FREE MARKET FRIEND

Colombia 2014 | EXECUTIVE GUIDE | REVIEW: LEGAL

Posse Herrera Ruiz Colombia outlines Colombia's free market friendliness that speaks volumes to foreign investors.

Colombia has a democratic and centralized government, divided politically into departments, districts, and municipalities. The President of the Republic is the chief of State and is elected for a four-year term, with re-election possibilities. The Congress is divided into two (2) chambers, one of national constituency and one of territorial constituency. The courts and judges hold power over the administration of justice. In 2013 the GDP had a positive variation of 4.3% with respect to the same period in 2012.

Key Regulatory Issues for Investors and Foreign Companies Coming to the Market

The cornerstone principle of foreign investment regulations in Colombia is the non-discrimination of foreign investor vis-à-vis national investors (and vice-versa). By and large, foreign investment is permitted in all economic sectors except for (i) national defense industry, and (ii) the processing or disposal of hazardous waste not produced in Colombia. In addition, there are limitations applicable to oil and gas, financial, open television, and private security and surveillance sectors.

On the other hand, branches dedicated to oil and mining activities and related services, have a special regime whereby they have no obligation to repatriate into Colombia any revenues obtained from their activity. This means that they are able to keep abroad such funds without bringing them into the country. On the other hand these types of branches have no access to the foreign exchange market, and thus cannot access foreign indebtedness operations or financing for imports.

THE EFFICIENCY OF THE LEGAL FRAMEWORK

Colombia has an inclusive legal framework for business. The 1991 Constitution entitles legal rights of commercial entities, and as indicated above the Law grants equal rights for foreign investors and national investors. In practice there is no tendency of judges to favor locals over foreigners, or the government over foreigners.

ARBITRATION PROCEDURES

In Colombia, applicable regulations provide for different types of in and out-of-court procedures for the settlement of disputes. Such dispute settlement alternatives are available to foreign and local entities, including governmental agencies. As of 2012, a number of procedural changes on the arbitration framework have been introduced, updating such system by introducing new applicable regulations for international arbitration.

For instance an arbitration clause for international contracts is valid in Colombia. An arbitration is considered international if one of the following criteria is met: (i) the parties to an arbitration agreement have, at the time of the conclusion of that agreement, their domiciles in different States; or (ii) the place where a substantial part of the obligations of the commercial relationship is to be performed, or the place with which the subject-matter of the dispute is most closely connected, is situated outside the State in which the parties have their domiciles; or (iii) the dispute submitted to arbitration affects the interests of international trade. Otherwise, the arbitration has to be domestic.

If the arbitration agreement between the parties complies with any of the internationality criteria, then Law 1563/2012 also recognizes the possibility for parties to agree on the arbitration rules and institution to administer their arbitration law applicable to the subject matter of the dispute, the language of the proceeding, and the method to nominate the arbitrators.

DEVELOPMENT OF COMMERCIAL LAW

The corporate legal market in Colombia has trended towards relaxing corporate formalities and requirements for incorporation of companies, while fostering formalization of non-incorporated enterprises. Those trends are attributed to Law 1258 of 2008, which introduced simplified stock corporations, and Law 1429 of 2010, which provided income tax benefits for new small businesses.

Important legal developments in several other areas have taken place. For instance tax, consumer protection and product liability, dispute resolution, infrastructure, international trade, capital markets, and insurance and reinsurance legislation has gone through major developments and improvements.

Major free trade agreements have been subscribed to over the past decade, welcoming new investors and foreign enterprises, and encouraging legislators to develop commercial legislation such that the legal framework accommodates upcoming foreign investment. In fact, the World Bank has ranked Colombia as the third most business-friendly country in the region, and the top reformer in Latin America.

KEY LEGISLATIVE CHANGES THE GOVERNMENT IS CONSIDERING

As President Juan Manuel Santos has been re-elected, key legislative changes are expected to be discussed by Congress. Major social security and health reforms will be presented, and new regulations for education and housing will be promoted by the Government. If peace talks with the FARC guerrillas conclude successfully, public policies in several sectors and amendment to current legislation will be triggered.

AVAILABLE COMPANY STRUCTURES & VEHICLES

Colombian commercial Law covers a number of business entities, including Private Companies, Joint Ventures, Private Equity Funds, and Trusts.

The most commonly used is the simplified stock company, or SAS. Law 1258 of 2008 introduced this form of company as a flexible, easy and accessible form of organization. It can be incorporated by a single person acting as shareholder, and no board of directors is required. It allows small enterprises to formally enter the market and foreign investors to easily incorporate their company in the country.

Employment Issues

Labor law in Colombia has strict standards for the employment of domestic or foreign individuals. One of the key issues regarding employment is the subscription of a written employment agreement. Such will apply solely when all of the following are included in an employment relationship: (i) The employee provides personal services to the employer, (ii) the employee is subordinated on a continuous basis (which means that the employer determines work regulations, orders and schedules), and (iii) a salary is paid. Otherwise, there are other types of agreements that can be subscribed.

Nonetheless if a formal employment agreement is signed, the employer will be required to pay, at least for social security, an annual payment to a severance fund, a semester service premium, and grant fifteen business day vacations a year, which may be taken proportionally to the time worked.

Also, there is a list of payroll taxes and contributions to the social security system that Colombian employers are obligated to make. These legal contributions are determined by reference to the monthly salary of each employee and amount to approximately 53% of the monthly salary.

When a foreign person comes to Colombia as an employee or investor, it is mandatory for them to obtain a visa.

THE OVERALL CLIMATE FOR FOREIGN INVESTORS

Since the enactment of the new Constitution in 1991, Colombia has made an effort to open up its economy to foreign investments. Liberalization in sectors such as telecommunications, auditing, energy, mining, and tourism has progressed, and it is intended that more sectors are added to the list. According to a recent Global Competitiveness Report, the World Economic Forum ranked Colombia in fifth place globally in terms of investor protection.

GDP continues to grow steadily, in fact expanding by a healthy 4.3% during 2013. The key sectors remain construction on a 9.8% increase, and agriculture on 5.2% growth, although mining has experienced a notorious slowdown, up by just 4.9% during the year. Mining, construction and commerce accounted for 2.15% of GDP growth during the fourth quarter of 2013.

Year to date inflation as of May 2014 was 2.5%, almost reaching the Central Bank's forecast inflation for 2014, expected at around 3%. As of April 2014, the unemployment rate had decreased to 9.0%, with a rise in the job creation indicator of 2.1%. These indicators are partially explained by the current public policies aimed at fostering the construction of low income housing, increasing formal employment, and reducing business informality levels.

All of this shows a clear trend toward free markets, while providing a suitable business and legal climate for foreign investment.

ADVICE FOR FOREIGN INVESTORS ON WHAT TO LOOK OUT FOR WHEN COMING

Introducing a new business to an unknown jurisdiction will require comprehensive and complete legal advice. Accordingly it is recommendable to search and be supported by local legal counsels when investing in Colombia, as there are various types of regulations and proceedings that will require their assistance.

Also, it's recommendable that a screening of where is the investment to be placed is done prior to the subscription of any contract, in avoidance of badly reputed organizations. Usually legal advisors can also help you with this. Finally, it's recommended that, while not obligatory, if developing your business activities in Colombia, incorporating a private company and establishing a commercial presence in the country will definitely facilitate the process of entering the market.