Initially closed-off economically due to protectionist measures by successive governments in the twentieth century, the Colombian economy opened up to international trade in the 1990’s. During this decade, the country faced notable challenges in the form of: i) armed guerrillas, paramilitaries, and drug lords; ii) the 1999 recession (which resulted in the first negative growth year since the early 1920’s).
However, during the 21st century, Colombia has made substantial headway in its security issues, reaching a peace deal with paramilitary groups and undergoing negotiations with the last remaining guerrillas. Parallel to its improvements in stability, Colombia has pursued a liberal economic policy, brokering free trade agreements with the U.S., the E.U., neighboring countries and strategic economic blocs in order to promote growth. Aside from the Pacific Alliance treaty, Colombia has signed trade agreements with the U.S., Europe, South Korea, Chile, Mexico, Canada, the Caribbean Nation Bloc (CARICOM), El Salvador, Guatemala, Honduras, among others. Some of these agreements have come into effect, and some are pending final approval by the respective legislative bodies.
The result has been consistent economic growth, which surpasses most of the neighboring countries’, with low levels of inflation and a control deficit. Due to its Since 2010, Colombia was labeled as a promising emerging market along with Indonesia, Vietnam, Egypt, Turkey and South Africa – CIVETS.
a. Payment of internal operations – With very few exceptions, Colombian regulation does not allow payment of internal operations in foreign currency. For these internal operations, prices can be set in other currencies, but payment must be done in Colombian pesos at the applicable exchange rate.
b. Reporting obligations – Due to a past foreign exchange crisis in the mid-twentieth century, Colombia enacted very strict foreign exchange regulations for the inflow and outflow of foreign currencies. Currently, this regulation requires local and foreign persons to report certain ingoing and outgoing transfers of foreign currency to the Central Bank.
Although reporting transfers is a simple process, infringement of this duty may entail substantial fines. It is advisable to evaluate the foreign exchange implications of any given transfer or operation.
c. Foreign Investment – Colombian law allows for both direct and portfolio foreign investment in Colombia. Both types of investment, however, must be reported to the Central Bank, and their status must be updated annually. If the investment is assigned, sold, or otherwise transferred to another party, it is necessary to inform the Central Bank of this operation. Profits received abroad must also be reported to the Central Bank.
Foreign companies looking to do business in Colombia can opt for several levels of local involvement. Below we highlight the main aspects of the most common methods of doing business in Colombia.
a. Local Branches – Establishing a local branch of the parent company in Colombia allows companies to have direct business presence in Colombia. Local branches are deemed as the same legal entity as the head office. Consequently, local branches do not provide corporate veil protection to the head office. However, the lack of corporate veil allows for the use of the head office’s financials to participate in, otherwise inaccessible, contractor selection procedures with the Colombian government or private companies.
Specific requirements will vary depending on the type of company, ranging from the notarized private document (for S.A.S. companies) to public deeds (S.A. companies). Companies must be entered into the local/regional commercial registry, open a bank account and obtain a tax ID number from tax authorities. Some companies may require additional steps before operating, depending on the nature of their business.
b. Subsidiary Companies – Creating a subsidiary company in Colombia allows companies to have a strong and direct presence in Colombia with the benefits of corporate veil protection, with few exceptions. The most common corporate vehicle is the Simplified Stock Company, which allows one person to own the entirety of its stocks. This kind of company has a flexible structure and reduces paperwork and formalities associated to other kinds of companies in Colombia.
Foreign company branches must be entered into the commercial registry via a public deed, and must then follow a similar path of opening a bank account and obtaining a tax ID number.
c. Commercial Contracts – Opting not to have any direct presence in Colombia, companies may, instead, choose to do business through or with a local Colombian company. Colombian law allows for ample freedom of stipulation in commercial contracts, including collaboration/association contracts. Please note, however, that contracts whereby a local company manages another company’s business in Colombia on its behalf in exchange for a commission can be subject to commercial agency regulations, which entails substantial mandatory severance payments to the agent. The analysis of the contract must be done on a case-by-case basis in order to evaluate this risk.
a. Income Tax
Local entities, branches of foreign entities, are required to file income tax returns in Colombia. In certain situations, foreign companies without any presence in Colombia may be required to file returns, due to the nature of their operations (Permanent Establishment rules in Colombia generally follow OECD guidelines). Foreign companies only pay income taxes over Colombian-source income, received directly or through a permanent establishment.
The general income tax rate for Colombian companies is 34% over the net taxable income and a surtax of 6% applicable on the net taxable income exceeding COP$800 million (approx. USD$267.000). In 2018 the general rate will be reduced to 33% and the surtax rate will be reduced to 4%. As of 2019 the surtax will disappear.
Shareholders who are local entities are not required to pay income taxes over company dividends. Shareholders who are individuals or foreign entities are subject to a dividends tax; the rate for non-resident entities and individuals is 5%, for resident-individuals the brackets are: 0%, 5% and 10%.). Additionally, in all cases, if the dividends are the result of company non-taxable income, a recapture tax will apply at the rate of 35%.
b. Income Tax Withholdings
Basically, all payments made by a local entity are subject to withholding taxes, the rates vary depending on the nature of the payment between 1% and 35%; withheld amounts may be credited against the final tax due, as assessed in the annual income tax return (eventual balances in favor may be reimbursed or carried forward indefinitely). Payments made abroad are also subject to withholding taxes if the payment is considered of Colombian-source, normally the withholding tax rate for payments abroad is 15% (with few exceptions such as payments for software licensing subject to a 26,4% withholding tax) as a general rule, the withholding taxes applied to foreign entities or individuals is considered their final tax due in Colombia.
c. Capital Gains Tax
This supplementary income tax is applied to lottery, and gambling income, as well as to: i) the profits derived from the sale of fixed assets after two (2) years of ownership; ii) the income derived from the liquidation of companies after more than two (2) years of existence; iii) inheritances, donations and, in general, any gratuitous act or contract. The current rate is 10%, except for lotteries and gambling (20%).
d. Double Taxation Treaties
Colombia has DTTs in effect with the following countries:
Currently there is a signed DTT with France, but it is not yet enforceable. Additionally, Colombia has DTTs covering certain international air transportation services with Argentina, Brazil, France, Germany, Italy, the United States, Panama, and Venezuela.
The general VAT rate is 19%, however there are other rates (5%, 0%) for specific products and services (usually agricultural products). Exports are exempt from VAT. Colombian law allows a simplified VAT collection regime for small businesspersons (never entities).
f. Consumption Tax
This tax applies to the sale of specific goods and services, such as mobile phone services, restaurant services and cars. The rates vary between 4%, 8%, 10% and 16%.
g. Wealth Tax
This temporary tax is currently being paid by companies based on their assets in Colombia as of January 1st, 2015 at a rate of 0.2-1.5% depending on the amount of assets. Payment of this tax is scheduled until the year 2017 for entities and 2018 for individuals.
h. Financial Transactions Tax
This tax levies all financial transactions involving the withdrawal of funds from an account in a Colombian financial corporation. The rate is 0,4% calculated on the amount of the withdrawal and the tax is withheld by the corresponding financial entity.
50% of the financial transactions tax paid during the year is deductible for income tax purposes.
i. Industry and commerce tax
The industry and commerce tax is a local tax levied by municipal and district authorities on industrial, commercial or service activities in their jurisdiction. The tax is charged over gross income derived from taxable industrial, commercial or service activity in the municipality or district, and its rate will vary depending on the municipality and activity carried out. Usually, Industry and Commerce tax rates vary between 0.2-1,38%.
100% of the industry and commerce tax paid during the year is deductible for income tax purposes, provided that it is related to the income-producing activity of the taxpayer.
a. General Labor Issues – Colombian labor law adheres to the principle of favoring employees, presuming that all personal work relations are governed by a labor contract. It is important for companies that intend to do business in Colombia to clearly structure both labor and non-labor contracts in order to avoid legal contingencies on the matter.
b. Wages – Minimum wages in Colombia is currently 644.350 COP (approximately 248 USD at the current exchange rate). Employers must pay social security contributions, social benefits and paid vacations in accordance with the amount of each workers’ total wages. These payments enable the worker to access different benefits provided by Colombian social security institutions. Below we list the monthly payments to social security entities associated with labor contracts, as well as the fraction borne by the employer:
Please note that, in addition to nominal wages, other payments may or may not be considered as part of workers’ salaries. Sale bonuses, business travel expenses, overtime, night shift surcharges, are all considered part of the workers’ wages. On the contrary, representation expenses, means of transportation, and extra-legal benefits are not considered as wages.
All foreign persons that are sent to Colombia for work purposes requires a work visa. Colombian consulates abroad and the Ministry of Foreign Affairs can issue the temporal TP4 visa to foreigners that need to enter the country to perform a labor contract with local companies. This visa can be issued with an expiration date up to three (3) years from the date of issuance.