1 Legislative framework

1.1 Which legislative provisions govern private client matters in your jurisdiction?

  • The Colombian Tax Code (Law 2010/2019);
  • Unique Tax Decree 1625/2016; and
  • All enforceable double taxation treaties.

1.2 Do any special regimes apply to specific individuals (eg, foreign nationals; temporary residents)?

Foreign nationals or temporary residents are subject to income tax only on Colombian source income and are only required to report income or assets generated or located in Colombia. The applicable income tax rate for non-resident individuals is 35% (resident individuals are taxed at progressive rates ranging from 0% to 39%).

1.3 Which bilateral, multilateral and supranational instruments in effect in your jurisdiction are of relevance in the private client sphere?

Double tax treaties: Colombia has extended its treaty network in the past 10 years. Almost all of the tax treaties refer to double taxation and exchange of information. Decision 578 of the Andean Community also applies.

The double tax treaties are based on the Organisation for Economic Co-operation and Development guidelines. Those currently in force have been concluded with Canada, Chile, the Czech Republic, India, Mexico, Portugal, South Korea, Spain, Switzerland and the United Kingdom. Tax treaties with France, Japan, Italy and the United Arab Emirates have been signed and are undergoing approval procedures.

Exchange of information: Colombia has entered into several agreements that allow for the exchange of tax information, such as:

  • the Multilateral Convention on Mutual Administrative Assistance in Tax Matters in 2014; and
  • the Common Reporting Standard in 2017.

Foreign Account Compliance Act (FATCA): Colombia and the US government have an enforceable Intergovernmental Agreement Model 1, implementing FATCA, which is mandatory for Colombian financial institutions and taxpayers.

Laundering Assets Risk Management and Terrorism System (SARLAFT): Colombian financial entities must identify and report to the Colombian Tax Office the ultimate beneficial owner in accordance with SARLAFT standards. These apply where a non-resident has direct or indirect ownership and control of more than 20% of a resident entity, and to local trusts and mutual funds.

2 Taxation

2.1 On what basis are individuals subject to tax in your jurisdiction (eg, residence/domicile/nationality)? How is this determined?

Individuals become subject to income tax in Colombia by obtaining residence status or upon deriving Colombian source income.

Non-resident individuals: Non-resident individuals are subject to income tax only on source income and are required only to report income or assets generated or located in Colombia.

‘Colombian source income' refers to income from activities undertaken within the Colombian territory and certain activities rendered from abroad. The applicable law refers to these as:

  • the provision of services rendered in the Colombian territory;
  • the transfer of assets inside the Colombian territory; and
  • the exploitation of tangible or intangible assets located inside the country.

Resident individuals: Individuals obtain tax residence in Colombia if they remain for more than 183 days in the territory, whether continuously or otherwise, during a 365-day period.

Colombian citizens are still considered tax residents, even if not in Colombia, where:

  • their close family (eg, spouse or children) are Colombian residents;
  • in the case of companies:
    • 50% of their income is Colombian sourced; or
    • 50% or more of their assets are managed or located in Colombia.

However, they will not be considered tax residents if:

  • 50% or more of the individual's revenue is sourced in the country of domicile; or
  • 50% or more of the company's assets are managed or located in the country of domicile.

2.2 When does the personal tax year start and end in your jurisdiction?

The personal tax year starts on 1 January and ends on 31 December each year.

2.3 With regard to income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Concerning income, individuals are subject to income tax in Colombia at different rates due to their residence status or upon deriving Colombian source income.

Non-resident individuals: Non-residents are subject to income tax on their Colombian source income and are required only to report any earnings or assets generated or located in Colombia. The applicable rate is 35% for those obliged to file an income tax return.

Dividends distributed to non-resident individuals are taxed as follows:

  • Dividends paid out of profits that are taxed at the corporate level are subject to dividend tax at a rate of 10%.
  • Dividends paid out of profits that are not taxed at the corporate level are taxed at the general income tax rate (33% for 2019, 32% for 2020, 31% for 2021 and 30% from 2022 onwards), in which case the dividend tax of 10% indicated above is applied once this tax has been reduced.

Resident individuals: Resident individuals are subject to income tax in Colombia on a worldwide basis. The applicable income tax rates are determined according to income baskets (labour income, pensions, capital income, non-labour income), with progressive rates ranging from 0% to 39%.

Dividends distributed to resident individuals are taxed as follow:

  • Dividends paid out of profits that taxed at the corporate level are subject to dividend tax at a rate of 7.5%.
  • Dividends paid out of profits that not taxed at the corporate level are taxed at the general income tax rate (33% for 2019, 32% for 2020, 31% for 2021 and 30% from 2022 onwards), in which case the dividend tax of 7.5% indicated above is applied once this tax has been reduced.

(b) How is the taxable base determined?

Non-resident individuals: The taxable base is determined on the total amount of income earned during the taxable year.

Resident individuals: The taxable base is calculated depending on the type of income basket (eg, labour income, pensions, capital income, non-labour income and dividends).

(c) What are the relevant tax return requirements?

Non-resident individuals: Payments that are made to foreign individuals are subject to income tax withholdings, which is their final tax liability in Colombia. For payments that are not subject to withholding, the individual must file an income tax return for the corresponding fiscal year. Also, non-resident individuals may be subject to income tax withholdings and the obligation to file a tax return. Income tax withholdings applied during the taxable year may be credited against the final income tax liability recorded in the annual income tax return.

Resident individuals: Resident individuals must file an income tax return on an annual basis. In this case, the individual must report income obtained on a worldwide basis. Any income tax withholding applied during the taxable year may be credited against the final income tax liability.

(d) What exemptions, deductions and other forms of relief are available?

Exemptions, reliefs and deductions are available for resident individuals depending on the type of basket, as set out below.

Labour income
Non-taxable income
  • Mandatory health and pension contributions made by employees.
  • Contributions to voluntary pension saving schemes, provided that they do not exceed 2,500 tax units (approximately $26,000) or 25% of the annual income.
Deductions
  • Interest payments from loans secured for a housing purchase.
  • Payment of pre-paid health services and health insurance payments.
  • 10% of all labour payments made to individuals who are dependent on the taxpayer – that is:
    • children who have not reached legal age;
    • children who have reached legal age but are being financed in a recognised educational institution; and
    • children over the age of 23 years who are dependent owing to physical or psychological incapability.
Exempt income
  • 25% of the individual's income.
  • Voluntary contributions to pension funds and savings accounts exclusively destined for the purchase of real estate ("Cuentas de Ahorro y Fomento a la Construcción - AFC for its acronym in Spanish-) not exceeding 30% of the individual's annual income.

Pension income
Exempt income Pensions not exceeding 1,000 tax units (approximately $10,300) are exempt.

The tax benefits cannot exceed 40% of earned income or 5,040 tax units (approximately $52,300 for 2021).

2.4 With regard to capital gains: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Capital gains are considered as any income obtained by a taxpayer from extraordinary activities. The activities that trigger capital gains are set out in the table below.

Type of income/activity Applicable rate
  • Indirect or direct sale of fixed assets held for more than two years.
  • Winding up of entities that are not classified as undistributed income or reserves.
  • Gains resulting from estates, legacies and donations (gifts).
  • Life insurance indemnities.
  • Distributions made by foreign trusts, private interest foundations or similar entities.
10%
Prizes, awards, lotteries and gambling earnings. 20%

(b) How is the taxable base determined?

Regarding capital gains, the determination of the taxable base depends on the type of income received. Some examples are set out in the table below.

Type of income Comments
Direct or indirect sale of fixed assets held for more than two years. The taxable base is determined by calculating the difference between the acquisition price and the asset's tax base.
Winding up of entities that are not classified as undistributed income or reserves. The taxable base is determined as any income that exceeds the capital contributions.
Inheritance The taxable base is determined by calculating the value of the assets as of 31 December of the previous year. If the assets were purchased in the same year that the death of the individual occurred, the taxable base is calculated by using the asset's purchase price.
Life insurance indemnities Any income exceeding 12,500 tax units (approximately $120,000)
Distributions from trusts or similar arrangements Total amount of distribution

(c) What are the relevant tax return requirements?

Income tax return: Both resident and non-resident individuals must file an income tax return for the corresponding taxable year reporting any capital gains. However, non-resident individuals must file a tax return only if the capital gains correspond to Colombian situs assets.

Foreign assets return: Resident individuals must report any assets held abroad when their value exceeds 2,000 tax units (approximately $19,600 for 2021) as of 1 January each year. This return is merely informative.

(d) What exemptions, deductions and other forms of relief are available?

The following types of relief are available.

Life insurance
Life insurance indemnities only on amounts that exceed 12,500 tax units Considered exempt income only on amounts not exceeding 12,500 tax units (approximately $120,000)

Gains resulting from estates, legacies and donations (gifts)
Inherited urban property Exempt up to 7,700 tax units (approximately $75,500 for 2021)
Inherited rural property, excluding recreational housing Exempt up to 7,700 tax units (approximately $75,500 for 2021)
Inheritance to heirs and surviving spouse Exempt up to 3,490 tax units (approximately $34,200 for 2021)
Assets or rights received by individuals not considered as heirs or surviving spouse Exempt up to 20% of assets or rights
Assets or rights gifted or transferred by the deceased during his or her lifetime that were received gratuitously by a beneficiary Exempt up to 20% of assets or rights without exceeding 2,290 tax units (approximately $22,500)
Books, clothing, personal belongings and furniture belonging to the deceased No limit

2.5 With regard to inheritances: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Following the death of the individual, the administrator of the estate must hold the estate assets under deposit. Once the inventory and appraisals of the estate are final, the administrator may sell the deceased's assets to cover any debts or outstanding taxes or fees.

Once the estate has covered all obligations, the inheritance is distributed among all heirs. This distribution is subject to capital gains tax at a rate of 10%. However, in some cases part of the inheritance may be considered as exempt income (eg, furniture, books, clothes).

(b) How is the taxable base determined?

The taxable base is determined by calculating the value of the assets as of 31 December of the previous year. If the assets were purchased in the same year that the death of the individual occurred, the taxable base is calculated by using the asset's purchase price.

(c) What are the relevant tax return requirements?

Individuals must file an income tax return for the corresponding taxable year reporting any capital gains. However, non-resident individuals are required to file a tax return only if the inheritance corresponds to Colombian situs assets.

(d) What exemptions, deductions and other forms of relief are available?

The following income is considered exempt for capital gains purposes.

Income Comments
Inherited urban property Exempt up to 7,700 tax units (approximately $75.500 for 2021)
Inherited rural property, excluding recreational housing Exempt up to 7,700 tax units (approximately $75,500 for 2021)
Inheritance to heirs and surviving spouse Exempt up to 3,490 tax units (approximately $34,200 for 2021)
Assets or rights received by individuals not considered as heirs or surviving spouse Exempt up to 20% of assets or rights
Assets or rights gifted or transferred by the deceased during their lifetime that were received gratuitously by a beneficiary Exempt up to 20% of assets or rights without exceeding 2,290 tax units (approximately $22,500)
Books, clothing, personal belongings and furniture belonging to the deceased N/A

2.6 With regard to investment income: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

Non-resident individuals: Investment income is subject to income tax with at an applicable rate of 35%.

Resident individuals: Investment income is subject to income tax with applicable rates ranging from 0% to 39%.

(b) How is the taxable base determined?

The taxable base is determined on the total amount of income received.

(c) What are the relevant tax return requirements?

Non-resident individuals: Payments made to foreign individuals are subject to income tax withholdings, which is their final tax liability in Colombia. For payments not subject to withholding, the individual must file an income tax return for the corresponding fiscal year.

Resident individuals: Resident individuals must file an income tax return every year. In this case, the individual must report income obtained on a worldwide basis.

(d) What exemptions, deductions and other forms of relief are available?

Colombian tax law treats local private entity funds as semi-flow-through entities for tax purposes. Revenues obtained by investment funds, prior deduction of the
expenses and the fee charged by the management company will be distributed among the investors under the same title as they were received by the fund, and under the same tax conditions as if they had been directly obtained by the investor.

However, distributions received by investors from local private equity funds can be deferred for income tax purposes until distribution. Deferral is possible where the following prerequisites are met:

  • Units held by the fund are traded on a stock exchange regulated and supervised by the Colombian Superintendence of Finance;
  • The fund is not directly or indirectly owned by more than 50% by the same beneficial owner, investment group belonging to related parties or family members up to a fourth degree of consanguinity; and
  • The fund's beneficial owners or investment group do have not powers or control over distributions made by the fund.

2.7 With regard to real estate: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What taxes are levied and what are the applicable rates?

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 municipality.

Income tax/capital gains: Income obtained by an individual from the sale of real estate will vary as follows.

Real estate Tax treatment
Held for more than two years Considered as a capital gain subject to a 10% rate
Held for less than two years Considered as taxable income subject to progressive income tax rates ranging from 0% to 39% or 35% for non-resident individuals

Net worth tax: From 1 January 2020, a net worth tax for the 2020 and 2021 financial years is triggered on the possession of net worth equal to or in excess of COP 5 billion (approximately $1.3 million). The applicable rate is 1%.

It is expected that the Colombian government will introduce a similar tax from 1 January 2022.

(b) How is the taxable base determined?

Property tax: The taxable base is determined based on the valuation of the asset made by the municipality.

Income tax/capital gains tax

Real estate Taxable base
Held for more than two years The taxable base is determined by calculating the difference between the income obtained and the asset's fiscal costs
Held for less than two years The taxable base is determined on the asset's sale price

Net worth tax: The taxable base is the value of the taxpayer's net equity on 1 January 2020 and 2021.

In the case of resident individuals, this tax is based on worldwide assets; while in the case of non-resident individuals and non-resident entities, it is based on Colombian situs assets other than shares, accounts receivable and/or portfolio investments – for example, real estate, aircraft, yachts, boats, speedboats, art or oil and mining titles.

(c) What are the relevant tax return requirements?

Property tax: Filing and payment of this tax are done on a yearly basis. The payment deadlines vary depending on each municipality in which the real estate is located.

Income tax/capital gains tax: Any taxable income or capital gains must be reported in the individual's income tax return for the corresponding year, which is filed on a yearly basis.

Net worth tax: Net worth tax is filed and paid in two instalments. For 2021, the first instalment is paid in May and the second in September.

(d) What exemptions, deductions and other forms of relief are available?

Property tax: Property tax exemptions and other forms or relief may apply, and vary depending on the municipality (eg, energy efficiency, social purposes).

Income tax/capital gains: Any income obtained from the sale of social housing projects is considered exempt for income tax purposes if certain requirements are met (eg, projects must be developed using a local trust and under a specific construction licence).

Furthermore, voluntary contributions to savings accounts that are exclusively destined for the purchase of real estate (AFC accounts) are considered exempt for income tax purposes if they do not exceed 30% of the individual's annual income or 30% of his or her labour income. Funds kept in AFC accounts and the interest they generate must remain in the account for 10 years. Otherwise, such funds will be considered as taxable income and will be subject to withholding by the financial entity.

Net worth tax: Individuals may exclude the following items from the taxable base:

  • 13,500 tax units (approximately $132,000) of the value of their residence;
  • 50% of any assets that are subject to the normalisation tax (ie, tax amnesty) reported during the 2019 financial year and repatriated to Colombia before 31 December 2019; and
  • 50% of any assets that are subject to the normalisation tax (ie, tax amnesty) reported during the 2020 financial year and repatriated to Colombia before 31 December 2020.

2.8 With regard to any other direct taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

Industry and commerce tax (ICT): ICT is levied on industrial, commercial and services activities performed by the taxpayer within a Colombian municipality. Corporations, entities and persons are subject to ICT on gross revenue earned in the municipality where the activity is performed at a rates ranging between 0.2% and 1.4%.

(b) How is the taxable base determined?

ICT: The taxable base is determined based on all ordinary and extraordinary income earned during the fiscal year. This includes income from financial returns, commission and all types of income that are not excluded by Colombian law.

(c) What are the relevant tax return requirements?

ICT: Taxpayers must file an ICT tax return in the municipality where the taxed activities are carried out using the National Single Form. Some municipalities may establish withholding mechanisms for ICT. In such cases, the ICT form will be established by each municipality.

(d) What exemptions, deductions and other forms of relief are available?

ICT: Exemptions, deductions and other forms or relief may apply and vary depending on the municipality.

2.9 With regard to any indirect taxes levied in your jurisdiction: (a) What taxes are levied and what are the applicable rates? (b) How is the taxable base determined? (c) What are the relevant tax return requirements? and (d) What exemptions, deductions and other forms of relief are available?

(a) What are they and what are the applicable rates?

The following are subject to value added tax (VAT) in Colombia:

  • the sale of tangible assets, with the exception of those expressly excluded by law;
  • the import of tangible assets, with the exception of those expressly excluded by law;
  • the sale or assignment of rights on intangible assets that are solely associated with industrial property;
  • the provision of services in the national territory or from abroad, with the exception of those expressly excluded by law; and
  • the circulation, sale or operation of games of chance, with the exception of lotteries and games of luck and chance operated exclusively through the Internet.

(b) How is the taxable base determined?

In general, the taxable base for calculating VAT will correspond to the total value of the sale or of the service provided. Some special tax bases are determined by law.

(c) What are the relevant tax return requirements?

VAT collectors are obliged to file VAT returns. There are two taxable periods applicable for VAT collectors to file their VAT returns: bimonthly and quarterly.

(d) What exemptions, deductions and other forms of relief are available?

Excluded transactions: These are transactions involving the provision or transfer of excluded goods and services which are expressly denominated as such by law and thus are not subject to VAT. The VAT paid (or accrued) in acquiring such goods and services may not be credited and will be treated as a higher cost.

Exempted transactions: These are transactions involving the provision or transfer of exempted goods and services which are also expressly denominated as such by law. Exempted transactions are zero-rated. Suppliers of VAT-exempted services are entitled to offset the input VAT relating to such services. Additionally, if the supplier of exempted goods or services has a balance in favour of VAT from exempted transactions, it is entitled to request a reimbursement from the Colombian Tax Office.

3 Succession

3.1 What laws govern succession in your jurisdiction? Can succession be governed by the laws of another jurisdiction?

The 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.

The Colombian courts recognise the succession rights of Colombian heirs under forced heirship rules without considering the decedent's last place of domicile.
Furthermore, the Colombian courts have also applied Colombian local law in respect of real personal property located in the Colombian territory.

3.2 How is any conflict of laws resolved?

The Colombian rules on forced heirship are mandatory and apply to the estates of all individuals whose last place of residence was Colombia.

Colombia has no separate statute on conflict of laws, international succession rules or international private law. However, it is a member of the Treaty on International Civil Law promulgated in Montevideo in 1889, which is currently enforceable in Colombia. The treaty seeks to provide uniformity in the resolution of conflicts of laws concerning succession. The treaty sets out 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 member state must be admitted in other member state jurisdictions.
  • The law of the situs of the property is applicable to any rules of inheritance, heirship rules and validity of the wills, and generally to any matter concerning wills and succession.
  • In the event of a conflict of succession laws, the treaty will prevail.

3.3 Do rules of forced heirship apply in your jurisdiction?

The Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (both nationals and foreigners) who die with their last residence in Colombia. However, by executing a will, an individual may free freely dispose of half of his or her estate.

However, certain local or foreign structures can be used when forced heirship rules do not meet the wishes or needs of the testator.

3.4 Do the rules of succession rules apply if the deceased is intestate?

Colombian law distinguishes between different orders of heirs in an intestate succession. The following table sets out the different orders of heirs in an intestate succession.

Order of heirs Proportion
Descendants (biological and adopted) Descendants inherit equal portions, not including the surviving spouse's marital portion
Ancestors and surviving spouse: the ancestors of the closest degree exclude the others In this order, heirs inherit per capita along with the surviving spouse, who receives the marital portion
Siblings and surviving spouse The inheritance is divided into two parts: one for the brothers and sisters, who receive equal portions, and one for the spouse
Children of brothers and sisters Equal portions
The state, through the Colombian Family Welfare Institute The entire estate

3.5 Can the rules of succession be challenged? If so, how?

The rules of succession can be challenged before a court in Colombia based on various grounds, such as:

  • the failure to meet formal or legal requirements;
  • the existence of an heir who was not included in the succession; or
  • assignments that are contrary to the forced succession rules.

4 Wills and probate

4.1 What laws govern wills in your jurisdiction? Can a will be governed by the laws of another jurisdiction?

Colombian law governs the wills of individuals (both nationals and foreigners) whose last residence was Colombia or any assets located in Colombia.

Foreigners whose only connection is real property may draft a will using the law of a foreign jurisdiction. Under Colombian law, a foreign will is considered valid if it complies with the legal requirements of both countries, among other formal requirements.

4.2 How is any conflict of laws resolved?

Colombia has no separate statute on conflict of laws, international succession rules or international private law. However, it is a member of the Treaty on International Civil Law promulgated in Montevideo in 1889, which is currently enforceable in Colombia. The treaty seeks to provide uniformity in the resolution of conflicts of laws concerning succession. The treaty sets out the following rules:

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

4.3 Are foreign wills recognised in your jurisdiction? If so, what process is followed in this regard?

Colombian law recognises foreign wills executed by Colombian nationals, provided that:

  • the testator is a Colombian national or resident;
  • the will has been reviewed and authorised at the Colombian consulate in the jurisdiction where the will is executed;
  • the witnesses are domiciled in the city where the will is granted; and
  • the will is compliant with the laws of the jurisdiction in which it is executed.

4.4 Beyond issues of succession discussed in question 3, are there any other limitations to testamentary freedom?

The testator can dispose only of half of his or her estate. The applicable law obliges the testator to assign compulsory portions under the forced heirship rules, which will be assigned even if the testator's will provides otherwise.

4.5 What formal requirements must be observed when drafting a will?

When drafting a will, the following formal requirements should be observed.

Solemn will: A solemn and nuncupative will is executed before the notary and three witnesses. The essential element of such a will is that the testator discloses its provisions to the notary and the witnesses. Finally, the testator, the witnesses and the notary must sign the will. If the testator cannot sign, this must be mentioned in the testament stating the cause.

Solemn sealed will: A solemn sealed will is executed before a notary and five witnesses. The essential element of such a will is the act by which the testator presents to the notary and the witnesses a closed deed. The testator must declare, in a way that the notary and the witnesses see, hear and understand, that the relevant deed contains his or her will.

The testator must then sign the will and seal it, so that it cannot be removed from its envelope without breaking the seal. It is up to the testator to use any means necessary to secure the envelope. The notary will state the following on envelope, under the epigraph:

  • the fact that the testator is of sound mind;
  • the testator's full name and domicile;
  • the names of the witnesses; and
  • the place and exact date of the grant.

Finally, the testator, the witnesses and the notary will sign the envelope. If the testator is unable to sign at the time of grant, a person other than the instrumental witnesses may sign on his or her behalf.

4.6 What best practices should be observed when drafting a will to ensure its validity?

To ensure the validity of a will, it should be confirmed that:

  • the testator has legal capacity to execute the will;
  • the forced heirship rules have been observed; and
  • all formal requirements have been complied with (eg, execution of the will before a notary and witnesses).

4.7 Can a will be amended after the death of the testator?

A valid will cannot be amended after the death of the testator. Only the testator can alter, or partially or totally revoke, his or her will at any time by making a new solemn will which states that the new will is to supersede its predecessor. If the new will is subsequently revoked, the first testament is not enforceable, unless the testator has stated otherwise.

4.8 How are wills challenged in your jurisdiction?

Wills can be challenged on many grounds, such as the following:

  • lack of capacity;
  • failure to meet the formal requirements;
  • the existence of an heir who was not included in the will; or
  • assignments that are contrary to the forced succession rules.

4.9 What intestacy rules apply in your jurisdiction? Can these rules be challenged?

The Colombian rules on forced heirship are mandatory and apply to the estates of all individuals (both 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 in many common law jurisdictions).

5 Trusts

5.1 What laws govern trusts or equivalent instruments in your jurisdiction? Can trusts be governed by the laws of another jurisdiction?

Companies which are authorised by the Colombian financial authority (Superintendencia Financiera de Colombia) may offer trust services and act as trustees. Such entities are subject to supervision and regulation. Local trusts cannot be governed by the laws of another jurisdiction and are regulated by the Colombian Civil and Commercial Codes.

5.2 How is any conflict of laws resolved?

As a general rule, any Colombian situs assets held by a local or foreign trust are subject to Colombian law.

5.3 What different types of structures are available and what are the advantages and disadvantages of each, from the private client perspective?

Both local (eg, simplified stock companies) and foreign structures (eg, trusts, private foundations and life insurance) are available, depending on the location of the assets and the family situation. The advantages and disadvantages of each type of structure must be analysed on a case-by-case basis.

5.4 Are foreign trusts recognised in your jurisdiction? If so, what process is followed in this regard?

There are no civil or commercial regulations regarding the establishment of a common law trust in Colombia. However, local tax and other authorities have recognised foreign trusts. No specific process need be followed in this regard.

Furthermore, Colombian law authorises individuals residing in Colombia and legal entities established under the laws of Colombia (ie, residents of Colombia) to invest and hold assets outside of the Colombian territory without the need to obtain further permits or authorisations. However, such residents of Colombia must comply with the foreign exchange regulations.

5.5 How are trusts created and administered in your jurisdiction?

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 for the purpose determined in the local trust agreement, for the benefit of either the settlor or a third party.

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

5.6 What are the legal duties of trustees in your jurisdiction?

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

  • A trustee has a duty to carry out its activities as trustees in a diligent manner;
  • A trustee must preserve 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;
  • The Colombian financial authority must be consulted by a trustee when in doubt of its duties or where it deems this necessary, acting against the instructions set forth in the trust agreement;
  • A trustee must undertake its best efforts to maximise the trust's profitability;
  • Upon the trust's termination, the trustee must transfer assets to the final beneficiary as set forth in the agreement; and
  • The trustee must report on the trust accounts at least every six months.

5.7 What tax regime applies to trusts in your jurisdiction? What implications does this have for settlors, trustees and beneficiaries?

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 must include such profits in their own income tax returns for that same year and pay the relevant taxes. The local trust will not be transparent for tax purposes if its assets cannot be attributed to its beneficiaries and will be considered as a corporation for income tax purposes.

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); otherwise, such assets will have to be declared by the individual as part of his or her equity.

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

Concerning the taxation of individuals, the Colombian Tax Office, through Ruling 021729/2019, reinforced the notion of local trusts as flow-through entities by mentioning that individuals must immediately recognise any taxable income obtained by the local trust as their own, regardless of whether it has been received.

Revocable foreign trust: If a foreign trust is revocable and controlled by the settlor, then it will be considered as a controlled foreign corporation (CFC) under Colombian law. Hence, net profits derived from passive income obtained by the trust will be recognised immediately in a proportion equivalent to the participation in the foundation/trust's capital or profits, and not upon the receipt of profits, meaning that no tax deferral will apply in this case.

Colombian tax residents must report in their income tax returns the passive income realised by the trust, considering the nature and characteristics of that income, as if it were received directly by them.

Assets held by a trust which is revocable and directed are understood to be held directly by the settlor and must be reported in the settlor's Colombian income tax return and foreign assets return (Form 160), as part of his or her own equity. If the characteristics of the trust/foundation are different, the reporting obligation may vary. This analysis should be carried out on a case-by-case basis.

Irrevocable foreign trust: If the underlying assets of an irrevocable and discretionary trust cannot be attributed to the beneficiaries, the latter must be reported by the settlor/founder/originator. This applies without any consideration of the trust's irrevocable and discretionary character.

Distributions made by a foreign trust: Distributions made by a foreign trust (revocable or irrevocable) to beneficiaries are subject to income tax at a rate of 10% without consideration of the trust's revocable or irrevocable nature.

5.8 What reporting requirements apply to trusts 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 must include such profits in their own income tax returns for that same year and pay the relevant taxes. A local trust will not be transparent for tax purposes if its assets cannot be attributed to its beneficiaries and will be considered as a corporation for income tax purposes.

Revocable foreign trust: Assets held by a revocable foreign trust are understood to be directly held by the settlor and must be reported for all tax purposes as part of its own equity.

Irrevocable foreign trust: If the underlying assets of an irrevocable trust cannot be attributed to its beneficiaries, the settlor must report the trust interest. This is without any consideration of the trust's irrevocable and discretionary character.

Foreign assets return (Form 160): Resident individuals must report any assets held abroad where the assets value exceeds 2,000 tax units (approximately $19,600 for 2021) as of 1 January each year. This return is merely informative. In the case of foreign trusts, assets must be reported as follows:

  • Revocable trusts: The settlor must report assets held by a revocable trust.
  • Irrevocable trusts: Interest held in the trust must be reported by the beneficiaries. If the assets cannot be attributed to the beneficiaries, the settlor must report the latter.

5.9 What best practices should be observed in relation to the creation and administration of trusts?

Reporting and taxation requirements for foreign trusts have increased in recent years and we expect that this trend will continue over the coming decade. Accordingly, structures involving foreign trusts and Colombian tax residents should be continually reviewed to avoid triggering unfavourable tax consequences.

Local trusts are mainly used in Colombia to develop projects or for estate planning purposes. In some cases, foreign trusts can be used for both estate and tax planning.

6 Trends and predictions

6.1 How would you describe the current private client landscape and prevailing trends in your jurisdiction? Are any new developments anticipated in the next 12 months, including any proposed legislative reforms?

On 17 June 2020, a team of international tax experts was appointed by the Colombian government to review the existing taxation system and propose new tax reforms to achieve the following objectives:

  • maintaining efficient tax benefits;
  • revitalising the economy;
  • creating new jobs;
  • encouraging entrepreneurship; and
  • promoting company and tax formalisation.

On 13 March 2020, the team of experts presented its report. Regarding individuals, their recommendations were as follows:

  • To compensate for the narrow tax base, impose high tax rates on those who cannot avoid paying tax in Colombia;
  • Significantly reduce the number of exempt and non-taxable items;
  • Avoid tax allowances that increase with income;
  • Lower the basic tax allowance and reduce the number of baskets;
  • Tax pensions at a fair effective rate;
  • Improve the design of taxes levied on personal capital income;
  • Use market values (not historical) to determine taxable income; and
  • Strengthen tax enforcement, particularly on the self-employed.

It is likely that Congress will not approve many of these recommendations, even though Colombia's legislative system allows different political groups to state their views on what an appropriate tax system should be.

It is expected that the following measures will affect private clients as from 2022:

  • The tax base will be broadened;
  • All exempt income benefits will be eliminated and a single automatic exempt income will be introduced for all individuals;
  • Pensions exceeding COP 7 million (approximately $1,900) will be taxed;
  • A ‘new' temporary ‘wealth tax' will be introduced for two years. This tax will be deductible for income tax purposes. The applicable rates will be 1% and 2%;
  • Payment of dividends will be subject to a 15% rate rather than a 10% rate; and
  • A new ‘solidarity' tax will be introduced for individuals with income exceeding COP 10 million, starting July and ending on December 2021 and 2022. This tax will be creditable for income tax purposes.

7 Tips and traps

7.1 What are your top tips for effective private client wealth management in your jurisdiction and what potential sticking points would you highlight?

Over the past decade, tax reforms have been introduced in Colombia every two years. For this reason, private clients should review their tax and estate planning structures regularly, to avoid the risk of non-compliance.

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

In the case of Colombian situs assets, the following should be borne in mind:

  • Trusts: The Colombian Commercial Code includes a provision whereby creditors cannot pursue the assets of a trust negotiation unless the debts arose prior to the constitution of the trust. The creditors of the beneficiary of the trust can only pursue the financial yields that the assets report. The interested creditors can challenge the execution of a trust with fraud.
  • Specific assets and income: Colombian law grants immunity from seizure in relation to certain assets as follows:
    • property assigned as family housing;
    • the legal minimum salary, except 50% to provide food, rent or to pay debts to cooperatives;
    • the excess over the minimum salary, seized to one-fifth;
    • pension payments, which receive the same treatment as the salary; and
    • individual pension savings.
  • Marital property: Under Colombian law, individuals have the freedom to dispose of their estate without limitation during their lifetimes. However, the disposition of certain assets may require the approval of the other spouse under Colombian marital rules.

In the case of foreign assets, the following should be borne in mind:

  • Individuals may place assets held in their own names into trust in order to designate them, or their proceeds, to a specific purpose or persons. The assets placed into a properly structured trust form an estate that is separate from the assets of the settlor, to avoid such assets being requested by creditors; and
  • Attention should be paid to foreign creditor rules when establishing a foreign structure.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.