THE SET UP

Colombia 2013 | EXECUTIVE GUIDE | REVIEW: LEGAL

Pinilla, González & Prieto outline some of the key legal considerations investors should keep in mind when thinking about Colombia.


Politically, Colombia is organized as a republic with a presidential system. It is ruled by the Constitution enacted in 1991, which provides the typical division of powers into: the executive branch, of which the head is the president elected by direct popular voting in two rounds for a four-year period, and the possibility of one-time, immediate reelection; the bicameral Congress comprised of senators and representatives, also elected by popular direct voting; and the judicial branch with three different heads: the supreme court, focused on the resolution of private and civil conflicts, the constitutional court, in charge of preserving the Constitution, and the state council, which resolves disputes between particulars and public powers, such as the nation, cities, and municipalities.

FOREIGN INVESTMENT

Foreign investment is constitutionally protected by an explicit clause and the clear prohibition of confiscation; any expropriation must be conducted before the judicial power and must be preceded by an adequate indemnification—administrative expropriation is completely forbidden. Nationals and foreigners are equal before the law, and with the exception of the political rights of voting and being elected, foreign nationals are entitled to the same rights as Colombian citizens. In practice, there is no tendency of judges to decide in favor of the government when foreign companies or investors are involved in the disputes, and the government always obeys judicial decisions and effectively executes the orders issued by judges.

PUBLIC CONTRACTING

Public contracting is regulated by the principle of public and objective selection, and the licensing system is ruled in detail by law. The so-called Public and Private Associations (PPAs) have recently been introduced to our legislation, which means that for any infrastructure project, such as road construction or energy supply, the private sector is allowed to propose that the public entity make efforts toward a common goal, where a public necessity is identified, so that the private sector provides the monetary resources, labor, and technical items to achieve the goals of the state. Both nationals and foreigners are allowed to participate on an equal basis without any discrimination.

Relationships between entities are ruled by the principle of autonomy of the private will, which means that for the private sector, anything that is not explicitly prohibited is permitted. This rule is exactly opposite from the one that regulates the public administration, under which public functionaries are allowed to do only what the law authorizes them to do specifically. Civil and commercial laws allow people to celebrate any kind of contract or juridical act without restrictions different from public order respect. Corporations and limited liability companies are regulated as they are usually ruled in democratic countries.

TAXATION

Taxation operates under the principles of legality, which means that there is no taxation without an explicit law and of in dubio pro-taxpayer, which means that any legal doubt has to be interpreted in favor of the contributors; the system is organized upon the internal political division, which is based on three levels, the first of which is the nation and national taxes. These are: i) the income tax at a rate of one-third of the difference between revenues and expenses associated with revenue generation without any difference for foreigners or for the different person used to develop an activity; ii) the sales tax or value-added tax with a general rate of one-sixth of the amount of the price of the goods or services involved in the transaction; iii) the financial operations tax with a rate of four-per-thousand; iv) the tax remittances caused by the transfer abroad of profits at a rate of 7%; v) the windfall tax caused by non-operating gains at a rate of 10%; vi) the stamp duty due on written contracts with public entities at a general rate of 0.5%; and vii) the registration tax due on deeds transferring real estate at a rate of a maximum of one per-thousand. The second level is for departments with gas and liquor consumption, and the third is the municipality or city with basically two kinds of taxes: real estate tax at a maximum rate of 33-per-thousand of the value of the property applied on every January 1, and ii) industry and trade tax also on a per-thousand basis. In almost all of the taxes, a withdrawal system is present, by which the payer has to retain a determined percentage of the amount of the operation and is obliged to pay it directly to the state as a taxation credit for the payee.

SYSTEM EVOLUTION

Aside from the principle of interpreting doubts in favor of the employee, which is applied in labor laws, the system has evolved from a very protective one in the early 1980s to a less protective operation. Nowadays, it is legal in all labor contracts to establish a two-month trial period during which the employer may terminate the contract without any additional compensation to his or her regular salary. There is no employee participation in the revenues or gains of the employer, and social security items such as health insurance and retirement contributions are directly deducted from a salary and paid to the private or public administrators of these resources as selected by an employee. With the exception of fixed-term labor contracts, employees may terminate contracts at any time without additional compensation. The employer is always allowed to finish the labor relationship in two different ways: i) if there is not a fair cause to terminate the contract, compensation of an amount of salaries upon the relationship term is due; or ii) if a fair cause is present, the contract finishes without any just compensation.

CRIMINAL SYSTEM

The Colombian criminal system operates with a prosecutor who investigates and accuses people; he always acts before judges who are the only ones enabled to issue previous restrictions such as liberty limitations or privacy surveillance; condemnations can only be issued by judges, and are always applied under the principle of double instance and due process. The favorability principle also always applies, which means that if there is any doubt about the law to apply to a specific case, the less restrictive and more favorable must be used.

As one can easily conclude, the Colombian legal and judicial framework is a guarantee for investors, businessmen, and new projects; it is constantly being adapted to the new challenges of globalization, receiving and maintaining new foreign investments, and providing conditions for economic growth and development.