LEGAL TRENDS AND OUTLOOK

Colombia 2016 | EXECUTIVE GUIDE | REVIEW: LEGAL

The Colombian government has made a number of changes to make it easier for companies to establish a base of operations and invest in the country.

Colombia is fast approaching an era of political change that will inevitably follow the conclusion of three complex years of negotiation by the current government with the FARC guerillas. This political climate could well offer attractive opportunities for foreign investors in all sectors of the economy, but particularly in public infrastructure projects, agribusiness, and post-conflict social issues.

Positive framework for foreign investment

As established in Article 100 of its 1991 Constitution and Decree 1068 of 2015—and with few exceptions (such as national defense)—Colombia grants foreign investors the same civil rights as it does to its own nationals. Although foreign investment in Colombia does not require prior authorization from a governmental authority, it does have to be registered with the Colombian Central Bank, particularly for the country's payment/exchange balance.

New conflict resolution mechanisms are now available to investors and companies

The Superintendence of Corporations has recently created a new arbitration proceeding that is specially tailored for corporate disputes, offering an alternative and more streamlined mechanism for conflict resolution, the cost of which will be significantly lower than traditional arbitration.
The new arbitration proceedings promise to be much faster and more efficient, as arbitrators will have a maximum term of 90 days extendable for up to 40 days to decide on the respective dispute. This means that times will be reduced by over 50% vis-à-vis traditional arbitration, which currently can take up to a year or more.

Costs have also been significantly reduced for two reasons: (i) the tribunal will consist of only one arbitrator (unless the parties agree otherwise), and (ii) the arbitrator's fees are convenient (between 1.5% and 3.25% of the amount of the dispute, depending on its value).

Notwithstanding the foregoing, the current Presidential instruction is for government-owned entities to avoid agreeing on arbitration, and to instead submit the dispute to ordinary courts. However, it is foreseeable that the main public contracts will continue to be submitted to arbitration.

New corporate obligations under Law 1778 of 2016

Law 1778 of 2016 provides that companies must issue policies, manuals, and proceedings to prevent, detect, and investigate cases of fraud, corruption, or bribery within their organizations. In order to do so, it is mandatory to establish a risk management system subject to ISO standard 31000 and to train company employees in fraud prevention and anti-corruption practices.
Law 1778 further provides that parent companies will also be liable for any acts of cross-border bribery conducted by their subsidiaries or affiliates. Sanctions for fraud, corruption, or bribery have also been extended to the absorbing companies in M&A transactions.

Streamlining of paperwork for incorporating traditional corporate vehicles such as corporations and limited liability partnerships

Bill 70 of 2015 was recently filed in Congress by the Superintendence of Corporations with the intention of simplifying the incorporation and operation of traditional corporate forms, such as corporations and limited liability partnerships. The initiative would extend some of the benefits of the simplified stock corporations to other corporate forms by, for example, no longer requiring that a company be incorporated by means of a public deed. The cost of establishing a new company in the form of a corporation or limited liability partnership will, therefore, be significantly lower.
Other reforms contemplated in Bill 70 mean that traditional companies will be able to (i) have an undetermined corporate purpose; (ii) establish an indefinite duration of the company; (iii) not appoint alternate directors; and (iv) establish more convenient conditions for the payment of the subscribed capital, among other benefits. With all of these measures, Bill 70 of 2015 intends to provide as much contractual freedom as possible for investors wishing to create a company under any of the corporate forms available in Colombia, but overall it makes business easier to conduct and complete through the different societal vehicles available under Colombian law.

Tax reforms expected in 2016

The government has asked an expert commission to prepare and submit a proposal for a possible tax reform to be implemented during 2016. This is due to a looming shortfall in taxes that must be corrected and the post-conflict costs for the country associated with the end of the peace process.

One of the most important proposals of the commission centers on indirect taxes such as VAT. For instance, energy, gas, public transport, health, residential leases, and fixed telephony services will be exempt from VAT, thus creating a positive outlook for investments in these sectors of the economy. On the downside, however, it is expected that VAT will be upped from 16% to 18%.

Regarding corporations, another significant proposal of the commission is to replace income tax with a tax on company profits at a rate of 30-35%. Therefore, initial investments and capitalizations will not be taxed, which is an interesting incentive for start-ups.

In summary, current legal trends in Colombia create a positive framework and are aligned with the government promotion of the country as an attractive foreign investment destination. The 2015 “Ease of Doing Business” rankings put Colombia in the 34th position worldwide (1st in Latin America), and the above-mentioned legal notification confirms that the country is continuing to seek ways to improve in that respect.