Colombia continues to be one of the preferred countries for investment in Latin America due to the stability of the country, its location, its numerous trade agreements with several markets, its tax incentives and favourable conditions for starting a business which benefits investors.
Colombia has investment opportunities in sectors such as energy, including renewable energy, fintech, infrastructure, health services, among others.
Foreign investors may invest in all sectors of the Colombian economy, except in defence and national security activities; and in the processing and disposal of toxic, hazardous or radioactive wastes not produced in the country. Additionally, participation in financial entities by foreign investors requires previous approval from the government.
The Colombian corporate framework is highly regarded and has progressed with time, solidifying its legal stability. Constitutional principles such as the right of association, the right to equality, and the protection of free enterprise and private initiative promote local and foreign private investment in the country. Respect for the rule of law is a trait of Colombia. Foreign investment receives equal treatment as any local investment.
This is undoubtedly one of the reasons why in 2019 Colombia ranked as fourth in the region with the best conditions for starting business, behind Chile, Mexico and Puerto Rico. In addition, in 2020, the government issued administrative regulations that have facilitated some foreign investment processes, as part of the decisions taken to mitigate the effects of Covid-19 on the economy.
Regarding the corporate presence, the most common business association used in Colombia is the Simplified Stock Corporation, better known as SAS. The advantages of the SAS lie mainly in the (i) ability to incorporate the corporation by means of a private document without the need for a public deed, (ii) ability to incorporate and operate with a single shareholder, (iii) flexibility regarding share classes with different voting and economic rights, and (iv) open-ended purpose and term.
With the issuance of the 2020 administrative decisions mentioned above, last year the value of the mercantile registry was reduced and electronic document filing and submitting systems have been implemented, facilitating compliance of public registry annual duties.
As part of the foreign exchange regime, foreign capital investors must register their investments pursuant to the procedure regulated by the Central Bank (Banco de la República). Thus, any investment, including foreign currency entering the country on behalf of non-residents, that is destined to be the capital contributions of a company or local branch of a foreign company, must be registered as foreign investment with the Colombian Central Bank.
Such a registration grants exchange rights that allow the transfer of funds abroad either as a result of the sale of the investment or the remittance of profits.
Colombian taxes: income, sales, financial transactions and remittances
The Corporate Income Tax (CIT) rate for Colombian companies, including limited liability corporations, SAS and local branches of foreign entities is 32% for fiscal year 2020, 31% for fiscal year 2021 and 30% for fiscal year 2022 onwards. It is important to note that both national companies (eg SAS) and branches of foreign companies are taxed on their worldwide source income. As a general rule, net income is the taxable base of the income tax. Withholding on remittance of dividends and interest payments is also subject to withholding tax. The rate varies depending on whether the foreign investor’s state has a double taxation treaty with Colombia or not.
As for VAT, the general rate is 19%, unless a specific provision allows an exclusion or the application of a reduced rate (0% or 5%). The general VAT withholding tax rate is 15% of the tax due.
Industry and Commerce Tax (ICA) is a municipal tax imposed on revenue generated by the exercise or performance, directly or indirectly, of commercial, industrial or service activities within the jurisdiction of a municipality. ICA tax rates vary from 0.2% to 1.2%, depending on the municipality and the nature of the activity performed in the respective municipality. 100% of ICA paid during the taxable year is deductible from income tax and the taxpayer may decide not to take this deduction but rather apply 50% of ICA paid during the taxable year as a discount from income tax.
Currently Colombia has in place a financial transactions tax (GMF), which is withheld by financial institutions and has a taxable base of 0.4% (4 x 1000) applicable on any withdraw, transfer or disposition of funds made from savings and/or checking accounts. Note that 50% of the GMF tax paid is deductible for income tax purposes.
In relation to labour matters in Colombia, employment contracts do not require special formalities, however, there are three conditions that the employment agreements must meet: (i) services must be rendered by the employee; (ii) subordination of the employee to an employer; and (iii) remuneration in return for the service rendered.
Employment contracts can be classified according by the agreement’s term, as (i) indefinite term; (ii) fixed term (its duration can’t exceed three years and has to be expressly agreed by the parties); (iii) for the duration of the work or hired service; and (iv) occasional, casual or temporary (for tasks that are not part of the regular activities of the company).
The social security system integrates the general pension system, the general health system and the general labour risks system. Every employer is required to enroll all employees in the social security system and make monthly contributions.
The percentages of the salary that the employer and employee must pay to the Social Security System are:
| System | Contributions (% of salary) | |
|---|---|---|
| Employee | Employer | |
| Pensions | 4% | 12% |
| Health | 4% | 8.5% |
| Labour Risks | N/A | 0.348%-8.7% |
| Pension Solidarity Fund | 1-2% | N/A |
Holland & Knight (H&K) is a global firm with over 1,400 lawyers and professionals in 27 offices worldwide. In Colombia H&K provides representation in M&A, finance, litigation, real estate and government law. The team in Colombia is prepared to advise companies of all nationalities in the implementation of opportunities in an increasingly competitive environment. H&K’s Colombia team is highly recognised for its practices in M&A, corporate and project finance, energy and natural resources, environmental, compliance, IP, tax and local and international arbitration. The firm has a great commitment and connection with Colombia and Latin America and an extensive experience advising those interested in investing in Colombia and the region.