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Trusts, foundations and charities

Trusts

Are trusts legally recognised in your jurisdiction? If so, what types are available and most commonly used?

Colombian civil law does not provide rules on common law trusts. However, Colombian law sets out rules on civil and commercial 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 in order 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.

What rules and procedures govern the establishment and maintenance of trusts?

Local trusts

In Colombia, only companies that are duly authorised by the Colombian financial authority (SFC) may offer trust services and act as trustees. Such entities are subject to SFC supervision and regulation.

Colombian law sets out a number of legal duties for trustees, which cannot be delegated to third parties or waived. These duties include the following:

  • trustee activities must be carried out in a diligent manner;
  • assets must be segregated;
  • assets in a  trust must be managed in accordance with a trust agreement;
  • trustees must act on behalf and for the benefit of the beneficiaries;
  • trustees must consult the SFC when in doubt about their duties or when they deem it necessary to act against the instructions set out in the trust agreement;
  • trustees must make every effort to maximise a trust's profitability;
  • upon the trust's termination, trustees must transfer the assets to the final beneficiary set out in the agreement; and
  • trustees must report accounts at least every six months.

Common law trusts

There are no civil or commercial regulations regarding the establishment of a common law trust in Colombia. Accordingly, common law trust is not recognised by Colombian civil or commercial law.

How are trusts taxed in your jurisdiction?

Local trusts

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 his or her 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 reported in the income tax return of the beneficiaries.

Trusts are used in Colombia as an instrument to administer properties or businesses or to grant a warranty, considering that trustees are professional entities. In the case of successions, trusts are used to administer the estate of certain heirs until they can do so themselves.

Foreign trusts (only for tax purposes)

The Colombian Tax Office (DIAN) analysed the formal and substantial obligations applicable to tax resident beneficiaries of foreign irrevocable and discretionary trusts. DIAN concluded the following in Tax Rulings 34071/2017 and 13287/2018:

  • Only if a Colombian tax resident has the economic benefits of a trust's underlying assets must the tax resident comply with all formal and substantial tax obligations derived from such assets.
  • Regardless of their status as trust's beneficiaries, Colombian tax residents that receive a distribution, income or benefit from a foreign trust must report such distribution, income or benefit in their income tax return, regardless of whether they enjoy the economic benefits from the trust's assets or not.

To date, DIAN has made no further remarks on the discretionary powers that may be exercised by a trustee in an irrevocable foreign trust, and it determined that each case must be analysed on a standalone basis. Further developments in this area are expected.

Foundations and charities

Are foundations and charities legally recognised in your jurisdiction? If so, what forms can they take?

National or foreign individuals and legal entities may incorporate corporations, associations or foundations in Colombia. Corporations and associations imply the union of individuals who wish to develop a social benefit activity. Foundations are characterised as the union of assets dedicated to a social benefit activity.

What rules and procedures govern the establishment and maintenance of foundations and charities?

Foundations are incorporated either through a private document or a deed of foundation, with compliance of requirements established by law. These must be registered before the chamber of commerce of the entity’s domicile. The governor of the corresponding jurisdiction (or the mayor, in the case of Bogota) exercises surveillance and control over foundations. Specific documents must also be filed before these entities.

How are foundations and charities taxed?

Foundations and charities are taxed in Colombia as follows:

  • As a general rule, non-profit corporations, foundations and associations are subject to the general tax regime and are subject to income tax at a 33% rate (plus a surcharge of 4% for 2018).
  • However, 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 according to 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;
    • their capital contribution and/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 could be considered as entities of the special tax regime, with DIAN’s approval.

  • Entities approved by DIAN as eligible for the special tax regime are subject to income tax at a 20% rate. However, any income surplus is considered as exempt, provided that the funds are destined directly or indirectly for programmes that develop the entity's social purpose and meritorious activities. Any excess benefits or surplus that are not reinvested in programmes that develop the entity's social purpose are deemed as taxable for the next fiscal year.

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