Legal and tax incentives for investment in Colombia

As a result of government policies, Colombia has experienced unprecedented growth in foreign direct investment (FDI), mainly in the tourism, real estate, technology and pharmaceutical sectors, leaving behind its dependence on oil, mining and natural resources. As one of the emerging Latin American champions, and as a member of the Pacific Alliance Trade Agreement, Colombia is a key market for medium and long-term investors to consider.

This article will discuss the main legal and fiscal incentives for foreign, and in particular UK, investment in Colombia.

Tax Incentives

Colombian tax legislation has abundant tax incentives for investors. These benefit many sectors in which the UK is particularly strong, such as the fintech sector and creative industries, as well as the hotel industry and tourism. Also, tax benefits could attract UK investors in sectors such as agriculture, given the existence of buyer demand for these products and trade agreements to facilitate trade between the two countries.

Some of the tax incentives available will be discussed below.

Fintech and creative industries

Colombia's current government has focused on shifting the country's economic dependence from natural resource extraction (gas, oil, coal, etc.) to an economy based on talent, creativity and technology. This project has been called "Orange Economy" and has been granted important tax incentives such as seven years of exemption from the income tax rate for companies or entities incorporated before December 31, 2021 that have their creative project approved by the Ministry of Culture, hire a certain number of employees (according to their annual income) and have a total gross income of around $800,000.

This benefit is extended to companies whose main purpose is to undertake technological and/or creative industry value-added projects such as software publishing, APP creation and computer systems testing, film production, visual arts, theater and musical creative activities.

On November 8, 2019, a government plan (CONPES 3975) was approved to incorporate digital transformation and artificial intelligence as national policy, both in the public and private sectors. An investment of more than US$40 million is planned to implement these measures by 2022.

The Colombian banking system has had great results with accumulated profits of around $12 billion up to the second quarter of 2019, so it grants a huge opportunity for the penetration of the UK fintech industry in Colombia with products such as peer-to-peer lending that do not exist in the country but are well developed in the UK.

Hotel and tourism industry

Tourism is considered the "new oil". Since 2003, there has been a 100% income tax exemption for hotels being built and refurbished. As a result, 48,708 new hotel rooms have been created and 27,000 have been refurbished.

The latest tax reform establishes that a 9% income tax rate will be applied for 10 years for hotels to be built in municipalities with more than 200,000 inhabitants, and an additional 10-year exemption for municipalities with less than 200,000 inhabitants. In addition, value added tax (VAT) exemptions will be applied to hotel services provided to non-residents, which will reduce the overall price of rooms by 19%.

The agritourism sector, referring to companies with hotels operated or renovated in certain rural municipalities and meeting certain conditions, also benefits from an income tax rate of 9%. This will apply to ecotourism theme parks and marinas, among others.

In addition, some regions of Colombia (mainly those located in municipalities where the armed conflict took place -known as ZOMAC- or on the border with Venezuela -ZESE-) have tax exemptions ranging from 0% income tax for a certain number of years if certain conditions are met (mainly the hiring of a fixed number of workers and the investment of a certain amount of monetary resources). Incorporating and managing hotel companies in these regions can be interesting from a tax point of view.

Agricultural industries

The latest tax reform (Law 1943/2018) grants an interesting tax exemption consisting of a 10-year income tax exemption to investments made for the development of the Colombian agricultural sector, and that meet certain conditions (mainly referring to a minimum investment of approx. US$250,000 in a six-year period, a maximum income of approx. US$800,000 per year, having the company's headquarters in the municipalities where the project is located, and the hiring of labor of a minimum of 10 people per project). For the tax exemption to apply, each project must be approved by the Ministry of Agriculture.

These incentives, in addition to the peso/dollar exchange rate, have led to a flourishing agricultural industry, especially for export purposes. Due to these factors, industries such as avocado, cocoa and medical cannabis have achieved unprecedented growth.

Upcoming legal reforms

A constitutional reform aimed at incorporating a principle of investment security and fiscal stability for investors (both foreign and domestic) is currently being processed in Congress.

This reform of the Constitution will give investors the right to know that the basic rules by which they invest will not be subject to adverse change, allowing investors to predict the long-term performance of their investments.

In addition, a new tax reform, which aims to confirm and extend the aforementioned tax benefits, is currently making its way through Congress and is expected to be passed before the end of 2019.

Existing treaties

Colombia and the United Kingdom have had, since the Latin American country's inception, a long history of mutual cooperation. During this period, more than 32 treaties, on issues ranging from cooperation in agriculture and railway construction to defense, have been signed by both nations.

The most relevant existing treaties, for the subject under consideration here, are the UK-Colombia Double Taxation Treaty (DTT), the Bilateral Agreement for the Promotion and Protection of Investments (BIT) between the UK and Colombia and the Business Continuity Agreement (Trade Agreement) between the UK and the Andean Countries (Ecuador, Peru and Colombia).

UK-Colombia DTT

This DTT, signed on November 2, 2016, entered into force on December 16, 2019, as the respective legislative and ratification procedures of both countries have been completed, diplomatic notes have been exchanged and, in the case of Colombia, the Constitutional Court has declared the constitutionality of the law approving the DTT. The agreement will take full effect in the United Kingdom as from January 1, 2020 (for withholding taxes), April 1, 2020 (for Corporate Income Tax) and April 6, 2020 (for Income Tax and Wealth Tax), and in Colombia as from January 1, 2020, for withholding taxes and other taxes.

This DTT is based on the OECD model, but differs from other DTTs signed by Colombia in that it is the first one to be negotiated post-BEPS and, in that sense, it is not included among the treaties to be amended by the Multilateral Agreement on the Application of Measures Related to Tax Treaties (MLI).

This DTT incorporates several aspects that are not specifically addressed by other Colombian DTTs such as:

- The extension to pension funds;

- including the OECD BEPS recommendations on the illicit use of permanent establishments (anti-fragmentation rules) and on the principal purpose test clause;

- having the OECD comments as a primary source of interpretation (as indicated in the Protocol)

- excluding activities such as technical services, technical assistance and consultancy as duty-producing activities; and

- extending information exchange mechanisms for anti-money laundering and counter-terrorist financing activities.

 UK-Colombia BIT

This treaty, signed in Bogota on March 17, 2010, entered into force on October 10, 2014. It aims to "promote investor confidence by setting high standards of investor protection in the host country." Its key provisions relate to:

- non-discriminatory treatment through provisions guaranteeing equal treatment with domestic or third-country investors (National Treatment and Most Favored Nation Provisions);

- compensation at market price in case of expropriation; and

- guarantee of free transfer of investments and returns; and (iv) independent international arbitration as a dispute settlement forum for investor-state claims.

Trade agreement between the United Kingdom and the Andean countries

The UK and most of the countries that make up the Andean Community (except Bolivia) have reached a consensus to continue their trade relations once the UK leaves the EU. The signing of this agreement (made on May 15, 2019, in Quito), will help protect a "£2.1 billion trade flow", as well as protect businesses and jobs in the signatory countries.

Some minor changes (mainly extensions) have been made "to the trade arrangements between the UK and Andean signatory countries in preparation for the UK no longer being bound by the EU-Andean Trade Agreement." These changes include extending the commitment to review the banana tariff liberalization mechanism, extending by 12 months to make the necessary amendments on intellectual property and geographical indications, and some "minor non-substantive technical changes to ensure that the effect of the provisions on competition, subsidies/aid and state enterprises are replicated without altering their substance."

The future

Because of its economic potential, its strategic location within Latin America (with access to two oceans), existing trade agreements with the EU (and now the UK), international treaty regulation for the avoidance of double taxation and for investment protection, as well as its legal and fiscal incentives for the development of specific sectors of the economy, Colombia is a highly strategic destination for FDI, including investment from the UK.