Doing Business In: Medellin

Contexto Legal S.A.

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Medellín is the capital city of the department of Antioquia. The city is located in the Aburra Valley, a central region of the Andes Mountains in South America. According to the 2018 census, the city had an estimated population of 2,508,452. With its surrounding area that includes nine other cities, the Metropolitan Area of Medellín is the second-largest urban agglomeration in Colombia in terms of population and economy, with over 3.9 million people.

Despite its well-known past, the city has become one of Colombia’s most important economic centers, and foreign investment has become a key factor in its economic development, as well as one of the primary sources of employment. Therefore, the city is committed to the continuous development of private businesses through innovation and entrepreneurship; Over Fifty years of sustained economic growth, and the permanent pursuit of the best environment for entrepreneurs, can confirm a generalized idea among the public and private sectors that respects, encourages, and promotes the creation and innovation of business and industries.

Considering the abovementioned, we would like to present an insight regarding the legal system that regulates the foreign investment in the city, especially those aspects that interested investors should consider, particularly those in the corporate regime.

As an introduction to the topic, an overview of the current panorama of Medellin is going to be mentioned, in order to respond to the common and natural question: Why invest in Medellin?

Medellin is a city that has become a strategic point for the regional supply of quality goods and services. Having macroeconomic strengths, fiscal policies, investment guarantees, conditions of stability and legal security, has allowed it to be more attractive for investments than other economies of the region.

A) Resilient city

Due to its violent past, investing or setting up a business in Medellin would have seemed absurd 20 years ago. Since then, the city has managed to reinvent itself through education and entrepreneurship changing the story remarkably.

Nowadays Medellin wants to be recognized for creating and innovating initiatives such as Metrocable, a transportation system of cable cars built in the northeast and west of the city, or Ruta N, a corporation created to promote the development of innovative technology-based businesses.

B) Compromised government.

Colombia has been known for maintaining political stability and solid institutions, which have led it to be one of the most politically stable markets in Latin America. Its governments, regardless of the presidential administration, have been committed to the continuous development of private activity and implementing the best economic and social practices for investment in Colombia, which allowed it to join the Organization for Economic Cooperation and Development in 2020. It has investment grade by the three most important risk rating agencies in the world, thanks to the significant advances made in terms of competitiveness and the new reforms and fiscal policies implemented in the last year.

C) Regional supplier

The COVID-19 crisis brought about several changes in the structure of international trade and is leading to a regional concentration of value chains. Medellin emerges as a strategic point for the regional supply of quality goods and services, thanks to the city’s strategic location in Colombia and connectivity it is easily accessible. Medellín has a local and an international airport which connects it with top international and national business hubs. With direct flights to cities such as Panama, Miami, Quito, Lima, Madrid, New York, and more than 30 daily flights to and from Bogota.

In addition, the Department of Antioquia is equidistant from the main Colombian urban centers. It has access to the Atlantic Ocean and is located close to the Pacific.

D) Developed technological infrastructure.

Colombia has a developed technological ecosystem and has the necessary standards to overcome any adversity that might come. Its technological infrastructure allows it to position itself as the second country in the region with the best connectivity, transmission, and stability.

The National government has reorganized the digital revolution as an important engine of growth, and Medellín became the regional platform for the development of public policies and regulations for implementation of technologies of the Fourth Industrial Revolution. With the creation of The Center for the Fourth Industrial Revolution, the city put Colombia at the forefront of regulatory matters. It also enabled the creation of quality jobs, seize international knowledge networks, and the development of new businesses.

E) Accurate environment

Medellin’s municipality guarantees adequate conditions for the growth of national and international private enterprise, which has allowed it to position itself a city that offers the greatest protection to investors in Latin America. Through the Cooperation and Investment Agency (ACI), the city has promoted international cooperation and attract national and foreign investment.

Corporate affairs

Before analyzing in a more detailed manner the affairs related to the corporation’s management, there are five vital things that an investor should keep in mind.

  • The corporate regime in Colombia is a stable legislation that has been modernized under evolving circumstances without affecting the legal certainty.
  • Every investor looking for establishing permanent businesses in the country must incorporate a legal vehicle. This means to create a company or to open a foreign company subsidiary.
  • Regarding legal vehicles, unipersonal companies in which the responsibility of the shareholder is limited by the amount of the respective contribution are allowed. This in accordance with the modern tendencies in that matter.
  • A foreign investor does not need a local shareholder of investor. With few exceptions, the entire share capital of the companies can be foreign and there are no restrictions for its repatriation.
  • The legal procedure of incorporation is quick, simple and lacks the need of governmental authorization, with few exceptions.

Legal entities to be used in order to initiate permanent activities in Colombia

A) Commercial corporations

Creating a new and independent legal person is the main way to canalize foreign investment in Colombia. Among them, the S.A.S. (simplified stock corporation), the S.A. and the Ltda. (limited liability company) are the most common legal figures to be found. Specifically, the S.A.S. has simple and flexible regulations regarding the incorporation, the administration, and the autonomy to set the structure and operation of the company, and that makes it more attractive for investors.

B) Subsidiaries of foreign companies

Lacking legal capacity, subsidiaries of foreign companies are another way for foreign investors to establish permanent economic activities in Colombia, as is stated in the country’s legislation.

Subsidiaries can be understood as commercial establishments that depend entirely on its principal parent company because they have no legal capacity.

It is important to note that the Colombian legislation does not provide a specific criterion or duration term in order to determine whether or not an activity is permanent. Therefore, the permanence or not will depend on the particular circumstances of the activity in the country such as the nature and scope of the activity, its regularity, the required infrastructure, the hiring of personnel in Colombia, among other relevant factors.

C) BIC Companies

Created with the Law 1901 of 2018, these kinds of companies are the ones willing to be identified as companies that involve communitarian, environmental and labor standards in the pursuit of its purpose. Frequently related to the Corporate Social Responsibility (CSR), being a BIC company is a matter of quality and reputation because these companies do not become another legal entity different from the previously mentioned and neither they have tax benefits.

D) Regarding the equity and the FDI registration

Colombian legislation does not demand a specific minimum amount of equity for incorporating commercial companies. This means that it can be decided by the shareholders or by the parent company (talking about subsidiaries).

Nevertheless, there are applicable regulations and norms over the moment in which the outstanding capital must be paid:

  • In subsidiaries of foreign companies, it must be paid entirely at the time of the incorporation.
  • In the S.A. (Limited Liability Companies) at least 50% of the authorized capital must be subscribed, and one third of each share must be paid at the moment of the incorporation. The remaining capital should be paid in a term of one (1) year.
  • Regarding the S.A.S. there are no capital payment ratios at the moment of its incorporation, but the full amount of the subscribed capital must be paid in a maximum term of two (2) years.
  • The currencies entering the country as a capital contribution by non-residents must be registered as a foreign investment before the Central Bank but being conducted through an intermediary of the exchange market (IMC) duly authorized in Colombia.

Parent companies, subordinates, and business group regime

It’s understood that a company is subordinated when its decision power is conditioned by, or depending on, the intention of another natural or legal person. Control can be economic, political, commercial, or because there is a majority shareholder position that could be executed in the administrative bodies of the controlled company.

Over this point, some key comments:

  • Laws recognize that eventually there could be subordination from one company to another even without participation in the corporate capital.
  • Control can be exercised by a natural person, a legal person, and even by legal entities of a non-corporate nature.
    Plural, natural, or legal entities can also exercise jointly control.

In cases where, besides the link of subordination and control, there is a unity of purpose and direction among various group entities, existence of business group is predicable. Unity of purpose means that the incorporation and activities of all the entities, although they could have a different purpose in the bylaws, pursue one same objective stated by the parent company.

The controlling company must register the control and business in the mercantile registry of the domicile of each one of the related companies, thus publicity is given to this particular circumstance and third parties could notice that.

Dissolution & liquidation

The termination of a company happens as a consequence of its dissolution and further liquidation. In other words, declaring the dissolution of a company determines the beginning of the liquidation process, which will finish with the cancellation of its business license.

The following are causes for the dissolution of a company in Colombia:

  • Expiration of the term for its duration, if not extended validly before its expiration.
  • The impossibility of developing the social enterprise, due to the termination of the same or the extinction of the thing or things whose exploitation makes up its object.
  • Because of the reduction of the number of associates to less than that the one required by law for their formation or operation or by an increase that exceeds the limit maximum set by the same law.
  • Causes that expressly and clearly are stipulated in the bylaws of the society.
  • By decision of the associates, taken in accordance with the laws and the social contract.
  • In the event of losses that decrease equity below 50% of the social capital, for not restoring the patrimony.
  • By decision of competent authority in the cases provided for by law.

Referring to the previously mentioned, subsidiaries of a foreign company since they are an extension of their headquarters and depend on it for their subsistence, they will be liquidated according to the causes that have been agreed upon for the headquarters. Additionally, the general causes for dissolution of Colombian commercial companies apply to them, due to their similarity to them, as long as they are compatible with their legal nature.

The legal capacity of a dissolved company is restricted to the purpose of making liquid its assets in order to pay its liabilities. Nevertheless, by implementing legal figures such as the reactivation, the re-incorporation, or a certain kind of merger, the liquidation process could be suspended, and the main purpose can be taken up again.

As a conclusion for this approach over corporate-related topics for foreign investors willing to undertake business in Colombia, we would like to present incentives to investment, the appropriate economic sector, and some facts regarding the taxes.

Legal and tax incentives

  • In the hotel and tourism sector, the income tax rate is reduced to 9% for new hotels, new projects of theme parks, ecotourism, agro-tourism, and the new projects of nautical docks during a period that goes from 10 to 20 years, depending on the population of the city.
  • Those responsible for VAT may deduct from the income tax payable, the VAT paid for the acquisition, construction or formation and import of real productive fixed assets, including that associated with the services necessary to put them into use.
  • Taxpayers required to file a return may deduct 120% of the wages paid to employees who are under 28 years of age.
  • Declarants who carry out efficient energy management will be entitled to deduct up to 50% of the value of the investments, for a period that not exceeding 15 years counted from the following taxable year in which the investment began to operate.
  • Also related to the efficient electric management, in order to promote the use of energy from non-conventional energy sources, the domestic or imported equipment, machinery and services intended for the production and use of energy from non-conventional sources, as well as for the measurement and evaluation of potential resources will be excluded from VAT.
  • Related to Holding Companies, defined as “national companies that have as one of their main activities the holding of securities, the investment or holding of shares or participations in Colombian and/or foreign companies or entities, and/or the administration of such investments”, Dividends distributed by non-resident entities in the country to the Holding Company are exempt from income tax and those dividends paid by the Holding Company to residents are subject to dividend tax, those paid to non-residents will not be subject to income tax, they are considered foreign source income.
  • Income taxpayers who make investments or donations, directly or indirectly, in projects qualified as research and technological development, are entitled to deduct from their net income in the period in which they are done.
  • For income taxpayers who generate at least 400 direct jobs and make new investments within the national territory with a value equal to or greater than 30,000,000 UVT (approximately USD $273,900,000). The benefits include the 27% income tax rate, exclusion from the presumptive income regime, exclusion from dividend tax, depreciation benefits and exclusion from equity tax.

Economic sectors attractive for investment

A) Real state:

Real Estate in Medellin, as in any other major city, offers diverse ways to invest. There is a more traditional route being rentals, furnished or unfurnished, mainly in neighborhoods of predominantly locals. There is another and less traditional rout. Short-term rentals, aiming at tourism or temporary rentals to foreigners, in the most vibrant neighborhoods of the city. For both, although more importantly for the latter, it becomes indispensable to count with a reliable property manager.

B) Agro-industry and food production

Thanks to its geographical position, Colombia has constant production throughout the year. In addition, it has a wide scope for sustainable growth. Colombia is an important consumer and producer of food in the region and is emerging as an export platform. The sector in Colombia has ample experience to produce diverse types of products responding to the world-wide tendencies of consumption.

C) Energy

Colombia has a great potential for energy generation because of its wealth of renewable natural resources and conventional sources. In order to take advantage of and supply the growing demand for energy in the country, a plan has been designed based on private investment with incentives and guarantees from the State so that it can continue to be a referent for clean energy production in the region.

D) Infrastructure

Medellin has the best development in public transportation in the country thanks to its integrated system. With a Focusing markedly on technical, environmental, and social sustainability, and implementing one of the best public-private partnership (PPP) framework, Medellin as well as many other cities in Colombia are focusing on transport infrastructure as a motor for economic recovery and has started up the fifth generation of infrastructure concessions.

E) Textile

The textile industry has been an important pushed for the development of SMEs, that nowadays are large generators of quality jobs in the city which has been a reference to characterize the region as a zone with a high industrial development in Colombia and with great contributions to the Gross National Product.

F) Health and life sciences services

The health care system in Medellín has demonstrated important regulatory advances in recent years. Along With different universities such as the University of Antioquia, the city is developing very interesting advances in medicine, which make it attractive for foreign investment, that forces the sector to remain competitive and updated in order to provide the highest quality services and products. In addition, the pharmaceutical industry in Colombia is consolidated and at the vanguard of world trends, including the medical and pharmaceutical use of cannabis.