Lloreda Camacho & Co presents an overview of the corporate structures, foreign investment guidelines, taxes and anti-corruption laws to establish new companies in Colombia
By: Lloreda Camacho & Co
Published in Amcham Colombia Business Express, available here
Pursuant to the World Bank’s Doing Business 2017 index, Colombia is ranked as the 2nd best economy in Latin America for doing business. Colombia is the leader in Latin America in strategic variables such as “starting a business” and was recognized as the second economy in the world in terms of credit access. In macroeconomic terms, Colombia’s GDP was worth USD$292 billion in 2015 and the GDP per capita is approximately USD$6,104.
Colombia has entered into several free trade agreements with strategic countries and economic areas such as Mexico, El Salvador, Guatemala and Honduras, CARICOM, Mercosur, Chile, EFTA, Canada, U.S., Cuba, Nicaragua, European Union, South Korea and Costa Rica. Colombia is also a member of the Andean Community (Ecuador, Peru and Bolivia) and part of the Pacific Alliance (Mexico, Peru, and Chile).
1. Corporate vehicles
Investors must incorporate a company or a branch in Colombia if the business entails a permanent activity. The decision on which vehicle or corporate structure should consider specific requirements for each investor and additional regulations imposed by special entities that govern certain sectors (e.g. oil and gas and financial services). From the variety of corporate structures, LC&C identified common vehicles as: (i) branch of a foreign company; (ii) simplified corporation (sociedad por acciones simplificada in Spanish); (iii) the corporation (sociedad anónima in Spanish) and; (iv) limited liability companies (sociedades de responsabilidad limitada in Spanish).
The first one refers to branches of foreign companies that are business establishments of foreign companies created by the main office to carry out permanent activities in Colombia. Thus, the branch is not a different legal entity from its foreign parent company.
The second one is simplified corporations that are a very flexible type of legal entity and, for such a reason, is the main mechanism for businesses in Colombia. This type of legal entity may be incorporated with only one shareholder as the liability of the shareholders is exclusively limited to their contribution to the company’s equity. On the downside, simplified corporations cannot be listed on the stock exchange.
The next one regards to corporations, which is the predominant legal vehicle before the introduction of the simplified corporations. The main characteristics of this corporate structure is that a stock corporation shall have a minimum of five shareholders, a sole shareholder can have up to 94.99% of the company’s shares and the shareholders’ liability is limited to the amount of each shareholder’s contribution. Besides this, corporations must have a Board of Directors.
Finally, limited liability companies are not very common in Colombia (as the simplified corporation is the predominant vehicle). The transfer of the quotas requires a public deed and an amendment of the by-laws. The company shall have a minimum of two and a maximum of twenty-five quota-holders. The quota holders’ liability is limited to the amount of their respective quotas, except in the case of tax and labor liabilities.
2. Foreign investment
Foreign investment in Colombia is legally treated as Colombian investment; therefore, governmental authorities may not discriminate against foreigners by imposing more conditions than those applicable to local investors.
Foreign investment must be registered with the Colombian Central Bank. Duly registered investments, confer the investor exchange rights to: (i) remit abroad the profits generated by the investment; (ii) reinvest the profits; (iii) capitalize any amounts that can be remitted abroad; and (iv) remit abroad the amounts resulting from the sale of the investment in Colombia or from the liquidation of the investment.
Although taxes and tax rates vary for the type of investment, the basic taxes to be taken into account by a foreign investor are:
• Income tax: In Colombia it is levied on the income that increases the taxpayer’s patrimony. However, for foreign investors the tax is levied only over income received in Colombia. The income tax rate is determined on a yearly basis. For 2017 the tax rate is 34% plus a 6% surcharge applicable in certain circumstances (surcharge only applicable for 2017 and 2018). Investors located in Chile, Spain, Canada, Mexico, Switzerland, South Korea, India, Portugal, the Czech Republic and countries of the Andean Community of Nations (Equator, Peru and Bolivia), may be eligible to apply the double taxation treaties entered into by Colombia.
• Value Added Tax (VAT): This tax is levied on goods and services (but also over the sale of new buildings and constructions). With few exceptions, the general VAT rate is 19%.
• Industry and trade tax: It is related to industrial and commercial activities. In general terms, it is a local tax where municipalities have the autonomy to set rates between 0.2% and 1.4%.
• Financial Transactions Tax: Levied over financial transactions involving the Colombian financial system. The tax rate is 0.4%.
Please note that Colombia introduced transfer-pricing rules in 2002 and they have been enforceable from fiscal year 2004 onwards. Transfer-pricing rules apply to income taxpayers that enter into transactions with an economic affiliate party domiciled abroad (cross-border and inter-company transactions) and they require the use of the arms-length principle to determine prices in those types of transactions.
In 2016, Colombia adopted the OECD standards against bribery and corruption. Bribery (including transnational bribery) and corrupt acts can be punishable not only as a criminal offense, but also through an administrative proceeding conducted by the Superintendence of Companies. The new sanctions establish fines and penalties to companies involved in local and transnational acts of corruption of up to 200,000 times the minimum monthly wage (in 2017, approximately USD $50 million), and this situation can lead to the suspension or the cancellation of the corporate chart.