Ways to invest in Colombia
A) The most common types of companies in Colombia are the sociedad por acciones simplifcada (S.A.S.) or simplifed joint stock company, the sociedad anónima (S.A.) or public limited company, and the branch of a foreign company.
S.A.S.s are the most common type of company in Colombia (93% of all companies incorporated in the country in 2017). Main characteristics of S.A.S.s include:
- Capital divided into: (i) authorized capital; (ii) subscribed capital; and (iii) paid-in capital.
- While no minimum capital is required, at least some capital must be present. Capital is represented by shares, which may be of different classes, including: (i) ordinary shares; (ii) shares with multiple voting rights; and (iii) shares without voting rights. Other share classes may be freely created by shareholders in the bylaws.
- The managing bodies, including the general assembly of shareholders, may be freely defined in the bylaws. Although a board of directors is not required, S.A.S.s must have at least a legal representative. There is no minimum number of shareholders.
- S.A.S.s can be formed through a private document.
- The corporate purpose need not be defined and there is a good deal of flexibility with respect to the bylaws.
- Average time for incorporation: approximately 5 business days.
S.A.s are also a widely-used vehicle for large investments. Characteristics are as follows:
- Capital divided into: (i) authorized capital; (ii) subscribed capital; and (iii) paid-in capital. Upon incorporation, at least 50% of authorized capital must be subscribed and at least one-third of subscribed capital must be paid in.
- The managing bodies include: (i) the general assembly of shareholders; (ii) the board of directors; and (iii) the legal representative. S.A.s must have at least five shareholders.
- S.A.s must be incorporated through a public instrument.
- A specific corporate purpose must be indicated.
- There are no restrictions on share transfers, except for the cases provided for by law or in the bylaws.
- Average time for incorporation: approximately 7-10 business days.
The liability of shareholders in both types of companies is limited to their capital contributions.
In certain sectors, such as insurance agencies and security services, companies must be sociedades limitadas (S.L.s), or limited liability companies. However, this company form is not widely used, given that shareholders’ legal and tax liability is more extensive.
B) Branch of a foreign company: Both the branch and the foreign parent company are understood to be the same legal entity and therefore liability for the branch falls wholly to the parent.
- These branches must be set up through a public instrument.
- They must have assigned capital.
- A representative in Colombia must be appointed.
- Average time for creation: approximately 10-15 business days.
Procedural formalities for incorporating a company
- Secure a merchant’s certificate from the Chamber of Commerce corresponding to the company’s registered business address.
- Apply for a taxpayer identification number (registro único tributario, RUT) for the company.
- Founding shareholders must provide powers of attorney executed before a notary. If the founder is a legal entity, a certificate of incorporation and legal representation, or equivalent, must be provided.
- Deed of incorporation executed as a public document (in the case of S.A.s) before a notary and registration at the Commercial Registry.
General matters regarding investment
- Foreign investment controls: Under Colombian law, all foreign investments must be registered with Banco de la República, the central bank, and must be updated each year within the time periods established by the bank.
- Investment transactions must be channeled through a foreign exchange market intermediary (normally banks).
- Accounting standards: Colombia has adopted IAS/IFRS and requires the preparation of annual fnancial statements at December 31 of each year.
A) Direct taxation
Corporate income tax
Nature: Direct tax on income of companies in Colombia. Levied on worldwide income of resident companies and on Colombian-source income of nonresident companies.
Tax residence: Companies are resident in Colombia when they have been incorporated in accordance with Colombian legislation, when their registered offices are located in Colombian territory or when their place of effective management is in that country.
Tax base: Profits resulting from subtracting deductions and exemptions from the total income that upon collection can produce a net increase in the taxpayer’s net worth.
Tax rate: The standard tax rate is 33%. For 2018, an additional 4% is added to this rate when revenues exceed COP$800,000,000. This surcharge will be eliminated as from 2019. (Special rates of 9% apply to publishing houses and certain hotel companies, among others.)
Non-recurring gains (Colombian “occasional gains”) and gains on disposals of assets owned for over two years are taxed at a rate of 10%.
Dividends and capital gains: A priori, dividends and share profits are not considered income or non-recurring gains for resident legal entities. Dividends paid to nonresident companies and individuals are subject to 5% tax (except where a tax treaty applies). Resident individuals are taxed at a rate of 0%, 5% or 10%, depending on the amount of the dividend paid out.
Offset of tax losses against future profits:
Companies may offset tax losses against ordinary liquid profits obtained in the following 12 tax periods, without prejudice to presumptive income for the period.
Rules on related-party transactions: In line with OECD transfer pricing guidelines, whereby related-party transactions must be carried out at arm’s length and are subject to certain declaration and documentation requirements (transfer pricing).
Main special regimes:
- Tax neutrality regime applicable to business contributions, mergers and spin-offs
- Transparency regime for contributions to commercial trusts
Main anti-avoidance rules:
- General anti-avoidance rule (GAAR).
- Thin capitalization rules: Loan interest exceeding the ratio of 3:1 debt-to-equity for the preceding year is not deductible.
- International tax transparency rules (controlled foreign corporation, CFC).
Formal obligations: Annual income tax returns must be fled beginning in April, based on the last digit of the taxpayer identification number (Colombian NIT) for legal entities.
Permanent establishments: Colombia follows the definition provided in the OECD Model Tax Convention and therefore does not take into account service permanent establishments or construction or project permanent establishments. However, the majority of Colombia’s tax treaties extend the concept of permanent establishment to include service and construction PEs.
Only Colombian-source income of permanent establishments is taxed, and PEs must always present a breakdown of income allocation.
Income obtained without a PE:
- Withholding at the source for nonresident individuals and foreign companies for:
- Fees, royalties, consulting services, technical services, interest income, technical assistance, etc.: 15%
- Dividends and share profits: 5%.
- Main exclusions: Special tax regime for members of the Andean Community (CAN) and for countries having a tax treaty with Colombia.
Personal income tax
Nature: Tax on the worldwide income of individuals in Colombia. Levied on worldwide income of residents and on Colombian-source income of nonresidents.
Tax residence: A foreign or Colombian individual is a tax resident of Colombia if he or she has been in the country for more than 183 days of a 365-day period. A Colombian national is presumed to be a tax resident when: (i) his or her spouse and/ or dependent children live in the country; (ii) 50% or more of his or her income is from Colombian sources; (iii) his or her assets are managed in the country or (iv) 50% or more of his or her assets are held in Colombia.
Tax rate: Schedular system of taxation, whereby tax rates depend on the taxpayer’s source of income. Employment and pension income are subject to a progressive tax up to a maximum rate of 33%. Non-employment income and capital gains are taxed at a maximum of 35%, while dividends are subject to up to 10% tax (providing they were paid out from profits taxed at corporate level).
Industry and commerce tax and supplementary billboard tax
Nature: Municipal tax levied on income earned from the performance of industrial, commercial or service activities carried out directly or indirectly by individuals, legal entities or unincorporated companies in the respective municipal jurisdictions.
Territoriality: Paid to the municipality in which the taxable activity is performed. Specific rules are followed for determining where the activity is preformed or where the service is rendered.
Tax base: Taxpayer’s income obtained during the tax period.
Tax rate: From 0.2% to 1% of net income, depending on the type of business activity.
B) Indirect tax
Sales tax (value added tax, VAT)
Nature: National-level indirect tax levied on services, the sale and import of movable property, the sale or transfer of rights over intangible assets and games of luck and chance.
Tax rate: The standard tax rate is 19%.
- VAT paid on the acquisition of fixed assets cannot be deducted by the taxpayer.
- In works contracts, VAT is only charged on the contractor’s profits and therefore all input VAT is added to the value of the cost or expense.
Excise tax: Levied on the provision of or sale to the end consumer, or import by the end consumer, of mobile telephone services, internet services, vehicles constituting fixed assets, restaurant services, and sales of certain domestic or imported movable tangible property (vehicles). Tax rate: 4% to 16%
Financial transactions tax: Permanent tax collected through on-the-spot withholding. Among others, the taxable event is the performance of financial transactions that involve the disposal of funds deposited in checking or savings accounts as well as in deposit accounts with Banco de la República, and the issuance of cashier’s checks. Tax rate: 0.4% of the total transaction value.
Property tax: Levied on ownership of real estate. Consequently, the property tax payers are the owners or holders of the real property.
Registry tax: Levied on all acts, contracts or business set in documents that must be registered with the chambers of commerce (e.g., incorporation of companies) or with public registry offices (e.g., property transfers). Tax rate: between 0.3% and 1%, based on the procedure in question.
Social security contributions
Maximum base: 25 times the minimum monthly legal wage (2018: COP$19,531,050)
Contribution rates under the general program: Contributions to the public health system amount to 12.5% of the base salary. 8.5% of this figure is paid by the employer and 4% by the employee.
Pension system: Employers pay 12% of the total contribution and employees pay the remaining 4%. Employees earning more than four times the minimum monthly legal wage must pay an additional 1% for the pension solidarity fund.
Occupational risks: Employers must pay between 0.348% and 8.7%.
Foreign workers may opt to not pay into the Colombian pension system, providing they pay into a home-country pension system with similar characteristics.
Labor and employment matters
Regulation: The labor relationship is governed by the employment contract, international treaties and agreements to which Colombia is party, and by the Colombian Labor Code.
Types of contracts:
- Duration of the contracted work or job
- Occasional or temporary
Salary: May be established in the employment contract, the collective labor agreement and/or in the collective bargaining agreement with non-unionized workers. May not be less than the minimum monthly legal wage (COP$781,242 in 2018).
Working hours: As agreed in the employment contract, the collective labor agreement and/or in the collective bargaining agreement with non-unionized workers. Not to exceed 48 hours per week.
Vacation: 15 business days paid vacation per year worked.
Business succession: Employees’ labor relationships are not extinguished or modified in the event of a business succession through sale, transfer, squeeze-out, etc.
Foreign workers: A work permit or work visa is required (depending on the contract and the type of work).