COLOMBIA Law and Practice Contributed by: Rodrigo Castillo Cottin, Ana María López and Alejandra Becerra, Rimon, P.C.
without any consideration of the trust/foundation’s irrevocable and discretionary character. Reporting of income If a trust/foundation were to be revocable and con - trolled 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 participa - tion in the trust/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 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 adminis - tration of certain assets to a trustee in exchange for fiduciary rights. Local trusts are commonly used in Colombia as instru - ments 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 regard - ing 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 Colom - characteristics of said income. 3.2 Recognition of Trusts Civil Law
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 will 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 condi - tion 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 enti - ties whose “place of effective management” (PEM) is located in Colombia are considered Colombian resi - dents 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
bia. Anti-abuse rules must be observed. 3.3 Tax Considerations: Fiduciary or Beneficiary Designation Local Trusts
In Colombia, only those companies duly authorised by the Colombian financial authority ( Superintendencia
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