Expatriate Forums in Colombia

Colombia Info · Joined: 23 Nov 2006 Posts: 17 Home Country: columbia

DOING BUSINESS IN COLOMBIA

FORMS OF BUSINESS ORGANISATION

Principal forms of doing business

Colombia has attempted to simplify procedures for setting up a local business. According to a World Bank report, the number of days required to set up a firm dropped during 2004 from 60 to 43 days. The forms of business organisation most often used by foreign investors in Colombia are the share corporation (sociedad anónima—SA), the limited-liability company (limitada) and the branch. Most investors use the SA form. Law 222 of 1995 reformed the Code of Commerce, which establishes the legal framework on this matter. This law also allowed the creation of limitadas with only one partner, beginning in July 1996.

Requirements of an SA in Colombia
Capital. No minimum amount is required, but at least 50% of the authorised capital must be subscribed, and at least 33.3% of the value of subscribed capital must be paid. The unpaid portion must be paid within one year of the subscription date. When local capital contribution is made in kind, the Superintendency of Corporations must approve the valuation for companies under its control. If capital contributions made in kind are from foreign sources, the Ministry of Trade, Industry and Tourism (Mincomercio) determines the value of the machinery or materials, based on pro-forma invoices and factory catalogues. The National Planning Department evaluates shares given in exchange for technical services or other intangibles. A legal reserve fund amounting to at least 50% of the company’s authorised capital must be established by setting aside 10% of after-tax profits each fiscal year.

Founders, shareholders. Minimum of five; no limitation on nationality or residence. No partner may have more than 95% of the shares in which the social capital is divided.

Board of directors. Minimum of three board members; no nationality or residence requirements.

Management. No minimum number of managers. For branch management, some limitations on nationality apply. Colombian nationals must manage utility companies or firms in areas considered of national security interest. There is no requirement to grant labour a voice in management.

Disclosure. Official books must be maintained in accordance with commercial codes and fiscal laws. All SAs under superintendency control must submit annual balance sheets and pay a supervisory fee of 0.05% of total assets. SAs must also employ a statutory auditor (revisor fiscal), who performs internal-control functions. These include reconciling monthly bank statements and authorising company balance sheets.

Taxes and fees. Legal fees average US$800–2,000. There is a stamp tax of 1% on the nominal value of registered shares not listed on the stock exchange and of 1% on nominal shares.

Types of shares. Under Colombian law, common and preferred shares and ordinary or compulsory convertible bonds may be issued.

Effective control. No single shareholder may vote more than 25% of the total shares represented at a meeting, except as otherwise provided in the corporate byelaws. For most decisions, a 51% majority suffices. Byelaw changes require a 75% majority.

Local registration. Foreign SAs and branches must register with the Chamber of Commerce in the Colombian locality where they are domiciled.

Annual fee. 0.7% of authorised capital.

Renewal fee. US$9–250 per year.

Establishing a branch

Branches of foreign companies are governed by the Superintendency of Banks (for financial entities) or the Superintendency of Corporations (for all others).

The parent company must apply to the appropriate superintendency, stating the type of business the branch will conduct in Colombia, its capital, location, expected duration, possible reasons for any termination of business in Colombia, and the names of its manager-designate and auditor, who must be Colombian. Proof that the branch’s assigned capital has been paid in must be provided. A notary public from the chosen domicile of the branch must authenticate a copy of the parent company’s byelaws and statutes.

For a foreign corporation to register in Colombia, prior authorisation from the National Planning Department is no longer required, but several documents must be presented to the local Chamber of Commerce. These include the documents of incorporation and byelaws of the foreign company and the board resolution that authorised the establishment of a branch in Colombia, with details of the capital assigned to the branch and appointment of officers. A statement from the Chamber of Commerce that the books have been registered and a certificate from the managing director and auditor that the capital for the branch had been paid must also be on file. The documents require authentication or notarisation by a Colombian consulate, the Ministry of Foreign Affairs and a local Chamber of Commerce.

Branches (like local corporations) must submit an annual statement to the superintendency. They must pay the same fees, keep the same books and build up the same legal reserves as those required for SAs. Once the documents have been authenticated by a notary public and officially recorded, the same registration steps must be taken as for SAs and limitadas.

Replacement of the holder(s) of the investment, as well as any modification in the designation of the investment or in the character of the recipient company, must be registered with Banco de la República (the central bank).

Setting up a company

A sociedad anónima (SA) with assets exceeding 20,000 times the annual minimum wage and Andean multinational companies are subject to full supervision by the Superintendency of Corporations. According to some international companies, this supervision can be advantageous. Moreover, SAs usually enjoy easier access to local credit facilities, in part because they can offer their shares as collateral; they also receive certain tax concessions. Shareholders are liable for the company’s debts up to the amount of their respective capital contributions. The company issues nominative share certificates that are negotiable in the stockmarket. At least 50% of the authorised capital must be subscribed and 33% paid in when the company is incorporated.

To set up an SA, at least five founders must sign the byelaws before a public notary. The authorisation and registration process generally takes only two days. Management contracts that prevent free replacement of the manager are illegal. The Code of Commerce permits the creation of an SA in several stages as the shares are placed with different partners (successive subscription). A programme outlining the creation, together with a prospectus, must be registered with the corresponding chamber of commerce.

To form a limitada, the partners (a maximum of 25) must assume liability up to the amount of the respective shares. Capital shares must be fully paid in at the time of formation but can be reduced later with the permission of the Superintendency of Corporations. Capital may be transferred only by formal assignment. When capital contribution is made in kind, the partners mutually decide on its value.

The limitada differs from the SA principally in that it does not issue shares and the participation of a member-owner is not negotiable on the open market (it is transferable only by formal assignment). The limitada is governed by the rules of regular partnerships and is restricted to a maximum of 25 owners; a share corporation may have any number exceeding five.

BUSINESS TAXATION

Overview

Colombia has one of the highest nominal tax rates in the Americas, for both corporate and personal taxes. The Uribe administration reformed the tax code via Law 788 of December 2002 and Law 863 of December 2003. The end-2002 reform sought to increase fiscal revenue by 1.5% of GDP per year during 2003–06. The end-2003 tax package aimed to cut the fiscal deficit to 2.5% of GDP in 2004 from 2.8% in 2003, under the terms of a loan with the IMF. Tax receipts were better than expected for 2004, and the Ministry of Finance projected the fiscal deficit for 2004 at 2.3% of GDP. There have been ten tax reforms in the past 11 years, but the government withdrew its 2004 tax-reform proposal after realising it did not have sufficient legislative support to push it through parliament.

The corporate tax rate was increased at end-2002 to 38.5% (from the already high 35% rate), and the tax reform of December 2003 (Law 863) extended the increase until 2006. In addition, the 2003 reform created a 0.3% assets tax that applies to individuals with total assets of Ps3.18bn and above. There are also remittance taxes, stamp taxes, financial-transactions taxes, registration taxes, municipal and state taxes, and a value-added tax (VAT) of 16% on most goods and services. But this long list of taxes is paired with numerous tax exemptions, incentives and discounts; together, they make the effective tax rate vary widely across different sectors of the economy and regions of the country.

Major changes over the past several years include the following:

* Increase in the VAT to 16% (from 15%) beginning in January 2001 (VAT paid on fixed assets is deductible from final income tax paid); expansion of the list of goods and services subject to VAT, to include cigarettes and other tobacco products, barley and satellite television.

* Increase in the financial-transactions tax to 0.3% in 2002 and again to 0.4% as from December 2003. The 0.4% rate remains in place until 2008 under Law 863.

* Permission for banks to take an incremental tax deduction on the provisions they are required to make on their loan portfolios and on the value of goods received as a result of foreclosures in 2000—this rate was increased from 40% in 2001 to 100% in 2004.

* Surcharge of 1.2% on all imports.

* Tax of 0.3% on assets for taxpayers in the highest tax brackets in the 2004–06 tax years on total assets worth more than Ps3.18bn.

* VAT tax rebate of 2% on credit- and debit-card purchases as from December 2003.

* Tax deduction of 30% for companies investing in machinery, equipment and new technology, implemented in December 2003.

VAT on the purchase of capital goods is deductible from income-tax payments. Both domestic and foreign-owned manufacturers may deduct the VAT payments for a two-year period. To make housing more affordable, Decree 1243 of June 2001 allows a return of VAT for builders buying construction materials for low-income housing, defined as homes equal to 135 monthly minimum wages at the time of purchase.

Enterprises involved in the printing and sale of scientific, scholarly and literary works are exempt from VAT and income tax. Under the 2000 reform, firms and individuals involved in scientific or technological research and development or environmental improvement may deduct 125% of related expenses from income, with a limit of 20% of net income. The following investments are eligible for tax exemptions of up to 10% of the taxpayer’s net income: construction of deep wells, irrigation systems and drainage works; reforestation of cocoa, coconut, fruit, palm oil, olive and rubber tree plantations; and silos.

Tax reform in 2000 allowed for a full income-tax exemption for 15 years (from 2001) for companies that build small hydroelectric plants with installed capacity of less than 25,000 kw. In an attempt to promote the democratisation of capital, the 2000 tax reform also established an exemption for the profits earned from the sale of publicly offered shares as long as they constitute 10% or more of the total shares of the company.

To promote exports and economic development in border areas, Law 677 of August 2001 established four special economic zones for exports in Buenaventura, Cucuta, Ipiales and Valledupar. Projects of 5–20 years that export at least 80% of their output will enjoy the same tax benefits as Colombia’s free-trade zones, which offer lower customs tax rates and exempt income tax on exports. Approved projects must invest at least US$1m during each of the first two years, and they have an external audit each year to guarantee that the projects meet the minimum requirements under which they were approved.

Law 633 of December 2000 extended the tax benefits granted to the coffee region after a devastating earthquake in western Colombia. The government decreed an economic, social and ecological emergency in January 1999 in Caldas, Quindio, Risaralda, Tolima and Valle del Cauca provinces. The emergency decree permitted a number of tax benefits and incentives for companies either to begin operations in designated towns in those provinces or to renew operations. The reform likewise extended the benefits of Law 218 of 1995 (Ley Páez), which had been established for companies investing in Cauca and Huila provinces (affected by a severe avalanche in 1994) until end-2003. Law 191 of 1995 established tax benefits in border zones.

Tax evasion has long been a serious problem in Colombia and partially explains the ongoing tax reforms and high nominal tax rates. The government estimates the evasion rate at about 30%. To combat evasion, the government has implemented a new online platform to facilitate payments and declarations and to verify taxes due by comparing reporting information with the financial sector and other government agencies. The government launched the system in early 2005.

Taxable income and rates

For the 2005 tax year, a uniform rate of 38.5% applies to all Colombian firms, both sociedades anónimas (SAs) and limitadas, and to all foreign companies, including corporations, share-issuing partnerships and foreign branches. The rate does not apply to consortia, which are generally part of administrative contracts with government agencies. A consortium’s partners pay their taxes independently. The tax was increased in late December 2002 and was scheduled to drop to 36.7% in 2005, but Law 863 (December 2003) has since extended the rate until at least 2006.

Foreign investment funds are generally exempt from income and related taxes. Oil and mining companies pay the 38.5% rate and a surcharge.

Taxable income defined
Taxable income in Colombia is defined as gross income minus returns, rebates, discounts, all ordinary costs incurred in obtaining the net income and all allowed deductions. Firms may deduct costs as long as they are “necessary and proportional to the activities performed”. Domestic corporations are taxed on both their Colombian- and foreign-source income; branches of foreign firms are taxed only on their Colombian-source income.

The only taxes that are deductible are the 80% of the industry and commerce tax and the 80% of the real estate tax.

Law 633 permitted banks to take an incremental income-tax deduction on the provisions they established for their loan portfolios and for goods received as a result of foreclosure in 2000. The deduction was increased by 20 percentage points per year, to reach 100% in 2004. The 100% deduction remains in effect for 2005.

All debts of agencies, branches, subsidiaries or other companies operating in Colombia that have headquarters abroad are considered patrimony of the branch, subsidiary or company in Colombia for tax purposes. Exceptions are made only when the debt results from short-term financing of raw materials supplied directly by the head office, or when the branch is a financial institution borrowing money from the head office. Nevertheless, this should not affect the deductions available for the devaluation adjustment and interest payments made on such debts. It affects only the calculation of presumed income.

All interest and other financial payments made to entities under the control of the Superintendency of Banks may be fully deducted from gross income. Interest and financial payments made to other firms can be deducted in an amount that does not exceed the maximum loan interest rate established by the superintendency.

Colombian tax law permits the amortisation of investments (usually over at least five years) that are necessary for the start-up of a business if such outlays have not given rise to any other type of deduction. These investments are usually related to installation, organisation, development, acquisition or exploitation.

Payments to agents abroad are deductible for as much as 5% of the value of an operation that involves the sale or purchase of merchandise and as much as 15% if it entails exports and the payments are registered with the Banco de la República (the central bank).

Firms may set aside reserves for bad debts by deducting either 33% of receivables overdue for more than a year or 5%, 10% or 15% of all accounts receivable, depending on whether the average outstanding is three months, six months or one year, respectively.

Losses resulting from force majeure are deductible; normal losses incurred by SAs or other entities subject to state supervision may be carried forward for as long as five years. Theoretically, the uninsured loss of capital assets may be written off against current income, and if the loss is greater than earnings in any one year, the balance may be carried forward in five yearly portions. However, the law stipulates that such losses may no longer be transferred to shareholders or partners.

Some investments may not be deducted, including investments to mitigate the environmental impact of projects, as mandated by the Ministry of the Environment.

Depreciation
Firms may use the straight-line, declining-balance or any other method of calculating depreciation, provided their choice is submitted for approval to the tax authorities at least three months before it is applied. Flexible depreciation schemes are not allowed. Law 488 of 1998 relaxed the inflationary-adjustment rules. Inventories and purchases of merchandise are no longer subject to inflationary adjustments. All other non-monetary assets must be adjusted for inflation.

Normal estimated useful lives of various assets are as follows: motor vehicles and computers, five years (annual depreciation rate of 20%); machinery, equipment, boats and aircraft, ten years (10%); and buildings, 20 years (5%). An inflation index makes yearly adjustments to assets, with depreciation calculable on the adjusted value.

Capital gains taxation

Capital gains are subject to income tax in Colombia. There is no difference in tax treatment between short- and long-term gains. Since all items on the balance sheet and profit-and-loss statement are adjusted for inflation, however, gains are similarly adjusted. Capital losses are deductible and may be carried forward for up to five years when force majeure is demonstrated.

Foreign income and tax treaties

Colombia has double-taxation agreements with Bolivia, Ecuador, Peru and Venezuela in accordance with Andean Community provisions. Andean Community members have agreed to avoid double taxation of income and net wealth among themselves, but tax legislation has not been harmonised except for Andean multinational firms. The most recent treaty to avoid double taxation between the Andean Community countries is Decision 578 of May 2004.

The following provisions apply to these firms (empresas multinacionales andinas—EMAs):

Profits earned by EMA branches will be taxed only in the country where the branch is located. The portion of dividends distributed by an EMA corresponding to profits earned by a branch in another Andean country will not be taxed in the country of the headquarters.

Colombia has double-taxation agreements on air and maritime transport with Argentina, Brazil, Chile, France, Germany, Italy, the US and Venezuela. Law 124 of 1961 and Law 4 of 1988 provide exemptions from income tax on profits made by US ships and aircraft operating in Colombia. Laws 15 and 16 of 1970 and Law 21 of 1972 prevent double taxation of shipping firms and airlines from Argentina, Chile and Germany. Law 16 of 1976 and Law 14 of 1981 prevent double taxation of income and assets of Venezuelan and Italian shipping companies and airlines.

Colombia signed a tax information agreement with the US in March 2001 to combat tax evasion and fraud. For Colombia, the agreement covers income tax and complementary taxes, and sales, stamp and bank debit taxes. For the US, it covers all federal taxes.

On March 31st 2005 Colombia and Spain signed a treaty to avoid double taxation, but the treaty is not yet in force.

Transfer pricing

Planning for methods, documentation, penalties and other transfer-pricing issues is a complex undertaking.

Local firms may not deduct payments to foreign affiliates. Branches of foreign companies may deduct interest payments to foreign financial institutions; they may also deduct short-term debt, interest payments, and administrative and financial expenses if withholding and remittance taxes are paid.

Turnover and other indirect taxes and duties

Value-added tax (VAT) of 7–60% is levied on imports and the sale of goods and services. The basic VAT rate is 16%. A taxpayer may make an income-tax deduction for the amount of VAT paid but may not claim a tax credit. Some goods and services are exempt from VAT; these include personal computers with fob value of less than US$1,500, real-estate leases and hotel accommodations.

Law 49 of 1990 expanded the list of taxable goods and services to include local and long-distance telephony, videotape rentals, restaurants and bars. Law 6 of 1992 further extended it to include most services. Under Law 488 of 1998, the application of VAT expanded to services related to the use of intangibles—like Internet access and satellite transmissions.

Law 633 of 2000 expanded the list again to include cigarettes and tobacco products, barley and satellite-television services. However, it also allowed new exemptions for a range of raw and processed foodstuffs, fibres, textiles, paper products, certain pharmaceuticals and chemical inputs, some agricultural machinery and computers worth more than US$1,500. Companies buying materials to build low-income housing are also entitled to VAT reductions or rebates.

Law 788 of December 27th 2002 made the following VAT changes as from January 2003:

* Some 100 goods and services that were previously exempt from VAT are now taxable; these goods (such as chocolate, coffee, maize, rice) and services (such as commercial property rents, hotel accommodations, gym memberships, private security and voluntary health plans) are now subject to a 10% rate (the rate increased from 7% on January 1st 2005).

* VAT on products such as diapers, oils, airfares and soaps was raised to 16% (from 10%).

* VAT on mobile telephony was increased to 20% (from 16%).

* Beer sales became subject to a new 11% VAT.

Imports are subject to VAT, except equipment destined for use by institutions of higher education and temporary imports of heavy machinery for basic industries, such as hydrocarbons and mining. Also exempt are imports of equipment destined for waste recycling or for water, air or solid-waste treatment. The national government levies excise taxes on playing cards, hotel rooms and other items. Local governments tax beer, cigarettes, liquor and property among other goods. Law 633 of 2000 requires all companies supplying electric energy to pay a tax of Ps1 per kwh to the national electric grid. The tax will be indexed to inflation until it expires in 2007. Proceeds are destined for a special fund to promote the electrification of remote regions of the country.

All games of chance (except lotteries) have been subject to a 5% tax since end-December 2003.

Other taxes

The financial transactions tax has been 0.4% since January 2004. The tax, which was established in December 1998, has been raised several times (from 0.2% at its inception to 0.3% in January 2001, under Law 633 of 2000), to the present 0.4% rate. This levy applies to all withdrawals from current and savings accounts, including accounts with the central bank. Savings accounts for low-income housing are exempt, as are transactions on the interbank market and the sale or purchase of foreign currency. Certain operations of credit, trust and other institutions that manage mortgage portfolios are entitled to a rebate of this tax. The financial transactions tax is not deductible from income tax.

Decrees 405 and 518 of March 2001 exempted all electronic securities transactions, including stockmarket transactions, from the tax. The issuer of securities is subject to the tax on the funds raised through the issue.

A registration tax is levied on public and private documents that state the existence, modification or extinction of obligations on transactions involving more than Ps48.9m. The registration tax has been 1% since January 1997. If a document is subject to this tax, however, it is exempt from the national stamp tax (1.5%).

Stamp tax is paid on written agreements executed in connection with Colombian income-producing activities, but only when the value of the agreement exceeds Ps60,142,000 (fiscal year 2005). The tax rate is 1.5% applied over the total amount of the agreement.

Tax compliance and administration

“Major taxpayers” (listed each year by the tax authorities) must file tax returns by a certain date. For the 2004 tax year, these major taxpayers must file between February 10th and April 15th 2005. Designated taxpayers must pay their final tax liability in five equal instalments (on February 10th, April 15th, June 9th, August 5th and October 7th). Since the first instalment must be paid before submitting the tax return, firms estimate the amount. At least 35% of the payment must have been made by the second instalment; 30% is to be paid in the third; 25% in the fourth; and 10% in the last payment.

All other companies must file tax returns between April 4th and June 13th, depending on the last digits of their tax identification numbers, and they must pay their first instalment at that time. Decree 408 of 2001 allows tax contributors to file electronically via software designed by the National Tax and Customs Office.

PERSONAL TAXATION

Taxable income and rates

Employees are subject to withholding taxes, with a top rate of 38.5% as from January 1st 2005. Non-formal employment contracts are subject to a 3.5–10% withholding rate. Most residents in Colombia need not file income-tax forms unless their income or net worth surpasses a limit set each year by the government. The Uribe administration has been lowering these limits, which apply to the value of assets, wages, other income and expenditures. Indeed, the number of taxpayers required to declare will probably double in 2005. The lowest income bracket is Ps1.8m for 2005.

The end-2002 tax reform (Law 788) increased compulsory social security contributions to help shore up the pension regime, created new taxes and eliminated existing exemptions. The reform also expanded the value-added tax (VAT) base and raised income and corporate tax rates. The income and corporate tax increase, in conjunction with the wealth tax, will go towards financing the military offensive against terrorists. Congress also passed higher penalties for tax evasion as part of the reform package; because of lax enforcement, however, they will do little to reduce evasion.

The administration’s end-2003 reform (Law 863) maintained some of the previous year’s tax increases and added some new ones. From 2004 until 2006, taxpayers with assets valued at more than Ps3.18bn will be charged a new 0.3% assets tax. The highest income-tax bracket will remain at 38.5% for 2004–06, despite a clause in the 2002 reform that would have reduced this rate.

Discounts can be applied for education or health expenditures or for the payment of credits or the initial down payment for housing, up to 30% of taxable income.

The National Administrative Statistics Department adjusts tax rates each year by a percentage that it bases on the October-to-October increase in the consumer price index. Income-tax forms are filed between April 18th and May 16th 2005, depending on the last two digits of the taxpayer identification number. Rates range from 0.29% in the lowest bracket to 38.5% on income exceeding Ps96m for the 2004 tax year. The top tax bracket was increased by 10% for 2003–06, to 38.5% (from 35%). Employees have income tax withheld from salary.

Determination of taxable income
Nearly all income is subject to taxation, including “occasional earnings” (such as inheritances and gifts). For residents, this includes both domestic and foreign-sourced income; non-residents are liable only for income from Colombian sources. Proceeds from the sale of shares through the stock exchanges are not considered occasional earnings and are thus tax-exempt.

In accordance with Law 546 of 1999, interest paid to authorised financial entities on housing loans is deductible and is calculated in terms of an indexed accounting unit, UVRs (unidades de valor real), up to 1,000 units annually. There is a 60% deduction for qualifying donations and a 100% deduction for donations to entities or programmes approved by the National Council for Science and Technology.

In an effort to promote construction, Decree 2005 of September 2001 allows workers to deduct initial mortgage payments and monthly mortgage quotas from their taxable earnings for up to five years following the publication of the decree. The Banking Superintendency ensures that the exemptions are used to pay mortgages.

Residency

Colombian nationals and foreign residents in Colombia must pay tax on income. A foreign resident is defined as someone who spends at least six months a year in Colombia. After five years’ residence, income earned outside Colombia also becomes subject to tax. Non-residents must pay 35% withholding tax and a 7% remittance tax when transferring earnings out of Colombia. Dividend income is exempt in Colombia.

Special expatriate tax regime

For fiscal purposes, individuals are considered Colombian residents if they:

* Remain in Colombia for more than six months in the tax year;
* Complete during the tax year six months of continuous permanence in Colombia;
* Remain discontinuously in Colombia for more than six months in the tax year; or
* Even if outside the country, maintain their family and main business in Colombia.

Individuals that are considered resident in Colombia will be levied on their worldwide income.

Capital taxes

The constitution and Law 44 of 1990 authorise local governments to tax real estate on the appraised value of a property. This rate is 0.1–1.6% of the appraised value, depending on the municipality. Property value is automatically readjusted each year for inflation.

To raise money for Colombia’s armed forces and police, the Uribe administration decreed a one-time wealth tax in late 2002. Companies and individuals with US$60,000 or more in net assets on August 31st 2002 paid a tax of 1.2% on those assets.

In accordance with Law 863 passed in late 2003, taxpayers with assets valued at more than Ps3.18bn (as from January 1st of each taxable year) will be assessed a 0.3% assets tax from 2004 until 2006.


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