Doing Business in Colombia: Economy, Law & Taxes

Introduction

Once considered a no-go zone, Colombia has enjoyed something of a resurgence in recent years. This paper examines the business environment in Colombia, highlighting the different issues that matter to businesses. Colombia recently became one of the fastest-growing economies in Latin America (The Economist, 2014), which is testament to key policy changes that have spurred renewed investment. The transformation began with a major security push to stabilize the country and has since left Colombia with a fairly attractive investment environment. This report outlines the country's economic and legal conditions to provide relevant background information for anyone considering doing business in Colombia.

Economic Conditions and Trade Framework

Colombia is experiencing strong growth, something that can be attributed both to improved security and to a shift in economic policies. With 46 million people and a relatively slow population growth rate, Colombia is the 30th-largest country in the world. Its economy ranks 32nd globally, with a GDP of $642.7 billion (CIA World Factbook, 2015). Major exports include petroleum, coal, emeralds, coffee, nickel, flowers, and bananas, and the United States is by far the largest trading partner. Colombia also sells to China, India, Spain, and Panama. Major import partners are the U.S., China, Mexico, and Brazil. The instability of prior decades had a negative impact on Colombia's manufacturing base, meaning that many industrial goods, transportation equipment, and consumer goods must be imported (CIA World Factbook, 2015), presenting potential growth opportunities for developing those sectors domestically. Despite being an energy exporter, Colombia does not have a massive supply of fossil fuels — it ranks just 35th in the world for proved crude oil reserves and 47th for natural gas (CIA World Factbook, 2015).

Colombia has been aggressive in modernizing its economy. President Juan Manuel Santos pursued a strategy of opening the market to trade and investment. South America broadly enjoyed a decade-long commodity boom, but when that ended it hurt many regional economies. Colombia weathered the downturn better than most of its neighbors, largely because its main exports are fossil fuels. While this helped in the short term, limited reserve levels mean the country's long-term energy prospects are constrained — one of the key reasons Colombia has moved to open its economy more broadly.

The World Trade Organization last reviewed Colombia's trade performance in 2012 and noted increasing openness since the prior review in 2006. Colombia had "participated in various negotiations to consolidate existing bilateral and regional agreements" (WTO, 2012). The WTO declared Colombia's trade regime "substantially open," and the average tariff declined over the review period. The country has also sought to maintain balanced economic policy, using fiscal stimulus during the recession while relying on monetary policy to support growth. With several free trade agreements in force and a sustained commitment to liberalization, Colombia has positioned itself as a moderately favorable destination for investment in the Western Hemisphere.

Laws, Regulations, and Ownership Requirements

The legal system in Colombia is based on civil law, largely influenced by the Spanish and French civil codes (CIA World Factbook, 2015). Colombia's legal system is generally considered transparent and functional. That said, Colombia scores poorly on the Corruption Perceptions Index (Transparency International, 2014). The country also scores poorly on the press freedom index — journalists face constant threats and there is limited respect for freedom of information. So, while a functioning judiciary exists, Colombia also has significant issues with corruption and restricted freedoms (RSF, 2015).

For businesses, the overall business environment has been ranked 45th out of 185 economies by the World Bank (2013), which is a respectable score. The biggest obstacles to operating a business include access to finance, practices of the informal sector, and tax rates. The concern about the informal sector reflects significant competition from unregistered entrepreneurs, and some formal businesses appear to expect government protection from such competition. Access to capital and tax rates are more widely recognized concerns. Overall, the regulatory environment is moderately favorable — Colombia scores better than most countries in Latin America in this regard, with the primary caveat being corruption.

Some countries use ownership requirements as a means of protecting their economies, demanding that a minimum percentage of ownership in major firms be held domestically. In a bid to attract more foreign direct investment, Colombia has liberalized its ownership regulations in recent years. Foreigners enjoy the same property ownership rights as Colombian citizens and may repatriate their income should they find Colombian taxes prohibitive. These changes have made it considerably easier for foreigners to invest in Colombian real estate (Miller, 2011). Foreign investors are still required by law to have a local representative, and doing so is practically beneficial for navigating the Colombian legal system.

Corporations are registered at the civic level, and several corporate structures are available in Colombia. Some, such as the LLC equivalent, will be familiar to American investors, while others — such as simple stock corporations — are somewhat more unusual. Foreign subsidiaries are legal, but must report their finances according to Colombian GAAP, denominated in Colombian pesos and filed in Spanish for local regulators (Deloitte, 2014).

Conclusion

Colombia has been an economic success story in South America in recent years, but caution must be exercised when doing business in the country. The legal system is transparent and sufficiently robust to cover all critical areas of business. Security has improved considerably since the 1990s, which has been encouraging for businesses seeking access to a fairly large market and to the country's wealth of natural resources. Politically, Colombia has benefited from a stable transition of government.

However, corruption remains an issue. The tax regime is complex and includes a number of surtaxes; doing business in Bogotá is especially expensive. Free trade zones can be used to lower the tax burden, but taxation is consistently cited as one of the major impediments to doing business in Colombia, alongside corruption. Labor laws are fairly generous to workers, though wages are not especially high — a reflection of a broader social contract that affords workers relatively strong rights.

A cause for optimism is the trade framework and the government's commitment to lowering trade barriers. Colombia has a reasonable trade infrastructure and participates in a number of bilateral and multilateral trade agreements that make it a moderately attractive place to do business — provided that local partners can be found to navigate the complex tax regime and the local political environment.