Legal regime for cross-border mergers and spin-offs

Colombia has had a quite dynamic development in terms of cross-border mergers and spin-offs. According to an ECLAC study [1], Colombia and Chile, second only to Brazil, are the Latin American countries that have attracted the most Spanish foreign investment since 2007. Many of these transactions have taken the form of international mergers or spin-offs, as in the case of the much talked-about merger between “UNE-EPM Telecomunicaciones S.A.” and Millicom Spain Cable S.L. of Spain.

However, Colombia lacks a legal regime for cross-border mergers and spin-offs that harmonizes commercial, tax and exchange provisions, thus providing legal certainty for international investors and local entrepreneurs. The control entities have understood that, according to the legislation in force in Colombia (Civil Code, articles 18, 20 and 21 and the international treaties of civil and commercial law signed in Montevideo in 1889 and approved by Law 33 of 1992), the international operations entered into between companies of different jurisdictions must comply, each one, with the requirements applicable in their own countries, reason for which the general rules for local operations are applicable to such operations. Nowadays, whoever intends to enter into an operation of this nature must circumvent all kinds of doctrinal requirements that often contradict each other and face tax rules that are not clear. This regulatory sudoku, explained to a foreign investor, kills the investment.

In corporate matters, since 1994, the Superintendence of Corporations has developed a thesis according to which, if a national company is absorbed by a foreign company, as a prerequisite for the entity to approve such operation, a branch of the foreign company must be created in Colombia to continue carrying out its business and to be liable for its obligations. The same occurs with the spin-offs of Colombian companies when their beneficiaries are foreign. The entity has also indicated that in case the absorbed company does not have active business operations in Colombia, but only passive investments that do not imply the need to open a branch of a foreign company in Colombia, then the merger would not be a valid mechanism to carry out the reorganization (see Official Notices 220-16478 of August 30, 1994, 220-10481 of March 27, 2001, and 220-100742 of September 17, 2019, among others).

The entity has also indicated (Official Letter 220-034391 of June 16, 2006) that, in a merger operation by absorption between two foreign entities where assets owned in Colombia are transferred (specifically, for the example, quotas in a Colombian limited liability company), the foreign company (absorbed) must "publicize the change of ownership of the quotas" and the foreign company (absorbing) must send to the Colombian limited liability company the bylaw reform from abroad so that said company may proceed to register it in the commercial registry..

In tax matters, although Law 1607 of 2012 created a tax regime for mergers and spin-offs (including international ones), many doubts remain. Such regime regulates two types of international operations; the taxation in Colombia of mergers or spin-offs perfected abroad and the taxation of mergers and spin-offs between domestic and foreign companies. In the first case, there are many doubts as to how the 20% of the assets transferred in Colombia should be calculated (whether on the assets related to the operation or on the total assets) and what should be understood by "group". Likewise, doubts also arise as to whether this treatment should be eliminated when the transaction is between resident companies of countries that have signed agreements to eliminate double taxation (due to the application of the non-discrimination clause). Regarding the second issue, doubts remain as to who is the taxpayer of such transactions (whether the company that is extinguished by the merger or its shareholders) and on which assets would be considered to have been disposed of (on the shares that are extinguished by the merger or on the assets that legally migrate abroad).

In foreign exchange matters, the rules for the substitution or cancellation of direct foreign capital investments, or capital repurchases, derived from corporate reorganization processes must be taken into account, as well as the terms for doing so. These rules are contained in the External Regulatory Circular DCIN 83 of the Bank of the Republic and in other concordant norms.

Colombia should have an official and agreed regime for international mergers and spin-offs where the corporate, tax and exchange aspects in this matter are regulated. This regime should have an official translation into English as a measure to promote -in the world- foreign investment in Colombia. Likewise, it should be harmonized with other corporate regimes such as those of countries belonging to the Pacific Alliance and the Andean Community of Nations, in order to promote corporate reorganizations at a regional level.