Better mandate for growth: A commitment to foreign investment through legal upgrades

In the past decade Colombia has become an important economy in the region and an attractive destination for foreign direct investment (FDI), following ongoing political and economic measures aimed at increasing foreign trade and attracting FDI. With a growing middle class and strong financial sector, Colombia is a stable destination for investors, multinationals, middle market companies and private equity funds.

BACKGROUND: In 2012 a key change took place with the enactment of the tax reform. The reform’s goal was two-fold: to make tax collection more effective and to redistribute the burden of contribution by taxing more heavily those in higher income brackets. With the implementation of the tax reform, the government anticipates an increase in tax collection. While the Ministry of Finance (MoF) announced its goal to reach a fiscal deficit of 2.4% of GDP by 2014, the end of the current term, it is now set to reach a deficit of 2.2% by the end of 2013, which would mean that the MoF accomplishes its goal one year earlier than planned.

Since 1990 Colombia has attempted to modernise its legal system to promote economic growth and protect FDI. An important milestone was the negotiation and execution of a free trade agreement (FTA) with the US. In the wake of the success of the US-Colombia FTA, additional FTAs are being negotiated with Panama, China and Japan, among others.

As part of its commercial strategy, Colombia is aiming to join the Organisation for Economic Cooperation and Development (OECD), which could improve governability, allow the country to increase efficiency and raise competitiveness standards to international levels. Colombia is currently an OECD member in the UN Convention against Corruption.

TAX REFORM: One successful measure to attract FDI was the law that allows for the creation of free trade zones. These special tax zones allow investors to develop a specific activity while enjoying lower tax rates and Customs benefits. Foreign investors enjoy lower income tax rates, as well as tax exemptions that benefit strategic industries. Meanwhile, Colombia benefits from the improved technology brought by new investors. Another advantage to new entrants are tax exemptions offered under Plan Vallejo (to foreign investors who guarantee that all of their production is exported).

Despite the country’s sustained economic growth, there are a number of challenges to be overcome, namely the strengthening of law enforcement, the harmonisation of environmental requirements and the development of the mining industry. The judicial system has also faced several hurdles, mainly in the enforcement of contracts due to bureaucratic delays.

Another issue is the lack of flexibility in labour laws, which makes it difficult to reduce the unemployment rate. Colombia ranked poorly in the area of enforcement of contracts, at 154th, but reached an impressive sixth place in protection offered to foreign investors, according to the World Bank’s “2013 Doing Business” report.

As a result of the economic policies adopted in the past 10 years, Colombia has emerged as the fourthlargest economy in Latin America behind Brazil, Mexico and Argentina, respectively. Additionally, the Andean country, together with several other emerging markets, is part of a bloc known as Colombia, Turkey, South Africa, Vietnam, Egypt and Indonesia (CIVETS). CIVETS expects to record growth rates of 4.9% over the next 20 years. Indeed, Colombia’s economic growth has been the result of congruent legal and economic policies.

Throughout this detailed legal review we will proceed to explain and address the most relevant laws currently in force in Colombia, covering a wide range of subjects including FTAs, corporate law, investment law, labour law, property law, tax law and infrastructure.

CORPORATE LAW: Simplified Stock Corporations: The introduction of the Simplified Stock Corporations (Sociedad por Acciones Simplificadas, SAS) represents a considerable advance towards providing flexibility and simplicity for investors looking to set up new corporate entities. Law 1258 (2008) updated the corporate legal structure by reducing transaction costs and formal requirements for setting up a corporation. In particular, the SAS waved the requirements to incorporate the company through a public deed or have more than one shareholder. Additionally, the company need not have a board of directors or statutory auditor.

There are no requirements in terms of amount of subscribed and paid up capital, and the payment of shares can be made within two years from incorporation. The creation of more than 11,000 SAS during the first year of its implementation demonstrates the success, effectiveness and acceptance of this corporate vehicle. That number is expected to continue to increase as a result of the new and simplified process. Agency Agreements (AA): In an agency agreement, a merchant undertakes, in an independent and continuous manner, the promotion and/or exploitation of services and products in a specific geographic area, as the other party’s agent, distributor or manufacturer. The compensation of the agent may consist of commission, royalty or profit.

With the execution of the Colombia-US FTA, the former agreed to implement reforms to certain aspects of its corporate regime. The US has no particular laws regarding AAs, and the FTA contains regulations regarding AAs specifically when one of the parties involved distributes commercial products for a third party. Colombia must now adapt its Commercial Code to reflect the terms of the FTA. Trademark Protection: With the Colombia-US FTA both countries must now create strong enforcement provisions to ensure that their intellectual property is protected. Colombia ratified the Trademark Law Treaty and the Madrid Protocol, allowing the simultaneous registry and protection of trademarks in numerous countries. The Madrid Protocol allows the protection of a trademark in up to 86 countries and the EU through one single application, in one language (English, French or Spanish) and one set of charge fees in Swiss francs. Further, trademark registry licences are no longer required to validate or consolidate trademark rights. Decision 486-2000 by the Andean Community (AC) affirms that the trademark registry is a requisite to oppose any trademark rights against third parties.

FREE TRADE AGREEMENTS: The execution of several FTAs has forced Colombia to implement legal reforms to enforce these agreements. In a short to medium term it is expected that reforms of fiscal and infrastructure matters aimed at updating and speeding up the Customs system will be implemented. Colombia-US FTA: The implementation of the Colombia-US FTA was one of the key measures to FTAs in 2012, as the trade pact significantly benefits both nations and companies seeking to expand their businesses. Several modifications in the Colombian legal structure are now being implemented while others already came into effect at the time of ratification.

The US is Colombia’s main trading partner and the FTA gives Colombia the opportunity to access the American market without any fiscal barriers, which will allow Colombian products to be competitive in a vastly developed market. The arrival of new middle-market US companies is expected to help generate jobs and contribute to GDP growth.

According to the Colombian Ministry of Trade and Commerce, the FTA is expected to generate around 380,000 new jobs and increase Colombian GDP by 1%. The Colombian-American Chamber of Commerce views the FTA as an instrument offering stability as well as a useful tool to set the boundaries of engagement between the two countries. The FTA provides an opportunity for both parties to promote economic growth, increase jobs, enhance competitiveness and take bilateral trade to the next level. Colombia and the US established a legal framework protecting foreign investment made by their nationals in the other country. Regarding public procurement, Colombian small and mediumsized enterprises will have access to the public acquisitions taking place in the US and the opportunity to execute contracts not exceeding $125,000.

In the agricultural sector, Bogotá has included measures for the protection of agricultural products and certain sectors of the national industry that are likely to be affected by the added competition of larger US counterparts. Various legal mechanisms were established to ensure the protection and effective access of “sensitive” or “vulnerable” products (including rice, poultry and dairy products), the effective re-establishment of the Andean Act of Trade Promotion and Drug Eradication between the US and Colombia as part of 2012’s FTA, and the entry of products such as fruits, dairy and tobacco, where Colombia is highly competitive, would be allowed.

In services, reforms aimed to eliminate any legal access barriers, maintain autonomy for social security programmes and remove fiscal restraints regarding access to technology. The elimination of these barriers aimed to end with any limitations to service providers, allowing all services to be rendered by foreign suppliers and ridding any restrictions.

Some critics argue that Colombia is not ready for the creation of such an FTA, due to a lack of infrastructure to move the additional goods arriving in Colombia. Moreover, they note that Colombia’s legal framework does not provide the necessary protection to allow Colombian companies and service providers to compete against larger and more competitive players.

The negotiation and execution of FTAs with the US, EU and South Korea has generated wide opposition in Colombia. Many sectors feel threatened and fear they will not be able to compete against larger and more developed foreign participants. For example, the automobile and appliances segments have expressed concerns about competing against stronger Korean products. This industry generates more than 100,000 jobs in Colombia and the entry of Korean products in large quantities may affect the viability of local vendors and directly impact employment figures. FTAs & Negotiations: Currently Colombia upholds FTAs with the US, Chile, Switzerland, Lichtenstein, the EU, Mexico, certain Central American countries, Argentina, Canada, South Korea, the AC (Peru, Ecuador and Bolivia) and Costa Rica.

Despite the concerns of a number of sectors, the government is keen to implement additional FTAs and strengthen commercial ties with global partners. Negotiations are currently taking place with Japan, Costa Rica, Panama, Israel, Turkey and the Pacific Alliance, among others. Bogotá continues to undertake aggressive policies toward establishing a number of commercial agreements, which, combined with reduced tariffs and fewer trade restrictions, will foster economic growth and help consolidate its competitive advantages. FTA Benefits: Colombia offers several competitive advantages to foreign investors: equal opportunity to access the country’s raw materials, a discriminationfree environment and a large middle class with modern consumer habits.

Foreign investors benefit from greater access to raw materials as the Andean nation relies on its deposits of oil, gold, nickel, natural gas, iron ore, silver, coal, platinum and emeralds. Indeed, the sectors with the largest FDI are mining, oil and gas.

Investors also benefit from the transfer of technology as Colombia was recently ranked fourth in the region under the Global Innovation Index. The index highlights Colombia’s performance in the categories of knowledge and technology as it provides a capable workforce and quality infrastructure in several cities. Special mention was given to Medellín as one of the country’s most innovative cities.

In addition, other countries may use the FTAs as a platform, not only to reach Colombian consumers, but also to tap into other Latin American countries. With the fulfilment of original requirements, companies whose nationalities are not part of the FTA may also benefit. For example, the German automobile industry has incorporated assembly factories in Mexico that benefit from tax exemptions provided by the FTA between Mexico and Colombia. The Germans benefit from a larger demand for automobiles, while Mexico benefits from FDI and Colombia from the possibility of acquiring German automobiles at a reduced cost. Updating Customs: With the enactment of Law 1609 in 2013, the legal system for Colombian Customs was modified to facilitate imports and exports and fulfil the requirements of existing FTAs. Legal principles such as good faith, impartiality and responsibility are established as legal pillars, and new deadlines are given for the issuance of new decrees and resolutions that further develop the principles in the new Customs law. The government is obliged to implement systematic statistic models to prevent money laundering, illegal contraband and corruption among public employees.

INVESTMENT LAW: Recent nationalisations in Latin America have reminded investors of the legal risks and the need to choose countries with consolidated legal systems that grant protection and due process to foreign investors. One attractive tool that differentiates Colombia from any other Latin American legal system is a legal safeguard designed to protect foreign investment. Law 963 of 2005 allows the government and any private entity to enter into an agreement whereby the terms are “stabilised” for 20 years, ensuring they will remain unaltered by subsequent legislative changes.

The Colombian exchange control regime regulates the free transfer of capital abroad (including repatriation of dividends), profits, interest earned, dividends and reimbursements of capital. The foreign exchange regime is regularly adapted to new products and requirements of foreign investors: the Central Bank recently created new conditions allowing Colombian issuers to implement sponsored Global Depository Note programmes. Bilateral Treaties: Colombia upholds international treaties known as bilateral investment treaties. These guarantee the promotion and protection of foreign investment, by including an equal treatment clause, which ensures that foreign investors receive the same treatment as local investors, except in specific cases related to national security.

Colombia has successfully negotiated bilateral investment treaties with Switzerland, Spain, Peru, the UK, China, Japan and India.

INFRASTRUCTURE: The National Agency for Infrastructure (Agencia Nacional de Infraestructura, ANI) announced that the government would increase threefold the amount to be invested in infrastructure in Colombia up to 2014. The infrastructure plan will be developed during the next decade, as the need to update Colombia’s infrastructure can no longer wait. Fourth Generation Toll Road Concessions (4G): ANI has launched a $22bn toll road competitive bid, the largest in Colombia’s history. The project, known as 4G, or Cuarta Generación de Concesiones Viales, awards selected developers with around 3200 km of roads which will interconnect strategic industrial sections of the country with commercial zones and ports. Public-Private Partnerships (PPPs): The creation of PPPs came into effect pursuant to Law 1508 of 2012. The legislation sets up the legal framework for the promotion and regulation of private investment in public assets. The PPP is established through a contract between the government and private entities to develop public assets and provide related services. According to government projections, the PPP law is expected to triple the number of public projects undertaken by private parties. Some aspects of the PPP law are still under review for subsequent regulation by decree.

PPPs allow private investors to negotiate with government entities regarding agreements on infrastructure maintenance, construction and operation of public assets. They offer an alternative to lengthy and sometimes expensive concession agreements. Under the PPP law, the private party designs and undertakes the project, reducing government risk and expense.

The creation of this mechanism is attractive for private investors as their project has priority. If any other participant joins the bid, the initial party may match the subsequent offer and the winning party earns fees from the administration and use of the infrastructure for a maximum of 30 years.

PPPs offer the possibility of breaking ground on the work without receiving any payments, which result in the infrastructure work commencing much faster than under traditional government contracts. This factor is taken into account by the government, which recognises the delay in infrastructure development as a result of the rules governing concession agreements. For the private investor PPPs offer a wide range of investment possibilities for the private sector, one of President Juan Manuel Santos’ objectives.

Shortly after the signing into law of the PPP initiative, several projects were identified as high potential. The ANI has received PPP proposals varying from the construction of railway lines, highways, airports and convention centres, to the renovation of areas in cities. 4G Tendering: The government conducted a public tender process to implement the Fourth Generation of Mobile Phone Communication technology. It is expected to offer seven sections of spectrum for 4G to which six operators applied. Five operators gained a piece of the spectrum.

With the implementation of 4G technologies, Colombia aims to promote greater competition among mobile communication providers, improving the quality of wireless communications, expanding coverage and promoting the use of the internet among Colombians. After the auction, the Ministry of Information and Communication Technologies has announced its goal to reach 100% 4G coverage in all municipalities by the end of 2014. Additionally, all wireless service providers that received one or more 4G sections of spectrum are obliged to offer mobile data plans, including internet connection for tablets and computers for students and teachers, who are part of the Public Educational Institutions, with the objective of covering more than 1m new high speed internet connections before July 2014.

New competitors will pay less than previously established competitors, as there is no need to build a new wireless backbone infrastructure. 3G wireless providers were obligated to pay an additional tariff for the use of the spectrum and make improvements to their current 3G services, if they want to offer 4G services. To promote competition, established participants had to ensure the supply of mobile network coverage to new entrants, charging fees for “lending” part of their capacity. The Colombian Communications Commission was defined the fees charged by existing carriers to the new competitors. Double-Taxation Treaties (DTTs): On the international front, Colombia continues to negotiate and sign DTTs. Colombia has executed treaties with Spain, Switzerland, Canada and Chile, and is negotiating or enacting similar treaties with various other countries. Colombia has followed the model created by the OECD. The country also applies the Double Treaty Convention with the members of the AC. Labour Law: Law 1429-2010, known simply as “First Employment Law”, is probably the most significant recent advancement for labour law in the country. The Colombian labour situation has encountered a number of difficulties, including high unemployment and informality rates. This law proved to be an excellent legal tool by establishing benefits for 45,000 businesses and approximately 400,000 individuals over the course of the past 12 months.

The government has used this law as a tool to minimise informal employment and fight unemployment. Despite economic growth, unemployment is still high with figures reaching 12.1%, while informal employment reached 44% of the working population in 2012. The Law of First Employment seeks to legalise informal businesses and jobs, generate formal employment and increase the earnings of those with unskilled employees and informal businessmen by granting tax credits to small and medium-sized start-ups.

Advantages for small businesses are created to promote growth and employment by decreasing labour costs during the first four years following start-up. Allowing companies the progressive payment of payroll taxes and contributions to the solidarity pension fund reduces labour costs and fosters employment. These benefits are only available with the employment of people under age 28, individuals subject to forced displacement, in processes of integration, disabled, women of 40 or over without recent formal work experience, and heads of households from disadvantaged economic backgrounds.

DISPUTE RESOLUTION: To address the difficulties in enforcing contracts, the government has identified a slow response to provide sufficient protection and speed in the enforcement of contracts and dispute resolution. In an attempt to modernise the judicial system to speed up decisions, oral trials are now allowed. The structural change is still being implemented and will take some time to be widely available. Nonetheless, it offers a glimpse of what Colombia can expect in terms of law enforcement.

Additionally, a new Code of Civil Procedure was enacted to reduce judicial congestion and provide more effective justice. Law 1564 of 2012 covers civil, commercial, agricultural and family civil proceedings, as well as proceedings that fall under no specific category. The code will gradually enter into force and gives judicial powers and competence to administrative authorities, modifies the existing rules for the allocation of cases, enforcement of guarantees, and regulates the intervention of the newly created National Agency for the State’s Legal Defence.

The Code also provides that any first instance decision or any other decision issued in proceedings with no possibility of being appealed must be rendered within a maximum of one year, starting from the date the lawsuit is accepted. Understanding that investors need legal decisions to be made in a reasonable period of time, the regulation allows for alternative dispute resolution methods. Colombia has now seen an increase in the number of disputes resolved by arbitration and a tendency to include arbitration clauses in many contracts between private enterprises. As a result of the increase in number of arbitration proceedings, Congress enacted Law 1563 of 2012 which lays out the National Arbitration Statutes (NAS).

The NAS keeps the possibility of resolving disputes by submitting them to local or international arbitration. The statutes implement rigorous regulations to consolidate arbitration as an effective mechanism to solve disputes and ensure the validity and enforcement of arbitral awards. Colombian law does not limit the inclusion of arbitration clauses in private or public contracts. Additionally, it provides the extraordinary annulment appeal for arbitral awards. With the fulfilment of the requirements established under the law, the challenged arbitral award is sent to the competent judicial authority when the decision adopted by the arbitral panel affects due process.

PROPERTY LAW: Colombia has undergone a long and consuming internal armed conflict. As a result, armed groups and paramilitary squads have forced a large number of Colombians living in rural areas off of their land. The enactment of the Victims Law was a milestone in Colombia’s objective to counter the effects of the armed conflict. The adoption of this law seeks to stop the theft of land, allow those who have lost their land to return to it, and annul the illegal transfer of land.

As part of this new legislation, those who have suffered the theft of their land or who have been displaced can initiate a legal procedure before a judge to have the tract of land returned to them. The government has labelled this law an unprecedented effort both from Congress and the judicial system to restore order in title and land ownership. No true peace can be achieved without proper restitution.

These are exciting times for Colombia, though both Congress and the government are aware of both the need to adapt the country’s legal system to meet international standards and the challenge that comes with achieving this. The implementation of sound economic policies together with adequate social investment will allow the country to continue down a path of sustainable growth, while also fostering the image of an attractive destination for foreign investment. OBG would like to thank prietocarrizosa for their contribution to THE REPORT Colombia 2013