Colombia. With its rich biodiversity, vibrant culture, and growing economy, this South American country has grown into a leading destination for travelers, expatriates, and businesses seeking to set up shop overseas. Only a short plane ride from the US East and West coasts, many companies also use Colombia as a gateway to Panama to the north, as well as to the rest of the South American continent.
Like any emerging market economy, doing business in Colombia initially presents some unique legal and tax challenges. However, these challenges can be overcome, and for those with a solid business plan, dedicating the time and resources to establishing a presence in Colombia can be well worth the investment. If you are exploring business opportunities in Colombia, here are some of the top considerations you will need to keep in mind:
Key Considerations for Starting a Business in Colombia
1. Permanent Activities in Colombia
Colombia’s law regarding formation of business entities incorporates a concept known as “permanent activity,” or “permanent establishment.” If a business carries on any of the following business activities on Colombian soil, it is considered to have a “permanent” presence:
- Operating from a commercial establishment or business office in Colombia
- Contracting for work or services to be performed in Colombia
- Participating in private savings managing activity
- Obtaining government concessions
- Holding shareholder, director, management, or administrative meetings in Colombia
If a business has a permanent presence in Colombia, it must formally establish a business entity, which may be a subsidiary or a branch location.
2. Types of Colombian Business Entities
There are three primary types of business entities in Colombia: (i) stock corporations, (ii) simplified stock corporations, and (iii) limited liability companies.
A Colombian stock corporation must have a minimum of five shareholders. Shareholders’ liability is generally capped at the value of their capital contributions, and a majority vote is required for approval of corporate decisions falling within the shareholders’ authority. Stock corporations (abbreviated as “S.A.”) must also have a board of directors and a legal representative.
Simplified Stock Corporations
Simplified stock corporations (abbreviated as “S.A.S”) have more flexibility with regard to management structure as compared to ordinary stock corporations, and shareholders’ liability is capped at the sum of their capital contributions.
Limited Liability Companies
Limited liability companies (abbreviated as “Ltda.”) can have up to 25 “partners,” and these partners can face personal liability up to the value of their capital contributions.
Forming a corporation or limited liability company in Colombia involves filing appropriate documentation (including incorporation documents, shareholder or partner identification documents, preliminary tax registration forms, and acceptance letters from designated individuals) with the chamber of commerce in the city where the entity is to be incorporated. It is possible to file under a power of attorney – shareholders or partners do not need to appear personally.
3. Individual and Corporate Income Tax
Tax reforms that went into effect in 2013 made some significant changes to Colombia’s individual and corporate tax regimes. Some of the key tax rates for business owners and legal entities with a presence in Colombia include:
- Individual Income Tax – Colombia imposes a progressive flat tax based upon income level.
- Corporate Income Tax – Both resident and non-resident companies must pay a 25 percent income tax rate (down from 33 percent prior to 2013), and certain companies may also be subject to an additional income tax, known as CREE.
- Capital Gains Tax – In Colombia, all capital gains are taxed at a rate of 10 percent (down from 33 percent prior to 2013).
- Value-Added Tax (VAT) – Similar to sales tax in the US, in Colombia, VAT rates range from zero to 16 percent (down from a maximum rate of 35 percent prior to 2013).
- Consumption Taxes – Businesses operating in certain industry sectors in Colombia are subject to an additional consumption tax, as well. This includes mobile phone services; restaurant services; and sale of boats, motorcycles, and other goods.
4. Requirements for Foreign Investment
Foreign investment in Colombia is permitted subject to limited exceptions, though foreign investors must register with Colombia’s Central Bank. Once registered, foreign investors must:
- Comply with the applicable procedural requirements regarding remittance of funds;
- Report any foreign exchange cancellations or substitutions within 12 months; and,
- File an annual report.
5. Incentives and Tax Benefits for Businesses in Colombia
Colombia offers a number of different incentive opportunities for businesses that qualify. Many of these involve tax benefits, including reduced corporate tax rates and exemptions from VAT. For example:
- Newly formed companies that comply with certain requirements can qualify for temporary tax benefits.
- Businesses operating in free trade zones (FTZs) may be eligible for a reduced income tax rate of 15 percent, exemption from certain customs duties, and exemption from VAT for raw materials and supplies.
- Under the Plan Vallejo, capital goods, raw materials, parts, and certain other products can be imported without customs duties and with deferral of VAT.
6. Employment Relationships and Contracts
Similar to the US, a written agreement is not required to establish an employment relationship in Colombia. Under Colombian law, a person will be considered an employee of a company if:
- The person provides personal services to the company;
- The company determines the time and place where services are performed and can direct the person’s activities; and,
- The company pays a salary to the person for services rendered.
However, if parties enter into an employment contract, the contract must include certain provisions. These include a description of the services to be performed, the amount of remuneration, the duration of the employment relationship (whether indefinite or for a fixed term), and conditions justifying termination.
7. Visas and Immigration
Traveling to Colombia for business purposes requires a visa. Business visas are valid for four years, though non-citizens are prohibited from staying in the country for more than a year consecutively without reentry. Those who enter Colombia on a tourist visa can request transfer to a business visa with sponsorship by a Colombian company.
Non-citizen employees may be eligible for temporary worker visas, which are valid for up to two years. Renewal applications can be filed in Colombia, so temporary workers do not need to return to their country of origin in order to apply for renewal.
8. Intellectual Property Rights in Colombia
Colombian intellectual property (IP) law provides protection for patents, trademarks, designs, and copyrights. Each of these four forms of IP must be registered with the appropriate office in order to secure maximum protections:
- Patents, trademarks, and designs are registered with the Superintendencia de Industria y Comercio (SIC).
- Copyrights are registered with the Colombia Copyright Office. Note, however, that registration is not required for protection.
Colombian law also provides protections for trade secrets, and appropriate agreements regarding non-use of confidential information will be enforced under the law.
9. Additional Resources for Entrepreneurs and Companies Seeking to Do Business in Colombia
Additional information on doing business in Colombia is available from these resources:
- Doing Business in Colombia (Embassy of the United States, Bogota, Colombia)
- Doing Business in Colombia (UK Institute of Export)
- Doing Business in Colombia (Export.gov)
Contact Jiah Kim & Associates
Jiah Kim & Associates is an international law firm that represents entrepreneurs and established companies seeking to conduct business in Colombia and other countries around the world. If you would like to speak with an attorney about next (or first) steps for establishing a permanent business presence in Colombia, please call (646) 389-5065 or schedule an initial consultation online today.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.