Do foundations pay taxes? The myth of VAT and income tax in non-profit organizations

«"Foundations don't pay taxes, that's why everyone sets one up." We hear that phrase often in the southern Aburrá Valley, and it's half true and half legend. The question is whether Foundations pay taxes —or claiming they pay nothing— are two sides of the same misunderstanding. The honest answer is that a foundation classified under the special tax regime does not pay income tax on the surplus it reinvests in its social work—it is exempt—but it is still a taxpayer: it files an income tax return every year, pays VAT on what it does not reinvest, and pays VAT on its purchases like anyone else. Neither the myth that they "pay nothing" nor the one that they "pay like a company" holds water.

We are Hepacom, a foundation for dignified housing (non-profit organization with Tax ID 900.841.914-1) that supports families in the southern Aburrá Valley. We are not the Colombian Tax and Customs Authority (DIAN) nor tax advisors, but we experience firsthand the obligations of a non-profit organization and understand the harm caused by a misconception: some people create foundations believing they are tax havens, and some donors are wary, thinking their contributions will be "eaten up by taxes." Here, we've compiled information from official sources so you can make informed decisions based on facts, not hearsay.

Do foundations pay taxes or are they exempt?

It depends on the tax and what the foundation does with its money. The confusion arises from mixing two different things: being exempt from income tax is not the same as not paying any taxes. A non-profit entity that is qualified under the special tax regime It receives preferential treatment in income tax, but remains responsible for other taxes and a number of formal obligations. That's why the question arises of whether Foundations pay taxes It doesn't have a simple yes or no: it has a "depends".

Why doesn't a foundation pay income tax on what it reinvests?

Because the law rewards money that stays in good use. Tax Statute It establishes that entities under the special regime pay income tax at a single rate of 20% on their net profit or surplus (Article 356). But Article 358 adds a significant benefit: this surplus is exempt when it is allocated, directly or indirectly, in the following year, to programs that develop the entity's social purpose and meritorious activity. In other words: if a foundation reinvests its surplus in its work—in our case, in decent housing For families—, no income tax is paid on that surplus. If it is distributed or diverted to something else, then it is subject to taxation under the 20% form. And none of this is automatic: one must be registered in the RUT (Single Taxpayer Registry) as an entity under the special regime, a process that the reform of Law 1819 of 2016 made annual and subject to control by the DIAN (National Tax and Customs Directorate).

Do foundations pay VAT?

Yes, just like anyone else. Here's the most common mistake. There are no special VAT regimes for non-profit organizations: liability for this tax is defined by the activity carried out, not by the nature of the entity performing it. When a foundation buys materials, pays for services, or acquires taxable goods, it pays the VAT included in the price and cannot deduct it as a commercial company would. And if it sells taxable goods or services, it would have to collect and declare the VAT. Being "non-profit" is not a free pass from VAT. There are specific exclusions—such as certain goods donated to food banks—but these are specific cases with their own procedures, not a general exemption simply for being a foundation.

What taxes and obligations does a non-profit organization have?

More than people realize. Being in the special tax regime doesn't mean disappearing from the DIAN's radar; on the contrary, the entity is subject to increased transparency scrutiny. It must file an income tax return every year, even if its surplus is exempt, maintain proper accounting records, and, if its income exceeds a certain threshold, submit a financial report detailing its operations. This table summarizes what applies and what doesn't to a foundation under the special tax regime.

Prepared by Hepacom based on the Tax Code and DIAN regulations. Rates, limits, and requirements are defined by DIAN and are subject to change. Last updated: July 2026.

Common mistakes with foundation taxes

• Believing that being "non-profit" exempts one from VAT: It does not exempt. VAT liability depends on the activity, not the nature of the entity, so the foundation pays VAT on what it buys.
• Thinking that simply registering as an ESAL (non-profit organization) is enough to avoid paying rent: That's not enough. You have to be registered in the RTE in the RUT (reform of Law 1819 of 2016) and, in addition, reinvest the surplus in the social purpose in order to be exempt.
• Not filing an income tax return "because we don't pay": The exemption does not exempt you from filing a tax return. Failure to file a return will result in penalties, and an entity that does not comply may lose its eligibility for the special tax regime.

For the complete schedule of these duties, we have a separate guide. the annual obligations of a non-profit organization.

Does Hepacom pay taxes? And does my donation count?

Yes, it pays what it owes, and no, your donation isn't "eaten up by taxes." Like any reputable foundation under the special tax regime, Hepacom declares its income, fulfills its formal obligations, and pays VAT on its purchases. What it doesn't pay is income tax on the surplus it reinvests, because every peso we have left over goes back into the project: materials, improvements, and support to help a family in the Aburrá Valley go from a dirt floor to a safe roof over their head. If you'd like to donate and also take advantage of the incentive the law offers to donors, see how the [program/program] works. tax benefits when donating to a foundation. And if you're thinking of creating your own entity, start with our guide to How to create a foundation in Colombia, where we explain it step by step without fine print.

How Hepacom accompanies you

If you're setting up or managing a foundation and these topics are overwhelming, you're not alone. At Hepacom, we share what we've learned about the obligations of the special regime, based on our own experience as a non-profit organization, and guide you towards the official sources from the DIAN. Your accountant handles the paperwork and filing, not us: we don't charge fees or manage payments to the DIAN (Colombian Tax Authority). Write to us at donaciones@hepacom.org or from contact us, Whether it's to donate to a family in need or to resolve a doubt about the world of foundations.

Frequently Asked Questions

Does a foundation pay the same income tax as a company?
No. A commercial company is taxed at the general income tax rate, while a non-profit organization (ESAL) classified under the special regime is taxed at the 20% rate on its surplus, and that surplus is exempt if it is reinvested in its corporate purpose. Therefore, it is not true that they "pay like a company," nor that they "pay nothing.".

What happens if a foundation does not reinvest its surplus?
If the net profit is not allocated to the qualifying activity in the following year, it ceases to be exempt and the entity is taxed on that amount in the 20% tax year, according to Article 356 of the Tax Code. Your accountant will confirm how this is reflected in the tax return.

Can the foundation recover the VAT it pays on its purchases?
Generally, no: since it's not under a tax regime that allows for its deduction, that VAT becomes an additional cost of the purchase. There are specific exclusions and procedures that your accountant can review on a case-by-case basis.

How do I know if a foundation is qualified under the special regime?
This is verified in their RUT (Taxpayer Identification Number), which should indicate their status as an entity under the special tax regime. Before donating or partnering with an organization, request their RUT and confirm this status; it's proof that they comply with the DIAN (Colombian Tax Authority).

Last updated: July 2026. This is an informational guide, not tax advice. Rates, limits, requirements, and exemptions are defined by the DIAN (Colombian Tax Authority) and the Tax Code and are subject to change; consult your accountant and verify through official channels. Hepacom does not collect or manage tax payments or procedures.