Starting a business or expanding a business to Colombia is a desirable option in Latin America as Colombia has one of the most outstanding economies in Latin America for global trade and foreign investment.
To do business in Colombia, foreign investors do not need a local partner as the whole equity of a corporate entity can be foreign-owned.
Under Colombian law, any individual or entity that carries out businesses in Colombia on continual bases is obliged to establish a local presence. A local presence can be achieved in two ways; either by establishing a local branch or through the incorporation of a local company.
Establishing a local branch in Colombia
A branch is a commercial institution set up by a foreign company in Colombia. The board of directors of the foreign parent company and the parent’s legal representative in Colombia is authorized by the entity’s management and administration. Branches are not corporate entities independent from the foreign parents although, for tax and other bases, they are expected to maintain local accounting books. Installing a branch in Colombia requires the following documents:
- Certificate of incorporation and legal representative of the foreign parent company, granted by the official entity in the company’s domicile.
- Power of attorney (POA) granted to an individual to act on behalf of the foreign parent company.
- By-laws of the parent company.
- Resolution from the parent company approving the opening of the branch in Colombia, indicating the purpose of the branch, the amount of capital allocated to the branch, its legal address, its duration, the grounds for termination of the business, the appointment of a legal representative and powers, and the appointment of an auditor.
After compiling all the necessary documents, the next step is formalizing a public deed which must be signed by the foreign company’s legal representative.
Next, is receiving the letters of acceptance which must be acquired from the branch representatives assigned in the company’s bylaws, such as the legal representative.
The final step is obtaining the Branch’s tax ID (NIT) before the Colombian Tax Authority (DIAN).
It is also important to open a bank account in Colombia, within 15 working days of the registration of the Branch before the Mercantile Registry of the Chamber of Commerce.
The individual assigned as legal representatives of the Branch must be registered before the Colombian Tax Authority to obtain a Tax ID, hence, if such registration has not been done before the branch establishment, it has to be fulfilled before the Branch’s registration.
Note that all branch must have accounting books, which includes accounts journal and general ledger, and must be registered in the Chamber of Commerce.
The types of companies in Colombia
There are various types of business structures available for foreign companies in Colombia. Each of these business structures has different advantages and disadvantages, as well as varying scopes of business activities, registration requirements, and minimum capital requirements.
Under Colombian law, there are five types of commercial entities that can be incorporated:
- General partnership (“Sociedad Colectiva” in Spanish)
General Partnerships are companies where partners must oversee the company themselves or authorize a third individual to do so, as well as authorize a total or partial assignment of participation in the company. A minimum of 2 partners is obliged at all times. The Partners in a general partnership have subsidiary personal liability, and the partnership board is the highest corporate body.
- Limited partnership (or “Sociedad en Comandita Simple y por Acciones” in Spanish)
This is a hybrid type of company, where partners can either be limited partners or managing partners. Each type of partner has varied levels of liability, functions, and participation in the company. There are two types of limited partnerships under Colombian law. (I) The simple limited partnership, where the partner’s contributions are specified as participation quota; and (ii) the share limited partnership, where the partner’s contributions are specified as shares.
- Limited liability company ( “Sociedad de Responsabilidad Limitada” in Spanish)
The LLC is a hybrid type of company where partners can restrict their responsibility to the amount of their contributions but there are specific exceptions. LLCs must have a minimum of 2 partners and a maximum of 25, and such partners have voting rights based on the capital quotas that they own. An LLC is overseen by a Board of partners and its capital can be allocated to other partners or other third parties after authorization by the Board of partners. Modifications to capital quota assignment can only be done by an amendment to the Articles of Incorporation which have to be legalized by a public deed and registered with the Chamber of Commerce.
- Corporation (“Sociedad Anónima” in Spanish)
In a corporation, shareholders do not have personal liability. A corporation must have the Shareholders General Assembly, a board of directors, a legal representative appointed by the board of directors, and a statutory auditor. A minimum of 5 shareholders is required in a corporation.
- Simplified Joint stock company (“Sociedad por Acciones Simplificada” in Spanish)
SAS is a recent and adaptable type of commercial entity created under Colombian legislation. A SAS must have a shareholder’s General Assembly and a legal representative. It can have a board of directors if the shareholders desire it. A minimum of one shareholder is needed and there is no maximum requirement. Its shareholders have no personal liability and all its representative and management duties can be conducted by the legal representative assigned by the shareholder assembly.
Taxes in Colombia
At a corporate level, all entities are taxed based on their earnings and at a personal level, partners and shareholders are taxed on the basis of distributed dividends.
The general corporate income tax rate is 25% and there is also a surcharge to the income tax of 9%, known as the fairness tax (CREE), which has to be paid by every type of business structure. Companies in Colombia may also be subjected to the VAT and local taxes which is 16% for goods and services but may differ depending on the type of good or service rendered.
Colombia has numerous opportunities for any foreigner looking to start a business venture in the region. If you are ready to begin your Colombian venture and need the right firm to help with it, let’s go ahead and contact your Damalion expert now.
