid directly or indirectly to parent companies or home offices: 33%.
• Technical services, technical assistance or consulting services, rendered in Colombia and from abroad: 20%.
• Interest, fees, rental income, royalties, exploitation of software, services and, in general, all personal service compensation deemed as Colombian source income: 20%.
• Interest when loans are granted for one year or more: 15%.
• Capital gains: 15%.
• Dividends: 20%, subject to the rules described above in connection to dividends paid out of taxed and untaxed profits.
• Payments made to non-resident individuals and foreign entities with a significant economic presence in Colombia: 10%.

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 their 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 14 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, the United Kingdom, Italy, Japan and France.

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 or resident in Colombia, may be deemed to be a CFC for tax purposes. In order to determine the existence of control, the definition of subordinate 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 the entity’s income, it is presumed that all income, costs and deductions would be considered as passive and therefore would be subject to the CFC regime. Conversely, if the CFC’s active income represents 80% or more of the entity’s 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:

• dividends, interest or financial income;
• the transfer or exploitation of intangible assets, disposals or assignment of rights over assets that generate passive income;
• the sale or lease of real estate, purchase or sale of tangible assets acquired or alienated from, for or on behalf of a related party, that are produced and used in a jurisdiction other than that where the CFC is domiciled; and
• the provision of technical services, technical assistance, administrative, engineering, architectural, scientific, qualified, industrial and commercial services, for or on behalf of related parties in a jurisdiction other than where the CFC is domiciled.

CFCs’ net profits from passive income must be recognised in proportions equivalent to the taxpayer’s participation in the CFCs’ capital or profits on an accrual basis and not a cash basis.

Capital Gains

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 (CTC) as follows:

• gains from the direct or indirect sale of fixed assets that have been held by the taxpayer for two years or more;
• profits obtained in the liquidation of legal entities, which do not correspond to undistributed profits or reserves;
• gains resulting from inheritances, legacies and donations (gifts); and
• prizes, awards, lotteries and gambling earnings.

Life insurance indemnities are taxed as capital gains, but only on the amount that exceeds 3,250 Tax Units (approximately USD32,297).

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 15%. 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 31 December of the previous year.

Wealth Tax

The most recent tax reform (Law 2277 of 2022) re-introduced a wealth tax for individuals with large/high-value estates, which in general terms, is likely to be similar to those that have been established in the past except that:

• this tax will be permanent rather than temporary;
• the tax basis is not “frozen” or “tied” to a specific triggering period with variations subject to a certain percentage of the annual inflation, but instead would have to be determined annually; and
• specific rules apply on the valuation and reporting obligations for assets such as shares and investments held through trusts, private foundations and other fiduciary arrangements.

Furthermore, the new wealth tax is levied mainly on resident individuals but also on non-resident individuals with respect to the equity they own in Colombia, as well as non-resident entities, in respect to assets located in Colombia such as real estate, yachts, boats, art, aircraft or mining or oil rights (other than shares, accounts receivables, portfolio investments, and/or financial leasing contracts with entities or persons resident in Colombia).

Wealth tax rate is 0.5% for the portion of the taxable equity exceeding 72,000 Tax Units (approximately USD715,521) and 1% for the portion that exceeds 122,000 Tax Units (approximately USD1.2 million). A temporary additional tax rate of 1.5% applies during FY 2023 to 2026 upon the amount exceeding 239,000 Tax Units (approximately USD2.4 million).

For the determination of this tax, the cost basis of the taxpayer’s primary residence could be excluded from the taxable base up to 12,000 Tax Units (approximately USD119,253).

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 or bar services) are excluded from VAT. The general rate is 19%, but certain goods and services are 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 on all financial transactions.

“SIMPLE” tax regime

As of 2020 (Law 2010 of 2019), a simplified tax regime was established for resident individuals and local entities whose prior year’s gross income does not exceed 100,000 Tax Units (approximately USD993,779) and who carry out certain economic or commercial activities (eg, owning a small shop, micro-market or hair salon), or who offer mechanical/technical services and consulting services, etc.

The SIMPLE tax regime unifies income tax, industry and commerce tax, VAT and excise tax for taxpayers registered under this regime. These taxpayers are obliged to file a unified annual tax return (although there are advance payments every two months) and make a unique tax payment at a rate between 1.2% and 8.3% on their gross income earned, depending on their economic activity code.

Inheritance and Gifts

Inheritance and gifts are deemed extraordinary income subject to the capital gains tax regime.

As mentioned in 1.1 Tax Regimes, the following extraordinary income is considered as exempted for capital gains purposes:

• the deceased’s primary residence – 13,000 Tax Units (approximately USD129,191 for 2023);
• the deceased’s real estate property other than their primary residence – 6,500 Tax Units (approximately USD64,595 for 2023);
• value inherited by the deceased’s surviving spouse and heirs – 3,250 Tax Units (approximately USD32,298 for 2023);
• 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 1,625 Tax Units (approximately USD16,149 for 2023); and
• any books, clothing, personal belongings and furniture belonging to the deceased – 100% of the assets’ value.

Transfer of Assets

Tax exemptions applicable on transfer of assets should be analysed on a case-by-case basis. As an example, in the case of real estate, Article 44 of the CTC establishes non-taxable income proportions, from 10% to 100% of the profits on the sale of a property used as the taxpayer’s residence, as long as the property was acquired between the years 1978 and 1986.

Income tax planning alternatives should be analysed on a case-by-case basis. As an example, anticipating real estate property disposal/transfer, taxpayers could apply for a step-up in the tax basis (costs) by applying the rule established in Article 72 of the CTC, which allows them to take the cadastral official appraisal as the asset’s fiscal cost which can be adjusted/increased at the taxpayer’s request.

There are no specific tax rules or planning mechanisms related to real estate owned by non-residents or non-citizens individuals. As a general rule, real estate located in Colombia is subject to taxation in the country regardless of whether the owner is a Colombian tax resident/citizen or not.

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. Fear of tax uncertainty leads many taxpayers to consider implementing estate-planning structures located in jurisdictions with greater legal stability or that have an enforceable investment protection treaty with Colombia.

Regarding any real or perceived abuses/loopholes in 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 a member of the organisation after subjecting it 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 has achieved tax transparency and met global reporting requirements using the following framework.

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), see the OECD website. For an assessment of the legal frameworks for the 102 jurisdictions committed to automatic exchange of financial account information from 2017, 2018 or 2019, see this map).

FATCA

In relation to the exchange of information, the Colombian and US governments 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 by means of Resolution 60 of 2015, issued by the Colombian Tax Office (CTO).

Ultimate Beneficial Ownership

Taxpayers are required to identify and report to the CTO the ultimate beneficial owner of legal entities and non-corporate structures such as trusts and other fiduciary businesses, collaboration agreements, private capital funds and pension funds.

The tax reform enacted in September 2021 (Law 2155) included some changes to the definition of the ultimate beneficial owner, incorporating a broader definition in the case of non-corporate structures, in which settlors, trustees, fiduciary or financial committees, and conditioned beneficiaries, among others, may be deemed ultimate beneficial owners for the purposes of the aforementioned report. Law 2155 of 2021 also created the Beneficial Owners Registry (the “RUB”) in order to regulate the taxpayers who are obliged to report information about ultimate beneficial owners and manage said information.

For the purposes of the RUB, the definition of ultimate beneficial owners will depend on which subject provides the report, as follows:

• For legal entities, the ultimate beneficial owner will be the shareholder who directly or indirectly, individually or jointly, controls 5% or more of the voting rights or economic benefits. In the event the ultimate beneficial owner cannot be identified, the legal representative or general manager will be regarded as the ultimate beneficial owner.
• In the case of non-corporate structures, the ultimate beneficial owner will, under certain circumstances, be the settlor, trustee, beneficiary or anyone who possesses ultimate control.

First submissions to the RUB had to be completed before 31 July 2023 for legal entities/structures established before 31 May 2023. New legal entities or non-corporate structures established after 31 May 2023 must comply with the report within the two months following their inscription or obtaining of their tax ID. Information provided on the RUB must be updated (if applicable) on the first day of January, April, July and October every fiscal year. Failure to comply with the reporting obligations or submitting incompletely or with errors will trigger penalties for the required taxpayers.

This information will not be available to the public, but as set forth in Law 2195 of 2022 there will be some government entities that, in compliance with their legal and constitutional functions, will have guaranteed access to the information contained in the RUB (ie, the CTO, the Public Prosecutor’s Office, the General Comptroller’s Office, the Superintendence of Companies and Superintendence of Finance, among others).

Rules against Tax Haven Practices

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

Angola, Antigua and Barbuda, Qatar, Kuwait, Hong Kong, Trinidad and Tobago, Seychelles, Yemen, Lebanon and Bahamas, among 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 CTC to determine if the current jurisdictions may be excluded or if there are additional jurisdictions to be included. This list has not recently been updated.

Anti-abuse Rules

Article 869 of the CTC established a tax anti-abuse rule. This rule allows the CTO to re-characterise or reconfigure any operations or series of operations that may constitute abuse for tax purposes and disregard its effect.

Conduct is considered abusive if:

• the transaction is not reasonable from a commercial and economic perspective;
• a high tax benefit is achieved but is inconsistent with the risks undertaken by the taxpayer; and
• the execution of a structurally correct legal act or business is apparent, but its content hides the true will of the parties.

The process of re-characterisation or reconfiguration of a potentially abusive operation would have to be initiated by the CTO within the term of expiration of the statute of limitation of the corresponding tax return. Relevant definitions and procedures applicable to the CTO in order to apply tax anti-abuse rules are established in Resolution 4 of 2020.

Most Colombian companies are family-owned. These companies are usually founded and managed by a matriarch or 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 are constantly concerned about 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. 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 their will.

The compulsory portions are:

• maintenance provided by law;
• the marital portion; and
• the legitimate portion.

Maintenance Provided by Law

A compulsory portion is assigned for the subsistence of the beneficiary in a way that corresponds to their 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 declared 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 subsistence. Taking into account the existence of any legitimate descendants, the surviving spouse or partner will be included among the deceased’s children and will receive a marital portion corresponding to a share of the estate equal to the portion to be inherited by all the legitimate descendants together.

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 or, in their absence, 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 particular descendant that they prefer, 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 will inherit the entire estate, through the Colombian Family Welfare Institute.

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 those assets’ value, derived from the individual property (including income generated by assets transferred to 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.

Colombian law respects both prenuptial and postnuptial agreements, although they must be granted by public deed. In the case of foreign agreements, the latter are recognised if they are duly 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. However, the cost basis of property transferred at death is the cost basis declared by the deceased as of 31 December of the previous year.

From a tax perspective, there are no mechanisms available to help the transfer of assets to younger generations, tax-free.

As a rule, inheritances or legacies are considered as capital gains, taxed at a 15% 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 person whose last place of domicile is Colombia, is usually subject to 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.

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 property or the 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 guarantees or collateral, 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 CTC. 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 or foundation would be subject to tax in Colombia at a 15% rate as a capital gain. Life insurance indemnities are taxed as capital gains, but only on the amounts that exceed 3,250 Tax Units (approximately USD32,297).

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 their 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. But if the settlor cannot be identified or determined, the reporting obligation falls on the beneficiaries irrespective of whether they are conditioned or have control over the assets and income of the structure. This is the case, without any consideration of the trust/foundation’s irrevocable and discretionary character.

Reporting of income

If a trust/foundation were to be 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 must be recognised immediately in proportions equivalent to the participation in the trusts/foundation’s capital or profits, and not upon receipt of profits, which means no tax deferral is applicable in this case.

Accordingly, Colombian tax residents must report the passive income realised by the trust/foundation in their income tax returns, 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 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.

Local Trusts

In Colombia, only those companies duly authorised by the Colombian financial authority (Superintendencia Financiera de Colombia or SFC) 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 will 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, they are required to report such rights for Colombian income tax purposes.

Foreign Structures

In the event beneficiaries are not subject to any condition necessary to 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 effectively be administered in Colombia.

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 that individual will have to report in their 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, PEM rules, CFC rules and the recognition of low-taxation jurisdictions.

Concerning irrevocable trusts, foundations or similar entities, the most recent tax reforms (Law 2010 of 2019, Law 2155 of 2021 and Law 2277 of 2022) have included 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. But, if a settlor cannot be identified or determined, the reporting obligation falls on the beneficiaries, irrespective of whether they are conditioned or have control over the assets and income of the structure. This is the case, 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 discretionary character of the structure should be real and easily provable to the CTO.

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 restructuring process.

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

• Bilateral investment treaties: China, Spain, Switzerland, Peru, India and the United Kingdom and Northern Ireland.
• 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), the Pacific Alliance (Chile, Mexico and Peru), South Korea, the USA, Israel and the recently signed treaty with the United Kingdom.

In Colombia, a testator only has an unlimited right of disposal over the 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 their heirs.

Certain corporate arrangements (national or foreign), involving 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. These arrangements can be achieved by legally allowing assets to be passed down to intended beneficiaries, thereby successfully circumventing Colombian forced heirship rules.

Partial Interest in an Entity Transferred During Life

If a partial interest is transferred during someone’s lifetime, it is presumed that the fair market value of the interest cannot be lower than its cost basis and its net asset value (valor intrínseco) increased by 30%.

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

Partial Interest in an Entity Transferred After Death

However, 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 15% rate. The value of the interest is its cost basis.

Reporting Obligation Regarding Estates, Trusts, Foundations and Other Similar Entities

Regarding estates, trusts, foundations and similar entities, regulations introduced by Law 1943 of 2018, and later by Law 2010 of 2019, Law 2155 of 2021 and by Law 2277 of 2022, have been widely criticised and subject to lawsuits for failing to acknowledge the legality and validity of the actions of Colombian taxpayers before said rules came into force.

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 and are therefore taxed at a 15% general rate on the gross distributed amount as of FY 2023.

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.

Similar rules were included in the wording of the normalisation tax proposed for FY 2022 included in Law 2155 of 2021 and of the wealth tax re-introduced by Law 2277 of 2022, as well as in the new definition of ultimate beneficial owners. It is anticipated that these could lead to new discussions with the CTO in the future.

Article 263 of the CTC

As set forth by Article 263 of the CTC, possession is understood to mean the economic benefit, whether potential or real, of any asset to the credit of the taxpayer. It is presumed that whoever has legal title as owner has 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 or private interest foundation of a revocable and non-discretionary nature.

However, 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 economic and disposition rights to an independent third party.

Tax Ruling No 34071

This interpretation was confirmed by the CTO through 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 to be that:

• 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 a cost basis as provided by the CTC; and
• 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 derives the economic benefits according to Article 263 of the CTC.

However, for income tax purposes, Article 882 of the CTC (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.

Law 1943

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, 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 were considered as taxpayers holding unreported assets. This situation led to serious questioning from taxpayers who had acted in good faith and resulted in lawsuits being filed.

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 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 timeframe, 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.

Similar rules were included in the last tax reforms enacted by the government (Law 2155 of 2021 and Law 2277 of 2022), which could lead to new discussions with the CTO.

Compensation for aggrieved parties in wealth disputes or disputes involving trusts, foundations or similar entities implies civil liability (torts) in Colombia. Requesting compensation for damages is usually carried out before the Colombian courts, which 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 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 to third parties or waived. These include the following:

• the duty to carry out trustee activities in a diligent manner;
• the 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 regarding its duties or when it deems necessary, potentially acting against the instructions set forth in the trust agreement;
• a trustee must utilise its best efforts in maximising the trust’s profitability;
• upon a 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 to invest and hold assets outside Colombian territory without the need to obtain 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 CTC, allows the CTO to pierce the corporate veil of any entity used by its shareholders, partners, directors or administrators to commit tax abusive conduct under Article 869, mentioned in 1.6 Transparency and Increased Global Reporting.

The CTO may also obtain information regarding ultimate beneficial owners using the following mechanisms.

• SARLAFT – financial entities are required to identify and report to the CTO the ultimate beneficial owners in accordance with SARLAFT regulations mentioned in 1.6 Transparency and Increased Global Reporting.
• Electronic tax information – Article 631 of the CTC requires Colombian affiliates or subsidiaries of national or foreign entities to identify and report the ultimate beneficial owners to the CTO electronically.

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 fiduciary 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, whether Colombian or foreigner, is a tax resident in Colombia if they remain in the country, continuously or discontinuously, for more than 183 calendar days in any period of 365 days. When a discontinuous residence 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:

• their spouse, life partner or dependent children are Colombian residents;
• 50% of the individual’s income is Colombian sourced;
• 50% of the individual’s assets are managed or deemed located in Colombia;
• the individual is unable to prove tax residency in another jurisdiction; and
• the individual is resident in a jurisdiction considered as a tax haven by the Colombian government.

Colombian individuals who meet the above-mentioned requirements will not be considered tax residents if:

• 50% or more of the individual’s income is sourced in the jurisdiction in which they are domiciled; or
• 50% or more of the individual’s assets are located in the jurisdiction in which they are domiciled.

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, 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 issue. This term may be reduced to two years if the individual is married to a Colombian national or has Colombian children.

Foreign entities such as trusts and private foundations may be used to hold and manage assets for minor children or adults with disabilities and 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 is used:

• Support agreement – an individual may appoint one or various persons to assist them in the performance of their affairs.
• Advance directive – an individual may register their will in advance providing directives for all (or specific) affairs during their lifetime.
• Support provided by court – an interested party (eg, relatives or a spouse) may request additional support or the appointment of a guardian to provide assistance for handling the individual’s matters.

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 from different interest groups in Colombia through 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 was put on hold, however, due to public scrutiny and massive public demonstrations which occurred in 2019 and 2021 in favour of maintaining current pension requirements. In March 2023, the Colombian government filed its pensions bill reform in Congress. The proposal seeks to redirect the annual contributions resources from private managers to the public pension fund (Colpensiones) so that this public entity can handle the majority of annual contributions.

The bill proposes that workers earning up to three times the monthly minimum wage (approximately USD815) would have to pay their contributions into Colpensiones, while workers earning more than three times the monthly minimum wage would be able to elect to pay contributions on amounts exceeding that figure to a private fund. Those earning four times the minimum monthly wage or more would have to make an additional contribution to a so-called solidarity fund (currently applicable).

The government’s pension bill discussion is expected to take place during the second semester of FY 2023. Pension reform may therefore occur soon.

There is no legal distinction for natural or adopted children, or those born out of wedlock, in terms of estate and succession planning. In accordance with Law 29 of 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;
• may 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 most recent legal development took place with Ruling SU-214/2016, whereby the Constitutional Court accepted same-sex marriages.

The CTC establishes that non-profit corporations, foundations and associations are subject to a special tax regime with respect to income tax (20% rate) and complementary taxes, provided that they comply with the following conditions:

• they are incorporated under Colombian law;
• their main purpose and resources are directed towards health, primary education, formal education, college education, sports education, culture, scientific or technological advances, ecological research, environmental protection or social development programmes;
• their 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 reinvested, in their entirety, in the activity of the entity’s corporate purpose and such corporate purpose corresponds to the activities mentioned in the preceding clause.

Further to 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 (35% from FY 2023 onwards).

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

Entities approved by the CTO 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.