Oct. 15, 2021
Colombia's longstanding social and economic issues have been exacerbated by the challenges posed by the global COVID-19 pandemic. Over the past year and despite the lockdown measures imposed by Ivan Duque's right-wing government, Colombia has confronted street protest and riots in major cities sponsored by citizens who are voicing left-wing political grievances.
With the current political landscape, the spectacle of neighbouring Venezuela sinking into deep economic crisis under a socialist government has brought many questions for Colombian companies and investors as left-wing radical socialist ideas are proving popular with many voters in Colombia, which are traditionally conservative on social and economic issues.
The medium-term political outlook in Colombia is very uncertain. On a positive note, Colombia's economy is already starting to rebound. GDP should grow by 4.8% in 2021 according to BBVA's economics department. And the World Bank is expecting a rebound in growth in the Colombian economy for the 2021-2022 period, provided that the COVID-19 vaccination campaign proceeds as planned and that the government maintains economic agents' confidence in a plan to normalize deficit and debt over the medium term.
Although the economic expectation for the years to come is overall positive, middle- and upper-class Colombians are anticipating the outcome of the forthcoming presidential elections. For the first time in the country history, investment abroad its showing to be a fast-phased solution for Colombian companies and investors.
Investing abroad - BITs and DTTs
According to Procolombia North American, European, and Latin American markets are the most common destinations for Colombian companies and investors. For these purposes it is relevant to consider the Bilateral Investment Agreements (BITs) and Double Tax Treaties (DTTs) in force, as these agreements and facilitates bring certainty and present tax benefits for Colombians investing abroad.
BITs are agreements establishing the terms and conditions for private investment by nationals and companies of one state in another state. These treaties aim is to protect investment abroad in countries where investor rights are not already protected through existing agreements and to encourage the adoption of market-oriented domestic policies that treat private investment in an open, transparent, and non-discriminatory way.
Colombia has 13 free trade agreements or agreements of economic cooperation that include investment chapters with: the US, the EU, Canada, Chile, Costa Rica, Cuba, Mexico, South Korea, CAN (Andean Community of Nations—Peru, Ecuador, and Bolivia), the Pacific Alliance (Colombia, Chile, Mexico, and Peru), EFTA (European Free Trade Area—Switzerland, Liechtenstein, Norway, and Iceland), Mercosur (Brazil, Uruguay, Paraguay, and Argentina), and Central America's Northern Triangle (El Salvador, Honduras, and Guatemala).
DTTs are treaties between two or more countries to avoid international double taxation of income and property. The main purpose of DTT is to divide the right of taxation between the contracting countries, to avoid differences, to ensure taxpayers' equal rights and security, and to prevent evasion of taxation. Basically, the tax treaty brings benefits on withholding taxes applicable (reducing dividends, interest, and royalty rates) and allowing to take a tax credit in Colombia on the taxes paid abroad.
Colombia has 11 double taxation treaties in force with Spain, Chile, Switzerland, the Czech Republic, Canada, Mexico, Portugal, South Korea, India, the UK, and CAN. Treaties with France, Italy, and the UAE are expected to enter into force for the 2022 taxable period. Colombia is currently negotiating double taxation agreements with Germany, Japan, the Netherlands, and Panama, and has expressed strong interest in renewing negotiations with the US.
The main benefits of using treaty benefits will undoubtedly be securing and having a positive consequence on the investments abroad. Legalnova* can help you out understanding the potential costs and advantages of BITs and DTTs, and the ways in which treaties operate to achieve intended outcomes. Legalnova* will assist in ensuring that foreign investments result in the most beneficial outcomes.
Investing abroad – US
The US is an important trade partner for Colombia, underscored by the landmark 2012 US-Colombia Trade Promotion Agreement, which has supported environmentally and socially sound economic growth and employment opportunities in both countries. According to US Department of State, the US is Colombia's largest trade and investment partner worldwide and, conversely, Colombia is the US' third-largest trade partner in Latin America, with two-way trade in goods and services totalling USD29.9 billion in 2020.
According to SelectUSA (an entity led by the US Department of Commerce), the US has the largest consumer market on earth with a GDP of USD20 trillion and 325 million people. In addition, free trade agreements with 20 other countries provide enhanced access to hundreds of millions of additional consumers.
Investment opportunities range from real estate, portfolio investments, direct business investment, and relocating or moving part of a business to the US. For these purposes investors should be aware that the domestic legal and tax rules vary in each state and are very different from Colombian regulations.
Having a good tax plan
The US and Colombia do not have a DTT currently in force and the negotiation of an agreement that prevents double taxation is only in the very preliminary stage of discussion. Therefore, Colombian companies and investors that are planning to invest or start a new business in the US should consider that their income and capital gains will be taxable in both countries.
Tax Basis—Individuals are subject to personal income tax at a top rate of 39% in the US and in Colombia, on the same income. Corporations are subject to a corporate income tax of an average of 33% or a 20% withholding tax (varies considering the federal income tax and the state income tax) and 31% in Colombia on the same income (35% on 2022 according to the proposed tax reform).
In both cases, it is possible to take a tax credit on the taxes paid in the US, which must be calculated in due form in accordance with Colombian regulations.
Tax Residence—An individual is resident for tax purposes if he/she is present in the US for more than six months in the tax year (continuous or discontinuously). Resident individuals are taxed on worldwide income, while nonresidents are taxed only on their effectively connected income to a trade or busines in the US.
To avoid double taxation, for Colombian investors it is recommended to be incorporated in the US through a company (LLC, Corporation, S-Corporation, or other), as companies located within its jurisdiction are not Colombian residents for tax purposes. Legal entities in the US are deemed to tax on the corporate or shareholder level depending on the election made by the taxpayer in the US (generally). For complex investments, it is recommended to use tax planning schemes.
Legalnova* can assist you investing in the US either if you are an individual or a company starting business in North America. Legalnova* has a team of advisors both in the US and Colombia. ✖