Sep. 7, 2018
An overview of the legal and tax process for doing business in Colombia
The most common types of vehicles for conducting business in Colombia are simplified stock companies (S.A.S. by its acronym in Spanish) and branches of a foreign company. The governing tax regime is the same for all the legal vehicles in Colombia. From a tax perspective, there is no advantage or disadvantage between them.
S.A.S. is a commercial company formed by capital contributions made by its shareholders and can be incorporated by one or more shareholders (natural or legal persons, Colombian or foreign). S.A.S. is preferred by local and foreign investors due to its flexibility and dynamism. The corporate capital of the S.A.S. is comprised of authorized, subscribed, and paid-in capital. Conditions, amounts, proportions, and terms of payment of capital can be freely determined in the company's bylaws. A legal reserve is not mandatory. The term to pay the shares cannot exceed two years. Shareholder liability is limited to the amount of capital contributed; however, there is an express legal provision that allows for the corporate veil to be pierced if a court decides that the company is used to subvert the law.
The S.A.S. must have:
• a general shareholder's assembly or sole shareholder, and
• an authorized officer.
A board of directors is optional. S.A.S. is a flexible vehicle that allows shareholders to decide between managing the company solely through an authorized officer or through both the latter and a board of directors. A S.A.S. must have a fiscal auditor when its assets and/or gross income exceed the maximum amounts set forth by law. The incorporation, as well as amendments to its bylaws, can be done by a private document (registered with the competent chamber of commerce) instead of a public deed, which simplifies the process in time and cost. A public deed is required only when the assets involved in the incorporation require transfer by means of a public document (for example, the transfer of real property). The incorporation process may take up to one week.
Branch of a foreign company
A branch of a foreign company is a commercial establishment organized by a foreign company in Colombia. A branch is an extension of its head office. It is not an independent entity, meaning the head office is liable for all the actions and operations carried out by the branch. The branch would not be a suitable structure if its purpose is to protect the foreign company from possible contingencies that may arise against the corporation established in Colombia. The capital assigned to the branch must be paid during its establishment in Colombia. The head office may determine the amount of said capital but not the form of payment. Branches are obliged to have an authorized officer domiciled in Colombia and an external auditor. The authorized officer may have broad powers, which would allow a fluid operation, although there would be no strict control over such activities by the head office. Additional contributions to the assigned capital made by the head office can be treated as a supplementary investment and can be used to cover operational costs and expenses. To create a branch, the bylaws of the head office must be notarized as a public deed and registered with the competent chamber of commerce.
Below is a comparison of the main aspects of the most common legal vehicles.
Colombian Exchange Regulation states the following operations must be reported to the Colombian Central Bank:
• foreign indebtedness;
• foreign liens and guarantees;
• foreign investment (direct investment and capital market investment); and
• derivative operations.
The mandatory exchange operations must fulfill formalities required by the Central Bank, which depend on the type of exchange operation. Branches of foreign companies can only engage with their head office for the following operations:
• transfer of assigned and supplementary capital;
• reimbursement of profits and assigned or supplementary capital;
• payment of reimbursable operations of foreign trade; and
• payment of services.
Branches engaged in the exploration and production of coal, natural gas, oil, ferronickel, and uranium, and branches that provide services exclusively to the oil sector, may be subject to a special exchange regime.
Colombian tax system includes national, departmental, and municipal taxes.
The main national taxes are income, capital gains, wealth, sales, dividends, and financial transactions.
National companies, entities, and individual residents in Colombia are taxed on their revenues, equity, and capital gains obtained in Colombia or abroad. Non-resident individuals, foreign companies, and entities are taxed on revenues and equities held in Colombia. The corporate income tax has the following rate scheduled (applied beyond a limited profit threshold):
The income surtax only applies to companies that have a taxable base higher than COP800 million (approximately USD270,000).
Capital gains tax
Capital gains tax (with a 10% rate) is levied on revenues arising from the disposal of fixed assets owned for more than two years as well as revenues from inheritances, estates, donations, and similar acts as well as those received from a spouse's participation in marital community property.
Wealth tax (temporary)
As of January 1, 2015, the wealth tax is levied on the possession of wealth equal to or greater than COP1 million (approximately USD431,000). This tax shall be filed and paid for companies, associations, and any other entity in 2017, and for individuals in 2017 and 2018.
VAT is a national tax charged to consumers based on the purchase price of certain goods and services. There are three different rates: 0%, 5%, and 19%. Exportation of goods and services is exempt from the VAT. Certain goods and services are excluded, especially transportation services under certain conditions, educational services, public utilities, and interests, among others.
Tax on dividends
Profits derived as of January 1, 2017, are taxed at the following rates:
Tax on financial transactions (GMF)
GMF is applicable to financial transactions through which resources deposited in checking or savings accounts and in the Central Bank and cashier checks withdrawn, are available. This tax is of permanent nature and takes place when the financial transaction resources are produced, at the rate of 4x1.000.
Municipal and departmental taxes
The main departmental and municipal taxes are the industry and commerce tax (ranging from 0.2% to 1.0% on the gross income), real estate tax (dates and rates are variable), and registry tax (usually 0.7%).
DOUBLE TAXATION AGREEMENTS (DTA)
Colombia currently has a number of agreements to avoid double taxation. The purpose of a DTA is to abolish or reduce double taxation and promote cooperation and trade between the countries involved. DTAs cover income and equity tax. Taxes such as the VAT or Industry and Commerce Tax are not covered by DTAs. Except for the treaty with the Andean Community of Nations (CAN), Colombia has either followed the model of DTA of the Organization for Economic Cooperation and Development (OECD) or the UN model. The DTA with the CAN states that the country that applies the tax is the main one in which the activity is performed. The model of DTAs of the OECD or UN establishes which country will apply the tax, based on residence criteria. Colombia has signed DTAs, totally in force, with the Czech Republic, Canada, India, Portugal, Korea, Mexico, Switzerland, Chile, Spain, and CAN nations (Peru, Ecuador, and Colombia).
In the maritime navigation or air transportation, Colombia has signed DTAs, all in force, regarding income tax and equity tax with Panama, the US, Italy, Venezuela, Argentina, Brazil, Chile, and Germany. Colombia also has signed DTAs in order to exchange information with the tax authorities of the UAE and Barbados (not in force because the exchange of notes is pending) and in force DTAs with the US and OECD.
GENERAL ENERGY FRAMEWORK
There is a current global need for clean and renewable energy sources. Colombia is an emerging market open to foreign innovation with corporate vehicles and tax reduction possibilities. The huge untapped renewable potential, ease of doing business, and encouragement of foreign investment make Colombia an exciting market for cleantech companies. Colombia is one of the major economies of South America and its main export is oil. Hydropower is the largest power-generating source in Colombia. The energy market in Colombia is based on Law 142 (the Public Utilities Law) and Law 143 (the Electricity Law) of 1994, which divide the power market into four activities: generation, transmission, distribution, and sales. The country has abundant water resources for hydroelectric power, and in Latin America is second to Brazil in hydropower potential. Much of Colombia's hydropower generation is in the mountainous northwestern part of the country. Thermal power—coal, gas, and oil—is the next largest source of electricity. With an electricity system dominated by fossil fuel and hydroelectric generation, the Colombian government has recently undertaken efforts to encourage more renewable generation. A national target has been set to increase the installation capacity of unconventional renewable energy from 9,893MW in 2013 to 11,113MW in 2018. To achieve the above, Law 1715 2014 was approved. This law aims to regulate the integration and promotion of non-conventional renewable sources, improve energy efficiency, and boost the implementation of demand response measures. It successfully establishes the first legal framework and mechanisms to promote the use of non-conventional energy sources in Colombia. The law aims to improve and protect investment as well as the R&D of cleantech companies. The Ministry of Mines and Energy issued Decree 0570 of March 23, 2018, establishing the guidelines for the long-term contracting of renewable energy generation projects that complement the current ones. This is the tool that complements the public policy signals that allow the country to firmly enter the era of renewable energy generation guaranteeing energy security.
THE OPPORTUNITIES FOR INVESTMENT
Colombia has renewable energy potential, with an average of 4.5kWh/sqm/day of solar irradiation. This is greater than the averages of Germany and Canada, which vary between 3 and 4kWh/sqm/day. Efficiency in energy is an area of opportunity. Certain sectors are inefficient users of energy. An example of this is the transportation sector. Transport in Colombia demands 39% of the country's total energy, compared to a world average of 31%. Therefore, efficiency in energy can play a vital part due to its substantial yet unexplored potential to generate clean energy and cost savings. Energy infrastructure in Colombia is in cases inefficient and often nonexistent. The aging nature of the transmission system in Colombia does not create a stable system, generating problems for renewable energy transmission. Therefore, the development of wind and solar power infrastructure will offer major opportunities for renewable energy in the country. There is potential for microgrid deployment in Colombia's unconnected zones, which reach from the Amazon forests to the Andean areas. Communities living in remote and rural areas do not have access to main energy systems and currently have electricity for less than eight hours per day. Yet, due to high solar irradiation in those areas, solar photovoltaics are an increasingly great economic option. The National Development Bank of Colombia (BANCOLDEX) recognized this opportunity and approved a USD9.3 million loan to any private investment that is interested in generating renewable energy in areas of Colombia that are currently not connected to the main system.