Colombia

Tax-deferred employer plans

Colombia's private pension system is managed by Administradoras de Fondos de Pensiones (AFPs) such as Porvenir, Protección, Colfondos, and Skandia. In the AFP system, employer and employee contributions go into individual accounts with segregated assets (fondos de pensiones obligatorias). These are likely foreign trusts under Treas. Reg. §301.7701-7. The exemption is available only to an ‘eligible individual’ under §5.02: someone who is compliant (or comes into compliance) with U.S. income-tax filing and has reported the plan’s contributions, earnings, and distributions as income to the extent U.S. law requires; a participant who never reported plan earnings cannot rely on it until they do. Colombia’s 2024 pension reform (Ley 2381 de 2024) reorganizes the system into contributory pillars; the Constitutional Court upheld most of it on procedural grounds in September 2026 (Sentencia C-264/26) with effect deferred to 1 April 2027 and returned parts to Congress, so the AFP structure described here remains current until then; check the status at the time of filing.

Colpensiones administers the public, pay-as-you-go pension system (Régimen de Prima Media). It is social insurance without segregated individual investment accounts, not a foreign trust.

Rev. Proc. 2020-17 does not require a treaty, so the absence of a U.S.–Colombia income tax treaty does not by itself disqualify AFP pension funds or cesantías. Whether they qualify instead depends on whether they independently satisfy the revenue procedure's conditions, including nondiscrimination, contribution limits, and withdrawal restrictions tied to retirement age, disability, or death.

Severance funds (cesantías) are mandatory employer deposits held in segregated individual accounts by AFPs. They have a strong trust argument: segregated assets managed by a third-party trustee. Cesantías are unlikely to qualify under Rev. Proc. 2020-17, but not because of their housing and education withdrawals: Section 5.03(5) expressly permits withdrawals for the purchase of a primary residence and for educational purposes. The obstacles are structural. A cesantías fund exists to pay a severance benefit on termination of employment, so it does not operate ‘exclusively or almost exclusively’ to provide pension or retirement benefits, and payout on termination is not a permitted early-withdrawal reason. The mandatory AFP pension account (fondo de pensiones obligatorias) is the better candidate for the exemption and should be analyzed separately from cesantías. If classified as foreign trusts, Form 3520-A and Form 3520 must be filed for the part your own contributions fund, once your own contributions exceed the employer’s, counted as the note at the end of this section explains (Treas. Reg. §1.402(b)-1(b)(6)), or for any part you otherwise own. Cesantías withdrawals go on Form 3520, Part III, unless reported as compensation income (see the note at the end of this section).

For a plan an employer contributes to, a trust holding it is generally a nonexempt employees’ trust described in §402(b). §6048(a)(3)(B)(ii) excepts transfers to §402(b), §404(a)(4), and §404A trusts from Part I, the participant’s own contributions included, and §679 does not make the participant the owner (see the Reporting Guide’s employer-plan section). Payouts the participant reports as compensation income are excepted from Part III. If the participant’s own contributions ever exceed the employer’s, the participant is treated as the owner of the part those contributions fund (Treas. Reg. §1.402(b)-1(b)(6)), reports it on Part II and Form 3520-A each year it is owned, and is taxed on its income each year. In that count, what the participant chose to put in, salary sacrifice included, is the participant’s, and anything the plan’s rules required taken from pay is the employer’s, as the IRS chief counsel read a national retirement fund in 1997. The rest is taxed when it vests and, after that, when paid out (§402(b)(1), (2)).

Tax-deferred individual plans

Colombian voluntary pension funds (pensiones voluntarias) are supplementary savings vehicles with tax benefits in Colombia. They hold segregated assets chosen by the member and are likely foreign trusts under Treas. Reg. §301.7701-7.

Rev. Proc. 2020-17 does not require a treaty. These are individual plans; §5.03(6) (the employer-plan nondiscrimination condition) does not apply. Whether they meet §5.03(1)–(5) requires plan-specific analysis.

If classified as foreign trusts, each voluntary pension fund requires its own Form 3520-A and Form 3520.

Gifts and inheritances

Colombia is a growing source of gifts and inheritances for U.S. persons, particularly among the large Colombian-American community. If a U.S. person receives more than $100,000 in gifts or bequests in a year from one nonresident alien individual or foreign estate (adding together gifts from donors related to each other), Form 3520 Part IV reporting is required. Gifts from foreign corporations or foreign partnerships exceeding $20,573 (for 2026, indexed for inflation) are also reportable.

Colombia imposes inheritance tax (impuesto a las ganancias ocasionales) at 15% on inherited assets (since Law 2277 of 2022). This is a Colombian obligation and does not affect the U.S. reporting requirement.

Common scenarios include inheritance of Colombian real estate, cash gifts from parents or family members, and inheritance of Colombian bank accounts or investments.

Penalties and practical notes

Failure to file Forms 3520/3520-A carries penalties under §6677: the greater of $10,000 or 35% of the gross reportable amount for certain Form 3520 failures (§6677(a)); 5% or $10,000 for Part II and 3520-A (§6677(b)).

The Colombian tax year is the calendar year, aligning with the U.S. No fiscal year conversion is needed.

AFP and cesantías fund administrators issue annual statements (extracto) showing contributions, returns, and balances. These can be used to prepare the 3520-A.

Convert Colombian pesos at the rate prevailing when each amount is received, paid, or accrued; the IRS has no official exchange rate and generally accepts any posted rate used consistently, so its published yearly average rate is a common choice for amounts arising evenly across the year.

No treaty deferral is available. If these funds are foreign trusts, the timing follows the employer-plan rule: contributions, the mandatory share taken from pay included, are taxed when they vest (§402(b)(1)), and returns when paid out, under §72 (§402(b)(2)). Returns are taxed each year only on a part the member owns (voluntary contributions above the employer’s total) or for a highly compensated employee in a plan that fails the U.S. coverage tests (§402(b)(4)(A)).