Starting a business in, or expanding it to Colombia is an attractive option in Latin America, but it is important to understand the challenges.
Colombia is one of the most attractive economies in Latin America for international trade and foreign investment. However, there are some challenges in terms of taxes, accounting, regulatory compliance and foreign exchange rules. In TMF Group's Global Business Complexity Index 2021, Colombia is ranked 4th out of 77 jurisdictions for the complexity of its business environment.
As a signatory of 16 international trade agreements, all of them currently in force, Colombia has access to more than 60 partner countries. In addition, Colombia receives preferential access to markets comprising 1.5 billion consumers, including the United States of America, the European Union and Mercosur. Similarly, Colombia has entered into 14 double taxation treaties, including those with Switzerland, Canada, Mexico, Spain, and the United Kingdom.
Colombia is a member of the Pacific Alliance, which was created in 2011 and includes Peru, Mexico and Chile. This group totals 56% of Latin America's foreign trade and 41% of total foreign investment in the region.
In addition, Colombia became a member of the Organisation for Economic Co-operation and Development (OECD) in 2020. Its membership was achieved after Colombia began standardising processes and adjusting legislation to the OECD standards, which will further help to open the country up to foreign investment, trade, and international relations.
2020 was an extremely complicated year for the global economy due to the Covid pandemic, which has resulted in an unprecedented slowdown across all sectors, regions, industries and social groups worldwide. Forecasts for the end of 2020 expected growth in Colombia to be around 4.9%, based on the country's solid domestic demand and the rising oil prices. If this trend is confirmed, forecasts for 2022 expect growth to be around 4.3%. Subsequent forecasts may be heavily affected if transmission of the disease rises, vaccination schemes are not completed and social distancing norms are not abided by, which could lead to additional lockdowns which halt the economy further.
Here are ten aspects to consider, for those wishing to do business in Colombia:
1. Starting a business
The first step to starting a business is to register the company or branch at the Chamber of Commerce of Jurisdiction. This process varies, depending on: which city or municipality the domicile of the entity is located in, the National Tax Office (DIAN) and the Municipal Tax Authority (SDH).
Stock corporations must contribute to the ensuing capital of the new entity within a given term in cash, or in kind, which can be up to two years for simplified stock corporations (Sociedad por Acciones Simplificada or 'SAS'). Other types of companies must pay capital at incorporation or capitalisation.
One of the most common vehicles of incorporation in Colombia is the 'SAS', which has phased out most other types of corporate structures, thanks to its simplicity. Documentation requirements need not be protocolised in public deeds, and the versatility in drafting its articles of association make its structure as adaptable and diverse as is needed by investors. Moreover, it is the only corporate form of a local company that allows a sole shareholder or owner.
2. Resourcing your business
Employment in Colombia is primarily governed by the Labour Code (the Code), which applies to all employers and employees in Colombia, regardless of their nationality. The Code regulates the terms and conditions of employment, such as the form and duration of employment contracts, trial periods, salary types, working hours, holidays and leave, termination of employment agreements and collective bargaining.
The monthly minimum wage is COP$908,526 (approximately USD$240) for 2021 and it is reviewed annually.
3. Dealing with construction permits and registering property
A building licence is an authorisation that is obtained for developing buildings, circulation areas and/or communal areas on a piece of land. Within construction licences, specific permits will be granted regarding land use, buildability, volumetry, accessibility and other technical aspects approved for the proposed building.
There are various types of construction licences: new construction, adaptation, expansion, restoration, structural reinforcement and demolition.
The process of issuing a construction licence can take approximately 45 days, if there are no adjustments or corrections to be made to the filing.
4. Getting electricity
Getting electricity is not an issue for most urban, industrial and free trade zones, since electric infrastructure is already installed. However, getting electricity in rural areas or for the construction of a new building is by far the most arduous aspect of starting a business in Colombia.
The World Bank's 'Doing Business 2020' report ranked Colombia in 82nd position, thanks to the excessive time it takes (average of 88 days), and the cost of completing the procedure. Depending on the municipality, the average time, cost and procedure can vary.
5. Getting credit and protecting investors
In terms of credit and access to it, Colombia has a wide variety of banks and financial institutions. Currently more than 20 entities are authorised to provide this type of service. This allows investors to obtain competitive interest rates and to access credit easily, so access to credit, in general, is not a barrier to entry into the Colombian market.
In terms of protecting investors, there are regulations in the Colombian commercial code and complementary laws concerning the protection of minority shareholders, such as the right of veto, for example.
6. Paying taxes
Colombia is currently experiencing its eighth tax reform in the last ten years. In 2021 alone, there have been two tax reform projects. The main changes of the last tax reform project, filed on 20 July, consist of an increase of the income tax rate for companies and the creation of a surcharge for the financial sector.
Additionally, the latest tax reform project contemplates the dismantling of the 100% discount of the ICA payment that was set to apply as of 2022, instead maintaining the existing rate of 50%.
Colombia has become more digitalised in recent years. Following a process spanning the past two years, electronic invoicing has now been made mandatory for all companies. Sharing payroll information with the DIAN will also be electronic as of autumn 2021.
The DIAN has also been increasing the use of technology for a number of other processes. In the last few months, the process of electronic notification has been regulated, and Law 1255 included the possibility that the DIAN will establish electronic invoicing for income tax and complementary taxes, according to information obtained from third parties.
Following the Covid pandemic, many banks in Colombia also mandated electronic pension payments from corporate bank accounts to pension funds. This digitalisation was in place before the pandemic but was optional, whereas now it is fully mandatory.
7. Enforcing contracts and resolving insolvency
Due to the economic crisis caused by the pandemic, the National Government issued Decree 560 of 2020, to create a comprehensive and speedy business recovery plan, which facilitates the preservation of a company through new procedural and financial tools that allow insolvency and reorganisation or debt negotiation processes to be carried out in less than three months.
However, it can take 1288 days to enforce a contract through the courts, largely due to the number of procedures that need to be carried out. Filing and notification take more than two months, and court proceedings can take years. Enforcing a contract can cost up to 46% of the total value of the legal claim, double the average among high-income OECD economies.
8. Trading across borders
The cost of trading across borders is higher than in most Latin American and Caribbean countries and far exceeds the OECD norm. It can also be a rather time-consuming endeavour, taking around two weeks to both import and export. Additionally, Colombia's numerous economic integration agreements have created overlapping tariff applications.
It is possible for a product to be subject to more than ten different duties depending on whether it comes from a member of the Andean Community, the Latin American Integration Agreement, or the Caribbean Community. Approximately 97% of Colombian Harmonized Tariff Schedule (CHTS) products can be imported without an import licence, but VAT and import tariffs are still applicable. Engaging with a local specialist can be of help here.
9. AML/CFT, anti-bribery and anti-corruption
Over the last 20 years, Colombia has strengthened its efforts to fight against practices such as money laundering, terrorism financing and the financing of weapons of mass destruction (AML/CFT/CFPWMD), and also transnational bribery and corruption. To this end, Colombia has entered into several international agreements and conventions, some of them with the United Nations and the OECD. Both the public and private sectors have developed different strategies and policies to prevent, control and punish such crimes.
The government of Colombia has also approved a set of regulations, focused on the prevention of corruption, bribery and AML/CFT/CFPWMD, within both public bodies and private companies.
10. Cultural barriers
Colombians are not very proficient in English. According to the English Proficiency Index 2020, Colombia ranked 77th (out of 100 countries surveyed) and 17th out of the 19 Latin American countries. However, given its proximity to the United States, popular culture in Colombia is deeply permeated with American influences.
Communication in Colombia is often subtle and indirect, which can cause problems when it comes to business negotiations. Punctuality and timekeeping is far more relaxed in Colombia than elsewhere in the world, so we advise taking an informal approach to doing business in the country.
Business days can start as early as 6am and can conclude as late as 7pm, depending on the industry and sector. Saturdays are considered partly business days. Working hours are being reduced from 48 hours to 42, by 2024.
Contact our local TMF Group experts
TMF Group has the local knowledge to help you overcome any challenge your business faces – or benefit from any opportunity. Whether you want to set up in Colombia or just want to streamline your existing Colombian operations, we have the local knowledge to help. Talk to us today.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.