Although the figure of the Trust has hundreds of years of history in the common law or better known as “Common Law”, it has taken special relevance in the region in the last decades. This appearance of the Trust as an element to be considered, arises as a consequence of the political, social and economic instability that is experienced in several Latin American countries, which has led families of high patrimonies to the need to protect them from the aforementioned vicissitudes, and in turn, to think of a succession planning that allows them to guard and maintain their wealth throughout the generations.

How is the Trust regulated in the region?

The Argentine case

When mentioning Argentina, we can say that we are perhaps talking about the country in Latin America that today has the richest jurisprudence and regulations on the subject. Many of the rulings issued by judges of that country have been cited both in doctrinal analyses made by lawyers and in judicial decisions issued in the region.

Considering the regulations in force, we can conclude that in Argentina there is a recognition of the figure of Trusts and that there are certain principles in this respect that are worth mentioning:

• Revocable or irrevocable Trusts are a valid way of structuring the assets;
• The irrevocable Trust where the Settlor does not maintain control will not be subject to taxation in that country;
• Discretionary Beneficiaries will pay taxes only when they receive benefits from the Trust, and they should not even include the assets of the Trust in their tax return.

Finally, as to what taxes the Beneficiaries of a Trust will pay, it is important to mention that, once they receive the income produced by the Trust, it will be necessary to be aware of the general principles on the subject which, in most of the countries of the region, assume that the Beneficiary will pay the applicable income tax rate on the portion of what is received that qualifies as income or accumulated profit, and not on the portion that qualifies as initial capital of the Trust.

Regulations and court rulings

In this regard, we can start by mentioning Opinion No. 23 of the year 2000[1] issued by the Federal Administration of Public Revenue – AFIP (tax authority in Argentina), which was later ratified by the courts, and by which it was understood that the Trust-type structure alleged by the accused, being the Settlor and Beneficiary of the assets contributed, and also being the same who manages the assets as Trustee, is legally valid but in turn is fiscally transparent since there was evidently no real detachment of the assets in favor of the Trustee.

But it is surely the tax reform promoted in Argentina at the end of 2017 and approved by Law 27.430[2], which modifies the Income Tax Law (LIG)[3] in said country, the one that sheds more light on this matter and lays the firmest legal foundations on the structure of the Trust and its recognition in said country.

Said Law, specifically in its article 71, amends article 133 paragraph d) of the LIG, giving it the following wording:

“Profits obtained by trusts, trusteeships, private interest foundations and other similar structures constituted, domiciled or located abroad, as well as any contract or arrangement entered into abroad or under a foreign legal regime, whose main purpose is the administration of assets, shall be imputed by the resident subject that controls them to the fiscal year or fiscal year in which the annual fiscal year of such entities, contracts or arrangements ends.

It will be understood that a subject has control when there is evidence that the financial assets are held and/or managed by such subject (including among others the following cases: i. when they are trusts, trusts or foundations, revocable; ii. when the constituent subject is also beneficiary; and iii. when such subject has decision-making power, directly or indirectly to invest or disinvest in the assets, etc.).”[4].

Regarding the tax treatment of the beneficiaries when they receive distributions, we have already mentioned that the capital gains of the trust will be taxed with income tax, not the initial capital. Specifically in Argentina this situation is regulated through the LIG, which stipulates in its article 140 paragraph b that:

“Profits from abroad obtained in the capacity of beneficiary of a trust or equivalent legal figures.

For the purposes of this subsection, all distributions made by the trust or equivalent legal entity shall be considered as profits, unless there is evidence to the contrary that reliably proves that they did not obtain benefits and do not have accumulated profits generated in periods prior to the last one completed, including in both cases capital gains and other enrichments. If the taxpayer proves in the aforementioned manner that the distribution exceeds the aforementioned profits, only the proportion of the distribution corresponding to the latter shall be considered as profit…”[5].

Therefore, whenever a distribution is made to the Beneficiaries of a Trust, it will be treated from the Argentine tax point of view as profits, and the Beneficiaries themselves must prove in each case, when this is not the case. That is to say, to prove that the distribution received is the product of the capital contributed to the Trust or that it is a distribution that includes on the one hand profits and on the other hand capital, being subject to taxation only the first one.

What is going on in Uruguay?

Unlike what happens in Argentina, in Uruguay there is no such specific regulation regarding trusts. There is a law 17.703[6] that regulates trusts, but it is focused on business and not as a form of family estate planning. In Uruguay, Trusts incorporated in jurisdictions that are not tax havens defer the profits obtained by the Trust until such profits are effectively distributed to its Beneficiaries.

Therefore, it is necessary to adhere to the provisions of the Uruguayan regulations regarding taxes, more specifically to the Personal Income Tax (IRPF), Title 7 Ordered Text of 1996, and to apply such regulations regarding the no or low tax jurisdictions (BONT), which are defined in Article 7° Ter of Title 7[7] as “...those countries or jurisdictions that do not comply with the requirements of the minimum effective tax rate or levels of collaboration and transparency…“.

The aforementioned Title is regulated by Decree 148/007 which expresses in its article 6 bis[8] the allocation of income obtained by non-resident entities in the case of BONT entities, establishing the fiscal transparency rule for such entities, by which capital income and capital gains will be automatically allocated to the individuals who participate in their capital.

Likewise, said rule is expanded, in the second paragraph of the mentioned article, to resident entities (including individuals) that verify the condition of current Beneficiaries of non-resident trusts. The article even covers the possibility that there are no current beneficiaries in non-resident trusts, establishing that in such case the income will be assigned to the settlor (Settlor) until such time as it is not received by the Beneficiary.

“The income obtained by resident entities that verify the condition of current beneficiaries of trusts, investment funds or similar entities, non-residents, are included in this provision. In case there is no current beneficiary, the income shall be assigned to the settlor until such time as it is not received by the beneficiary…”.

We can then say that, based on the provisions of the above mentioned regulations, whenever a Trust is incorporated in a BONT jurisdiction, i.e., its Trustee is considered BONT, the rule of fiscal transparency will apply to the Beneficiaries of such Trust, who will be fiscally obliged as soon as the entity receives capital income or capital gains, and that in the event that the Beneficiaries are discretionary, the Settlor will assume the fiscal obligation until they effectively receive the benefits of the Trust.

Therefore, as opposed to the rules applied to BONT entities, the Trust incorporated in non-BONT jurisdictions will be treated similarly to Uruguayan legal entities, and the profits obtained by the Trust will be deferred until they are effectively distributed to the Beneficiaries.

Trust regulations in Colombia

With respect to Colombia, we can mention that said jurisdiction began to give legal recognition to the figure of the Trust as from Law 1739 of 2014, specifically in its article 37[9], by which it was established that for the purposes of the standardization tax[10] the rights held over Trusts abroad are assimilated to the trust rights held in Colombia. 

In this sense, and after the approval of the mentioned Law, the tax administration of said country, the Directorate of National Taxes and Customs (DIAN), has recognized the existence of the figure of the Trust in different occasions, for example, concept N° 034071 of 2017 and official letter 013287 of 2018, establishing in line with Article 263 of the Tax Statute[11] which refers to the possession for tax purposes, that whenever it is not possible to determine the quality of possessor of a Trust or of the assets that comprise it, the taxpayer does not have the duty to include these assets within its patrimony in its return.

That is to say, a tax obligation will only fall on the Settlor or Trustee of a Trust, when he/she has certain control or economic use of the assets contributed to it, otherwise, it is understood that they should not even be considered part of the assets of such Trustee and, therefore, no tax obligation falls on him/her for such assets contributed to the Trust.

Currently and as from the approval of Law 2010 of 2019[12], which complemented the Normalization Tax approved in 2014, the recognition of the Trust as an asset structure independent from the Trustee is compromised in certain cases even with retroactive effect, which currently entails several possible actions of unconstitutionality in that country and questioning the legality of this regulation.

In short, said Law through its article 54[13] states that, for the purposes of the tax in question, omitted assets shall be understood as those that were not included in the national tax returns when there was a legal obligation to do so, including in this case the assets contributed to an irrevocable Trust. Therefore, this new regulation obliges to include in the tax return certain assets over which the taxpayers did not enjoy direct or indirect possession, nor had the economic use of them, as is the case of the assets contributed to an irrevocable Trust.

Even Article 55[14] of said regulation establishes that in the event that the beneficiaries are conditioned or do not have control or disposition of the assets, the declarant of the assets shall be the Trustee of the Trust, and through the regulatory Decree 1010 of 2020 establishes a presumption of economic use in the head of the latter, being obliged to declare, liquidate and pay the tax referred to above. This situation is similar to what happens in Uruguay when we are in the presence of a BONT jurisdiction.

Therefore, based on this new regulation, we can say that the legislator has created two obligations for the Trustee:

1. On the one hand, to file income tax returns for taxable years prior to January 1, 2020, and on the other hand, to file income tax returns for taxable years prior to January 1, 2020;
2. The obligation to include the assets transferred to these structures in the tax normalization tax return.

In conclusion, as from this new regulation, the figure of the Trust would be fiscally transparent in the head of its beneficiaries in case they have control over the assets, or of its Trustee if the former did not. This obligation is even established retroactively. In any case, although it was approved, it is currently being strongly questioned as to its legality and unconstitutionality in that country, which suggests that it may undergo changes.

What is the situation in Brazil and Chile?

Brazil

Brazilian law does not recognize the figure of the Trust in its regulations, therefore, at the time of encountering a structure of this type, it happens that it is transparent in the head of the Settlor, ignoring the legitimacy of the foreign regulations by which the same was created, and, in this way, the tax and legal obligations on the assets contributed are imputed to the Settlor.

Although the fact that there are no regulations in this regard, it is difficult to determine how the Trust will be treated in Brazil, and the implications that this will have both for the Settlor and its beneficiaries.

Chile

Contrary to what happens in Brazil, Chilean law does regulate some aspects related to the figure of the Trust, and we can say that it does so in a somewhat particular way.

The specific regulation concerning the Trust arises from the tax reform carried out in that country in 2016, through laws 20,780 and 20,899. Being perhaps the most relevant issues of this reform those that introduce a special regime on the Foreign Controlled Entities applying on them certain rules of fiscal transparency.

Particularly, these regulations establish some modifications to the Chilean Income Law, adding to it the clause G[15], by which it is established that passive income earned or received by entities domiciled abroad, controlled by Chilean taxpayers, both individuals and legal entities, whether they participate in them directly or indirectly, will be subject to taxation in Chile.

In this respect, the regulation mentions that foreign entities, including the Trust, are susceptible to control by persons domiciled or resident in Chile. There is a presumption on the part of the Chilean regulations on these figures, as far as control is concerned, since it does not distinguish whether they are revocable or irrevocable or discretionary or non-discretionary, It presumes that whatever their form or characteristics, they would be controlled by a person domiciled or resident in Chile if the Settlor is domiciled or resident in Chile in the case of a revocable Trust, or even by the Beneficiaries in case the Settlor does not exist or if it is an Irrevocable Trust.

Therefore, in the case of revocable trusts, the Settlor will be the tax obligor, while in the case of irrevocable trusts, the beneficiaries will be the tax obligor. It even assumes that in the case of Irrevocable and discretionary trusts, the tax obligor in Chile continues to be the beneficiary.

Therefore, considering that the Chilean legislation understands that the income generated in a Trust is considered passive income, understood as that which corresponds to or comes mainly from the financial world because it is easily transferred or moved between countries, and which is not intended to constitute an operating activity such as a factory of goods, and assuming that there is control over the same by a person domiciled or resident in Chile, which may be the Settlor or even the Beneficiaries of the Trust. The income generated by such structure, will be transparent by the Chilean regulations in one of the mentioned subjects, and therefore, they would be obliged to pay taxes on them at the moment of their accrual.

In short, the Chilean legislation that regulates the figure of the Trust in said country makes many presumptions which may not be entirely correct considering the legal origin of the figure of the Trust and its particular characteristics regarding how it can be configured.

What happens when in an irrevocable and discretionary Trust the Settlor dies and the Beneficiaries of the same do not even know about it?

The following is a detail of the tax treatment granted to the Trust by Chilean regulations and authorities: