Two decades ago, Colombia had a largely unfavourable reputation among much of the business community. Drug dealing and kidnappings were far from rare, inflation was beyond 20% and foreign investment flows were generally poor. However, the situation has shifted substantially since then, and Colombia’s economy has been growing quickly, transforming the country into one of the most important developing motors in the region.

A Growing Miracle

Politically speaking the country has seen a greater degree of openness since the 1990s, following previous periods of instability and dictatorship, with the government promoting international trade through an approach that has favoured foreign investment. Privatisation was regulated with a view to maintaining a balance between the necessary protection of state-owned assets and the need to attract new capital, both foreign and local. As a result, the government has overseen a concerted policy of privatisation in the banking sector, the electricity industry and in the telecoms business. This attitude of openness has been combined with a commitment to national security, leading successive governments to overhaul Colombia’s criminal law system, as well as to look for international alliances aimed at supporting the armed forces from both an economic and a strategic perspective. The combined effect has been to take the country to its lowest crime rate in decades by the end of 2013.

Colombia can point to a longstanding tradition of civilian government and democratic elections, although this has also alternated with a period of military rule in the 1950s. Political conflict has at times been intense and spilled over into violence; however, the strong separation of public powers has been respected – and even reinforced – with the promulgation of a new constitution in 1991.

The constitution has provided a legal framework to preserve the high degree of political independence accorded to the Bank of the Republic (Banco de la República), the state-run central bank, the country’s most influential economic policy-maker. The bank’s policies have resulted in a reduction in rates of inflation – which by the end of 2013 reached an historic low of 1.94% – as well as in a sound handling of currency markets. This has had the effect of preserving relatively stable exchange rates.

In demographic terms, Colombia is one of the few countries in the region with modern consumption habits, with over five cities with more than 1m inhabitants each. This has favoured demand for high quality goods and services, thus becoming an important contributor to growth. The middle class is increasing in size, with growing numbers of professionals completing their studies abroad. Indeed, the business community is pushing for further reforms.

Key Reforms

Recent years have already brought substantial legal reform in areas such as:

• Public-private partnerships (PPPs), an area where new regulations have been put in place over the past few years, with the intent of improving cooperation between the public and private sectors.

• Dispute resolution, on which a new procedural statute was issued last year with the aim of making the resolution of business disputes more efficient and less costly for the benefit of both the parties and the state. This has been complemented with a new arbitration statute adopting the UN Commission on International Trade Law (UNCITRAL) standard for international arbitration.

• Simplified stock corporations, under which it is now possible to have wholly owned subsidiaries with one single member, without the burdens of the usual formalities of traditional companies.

Additional reforms are expected with regards to health care and social security over the coming years, as well as in other spheres such as justice and administration, among other areas.

Corporate Law

Doing business in Colombia is relatively easy when compared to many other economies. Firstly, there is no need for government approval for the incorporation of companies or for the creation of business establishments, except in certain areas that are also regulated elsewhere, such as banking. Secondly, there are no nationality or residence requirements, either for the company’s shareholders or for its administrators, managers or employees. The principles of freedom of enterprise and equal treatment for foreigners have existed for decades in Colombian law, and have been raised to the constitutional level, thus providing the highest degree of legal protection.


The permanent conduct of activities by a foreign company in Colombia implies the creation of a local establishment that can be either a subsidiary or a branch. A subsidiary can be created through any of the six types of legal entities existing in Colombian law, and is an entirely different and separate entity from its owner(s) abroad, meaning that there is generally a separation of patrimonies and liabilities. The branch, although treated as an independent entity for certain purposes ( especially taxes), is considered as one and the same entity with the parent. Therefore, the parent becomes directly liable for everything that happens with the branch. Company law has evolved to a great degree in recent years. Up until 2009, Colombia had five types of companies whereby the limitation of liability was – and still is – the general rule with very few exceptions. There remained a high degree of overregulation, with burdens of plurality and with certain cumbersome requirements for the integration and payment of capital. In 2009, a new type of legal entity was created, the simplified stock corporation (sociedad por acciones simplificada, SAS). This follows the French model of SAS and corresponds to a hybrid type of company in which elements of a stock corporation and a partnership are combined.

Under these regulations, it has become possible to establish a company without any need to have a specific number of shareholders and without a limit in the ownership percentage that anyone may have. Most importantly, the entity can have a tailormade corporate structure in terms of capital, governance, rights and liabilities.

As a result, there has been a significant increase in the number of incorporated businesses, including many small and medium-sized enterprises (SMEs). Due to the size of the Colombian economy, SMEs represent a considerable percentage and formalising their activities has had the effect of creating more jobs and paying more taxes.


Also worth mentioning in the context of the regulatory environment of an SAS is (i) the incorporation of companies is less formalistic, since they may be created by a private document rather than through public deed, which means less costs and procedures than in traditional companies; (ii) the subscribed capital may be paid within a twoyear period, which means that no minimum contribution needs to be made at the company’s creation; (iii) a single shareholder, owning a majority of the company’s issued shares, may adopt decisions unless the by-laws otherwise provide, which represents a dramatic shift from the traditional regime where a plurality of decision makers was (and still is for traditional companies) always required; (iv) there are no restrictions on creating different classes of shares with substantially different rights for their holders; (v) it is not mandatory to have a board of directors, and therefore, the company can be entirely managed by the sole shareholder; (vi) the mechanisms for appointing board members (when there is a board in place) are much simpler than in traditional companies; (vii) shareholder agreements are widely recognised since they can be enforced before the company, and the company may, to a certain extent, serve as an instrument to secure the enforcement of agreements between the shareholders with no specific restrictions, as opposed to the more widespread type of regime, where the company can only be an instrument to secure compliance of certain voting agreements; (viii) corporate conflicts are generally deferred to the superintendency of companies, thus making the administration of justice more specialised and efficient in this area; and (ix) extension of liability to the shareholders may derive only from fraud or abuse. From various other perspectives, it should be noted that Colombian courts have traditionally maintained a respect for the liability separation between the company and its members, and that the Colombian legal market has become very familiar with shareholder agreements and other sophisticated structures adopted from abroad.

It should be noted that the superintendence of companies has been advocating for the proper use of corporate laws, and as a consequence, it has commenced issuing important decisions in cases where the abuse of corporate forms – especially the SAS – has been sanctioned, which rather than being a deterrent for the establishment of new companies, should act as a guarantee that shareholder and creditor rights will be respected at all times.

It should also be noted that in 2013 the Colombian government made it possible to create a working group at UNCITRAL, under whose aegis discussions will be held around the simplified creation of companies and the paths to formalise SMEs, based on the Colombian experience.

Foreign Investment & Exchange

Since the early 1990s, Colombia has adopted a flexible and open approach towards foreign investment. Generally speaking, foreign investment is allowed in all areas (with a few exceptions such as national defence), and there is no need for government approval to invest in a Colombian company, except for specific sectors where, as in a number of other countries and as a matter of public policy, strong regulations and controls exist such as banking.

Notwithstanding the foregoing, there are certain formal requirements associated with foreign investments which, although generally oriented only to gather information for statistical purposes, need to be properly handled to avoid sanctions and fines which can be substantial and may even go up to twice the value of the relevant investment.

Those formal requirements refer to (i) the obligation to channel all inflows and outflows of foreign investment through authorised institutions ( normally banks) in charge of the conversion of currency; and (ii) specific reports that must be presented to the Bank of the Republic, Colombia’s central bank, via certain forms. These forms must be completed and delivered to the commercial bank through which the currency conversion is made. The type of form used, in addition to the reference number for each kind of investment made, are central to the reports. As a result of this, failures on those aspects may be subject to sanctions.

Until recently, fund injections to companies were usually made only through capital subscriptions by their shareholders, especially considering that up to 2011, the only source allowed for foreign loans was established foreign banks qualified as such in their own jurisdictions and registered with the Colombian central bank. This situation, along with the fact that there are various restrictions for capital reductions to allow a shareholder making periodical cash outs, represented a serious burden to investors, who were looking for mechanisms to move funds back and forth with a certain degree of flexibility.

In October 2011, a new regulation was passed allowing both foreign shareholders and non-bank third-party financers to grant loans to companies located in Colombia, thus making currency movements much easier. Loans, whether intercompany or otherwise, are subject to tax requirements, and this has led the business community to combine loans with other alternative structures such as the implementation of the so-called supplementary investment account – only applicable to branches, not to subsidiaries – under which there is some sort of current account between the parent and the branch allowing them to bring funds and take them out without the tax burdens of loans or the corporate restrictions of capital reductions.

An additional point refers to the handling of foreign currency: Colombian companies are allowed to own banking accounts in foreign currency if they are held in banks located abroad, thus avoiding the foreign exchange risks related with the conversion of funds derived from foreign investments or exports, provided that those accounts are only used for certain purposes (imports and exports, for example), and provided further that those accounts and their movements are reported monthly to the Bank of the Republic using the appropriate forms. Notwithstanding this, there is a general prohibition of payments in foreign currency between local residents and companies, with certain exceptions existing for the oil and gas and mining industries.

As a complement, branches from the oil and gas and mining industries have a specific currency regime which, while allowing them to receive payments in foreign currency, brings certain restrictions for the acquisition of foreign currency in the markets, since such acquisition is permitted only to repatriate capital or to send abroad the income obtained from the sale of the resources exploited by them.


Following the conclusion of the economic crisis that the country went through between 1999 and 2000, new regulations were put in place. Although the new rules were originally intended to be provisional, their benefits were substantial and, as a consequence, the Colombian government proposed their conversion into a permanent regime, which with some changes and additions was materialised by Law 1116 of 2006. The ideas behind these rules are (i) to have a specialised judge for insolvency, which is the superintendency of companies rather than ordinary judges; (ii) the rebalancing of powers between creditors and debtors for reorganisation agreements, since the company’s shareholders now vote as all other creditors, and their votes will depend on their capital participation in the company and the company’s net worth, while in the previous regime a reorganisation agreement was a two party arrangement, where one party was the creditors, and the other party was the company, which of course gave the shareholders a disproportionate power to block the agreement or put undue pressure on the creditors; and (iii) to simplify the process in terms of steps, times and requirements, in order to quickly revive feasible companies or to promptly liquidate those which are no longer viable.

Insolvency Proceedings

Broadly speaking, insolvency proceedings have one of two purposes: to reorganise a company or to liquidate it. Reorganisations normally take place over a period of eight months. During the first four months, credits are presented and voting rights are determined, whereas in the remaining four, the parties shall come to an agreement based on their voting rights. If an agreement is not reached or if the agreement is not confirmed by the judge (superintendent), then (i) the company must go into insolvent liquidation, where in general terms, if the company’s assets are not sold within certain periods and conditions, they must be transferred to the creditors, or (ii) the company’s assets shall be assigned to the creditors, respectively. Some features of Colombian insolvency regime are as follows: 1) An important role has been assigned to the so-called “promoter” who is a specialised person appointed from an official list who, although s/he does not replace the company’s administrators, is in charge of reviewing the reorganisation plans, of proposing the allocation of voting rights based on the financial information presented, and of assuring proper and permanent communication channels between the company, its creditors, its shareholders and the superintendency, among others. Although a good promoter does not assure success to the process, a bad promoter assures its failure.

2) There is no compulsory filing as commonly occurs in other countries and, as a consequence, even if a company is in a situation where legal grounds for insolvency exist (i.e. two or more unpaid debts which have remained overdue for more than 90 days and represent no less than 10% of the company’s liabilities), alternative solutions can be sought such as private workouts. This represents an important advantage compared with what happens in other jurisdictions, because it gives the company’s administrators and creditors the flexibility they need to consider different alternatives without the fears of penalties and sanctions, provided that legal payment orders are always respected.

3) Private workouts can be converted into formal reorganisation agreements under certain rules and conditions. This is an important instrument to secure an agreement which, at the end, will be fully enforceable vis-à-vis third parties.

4) Stays of action since the beginning of the process assures the equal treatment of creditors, thus preventing any of them from demanding payment by means different from those provided under the insolvency proceeding. In addition, any arrangement for the payment of debts during the life of the process needs approval from the superintendency as the competent judge.

5) Acts that have been performed by the debtor before the commencement of proceedings such as sales, the granting of securities, payment arrangements, gifts or others can be revoked if it is found that they contributed to the insolvency situation or caused harm to the creditors. The term during which those acts should have been properly conducted in order to be revocable is between 12 and 24 months before the beginning of the process, depending on the type of act or agreement.

6) There are certain rules applicable to groups of companies such as the need for additional votes to agree on a reorganisation when a majority of votes come from the same group or the legal presumption of liability from the controlling entity with respect to the insolvency of any of the companies under its control, which may lead to liability extensions to the controllers unless the presumption is successfully rebutted. These measures have been complemented with recently issued rules for the insolvency of groups of companies, whereby various companies within the same group can be taken to the same insolvency proceeding under certain circumstances.

7) New rules have been created for transnational insolvencies, whereby insolvency procedures conducted abroad for multinational companies may have some effects in Colombia, and vice versa.

Legal Reforms

Although this is an extensive and complex area of law, it can be said that Colombia has substantially modernised its insolvency system with legal reforms that started in 1989, and that our law updates have been made thanks to joint work of the Colombian government and international organisations such as the World Bank and UNCITRAL, among others, all of which has represented a big success for the Colombian insolvency system as compared with other similar countries.

Data Protection

Colombia was not in line with international standards for the protection of personal information until 2013. Data protection rules in Colombia were limited to applicable to financial information handled by banks and credit bureaus. Since 2013, however, new regulations have come in effect. Those regulations are aimed at generally protecting all personal data pertaining to individuals, bringing broad concepts of (i) “personal data”, which basically refers to all information related to a person that can make that person identifiable, and (ii) “handling” of personal data, which refers to any and all activities that can be conducted with personal data, not only for sharing it with others, but also for its storage, inclusion in or removal from databases.

As a consequence of the new regulation, all companies dealing with personal data must publish a data protection policy, and there is need for express approval from those individuals whose personal data will be handled. The approval cannot be generic, and therefore, it must be more specific as to the type of activities authorised with such personal data, as well as the purposes for which the authorisation is given. In addition, the transnational transfer of personal data needs to be expressly authorised, and there are certain additional regulations with respect to so-called sensitive information, such as that pertaining to children or teenagers, as well as that related to sex, race and religion.

Although this regulation can be seen as an additional impediment to conducting business, in fact it constitutes the entrance of Colombia into the league of countries with strong protections for personal information. Rather than a burden, this should be regarded as an assurance of respect that goes in line with the Colombian democratic tradition and brings an additional motor for development.

Procedural Law & Enforcement

Since 2012-13, new procedural laws have been in place with the aim of reducing the steps and duration of judicial proceedings and to make the administration of justice more efficient and effective. The new rules – which are based to a considerable extent on the Spanish Law of Civil Judgments – have as their core feature the evolution from a mainly written system to a primarily oral procedure. Until now, Colombian courts have been extremely congested by legal writs, since the main steps of all types of proceedings ( lawsuits, allegations and even evidence presentations) are conducted in writing. As a consequence, not only has access to justice been restricted from those sections of the population without physical and technical resources to formalise their claims in writing, but also serious adverse consequences have been derived for judicial procedures and their outcome, because any omission from the judge in examining those written pieces may give rise to appeals and even to claims for nullification of the process once it has gone all the way through. The current regulation, while still preserving the essential rights of defence and of a proper and complete procedure, is intended to eliminate these burdens by bringing the principle of orality and by substantially simplifying the process.

Generally speaking, it can be said that judicial proceedings are now completed in three stages, all of which have been conducted through various hearings. Those hearings refer to (i) presentation of the claim, which is now less formalistic and burdensome than it was, and as a consequence, has a minor risk of rejection by the courts as compared with what happened with the previous legislation; (ii) evidence presentations, which still admit written evidence but do not allocate the highest weight on those; and (iii) allegations and the final decision.

The new process will apply to both private procedures and claims against government-owned entities, and the transition from the old process to the new one has been designed to be gradual, whereby it is first expected to introduce the orality principle, and thereafter move to the simplified procedure.

These reforms, applied to traditional courts, have been reinforced through the issuance of a new arbitration law. Although a strong arbitration culture is deeply rooted in the Colombian legal system, and alternative dispute mechanisms – specifically arbitration – have been promoted from the Colombian Constitution, arbitration rules had been scarce, inconsistent and scattered. Through the new statute, a unified system has been created, and the UNCITRAL model law for international arbitration has been adopted. The extension of the process has been limited to six months, extendable for an additional equal term, and the role of arbitration centres has been enhanced, thus recognising the growing importance of long-standing institutions such as the Conciliation and Arbitration Centre of the Bogotá Chamber of Commerce which, with more than three decades of experience, has actively fostered the expansion of the arbitration culture between lawyers and entrepreneurs. The new statute also provides for online arbitration, and this is set to be further developed through additional decrees and resolutions on which the Ministry of Justice is already working.

Tax Reform

A new tax reform was introduced at the beginning of 2013. Generally speaking, Colombian corporate tax levels have been very similar to those of individuals. The new law has created certain differences. However, at the same time, it picks up rulings and principles that have been developed through the years by the tax authorities and courts, thus raising them to legal principles.

Main Features

Although this is, as in other countries, a substantive and difficult area of law, some of the most important features of Colombia’s tax system can be summarised as follows: (i) Prior to legal reform, corporate income tax was 33% and additional payments were due to the social security systems which represented a substantial burden to employers. After the legal reform, the income tax rate was reduced to 25% and certain contributions to the social security system were lowered or eliminated but in exchange for such reductions, a new tax was created – the so-called “CREE” – which is intended to cover those certain social security payments that were also reduced or eliminated. The CREE rate is 9% for around two years and will be reduced to 8% thereafter, so that the net effect in taxes will not change but the overall effect of taxes plus contributions will represent a reduction of burdens for entrepreneurs. (ii) The number and extent of deductible payments recognised for individuals, for example employees, have been reduced, all of which will represent higher taxation, particularly for high-income employees who derive more than 70% of their income from salaries. (iii) Capital gains derived from the sales of assets held in Colombia (including company shares) have been reduced from 33% to 10% if and when the sold asset was held for more than two years. This is an important rule, especially in the context of mergers and acquisitions transactions and the investment cycle of private equity funds, for example, because there is an obligation not to sell assets below 75% of their market value, and therefore, the capital gains tax was a serious deterrent for sales that demanded a great amount of time, cost and effort to be properly handled through alternatives different than direct sales. (iv) In connection with foreign loans, it is now clear that: (a) there is a 14% withholding on loan interest paid to lenders abroad, if the loan term is for a period of more than one year, whereas if the term is less, then withholdings will be applied at a 33% rate; (b) if withholdings are not properly applied, then the interest payments cannot be deducted by the local lender from its income tax basis; (c) newly-created thin capitalisation rules state that there must be a ratio of 1:3 between debt and patrimony in order to deduct interests on foreign loans. (v) Transfer pricing rules, in force since the year 2007, provide that all operations between a local company and its affiliates abroad must comply with: (a) substantial obligations, under which those transactions must be at arm’s length (on market conditions as compared with similar transactions conducted with unrelated parties) and (b) formal obligations, consisting of the obligation to have supporting studies showing that the transactions are being carried out on market conditions, plus an obligation to file an annual declaration of intercompany transactions with the tax administration. (vi) These rules have provided certainty as to the way in which assets can be contributed to companies. Although this was an area in which transactions were being conducted based on previous decisions from the tax authority, which were thus still subject to interpretation, the main content of those decisions has now been incorporated into the law. Under these provisions, when contributing assets to a company, it can be decided (a) that they are contributed at the same cost basis that the investor previously had on those assets, or (b) that their value shall be updated for purposes of the contribution.

In the first case, if a low cost was initially registered in the investor’s accounts, then such a low cost will remain in the company to which the assets are contributed, which means that, although any future sale is likely to be taxed, the transfer to the company in which the assets are contributed is not.

In the second case, a step-up is being made, so that the cost basis is increased. As a result of this, the decision in this case, as opposed to in the previous one, might imply the payment of taxes when the assets are contributed. It will most likely prevent such payment from occurring in a subsequent sale, or at least make them low. (vii) Additional rules have been created for corporate reorganisations, whereby in some cases it can be considered that, in fact, an internal reorganisation of assets and investments is being conducted and therefore no taxes are imposed, while in some other cases it can be considered that the intended reorganisation is really an intermediate step for a transfer, and therefore, taxes would accrue. (viii) The new system has also brought certainty as to the equal tax treatment for dividends obtained from branches and subsidiaries in Colombia. The general principle is that if profits have been taxed at the local company or branch level (which is normally the case), then the dividends will be tax free for the shareholders or parents, as the case may be.

From this perspective, it is important to consider the so-called First Employment Law, issued in 2010, upon which newly created companies applying for the benefits of the said law, and that have the conditions to be considered small enterprises, will have an income tax of 0% for the first two years of their life. Thereafter, they will start being taxed gradually, provided that they do not lose their condition of small enterprise. As a consequence, the full income tax rate will only apply upon completion of their sixth year of existence. For these purposes, a company is deemed to be a small enterprise when it has less than 50 employees and has assets for less than 5000 minimum monthly wages, which at current rates is equivalent to $1.5m. (ix) Finally, the new tax regime brought several provisions with respect to “permanent establishments”, which refer to those situations where a foreign entity is deemed to have a permanent establishment in Colombia for tax purposes, even if an establishment has not been formally created. These provisions may not be considered as entirely new to the Colombian legal system, since the situations where a permanent establishment is deemed to exist basically coincide with those set forth in company law as giving rise to the obligation to incorporate a business establishment. Therefore the real novelty is just the idea of being taxed as if an establishment were formally incorporated even if that is not the case.


Under the Colombian merger control regulation, any merger, acquisition of control, consolidation, or any other type of integration (whether horizontal or vertical), notwithstanding the form of the proposed transaction, is subject to previous merger control when the operational revenue or the total assets of the parties to the transaction, jointly or independently, exceeded 100,000 monthly minimum legal wages (approximately $32m) during the previous fiscal year (from January to December).

If a deal were to fall within the above-mentioned parameters, the applicable procedure depends on the combined market shares of the parties to the transaction in the relevant market. The applicable procedure can be either one of simple notice, if the combined market share of the parties is less than 20% in each of the relevant markets of the transaction, or else an authorisation request, in the event that the combined market share exceeds 20%.

Colombian regulations bring the which means that: (i) merger control takes place before completing the corresponding business transaction, and (ii) the parties are subject to a standstill obligation, which means the transaction may not close and may not produce any effect before the antitrust authority issues the authorisation.

It should be noted that, although the antitrust authority has the power to deny authorisation, in practice its approach has been to condition the deals to certain acts such as divestments of certain assets or businesses by the intervening parties.

Customs & Trade

Reference should also be made to recent significant developments in Customs and trade. The current government is committed to the elimination of trade barriers. As part of this policy, Colombia has signed more than 15 free trade agreements, the latest of which took the form of a strategic alliance closed on February 10, 2014 between Mexico, Peru and Chile through the so-called Pacific Alliance (Alianza del Pacífico). Through this mechanism, Customs tariffs will be eliminated for 92% of the traded products in a very short period of time. These agreements have given access to Colombian products into countries as varied as the US and Turkey. They also imply the adoption of international standards on issues including labour, environmental law and intellectual property.

These agreements are expected to further social and economic development within all corners of Colombia, in a way that can advance the country’s mission of joining the ranks of the developed world.