Article published on December 20th at bloombergtax.com
Autor: Juan Esteban Sanín Gómez
juan.sanin@isanin.com.co
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 dependency 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 mid- and long-term investors to consider.
This article will analyze the main legal and tax incentives for foreign investment, and in particular for the U.K., in Colombia.
Tax Incentives
Colombian tax law has abundant tax incentives for investors. These benefit many sectors in which the U.K. is particularly strong, such as the fintech and creative industries sector, as well as the hotel and tourism industry. Also, tax benefits could attract U.K. investors in sectors such as agriculture, given the existence of a buyers’ demand for these products and of trade agreements to facilitate commerce between both countries.
Some of the tax incentives available will be analyzed below.
Fintech and Creative Industries
Colombia’s current government has focused on shifting the country’s economic dependency from the extraction of natural resources (gas, oil, carbon, etc.) to an economy based on talent, creativity and technology. This project has been called the “Orange Economy” and has been granted considerable tax incentives such as seven years of exempt income tax rate on profits of companies or entities incorporated before December 31, 2021 which have had their creative project approved by the Ministry of Culture, hire a set number of employees (according to their annual income) and have total gross income of around $800,000.
This benefit is extended to companies that have, as their main object, the undertaking of technological value added and/or creative industry projects such as software editing, APP creation and informatics system testing, film production, visual arts, theater and musical creative activities.
On November 8, 2019, a government plan (CONPES 3975) was adopted in order to incorporate digital transformation and artificial intelligence as a national policy, both in the public and private sectors. An investment of over $40 million is anticipated in order to implement these measures before 2022.
The Colombian banking system has had great results with cumulative earnings of around $12 billion up to the second quarter of 2019, therefore granting a huge opportunity for the U.K.’s fintech industry penetration in Colombia with products such as peer-to-peer lending that do not exist in the country but are well developed in the U.K.
Hotel and Tourism Industries
Tourism is considered to be the “new petroleum.” Since 2003, a 100% income tax exemption has been in place for hotels being built and refurbished. As a result, 48,708 new hotel rooms were created and 27,000 remodeled.
The latest tax reform states that a 9% income tax rate will be applicable for 10 years to hotels that are constructed in municipalities with more than 200,000 inhabitants, and an additional 10 years’ exemption for municipalities with less than 200,000 inhabitants. In addition, value-added tax (VAT) exemptions apply for hotel services rendered to nonresidents, thereby lowering the overall room price by 19%.
The agrotourism industry, referring to companies with hotels operated or renovated in certain rural municipalities and complying with certain conditions, also benefits from a 9% income tax rate. This will apply to eco-touristic theme parks and nautical marinas, among others.
In addition, certain 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 set number of years if certain conditions are met (mainly hiring a fixed number of workers and investing a certain amount of monetary resources). Incorporating and managing hotel companies in these regions can be interesting from a tax perspective.
Agricultural Industries
The latest tax reform (Law 1943/2018) grants an interesting tax exemption consisting of a 10-year income tax exemption on investments made to develop the Colombian agricultural sector, and which comply with certain conditions (mainly referring to a minimum investment of approx. $250,000 in a six-year period, a maximum income of approx. $800,000 per year, having the company seat in the municipalities in which the project is located, and labor recruitment of a minimum 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 given rise to a blossoming of the agricultural industry, especially for export purposes. Because of these factors, industries such as avocado, cocoa and medicinal cannabis have reached unprecedented growth.
Upcoming Legal Reforms
A constitutional reform aimed at incorporating a tax security and stability investment principle for investors (both foreign and domestic) is currently making its way through Congress.
This amendment to the Constitution will give investors the right to know that the ground rules by which they invest will not be subject to adverse changes, thereby allowing investors to predict their investment return in the long run.
In addition, a new tax reform, which aims to confirm and extend the previously mentioned tax benefits is currently making its way through Congress and is expected to be approved before the end of 2019.
Existing Treaties
Colombia and the U.K. have, since the Latin-American country’s inception, had a long history of mutual cooperation. During this period, more than 32 treaties, on issues ranging from agriculture and railway construction cooperation to defense, have been signed by both nations.
The most relevant existing treaties, for the issue considered here, are the U.K.–Colombia double tax treaty (DTT), the U.K.–Colombia Bilateral Agreement for the Promotion and Protection of Investments (BIT) and the U.K.–Andean Countries (Ecuador, Peru and Colombia) Trade Continuity Agreement (Trade Agreement).
U.K.–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 finalized, 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 have full effect in the U.K. from January 1, 2020 (for taxes withheld at source), April 1, 2020 (for Corporation Tax), and April 6, 2020 (for Income Tax and Capital Gains Tax), and in Colombia from January 1, 2020 for taxes withheld at source 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 to be negotiated post-BEPS and, in that sense, it is not included among the treaties to be modified by the Multilateral Convention to implement Tax Treaty Related Measures (MLI).
This DTT incorporates several aspects not specifically addressed by other Colombian DTTs such as:
- being extended to pension funds;
- including the OECD’s BEPS recommendations on the unlawful use of permanent establishments (anti-fragmentation rules) and on the principle purpose test clause;
- having the OECD commentaries with the rank of a principal source of interpretation (as stated in the Protocol);
- excluding activities such as technical services, technical assistance and consulting as royalty producing activities; and
- extending the information exchange mechanisms for battling activities such as money laundering and terrorism financing.
U.K.–Colombia BIT
This treaty, signed in Bogotá on March 17, 2010, became effective on October 10, 2014. Its aim is to “encourage investor confidence by setting high standards of investor protection in the host country.” Its key provisions are those relating to:
- non-discriminatory treatment through provisions that guarantee an equal treatment to that of domestic investors or investors from third party countries (National Treatment and Most Favored Nation Provisions);
- market rate compensation in case of expropriation;
- guarantee of free transfer of investment and returns; and (iv) independent international arbitration as a dispute settlement forum for investor-to-state claims.
U.K.–Andean Countries Trade Agreement
The U.K. and the majority of the countries that form the Andean Community (Bolivia excepted) have reached a consensus over continuing their trade relations once the U.K. leaves the EU. The signing of this agreement (made on May 15, 2019 in Quito), will help protect a “trade flow of £2.1 billion” as well as protect business and jobs in the signatory countries.
Some minor changes (mainly extensions) “have been made to the trading arrangements between the UK and the signatory Andean countries in preparation for the UK ceasing to be bound by the EU-Andean Countries Trade Arrangement.” These changes include a rollover of the commitment to review the banana tariff liberalization mechanism, the 12–month extension to make the necessary amendments for intellectual property and geographical indications, and some “minor non-substantive technical changes to ensure that the effect of the provisions on competition, Subsidies/State Aid and State-Owned Enterprises are replicated without altering its substance.”
Going Forward
Due to its economic potential, its strategic location within Latin America (with access to two oceans), existing trade agreements with the EU (and now with the U.K.), international treaty regulation for avoiding double taxation and for the protection of investments, as well as its legal and tax incentives for the development of specific sectors of the economy, Colombia is a highly strategic destination for FDI, including U.K. investment.
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