Colombia: Private Client

Tax residents are subject to income tax and capital gains on worldwide basis. Non- residents are subject to income tax and capital gains only on Colombian sourced income and capital gains.

• Residents:

An individual becomes a tax resident when she/he remains in the country, continuously or discontinuously, for more than 183 calendar days during a period of 365 days.

If the individual remains in the country continuously or discontin­uously for 183 days during 2 consecutive fiscal years, it will become tax resident after the second of the two consecutive years.

Colombian citizens are considered tax residents if their family mem­bers (i.e., spouse or dependent children) are Colombian tax residents, or if 50% or more of the individual’s income is Colombian sourced, or if 50% or more of the individual’s assets are managed or held in Colombia. A Colombian citizen is considered a tax resident in Colombia if she/he has tax residence in a tax haven.

Colombian citizens are not deemed as tax residents in Colombia if 50% or more of the individual’s income is sourced in the juris­diction of her/his domicile and 50% or more of her/his assets are managed or possessed in the country in the jurisdiction of her/his domicile.

• Non-residents:

Non-residents are subject to income tax only on source income and they are only required to report Colombian sourced income or assets located in Colombia.

Colombian sourced income refers to income from activities undertaken within Colombian territory. The Colombian tax code refers to this as the provision of services inside Colombian territory, the transfer of assets located in Colombian territory at the time the transfer takes place and the exploitation of tangible or intangible assets located inside the country

The fiscal year in Colombia is the same as the calendar year. The Colombian fiscal year starts on January 1st and ends December 31st of each year.

• Non-residents:

Non-residents are subject to income tax at a 35% rate on Colombian sourced income and at a 15% rate on Colombian sourced capital gains, or 25% in the case of gains from lotteries, draws and gambling (as per the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only). They are only required to report assets located in Colombia.

• Residents:

Individual tax rates depend on income baskets and residence status. The applicable rates for each type of income are the following:

The following exemptions, reliefs or deductions are available:

The abovementioned tax benefits may be applied as long as they do not exceed 40% of the total income received or 1.340 UVTs (Approximately USD 11.187), according to the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only.

• Capital gains

For Colombian tax purposes, capital gains are those that are not obtained by a taxpayer as a result of the activities that she or he ordinar­ily carries out. The activities that trigger capital gains are specifically listed in the Colombian Tax Code:

• Capital gains from the sale or indirect sale of fixed assets that have been owned by the taxpayer for a term of two or more years;
• Profits obtained in the liquidation of legal entities, and that do not correspond to undistributed profits or reserves;
• Gains resulting from estates, legacies and donations (gifts);
• Prizes, awards, lotteries and gambling earnings; and
• Life insurance indemnities, only on the amount that exceeds 3.250 UVTs (Approximately USD 27.134), according to the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only.

Yes. They are. As a mean to collect income taxes in advance, Colombian law estab­lishes a system of income tax withholdings that requires every per­son making payments to a taxpayer to withhold a certain percentage, depending on the income characterization being paid. For those who must file an income tax return, all amounts withheld or self-withheld are a prepayment of the final tax liability and as such are credited on their income tax return.

The following payments made to individuals are subject to income tax withholding:

Income tax withholding rates applicable to payments abroad (non-resident individuals not required to file an income tax return in Colombia) are as follows:

If Colombian sourced payments are not subject to income tax withholdings, the foreign individual will be required to file an income tax return in Colombia. On the contrary, if income tax withholdings are applied entirety, this will be the final tax liability.

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, France, and Japan.

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

A new net worth tax has been (re)introduced, as the new Colombian Government at the head of the Minister of Finance and the new Tax Director have already publicly announced it. Actually, on August 8, 2022 (ie. a day after the president-elect took office) a tax bill was filed in Congress. As per the text recently approved by Congress, a new net worth tax will be re-established as from FY 2023 onwards, which, in general terms, is likely to be similar to those that have been established in the past except that:

(i)         this would be a permanent tax rather than temporary;

(ii)        the tax basis would not be “frozen” / “tied” to a specific triggering period with variations subject certain percentage of the annual inflation as it was provided for the previous version of the net worth  tax, but instead it would have to be determined annually; and

(iii)       there would apply specific rules on valuation and reporting obligation for assets such as shares in Colombian companies and Colombian companies publicly traded at the stock market, and investments held through private investments funds, trusts, private foundations, lifer insurance policies with material savings component and other fiduciary arrangements.

Furthermore, the new net worth tax would be levied mainly on resident individuals and, potentially, it would also tax 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).

The tax rate would be 0.5% for the portion of the taxable equity exceeding 72.000 UVTs (Approximately USD 601.118), 1% for the portion that exceeds 122.000 UVTs (Approximately USD 1.1 million) and 1.5% for the portion that exceeds 239.000 UVTs (Approximately USD 2.0 million). The last 1.5% rate would be applicable temporarily between fiscal years 2023 and 2026 only.

All the above as stated in the tax bill, pending of presidential approval.

Inheritances, gifts and donations are subject to capital gains tax in Colombia. The transfer of any real estate involved will also trigger registry tax of approximately 1.8%.

Once an estate has covered all obligations, the inheritance is dis­tributed among all heirs. Such distribution is subject to capital gains tax at a 15% rate (as per the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only). However, in some cases part of the inheritance may be considered as exempted income.

Inheritances, gifts and donations are subject to capital gains tax regardless of the location of the assets if the individual is a Colombian tax resident. If the individual is not considered as a tax resident, only inheritances gifts and donations of Colombian source are subject to taxation in Colombia.

Inheritances, gifts and donations are subject to capital gains tax in Colombia at a 15% rate (as per the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only). The transfer of any real estate involved would also trigger registry tax of approximately 1.8%.

Generally, the applicable taxable base shall be the assets or rights’ cost basis as of 31 December of the previous year. The following income is considered exempt for capital gains purposes:

• The equivalent to 13.000 UVTs (Approximately USD 108.535) of the deceased’s primary residence irrespective of whether it is urban or rural property; as per the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only;
• The equivalent to 6.500 UVTs (Approx. USD 54.268) of all the deceased’s real estate property apart from their primary residence; as per the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only;
• The equivalent to 3.250 UVTs (Approximately USD 27.134) of the value inherited by the deceased’s surviving spouse and heirs according to the tax bill text recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only;
• 20% of assets or rights received by individuals not considered as heirs or surviving spouse; and 20% of assets or rights gifted or transferred by the deceased during their lifetime that were received gratuitously by a beneficiary without exceeding 1.625 UVTs (Approximately USD 13.567) according to the tax bill text recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only; and
• Books, clothing, personal belongings and furniture belonging to the deceased.

Yes. 25% of the gifts made to entities of the special tax regime can be credited for income tax purposes. However, certain requisites must be met as explained below.

The Colombian Tax Code establishes that non-profit corporations, foundations and associations are subject to a special tax regime with respect to income tax and complementary taxes provided always that they comply with the following conditions:

• They are incorporated under Colombian law;
• Their main purpose and resources are destined to health, sports, formal education, culture, scientific or technological, ecologi­cal research, environmental protection or social development programmes;
• Such activities are of general interest and may be freely accessed by the community.
• Their capital contribution or surpluses cannot be distributed; and
• Their surpluses are totally reinvested in the activity of its corporate purpose and such corporate purpose corresponds to the activities mentioned in the preceding clause.

Entities that comply with the aforementioned requirements can be considered as entities of the special tax regime, with the Colombian Tax office’s approval.

The following taxes apply to a non-resident individual’s real property:

i. Property tax:

Real estate held by an individual is subject to taxation at a municipal level at an applicable rate of 0.5% to 1.6% based on the valuation of the real state assets made by the municipalities where the asset is located.

ii. Transfer tax:

Transfers of immovable property trigger notary fees and land registry taxes at 0.3% and 1.5% of the purchase price, respectively.

iii. Stamp tax:

As per the tax bill recently approved by Congress, a 1.5% stamp tax applies on public deeds related to the transfer of immovable property amounting 20,000 UVTs or more (Approximately USD 166.977); and a 3% stamp tax in the case of the transfer of immovable property exceeding 50,000 UVTs (Approximately USD 417.443). The stamp tax would also apply on public deeds that document the transfer of ships, or mortgages on such immovable property or ships.

iv. Net Worth Tax

As noted above, as per the text recently approved by Congress, a new net worth tax will be re-established as from FY 2023 onwards.

This tax would apply to individuals and foreign entities. It is based on Colombia situs assets. In the case of foreign entities assets subject to net worth tax would exclude shares, accounts receivables or portfolio investments; for example, real estate, aircrafts, yachts, boats, speedboats, art or oil mining titles.

The tax rate would be 0.5% for the portion of the taxable equity exceeding 72.000 UVTs (Approximately USD 601.118), 1% for the portion that exceeds 122.000 UVTs (Approximately USD 1.1 million) and 1.5% for the portion that exceeds 239.000 UVTs (Approximately USD 2.0 million). The last 1.5% rate would be applicable temporarily between fiscal years 2023 and 2026 only.

The following taxes are relevant to individuals in Colombia:

i. Value Added Tax:

VAT is levied on the sale or 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% (cof­fee, corn for industrial use, agricultural machinery, pre-paid medicine plans, security services and temporal services).

ii. 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.

iii. Income tax withholding:

As a mean to collect income taxes in advance, Colombian law estab­lishes a system of income tax withholdings that requires every per­son making payments to a taxpayer to withhold a certain percentage, depending on the income characterization. For those who must file an income tax return, all amounts withheld or self-withheld are prepayment of the final tax liability and as such are credited on their return.

There is no preferential tax regime for individuals who have recently arrived or are only partially connected with the jurisdiction.

This must be analysed on a case-by-case basis. It is always advisable to analyse the ultimate beneficial owner’s (UBO) applicable tax rules according to the UBO’s tax residence and the situs assets’ tax rules.

Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. Colombian resident heirs and foreign heirs have the same rights and, thus, are entitled to equal treatment in Colombian probate proceedings. The Civil Code forces the testator to assign certain compulsory portions, applicable to half of her/his estate even against her/his will.

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

1. Maintenance provided by law:

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

2. Marital portion:

The marital portion is the portion of the estate that the law assigns to the surviving spouse or permanent partner lacking the necessary means for a subsistence. Taking into account the existence of any legitimate descendants, the widower or widow shall be counted among the children, and shall receive as the marital portion a share equivalent to the legitimate portion corresponding to the legitimate descendants.

3. Legitimate portion:

The legitimate is that part of the estate of a deceased that the law assigns to the legal heirs. The following are legal heirs: Children personally, or represented by their descendants; and ancestors. The legitimate is obtained by dividing half of the inheritance between all legitimate descendants and the widow or widower. The legal heirs converge to the succession and are excluded and represented according to the order and rules of the intestate succession.

Should there be any legitimate heirs:

The testator may, at her/his discretion, favour the descendant or descendants that she/he prefers assigning part of the estate in the proportion desired.

Should there be no legitimate heirs:

If there are no heirs entitled to inherit this part of the inheritance, it will increase the freely disposable portion as explained below.

4. The Freely disposable portion:

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

The general rule for marital property is the community of property regime. This is a regime that automatically comes into effect for all marriages and will remain so until the community of property is dissolved; either as result of a judicial decision, or as result of free will. In this regime, community property is commonly owned by the spouses. It is not similar to co-ownership because the spouses (joint owners) do not possess a share in the property, but are full owners of the community property.

Colombian law also recognises ‘common law’ unions under ‘de facto marital union’ provisions. Opposite-sex couples that have cohabited together for at least two continuous years may request the declaration of the existence of de facto marital union. As of 2007, both opposite and same-sex couples who have cohabited together for at least two continuous years may request the declaration of the existence of de facto marital union. This declaration implies the presumption of the existence of a community of property regime (as applicable to married couples), and leads to the distribution of the common property. This declaration may be made by a family judge or by mutual consent of the couple before a notary public or a duly authorised conciliation centre.

Upon the death of one of the spouses, the ‘marital portion’ is the portion of the estate that the law assigns to the surviving spouse or permanent partner lacking the necessary means for a congruent subsistence. Taking into account the existence of any legitimate descendants, the widower or widow will be counted among the children and receive as marital portion a share equivalent to the legitimate rigorous corresponding the legitimate descendants.

The ‘legitimate’ is that part of the estate of a deceased individual that the law assigns to the legal heirs. The following are legal heirs: children (personally or represented by their descendants) and ancestors. The legitimate is obtained by dividing half of the inheritance between all legitimate descendants and the widow or widower. The legal heirs converge to the succession and are excluded and represented according to the order and rules of the intestate succession.

The following factors cause Colombian succession law to apply on the death of an individual:

1. The death of nationals or foreigners who die with their last residence in Colombia; and/or
2. Colombian situs assets.

Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. However, Colombian courts will recognize the succession rights of Colombian heirs under forced heirship rules without considering the decedents last place of domicile. Furthermore, Colombian courts have also applied Colombian law in respect of real personal property located in Colombian territory.

Colombia is also a member of the treaty on International Civil Law promoted in Montevideo in 1889, which is currently enforceable in Colombia. The treaty seeks to provide uniformity to the solution of conflicts of law concerning successions. The treaty provides the following rules:

• The validity of a will disposing of property is governed by the jurisdiction where the property is situated at the time of death. However, an executed will under the laws of any of the member states must be admitted in the other member jurisdiction.
• The law of the situs of the property is applicable for any rules of inheritance, heirship rules and validity of the wills and generally any matter concerning the succession and wills.
• In the event of conflict on succession laws, the treaty shall prevail.

Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (nationals and foreigners) who die with their last residence in Colombia. For this reason, there are no specific rules and procedures governing intestacy in Colombia (unlike many common law jurisdictions).

Notwithstanding the above, if the individual is subject to forced heirships rules in accordance with Colombian law, by executing a Will, a person may freely dispose half of her/his estate. The Civil Code forces the testator to assign some compulsory portions that will be assigned when the testator did not make them, even against his or her will.

Foreigners whose only connection to Colombia is real property may elaborate a Will in her/his preferred jurisdiction. Under Colombian law, a foreign Will is considered to be valid if it complies with the requirements of each country and is granted by public deed.

Under Colombian law, an estate executor is designated to administer the assets and insure the fulfilment of the deceased’s last will. The estate executor must accept such designation; however, if an executor is not designated, the heirs are in charge of administering the estate.

The estate executor is required to hold the estate assets under deposit. When the inventory and appraisals of the estate are final, the administrator may sell the deceased’s assets to cover any debts or payment of any taxes and fees.

The result constitutes the net estate available for partition between heirs, which must be performed in accordance with the rules on forced heirship and half of the estate that may be freely assigned by will.

Yes, 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 precisions must be made:

• Civil law

Colombian civil law does not provide rules on common law trusts or private foundations. However, Colombian law sets out rules on civil and commercial local trust agreements whereby a settlor transfers the property or adminis­tration of certain assets to a trustee in exchange for fiduciary rights. The trustee is responsible for managing such assets or transferring them to a third party to carry out the purpose determined in the local trust agreement, either for the benefit of the settlor or a third party. The local trusts should not be confused with the Anglo-Saxon or common law trust.

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

• Foreign structures

There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations, etc. However, foreign entities are recognized by Colombian law and tax authorities and may be used as structures to administer private family wealth and circumvent forced heirship rules in Colombia. However, anti-abuse rules must be observed.

• Domestic trusts

In Colombia only those companies duly authorized by the Colombian financial authority (Superintendencia Financiera de Colombia – “SFC”) may offer trust services and act as trustees (i.e. compañías fiduciarias). Such entities are subject to SFC supervision and regulation.

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

The title to the assets that an individual contributes to the trust fund must pass to the trust fund (exceptions apply – for example, for the guarantee trust) or otherwise such assets would have to be declared by the individual as part of her/his equity and thus be subject to net worth taxes.

Additionally, if the individual receives fiduciary rights over the trust fund because of said contribution, he or she would be obliged to report such rights for Colombian income tax purposes.

Whenever the settlor or any of the beneficiaries receive income from the trust, they must pay the relevant taxes in Colombia. Income tax regulations establish that the results of any activities of the trust and all equity increases must be included in the income tax return of the beneficiaries.

• Foreign structures

There are no civil or commercial regulations regarding the establishment of foreign trusts, private foundations and life insurance policies. However, these are recognized by Colombian tax law and tax authorities.

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 15% according to the tax bill recently approved by Congress and which at the moment of the final review of this publication was pending the President execution only. Life insurance indemnities are taxed as capital gains, only on the amount that exceeds 3.250 UVTs (Approximately USD 27.134) would be subject to capital gains tax.

Assets held by a trust/foundation (which is revocable and directed) are understood to be directly held by the settlor and shall be reported in their Colombian income tax returns, as well as their foreign assets return (Form 160) as part of their own equity. If the characteristics of the trust/foundation are different, the reporting obligation could be of the settlor. This analysis should be carried case by case.

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

Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.

If the underlying assets of an irrevocable and discretionary foundation cannot be attributed to the beneficiaries because their benefits are conditioned, the settlor,  founder or originator must report the trust or foundation rights as part of their equity. But if settlor, founder or originator cannot be identified or determined, the reporting obligation falls on the beneficiaries irrespective of whether they are conditioned or do not have any control over the assets and income of the structure. This, without any consideration of the trust or foundation’s irrevocable and discretionary character.

For the purposes of the new wealth tax, rules referred above will further apply in the event of the settlor’s / founder’s death. In that case, the deceased estate will report the trust or foundation rights as part of its equity until the structure beneficiaries actually receive the assets in cash basis

Financial entities are required to identify and report to the Colombian tax authorities the ultimate beneficial ownership           in accordance with the Laundering Assets Risk Management and Terrorism System (SARLAFT) standards. This, provided that a non-resident has direct or indirect ownership and control of more than 25% of the shares of a resident entity, local trusts and mutual funds. This information is not available to the public.

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

The Law 2155, 2021 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 (RUB) in order to regulate taxpayers obliged to report information about ultimate beneficial owners and manage said information.

For the purposes of RUB, the definition of ultimate beneficial owners will depend on who is the subject to provide 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 manger shall be considered 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 that possesses ultimate control.

First submissions to the RUB must be completed before 31 July 2023 (Res.01240, 2022) for legal entities/structures established before 31 May 2023. New legal entities or non-corporate structures established from 1 June 2023 must comply with the report within the two months following their inscription/obtention 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 oblations or submitting incompletely or with errors will trigger penalties for the required taxpayers.

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

There are no civil or commercial regulations regarding the establishment of common law trusts or private foundations in Colombia. However, common law trusts are recognised by Colombian law and tax authorities.

There are no civil or commercial regulations regarding the estab­lishment of common law trusts or private foundations in Colombia. However, common law trusts are recognised by Colombian law and tax authorities.

• Asset’s report

Assets held by a trust or foundation that is revocable and directed are understood to be held directly by the settlor 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 because their benefits are conditioned, the settlor,  founder or originator must report the trust or foundation rights as part of their equity. But if settlor, founder or originator cannot be identified or determined, the reporting obligation falls on the beneficiaries irrespective of whether they are conditioned or do not have any control over the assets and income of the structure. This, without any consideration of the trust or foundation’s irrevocable and discretionary character.

For the purposes of the new wealth tax, rules referred above will further apply in the event of the settlor’s / founder’s death. In that case, the deceased estate will report the trust or foundation rights as part of its equity until the structure beneficiaries actually receive the assets in cash basis

• Income’s report

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

Colombian tax residents shall report on their income tax returns the passive income realized by the trust/foundation, considering the nature and characteristics of said income, as if it was received directly by them.

Any distributions made by a foreign trust/foundation would be subject to income tax in Colombia at a 10% rate (this might increase up to 15% according to the tax bill recently approved by Congress).

• In case of Colombian situs assets:

In structuring asset transfers, whether or not gratuitously made, attention should be paid to Colombian civil and commercial regulations:

1. Trusts: The Commercial Code includes a provision whereby the assets of a trust negotiation cannot be pursued by the creditors, unless the debts are prior to the constitution of the trust. The creditors of the beneficiary of the trust can only pursue the financial yields the assets report. The execution of a trust with fraud can be challenged by the interested creditors.
2. Specific assets and income: Colombian law stated immunity from seizure to some assets as follows: (i) property assigned as family housing; (ii) the legal minimum salary except the 50% to provide food rents or pay debts to cooperatives; (iii) the excess over the minimum salary is only seized in one-fifth; (iv) pension payments receive the same treatment as the salary; (v) individual pension savings.
3. Marital property: Under Colombian law, individuals have the freedom to dispose of their state without limitation during their lifetime. However, the disposition of certain assets may require the approval of the other spouse under Colombian marital rules.

• In case of foreign assets:

1. Individuals may place assets held in their own names into trusts, private foundations, etc. in order to designate them or their proceeds to a specific purpose or persons. The assets placed into a properly structured trust, private foundation, etc. form an estate separate from the assets of the settlor, so as to avoid such assets being requested by creditors.
2. Attention should be paid to foreign creditor rules when establishing a foreign structure.

• Foreign tools

Foreign entities such as trusts and private foundations may be used to hold and manage assets for minor children and grandchildren that may be transferred once a specific condition is met.

• Domestic tools

Local trusts may also be used to hold and manage assets for minor children and grandchildren that may be transferred once a specific condition is met (e.g. legal age).

• Typical arrangements under Colombian law

Colombian family law grants the parents of a child usufruct over the property of the child, save for some exceptions, such as the assets acquired by the child because of his or her work, or received by the child as a result of an inheritance, legacy or gifts. In addition, Colombian family law grants the parents a right to manage the property of their children, except for the assets acquired by the child because of his or her work.

Once a child becomes of legal age, and the parental powers over a child terminate, the parents are required to give full account of and hand over the property to the child. Parents are liable for any damage or reduction in the property of the child administered by them resulting from their negligence or wilful misconduct. They must therefore act in a careful and faithful manner. The administration of the child’s prop­erty by the parents can be subject to review by the authorities. Apart from establishing specific regulations regarding the administration of the property, authorities may, as an ultimate measure, appoint a legal guardian for the administration of the child’s property.

Under Colombian law, any individual is subject to legal rights and obligations except for individuals declared incapable by a judge after a medical evaluation and due process.

An individual may be declared incapable by means of a voluntary agreement whereby a judge declares that an individual is unfit to exercise his or her rights and obligations. Once the individual has been declared incapable to handle his or her own affairs, the judge will designate a guardian to take care of the individual’s affairs.

In anticipation of a mental incapacity, an individual may (i) set advance directives on how to manage her/his estate in case of disability. These directives must be recorded in a public deed executed before a Notary Public, or (ii) implement contractual arrangements or structures to protect her/his assets making sure there is enough evidence showing that the individual is capable at that moment.

Colombian is very active on EOI. During the last decade, Colombia has introduced numerous tax rules involving the taxation of individuals, identification of UBOs, foreign assets and the implementation of information exchange mechanisms (e.g. the Foreign Account Tax Compliance Act, the OECD common reporting standard and the anti-money laundering and counter terrorism financing measure known as Sistema de Administración del Riesgo de Lavado de Activos y de la Financiación del Terrorismo (SARLAFT)) leading to greater transparency. These developments (among others) have led Colombia to officially become the 37th member country of the OECD after Colombia’s willingness to adopt OECD legal recommendations and standards had been assessed and confirmed.

• OECD exchange of information

Colombia has also entered into several agreements for the exchange of tax information, and it is very active on this matter. For a list of countries with which Colombia has received and shared information under the OECD common reporting standard, please go to the OECD site.

• FATCA

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

Definitely the tax reform accompanying the recent a change of government.

On August 8, 2022, the Minister of Finance filed before the Colombian Congress a new tax reform bill that seeks to comply with the ambitious economic, social and environmental agenda proposed during the election campaign, which would need a USD 12.1 billion tax reform to partially fund it. These are some of the most relevant rules proposed in the tax bill:

1. New net worth tax

As per the text recently approved by Congress, a new net worth tax will be re-established as from FY 2023 onwards, which, in general terms, is likely to be similar to those that have been established in the past except that:

• this would be a permanent tax rather than temporary;
• the tax basis would not be “frozen” / “tied” to a specific triggering period with variations subject certain percentage of the annual inflation, but instead it would have to be determined annually; and
• there would apply specific rules on valuation and reporting obligations for assets such as shares, and investments held through trusts, private foundations and other fiduciary arrangements. This situation could lead to differences / discrepancies between the deemed taxpayer for income tax and net worth tax purposes.

Furthermore, the proposed net worth tax would be levied mainly on resident individuals and, potentially, it would also tax 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).

The tax rate would be 0.5% for the portion of the taxable equity exceeding 72.000 UVTs (Approximately USD 601.118), 1% for the portion that exceeds 122.000 UVTs (Approximately USD 1.1 million) and 1.5% for the portion that exceeds 239.000 UVTs (Approximately USD 2.0 million). The last 1.5% rate would be applicable temporarily between fiscal years 2023 and 2026 only.

2. Taxation of dividends

The tax bill also proposes an increase of the income tax rate applicable to dividends paid to resident and non-resident individuals and foreign entities as follows:

• Resident individuals would pay income tax on dividends at the general progressive tax rate between 0% and 39%, instead of the income tax rates for dividends between 0% and 10% applicable up to FY 2022.
• Additionally, it is proposed a marginal 15% income tax withholding as well as a marginal tax credit up to 19% applicable to resident individuals earning dividends that exceed 1.090 UVTs (Approximately USD 9.100).
• Non-resident individuals and foreign entities would be subject to a 20% income tax on dividends, instead of the 10% rate applicable up to FY 2022.

3. Capital gains

Regarding capital gains regime the bill brings in some relevant changes:

• Most of the thresholds for applying exempted income are reduced.
• The capital gains tax general rate would be 15% instead of the 10% rate applicable up to FY 2022.
• The capital gains tax rate applicable in the case of gains from lotteries, draws and gambling would increase to 25% instead of the 20% rate applicable up to FY 2022.