Article 8 minute read

Top 10 Challenges of Doing Business in Colombia

11 July 2018

Starting or expanding a business to Colombia is an attractive option in Latin America but it is important to understand the challenges.

Colombia is one of the most attractive economies in Latin America for international markets and foreign investment. However, it presents some challenges in terms of tax, accounting, regulatory and foreign exchange. As signatory to 13 commercial agreements, Colombia receives preferential access to a market of 1.5bn consumers for companies investing in the country to access Latin America.

Columbia is a member of the Pacific Alliance, which was created seven years ago, and includes Peru, Mexico and Chile. This group totals 57% of Latin America's foreign trade and 41% of total foreign investment in the region. The Pacific Alliance is an initiative of political, economic and regional cooperation and integration.

These countries’ growth expectation for 2018 is higher than the average for Latin America and the Caribbean, according to the International Monetary Fund (IMF). The IMF expects the economy of Columbia to grow by 3%. But the complex fiscal and regulatory environment can make exploring the many opportunities at hand a tricky endeavour, which is why having local help on board is essential in order to make the most of your Colombian venture.

1. Starting a business

The first step to starting a business is to register the company at the Chamber of Commerce, National Tax Office (DIAN) and the Municipal Tax Authority (SDH). New Simplified Stock companies (SAS) must then deposit capital into a Colombian bank account within the next two years after their incorporation, the other type of companies must pay the capital immediately. Employees and employer are also required to be registered with several mandatory social security entities the same hiring date such as: Administrator of Professional Risks (ARL), Health Insurance Entity (EPS) Pension Fund Entity (AFP) and the Welfare Entity (CCF). The registration process takes 11 working days in total if the bank account is opened and if the company is dully registered at the Chamber of Commerce and the National Tax Authority.

2. Resourcing your business

Employment in Colombia is primarily governed by the Labour Code, which applies to all employers and employees in Colombia, regardless of their nationality. The Code regulates the terms and conditions of employment, such as the form and duration of the employment contracts, trial period, salary types, working hours, holidays and leaves, termination of the employment agreement, and collective bargaining.

The monthly minimum wage is COP$781,242 (approx. USD$265) for 2018 and is reviewed annually. Once employees complete one year of service they are entitled to receive a paid vacation time of 15 days. The employees who earn ordinary salary are also entitled to receive a 13th salary, which is paid twice a year, the 50% on June and the other half in December,  a payment which is deposited to the Fund Entity (unemployment insurance) annually in January and interests on this amount are paid to the employees once a year in February. In the case of the employees who earn special wage, the salary itself contains these fringe benefits.

3. Dealing with construction permits & registering property

Obtaining a construction permit is a laborious process taking 132 days along with 13 procedures. Companies are required to file for and obtain construction licences, which can take 42 days, and pay variable charges and tax on urban delineation at the bank, which can be a rather substantial cost. Once certified, connections are to be conducted by EAAB - Bogotá’s public water utility (Empresa de Acueducto y Alcantarillado de Bogotá) - before final inspection can be carried out by the Mayor’s office, taking 25 days.

It takes just over two weeks on average to register property and seven procedures, requiring a lawyer or notary to oversee most aspects. Once registration fees have been paid at the bank and all other matters have been sorted, the public deed must be registered at the Registry Office to complete the process. This last aspect normally takes one week.

4. Getting electricity

Getting electricity is not an issue for most of the urban, industrial and free trade zones, since electric infrastructure is already installed. But, getting electricity for rural or constructing new building is by far the most arduous aspect of starting a business in Colombia. The World Bank and International Finance Corporation (IFC) rank it in 81st place, thanks to the excessive time it takes (average of 106 days) and the cost of completing the procedure. Depending on the municipality the average time, cost and procedure may vary.

5. Getting credit & protecting investors

Colombia has a wide framework regarding credit, credit information access, borrower’s rights and also simple process to registry collaterals, among others rights to prevent banks to abuse of their position in the relationships with their clients. 

Regarding the investor protection, there is a wide legislation and jurisprudence to protect the minor investor against misuse of corporate assets by directors for their personal gain as well as shareholder rights, governance safeguards and corporate transparency requirements to reduce the risk of abuse.

Colombia is considered to have a good private bureau coverage and also, is ranked 2nd by the World Bank and IFC in the world for getting credit and 16th for investor protection.

6. Paying taxes

Tax payments are an extremely complex affair and can absorb around 240 hours of business time a year. Corporate income tax alone, which is a flat rate of 33% for 2018, takes 86 hours. There is also a surcharge of 4% over taxable incomes higher than COP 800.000.000 (approx. USD$267.000). There are several other levies that can catch firms off guard, such as the municipality tax. In Colombia, the occasional profits are taxed at a rate of 10% (down from 33% in 2013). VAT rates range from zero to 19% (down from a maximum rate of 35% in 2013).

There is a levy over the financial transactions which is paid when the money is withdrawn from the bank account at a tariff of COP $4 per every thousand. In addition there is a consumption tax that is paid for mobile phone services, data services and restaurant services. This tax must be filed to the National Tax Authority by the companies that render these services.  There is also a levy for the use of plastic bags and a public and private documentary stamp tax.   

Colombia has a mandatory social security system, which provides benefits for retirement, healthcare, labour risks and family welfare services. Both the employers and the employees are required to make contributions towards social security with the employer contributing from 30% up to 36%, this rate depends on the risk assigned by the Labour Risk Entity and the employee up to 10%. The company could reduce the 13.5% of the contribution for those employees who have incomes considered as salary per month lower than 10 minimum wages COP$7.812.420 (approx. USD$2600) and if the Company is income tax contributor.

New companies can also apply to the benefit of the law 590 if they fulfil with some requirements related to the volume of assets and headcount. This benefit consists is a progressive reduction of payroll taxes during the first three years of operation. 

7. Enforcing contracts and resolving insolvency

Resolving insolvency takes an average of 1.7 years to complete, and the recovery rate is very good compared to many of Colombia’s Latin American and Caribbean neighbours. It can take close to four years to enforce a contract in Colombia, largely down to the number of procedures which are required to be completed. Filing and service takes well over two months, and the judicial procedures can take years. The legal system in Colombia is still weak and not developed to a high standard.

8. Trading across borders

The cost of trading across borders is far higher than in most Latin American and Caribbean countries and exceeds the OECD norm by around three times. It can also be a rather timely endeavour, taking around two weeks to both import and export. Additionally, Colombia's numerous economic integration agreements have created overlapping tariff applications. It is possible for a product to be subject to more than ten different duties depending on whether it comes from a member of the Andean Community, the Latin American Integration Agreement, or the Caribbean Community. Approximately 97% of the Colombian Harmonized Tariff Schedule (CHTS) products can be imported without an import license, but VAT and import tariffs are still applicable. Engaging with a local specialist can be of help here.

9. Protecting your intellectual property

Colombia understands the importance of intellectual property and is a signatory of a variety of agreements and conventions. Colombia has its own intellectual property registry and several legal precedents on this matter, especially on the last few years, despite the recent development and the country’s effort around intellectual property, still there are high levels of physical contraband and digital content piracy, as well as shortcomings in enforcement and market access.

For effective management of your intellectual property rights (IPR) in Colombia, an overall strategy, tailored to the country, is crucial. The strategy must be registered and enforced in Colombia, under local laws, so having a local advisor is of help.

10. Cultural barriers

Colombians are not very proficient in English. According to the English proficiency index 2018, Colombia ranked 51 out of 80 and in Latin America, 11th of 15. Unless you speak Spanish, there  may be  communication issues. Communication in Colombia is often subtle and indirect, which can cause problems when it comes to business negotiations. Punctuality and time keeping is far more relaxed in Colombia than elsewhere in the world, so take an informal approach to doing business in the country.

Contact our local TMF Group experts

TMF Group has the local knowledge to help you identify and face any challenge or opportunity for your business. Whether you want to set up in Colombia or just want to streamline your Colombian operations we have the local knowledge to help. Talk to us today.

Learn more about TMF Group in Colombia.

 

Written by

Daniela Diaz Quijano

Managing Director

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