Setting up your Business in Colombia Issues to consider

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1 Colombia is a country on a full development path, with a stable and dynamic economy, with excellent macroeconomic indicators, fiscal discipline, important structural reforms, strong public commitments in offering investment incentives, business stability and security of a safe and profitable investment. However there are a number of issues which you must consider when you are looking to set up your business in Colombia. This document takes you through some of the common questions we come across and gives you practical information about the issues you need to consider. What type of Business Structure should we use? There are advantages and disadvantages to all of them, and there is no one correct answer, it is all dependent on your specific business circumstances and needs. A brief overview of the main structures is below: The formation of single-person investment vehicles, where the sole shareholder liability is limited to the amount of their respective contributions. A foreign investor does not need to have a partner or a local investor. With a few exceptions, the entire capital of the company may be abroad and there are no trade restrictions for repatriation. Establishment (a branch of your overseas business) Not a separate legal entity but an extension of the overseas parent company No limited liability or ring-fencing of the Colombian operations The foreign company and the branch are jointly and severally liable for the tax liability of the company. If there is a permanent establishment in Colombia then profits from this PE are liable to Colombian Corporation tax Must file parent company accounts, prepared under Colombian Company Law, at Companies House for public inspection, even if these are not made publically available overseas A branch that is not obliged to supply financial statements to the Superintendency of Corporations, shall update the Colombian Central Bank on foreign investment registration, no later than June 30 of each year. For tax purposes, the transfer of the profits of the branch to the main office, are treated as dividends. The foreign company is responsible for its activities in Colombia. Consequently, if the capital of the branch is not enough, the foreign company is responsible. The Statutory Auditor is mandatory for branches. They are under the surveillance of the Superintendency of Corporations, among others, if the amount of assets or revenues is equivalent to or greater than 30,000 monthly minimum legal wages.

2 Limited Company: Provides limited liability and ring-fencing to Colombian operations Shareholders can not be responsible for any credit unless they have granted a specific guarantee Shareholders are liable beyond their contributions for fraud or if the parent or controller of a subsidiary is responsible for insolvency or liquidation proceedings of the subsidiary Gives a perception of a local business, with longevity Corporation tax to be paid on company profits The shareholders are jointly and severally liable in proportion to their holdings in the event of tax abuse or the entity is used for the purpose of defrauding the tax administration or for a tax avoidance scheme They are under the surveillance by the Superintendency of Corporations, among others, if the amount of its assets or revenues is equivalent to or greater than 30,000 minimum monthly legal wages The statutory auditor is mandatory for Limited Companies Limited Liability Partnership: Members (partners) have limited liability for the payment of sums due for labor and tax obligations. The partners are jointly and severally liable in proportion to their holdings in the event of tax abuse or the entity is used for the purpose of defrauding the tax administration or for a tax avoidance scheme Profits are allocated to members who then pay Income Tax on these profits personally The tax residence of the member, and where the profits in the LLP originated will determine in what jurisdiction and how these profits are taxed Requires statutory auditor, when the value of the gross assets is equal to or greater than 5,000 Minimum Monthly Legal Wages or gross income of the previous year are equivalent to or greater than 3,000 minimum monthly legal wages They are supervised by the Superintendency of Corporations, among others, if the amount of its assets or revenues is equivalent to or greater than 30,000 minimum monthly legal wages How much Corporation Tax will the business pay? Current Corporation Tax rates in Colombia are: Income tax Rate 25% ordinary regime

3 33% foreign companies, when their incomes are not through branches or establishments Tax Base The net taxable income, obtained by subtracting from taxable net income or foreign source, costs and expenses that would have been accepted tax accrued or paid during the period. Income tax for equality (CREE) Rate 9% for the years 2013, 2014 and % from 2016 Tax Base Gross income returns, rebates, discounts, non-income revenue, costs, deductions and capital gains tax accepted to decrease this basis, which can not be less than 3% of the net assets of the previous year. Capital gain tax Rate 10% Tax Base Subject to gains from activities not covered by the regular operations. What if we use Colombia to set up our holding company? Colombia s tax legislation means that it is a very attractive place to set up a holding company. Colombian companies receiving foreign investment are taxed at the income tax rate on the same terms as fully national entities Due to the principle of equality between domestic and foreign companies, there is no tax advantage for foreign companies. Although, in practice to establishment in a free zone can be advantageous.

4 The profits of the company are subject to tax only once, either by society or by the shareholder. Therefore, if the company pays corporate income tax on their profits, shareholders will not be subject to any additional tax on dividends received. If the corporate income tax is not paid at the level of society, dividends that are decreed in favor of non-resident individuals or foreign companies and organizations, will be subject to withholding income tax by way of 33%. What if we make cross-border transactions between group companies? Colombia follows internationally recognised Transfer Pricing (TP) rules where crossborder trading and financial transactions between affiliated entities have to be conducted on an arm s length basis. The price and terms should be the same as if the transactions had been between completely independent parties. The application of transfer pricing regime is mandatory when given the following assumptions: The existence of a obligated subject, that is, a taxpayer's income tax The existence of foreign party linked to that taxpayer. The performance of transactions between the taxpayer and its related parties abroad. Typical transactions between affiliated entities that are covered by TP regulations are: Sale and purchase of goods Provision of management services Property rental charges Transfer of intangible assets e.g. trademarks, patents Sharing of knowledge, expertise, business contacts etc. Provision of financial support e.g. inter-group loans and charging a market interest on loans A business will need to prepare a Transfer Pricing Report proving the arm s length basis of transactions. The report will include a functional and risk analysis, analysis of the adopted pricing model and benchmarking of the arm s length basis. SME s are generally exempt from Colombia s transfer pricing regime, so only large entities need to undertake detailed TP analysis. A large entity for TP purposes is one with > 250 employees, or < 250 employees but Revenues > 50M and Gross Assets > 43M. However even if an entity is exempt from Columbia s transfer pricing regime it may fall under the scrutiny of the other international tax jurisdictions where it transacts. There may also be other tax regulations which ensure transactions are undertaken at a commercial value.

5 What Employment Taxes and Social Security will need to be paid? If an individual is resident in Colombia then they are subject to Colombian tax laws. Taxation of individuals in Colombia depends on the source of their income, their nationality and on whether or not they are Colombian residents. According with Law 1607 of 2012, the residence is the physical permanence in the country continuously or discontinuously for more than 183 days over a period of 365 consecutive days with the understanding that when continuous or discontinuous permanence in the country rests with more than one year or taxable period it shall be deemed that the person is resident in the second taxable year or period. Natural persons, national or foreign, domestic residents are subject to income tax and complementary tax with regard to their income and capital gains on both national source and foreign source. National individuals residing in the country are subject to income tax on their income both of national and foreign source. Foreigners residing in Colombia are subject to income tax in respect to their local source income, and on their foreign source income as of the first day of their first year of continuous or discontinuous residency in Colombia. For residents, income tax rates are progressive. The maximum tax rate is thirty-three percent (33%) and is applicable to taxable income in excess of four thousand and one hundred (4.100) UVT 1. Net income up to one thousand and ninety (1.090) UVT would be subject to an effective rate of nineteen percent (19%) We would advise any new entrant to Colombia or person who spends time working in Colombia to take professional advice to determine whether they are Colombia tax resident. Current Personal Income Tax rates in Colombia are: Tax Base Law 1607 of 2012 introduces two new concepts applicable to employees: National Alternative Minimum Tax (IMAN) and National Alternative Minimum Tax (IMAS). IMAN is a mandatory and presumptive determination of the tax basis and tax rate of the income tax; the IMAS is a simplified system for determining the tax, and shall apply only to individuals residing in the country, classified in the category of employee, whose alternative taxable income, during the tax year is less than four thousand seven hundred (4,700) UVT. Rate 1 UVT: Acronym in Spanish for Tax Value Unit. UVT for year 2013 is COP $$26.841

6 The tax rate ranges from 0% to 33% according to the table and depending on the income level of the taxpayer. The tax in no case can be less than the table of National Alternative Minimum Tax - IMAN. Employees with less than 4,700 gross UVT may calculate the tax by using the National Alternative Minimum Tax IMAS system. Self-employed will apply IMAS table according to their economic activity. Employers and employees also have to pay Colombian social security, which is called Sistema de Seguridad Social Current Social Security rates are: Employee Rate (%) Employer Rate (%) Old-Age Pension (OAP) 4% 12% Healthcare 4% 8,5% (***) Labour Risks (*) Between 0,348% and 8,7% Voluntary Savings Regime (**) Between 1% and 2% (*) The percentage of contribution to the overall system of occupational risks varies with the insured risk, which is defined by the activity performed. (**) The percentage of the contribution to the Pension Solidarity Fund varies according to salary. (***) From 2014 companies should not make this contribution against workers earning less than ten Minimum Monthly Legal Wages. It is the employers legal responsibility to pay over employee s tax and social security deductions to the Colombian tax authorities. It is the responsibility of the employer to deduct and pay the taxes and contributions to the Social Security System. Colombia has a Reciprocal Agreement with the USA, EU countries and many others whereby when an overseas national of those countries is seconded to Columbia for a defined period of time and continues to pay social security in their home country, then the employer and employee are exempt from paying Columbia social security. What is Value Added Tax (VAT) and should the business be registered? VAT is a goods and services tax on supplies made, the standard rate of which is 16%. For Individuals if a business makes taxable supplies then it MUST be registered for VAT. Legal persons belong to the common system and are required to register with the tax

7 number. There are three types of supply Taxable must charge VAT on supplies, can reclaim input VAT Exempt zero rate, entitled to deduct and claim back the VAT paid. Excluded - No fee, VAT paid is higher value of the cost, so it is not entitled to a refund. Outside the scope not in the Colombia VAT system The supply of most types of goods and services in Colombia would be classed as Taxable supplies. However when these supplies are made to companies which are outside of Colombia advice needs to be sought as to what rate of VAT, if any, to use. Consumption national tax It is an indirect tax levied on vehicles sectors, telecommunications, food and beverage. All rates are 4%, 8% and 16%. Can we provide Share option plans to our staff? Many companies see Share Option plans as being an important way of attracting, motivating and retaining key staff. Colombia has a number of approved share option plans which give tax benefits to employees and employers alike and it is often possible to adapt an overseas stock option plan to fit into one of these approved plans. However this is a very technically complex area and careful planning needs to be undertaken as soon as share option plans are being considered for implementation in Colombia. How else can we compensate our employees? Colombia has a very comprehensive range of compensation and benefit options available for companies to offer their employees. Pensions, private medical insurance, life and disability cover are now commonplace benefits provided by many Colombia businesses to their workforce.

8 To discuss your requirements please contact the International Office on +44 (0) or us directly. Kreston International Kreston International Limited is a global network of independent accounting firms. Offering reliable and convenient access to efficient and seamless advisory and assurance services through member firms located around the globe, Kreston: Is ranked the 13th largest accounting network in the world Covers 105 countries Has 700 offices Has a resource of 21,000 professional and support staff. Our members are accustomed to working together to deliver cohesive international solutions to ensure clients receive the highest quality of expertise available in their respective countries. Beyond assurance, quality and experience, clients will enjoy the unique synergy that stems from the trusted relationships that Kreston members have created globally and which support the consistent delivery of exceptional international service. This information is provided for guidance only and is not a substitute for professional advice. Neither Kreston International Limited nor its member firms accept any liability for any loss arising as a result of actions taken or not taken based on the information contained in this document. The information in this document was prepared as at 30 November 2013.