What are the key recent developments affecting doing business in your jurisdiction?
The most remarkable legal development in Colombia is the Tax Bill, enacted on 27 December 2016 (Law 1819 of 2016) and in force from 1 January 2017. The reform purports to simplify the tax system, increase tax collection and align the Colombian legal system with the Organisation for Economic Cooperation and Development's base erosion and profit shifting action plan.
Income tax changes include:
A new system to assess income tax. Taxation of dividends (see Question 20). Restriction of tax exemptions to a maximum of 40% of the total labour earnings, or 5040 tax units (about COP160 million for 2017). Restriction of tax exemptions for other types of income to 10% of total earnings. Elimination of the following special systems to assess income tax on earnings by individuals: the national alternative minimum tax (IMAN); and the minimum alternative simple tax (IMAS). Corporate income tax changes include:
A 34% tax rate for 2017, and a general rate of 33% applicable for the following taxable years. Taxation of dividends (see Question 20). Elimination of a parallel system to assess income tax (income tax for equality), in force from 2013. Elimination of incentives to the newly incorporated companies established in the Law of Formalisation and Employment Generation (Law 1429 of 2010) (First Employment Law). Value Added Tax (VAT) was also modified in the following ways:
The general rate increased from 16% to 19%. The scope of the definition of a VAT-taxable event was broadened. Taxable periods are set for every two months and every four months, eliminating the annual filing. The following anti-avoidance measures were introduced:
Qualification of the non-cooperative and low or no tax jurisdictions, and preferential tax regimes. Regulation of automatic information exchange. Obligation to identify the beneficial owners (effective beneficiaries) of companies. Incorporation of new controlled foreign corporations (CFC) rules. International trade (customs)
In 2016 there was also a reform to the Customs Statute, enacted by Decree 390 of 2016. The reform aims to:
Facilitate the movement of merchandise. Reduce commercialisation costs and smuggling. Harmonise domestic regulations with international standards and free trade agreements. Peace agreement
A key political event expected to improve the conditions for doing business in Colombia is the approval of the peace agreement signed with the guerrilla group Fuerzas Armadas Revolucionarias de Colombia (FARC). The agreement is expected to put an end to the five-decade internal conflict, leading to major changes in regions historically controlled by the FARC guerrillas, and welcoming foreign and domestic investors with tax benefits (see Question 6).
What is the legal system based on (for example, civil law, common law or a mixture of both)?
The Colombian legal system is based on civil law. The interpretation and scope of written laws are often broadened or narrowed and defined by the Constitutional Court, the Supreme Court of Justice and the Council of State, in accordance with Colombia's constitution.
Are there any restrictions on foreign investment (including authorisations required by central or local government)?
Typically there is no prior governmental authorisation needed to formalise foreign investment, except for the special regimes that cover the financial, hydrocarbons and mining sectors.
However, foreign investors are subject to certain obligations. The timely registration of any foreign investment with the Colombian Central Bank is mandatory, as well as providing information on any changes to the investment (including changes in the destination or cancellation of the investment).
The remittance of funds relating to foreign investment must be carried out through the foreign exchange market.
If a foreign investor omits the duty to register the investment, there will be penalties of up to 200 minimum monthly wages (about COP147 million), and the investor will lose any exchange control rights relating to the investment (for example, the right to send profits abroad or to reinvest them).
There are no restrictions on foreign shareholders, except for certain activities considered to be of special interest, including:
Companies carrying out activities relating to national defence and security, private security, and processing and disposal of toxic, dangerous or radioactive waste (where foreign investment is prohibited). Television services (where foreign investment cannot exceed 40%). 4. Are there any restrictions on doing business with certain countries or jurisdictions?
There are no restrictions on doing business with certain countries. However, whenever doing business with countries included in the high-risk and non-cooperative jurisdictions listed by the Financial Action Task Force (FATF), a higher due diligence standard must be applied to prevent financing terrorism and money laundering (www.fatf-gafi.org/countries/#high-risk).
In addition, the tax reform introduced the non-cooperative and low or no tax jurisdictions regime. Under this, payments made to individuals or entities domiciled in the countries included in the regime cannot be considered as costs or deductions for tax purposes, unless income tax is withheld (when applicable) or the payments are due to financial obligations duly registered before the Central Bank.
Taxpayers who engage in transactions with entities domiciled in non-cooperative or low or no tax jurisdictions will be subject to the transfer pricing regime.
Are there any exchange control or currency regulations?
Colombia's exchange control regulations operate in two different scenarios:
The foreign exchange market. This comprises transactions that must be channelled through authorised foreign exchange intermediaries or compensation accounts, and which must be reported to the Central Bank. It includes transactions relating to the import and export of goods, foreign debt, international investments, collateral in foreign currency and derivative transactions. The free or non-regulated market. This includes transactions that are not regulated by the foreign exchange market. 6. What grants or incentives are available to investors?
Promotion of young employment and entrepreneurship (Law 1780 of 2016)
The benefits of this law include:
Not having to pay a contribution to the family compensation fund during the first year of employment for people between 18 and 28 years old. An exemption for the mercantile registry and the first renovation for young entrepreneur companies, where at least 50% plus one of the outstanding shares or quotas are held by people younger than 35 years old. Free trade zones (FTZ)
Free trade zones provide the following benefits:
An income tax rate of 20% for industrial users. No custom duties on goods entering FTZs from abroad. A VAT exemption for raw materials, inputs and finished goods sold from the national customs territory to industrial users of FTZs. Exports from FTZs to foreign countries benefit from free trade agreements with Colombia. The possibility of performing partial processing outside the FTZ. Tax benefits to companies domiciled in the most affected by the armed conflict zones (ZOMAC)
New companies domiciled and carrying out activities in ZOMAC are subject to the following income tax rate:
For small and micro companies: 0% for taxable years 2017 to 2021; 25% of the general rate from 2022 to 2024; and 50% of the general rate from 2025 to 2027. For medium and large-sized companies: 50% of the general rate for years 2017 to 2021; and 75% for taxable years 2022 to 2027. From 2027, the general tax rate will apply to all the above businesses.
Also, companies that meet certain requirements can pay up to 50% of their applicable income tax by assigning it to direct investment projects in ZOMAC.
Special import and export system (Plan Vallejo).
Tax and customs incentives will apply to the importation of goods if the imported assets are used in the production of goods for export.
Treaties with investment protection provisions
Investors can benefit from over 30 bilateral investment treaties and treaties with investment provisions where Colombia is a party.
What are the most common forms of business vehicles used in your jurisdiction?
The main business vehicles used in Colombia are:
Private companies. These include corporations and simplified stock corporations. Public companies. Corporations can be listed as public. Partnerships. These include limited liability companies. Branches of foreign entities. Whenever a foreign entity is carrying out permanent activities in Colombia they are required to either incorporate a subsidiary or open a branch, which is a commercial establishment owned by the foreign entity. Joint ventures. These allow investments in specific projects and contracts. Trusts. There are several types of trusts that can be used for specific purposes (for example, real estate projects, managing assets). The most commonly used is the simplified stock corporation, which is very flexible and allows for tailor-made bye-laws and fewer corporate governance requirements.
Branches of foreign entities are also common, as they are taxed on Colombian source income.
Joint ventures and trusts are also used for specific projects, rather than to carry out permanent activities in Colombia.
In relation to the most common form of corporate business vehicle used by foreign companies in your jurisdiction, what are the main registration and reporting requirements?
Registration and formation
A simplified stock corporation (SSC) is incorporated by registering its bye-laws with the chamber of commerce for the relevant domicile.
The chamber of commerce takes approximately three business days to register the company, once the following documents are filed:
Powers of attorney granted by the shareholders, duly notarised, apostilled and translated into...