Doing_Bussines_KPMG_in_Colombia_2010

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KPMG in Colombia Doing Business in Colombia 2

1. INTRODUCTIONThe Colombian business environment is becoming more attractive. Therefore, KPMG Impuestos yServicios Legales Ltda. has prepared this booklet in order to provide general information andguide that could be helpful in a preliminary business or investment planning.

All information contained in this document is valid as of December 31st 2009.

Finally, since Colombian laws are frequently changing, legal and tax counsel is always advisablebefore implementing a specific business structure.

1.1.Country OutlineMain Information

Geography: The Republic of Colombia is located northwest of South

America and is bordered on the northwest by Panama, onthe east by Venezuela and Brazil, and on the southwest byPeru and Ecuador.

Area: The Continental area is 1,141,748 Km2

Weather conditions: Colombia has no seasons. However due to its location onthe Ecuador, it is possible to find a wide range ofclimates.

Population 42.888.5921

Official Language: Spanish

Capital: Bogot D.C.

Main Cities: Medelln, Cali, Barranquilla, Cartagena

Governmental System A presidential representative democratic republic,whereby the President of Colombia is both head of stateand head of government. Executive power is exercised bythe government. Legislative power is vested in twochambers of congress, the Senate of Colombia and theHouse of Representatives of Colombia. The Judicialpower is independent of the executive and the legislature.

Annual Inflation 3.33%2

1 DANE, Census 20052 Banco de la Repblica, annual inflation until December, 2009


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2. INFRASTRUCTURE AND SECTORS OF THE ECONOMY2.1. Overview of Colombian InfrastructureUtilities, transportation and telecommunications are highly important in deciding whether or not tostart a business in certain place.

Therefore, it is appropriate to point out that since 1991s Constitution, Colombian infrastructure hassuffered a significant improvement due to the fact that the private sector can participate ininfrastructure projects through concessions, direct provision of services, association with Statecompanies, etc.

2.1.1. UtilitiesUtilities represent an operational cost in every business. Bearing this in mind the following tableshows the rates applicable in Colombia.

Utility3 ResidentialUSD4

Commercial & Industrial

USD

Water

Basic Average Rate ($/M3) 2,9 4,9

Sewerage

Basic Average Rate ($/M3) 1,77 2,9

Natural Gas

Variable cost ($/M3) 0,37 0,28

Fixed Cost $/month 1,03 0,74Electric Power

Tariff $/ Kwh. 0,12

Voltage 4 0,11

Voltage 3 0,09

Voltage 2 0,07

Voltage 1 0,07

Telephone

Connection cost 81.08 94.84

Variable cost ($/IMP) 0,027 0,027

Fixed cost ($/month) 11 12,9

3 Proexport, Utilities Cost Report 2007. This is an average between the 6 main Colombia cities.4 2010. Exchange Rate used in the entire document, USD $1 = COP $1.900


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2.1.2. TransportationPort Infrastructure Features

Colombia has six (6) seaports on the Caribbean Sea and two (2) on the Pacific Ocean5. More than 80% of Colombian foreign trade6 is transported via maritime means, as follows:

Total Ports Traffic Caribbean and Pacific Zone7

Item Tons

Import 19.601.701,15

Export 86.839.588,77

Foreign Trade 106.441.289,92

Costing Trade 454.415,38

River transportation 170.593,48

In transit 1.442.032,48

Transitory 213.296,72

Total Tons 112.445.740,76

Air infrastructure Features

Regarding the quality of the air transportation infrastructure Colombia ranks second between theLatin-American countries. Moreover, El Dorado, which is Bogotas international airport, ranks firstin cargo mobilization in South America and third in passenger transportation8. Currently, thisairport is being improved through a concession agreement with the private sector, in order to be ableto mobilize 16 millions of passengers and 1.5 million of cargo9.

Principal Cities

Airports10

International National

Passengers Cargo and

Courier (ton)

Passengers Cargo and

Courier (ton)

Bogota 4.345.566 465.561 8.418.046 120.018

Barranquilla 199.555 9.146 950.685 30.652

Cali 381.585 17.468 2.025.261 23.711

Cartagena 168.106 174 1.201.681 11.692

Medellin 307 3 893.643 5.480

Rionegro 469.211 101.439 1.860.656 30.943

Santa Marta 3 0 443.344 1.920

5 Ibid.6 Proexport, Colombian a golden opportunity, 2008 -1- 227 Port and Transport Superintendence, Colombian Ports 2007 Cargo Movements report.8 Global Competitiveness Report, 2006-20079 Proexport, Colombia a golden opportunity, 2008 -1 -2210 Aeronautical Authority, Cargo and Passengers transportation report, February 11, 2008.


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Road Network

The road network is very important to mention, considering that 66% of the cargo in Colombia istransported by road. Despite the importance, not all national roads in Colombia are paved, and thequality of the pavement can vary.

Nowadays, the roads are usually built by the Government through the private sector by means ofconcessions.

The following tables show the aforementioned.

Distribution of the Cargo by transport means (%)11

Road Railroad River Air Costing Trade Total

66,2 61,5 2,6 0,1 0,3 100

Paved Road Network (km)12

Condition

Very Good Good Regular Bad Very Bad Total

1.127,96 3.233,48 3.286,63 1.952,74 22,62 9.623,43

Unpaved Road Network (km)

Condition

Very Good Good Regular Bad Very Bad Total

83,17 636,49 1.065,76 1.591,74 233,41 3.610,56

2.1.3. Telecommunications infrastructurePursuant to the Global Competitiveness Report 2006-2007, in quality of telecommunicationsinfrastructure, measure in services such as the telephone and fax, Colombia ranks third between theLatin-American Countries.

Our Country has access to Cable Transcaribeo, ARCOS, MAYA and Panamericanos submarinecables,13 as well as other cable systems.

11 Colombian Ministry of Transport. Annual Statistics 2007 report. The last information published in this

report is form year 2006.12 Ibid.13 Proexport, Colombian a golden opportunity, 2008 -1- 22


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2.2. Special Investment opportunities2.2.1. Oil and Gas SectorColombia has a significant energy potential. Its proven oil reserves are estimated to be 1.8 billionbarrels, while its proven natural gas reserves stand at 7.5 trillion cubic feet. Oil is the countryslargest foreign exchange earnerrepresenting 27% of its total exports14

Taking into account the aforementioned, the oil and gas sector represents a great investmentopportunity, especially because more than 80%15 of the countrys territory remains unexplored.

Regarding the oil exploration, in 2003, in order to make matters more appealing, the Governmentchanged the contractual model. Through The Hydrocarbon Exploration and Production Agreement,the contractor company has more autonomy to develop and operate the facilities and has full title of

the projects assets.

Moreover, the Colombian State receives the following benefits by the exploration and exploitationof hydrocarbon:

Royalties, calculated according to the law. Spread from 5 to 25% according to productionlevels.

Fees for subsoil use Fees for high prices2.2.2. Energy SectorThe Colombian energy sector represents a great opportunity to invest in two different aspects.

On one side, the current installed capacity of electricity is around 13.300 Mw, of which 65% ishydroelectric but the South West and Center (includes Bogota) regions, are the largest energyconsumers and do not have enough internal supply.16 Therefore, as electricity is a public servicethat can be rendered by private sector, under the surveillance of the Authorities, ColombianGovernment is currently searching investors through auctions, in order to secure the possibility ofsupply energy after year 212.17

Additionally, there is an exports plan to Central America, projected to start by 2008, through an

electric interconnection project with Panama. Currently, both countries are studying the technical,economic and environmental feasibility of the project.18

14 Nacional Hydrocarbons Agency, http:/www.anh.gov.co15 Ibd.16 XM Economic Model of the Colombian Electricity System17 Ministry of Energy, press release, may 7, 2008 http://www.minminas.gov.co18 Proexport Colombia, http://www.proexport.com.co


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On the other hand, renewable energy sources are becoming highly important, taking into accountthat according to Act 693 of 2001, every Colombian city with a population equal or higher than500,000 inhabitants must use a gasoline blend between fuels and Ethanol (or others kind ofalcohols).

Hence, Colombia has the most developed regulatory framework in the region along with Brazilsoffering several incentives to promote the sector,19 which includes tax incentives that will bementioned below.

2.2.3. Tourism SectorAn economic overview of this sector shows that according to the World Travel & Tourism Council(WTTC), real demand for trips and tourism in Colombia is expected to increase from US$ 9,800million to US$ 14,300 million during 2006-2015, a real growth of 4.5% per year, greater than thegrowth rate of 4.1% expected for Latin America. The tourism sector currently accounts for 2.2% of

total GDP in Colombia (US$ 2,700 million), contributes 11.2% of total capital investments worthUS$ 1,800 million, and generates 380,000 direct jobs, equivalent to 2.2% of total employment in thecountry.20

Beyond the economic information, the tourism sector results really attractive to invest in it, becauseColombian Government is really interest in its growth; thus, there are tax incentives in order tomake this sector more appealing.

3. SETTING UP BUSINESS IN COLOMBIA3.1. Types of business presence3.1.1. FormalitiesDue to recent changes in commerce regulation, the way that a company can be incorporated inColombia depends on the amount of the assets and employees at the moment of the incorporation.Therefore, companies are incorporated in Colombia by:

Signing a private document that should include the incorporation articles and that must beregistered on the Chamber of Commerce if the company that is going to be incorporated has ten(10) or fewer employees or its assets do not exceed five hundred (500) minimum legal monthlywages (mlw) (approximately USD 135,526 for 2010), or;

Registering the bylaws in a public deed at any local notarys office and subsequently in theChamber of Commerce if the company that is going to be incorporated has more that ten (10)employees or its assets exceed five hundred (500) minimum legal monthly wages (mlw).

19 Ibid. Sectorial Information, Energy20 Proexport Colombia, Business Opportunities, Sectorial Information, Tourism.


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3.1.2. Corporation (S.A.)A corporation must be incorporated with a minimum of five shareholders. Each shareholder is liableup to the amount of its capital contribution, represented by negotiable shares.

The capitals corporation is divided in authorized share capital, subscribed share capital and paidshare capital. At the time of the companys incorporation, at least 50 percent of its authorized sharecapital must be subscribed and at least 33 % of its subscribed share capital must be paid-up. Thebalance must be paid within one year following the subscription.

Some characteristics of corporations are:

If a corporation needs to be capitalized, it may issue shares or bonds convertible into shares. When new shares are issued, they may be offered at a price higher than their face value to

increase the corporations net worth. This excess of the price of the shares over their face value,also known as the premium on share placement, is exempted of income and complementarytaxes at the time of the capitalization. However, this value will constitute a taxable income atthe corporation level, when it is distributed.

Stock may be sold at any time without restrictions, unless the corporations bylaws provide for aspecial procedure or provides a pre-emptive right in favor of existing shareholders. When acorporations shares are registered on the stock market, they may be freely negotiated.

The shareholders meeting can deliberate and reach decisions in a place other than thecorporations main offices, and even abroad, if the total of the corporations shares arerepresented in the meeting.

Corporations must have a statutory auditor (revisor fiscal, name in Spanish). They will also beunder surveillance of the Superintendence of Companies, if its surveillance does not correspondto any other Superintendence and their assets or revenues are higher than 30.000 minimum legalmonthly wages (mlw) (approximately USD 8.131.578 for 2010).

The corporation will fall into a dissolution cause when the 95% or more of the contributedshares belongs to one shareholder.

3.1.3. Limited Liability Company (Ltda.)A limited liability company has to be incorporated with a minimum of two partners and a maximum

of twenty-five. The partners are liable up to the amount of their capital contributions, except for taxand labor liabilities, in which case partners are severally and jointly liable along with the companyaccording to particular provisions.

The capital of the company must be fully paid at the time of the incorporation and is divided intocapital quotas of equal amount, which may be assigned in accordance with the provisions in thecompanys bylaws and Colombian law.


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The limited companys highest direction and administration body is the board of partners, in whichthe partners will have as many votes as they own capital quotas in the company. The capital quotas(stock) of limited liability companies may be assigned to other partners or third parties, afterapproval by the board of partners. Every stock assignment impliesan amendment of the bylaws that must be legalized by a public deed and registered before thechamber of commerce of the companys domicile.

A statutory auditor (revisor fiscal) is mandatory if the bylaws require so, or when the assets arehigher than 5,000 mlw (approximately US$ 1,355.263 enforceable in 2010) or the revenues arehigher than 3,000 mlw (approximately US$ 813,157).

The limited liability company will be under the Companies Superintendences surveillance if itssurveillance does not correspond to any other Superintendence and their assets or revenues arehigher than 30,000 minimum legal monthly wages (mlw) (approximately US$ 8,131,578 for 2010).

3.1.4. Limited Partnership (Sociedad en Comandita)A limited partnership involves:

One or more managing partners who are jointly and severally liable for the entitys operations. And one or more comanditarios partners who limit their liabilities to their respective capital

contributions (silent partners).

The partnership capital consists of the comanditario partners contributions and those of themanaging partners or partners with unlimited liability.

Limited partnership entities can be subdivided into simple limited partnerships and sharespartnerships. A simple limited partnerships capital is divided into partnership quotas, while ashares partnership capital is divided into shares.

3.1.5. Branch of a foreign companyA foreign company wishing to execute permanent activities in Colombia, such as having offices orcommerce establishments within Colombian territory, must set up a branch office in Colombia, andfor this purpose it must register the following documents at a notarys office in the place chosen forits main office:

A true and legalized copy of the bylaws of the head office. A minute issued by the head office governing body authorizing the incorporation of new office

in Colombia.

Documents evidencing the head office companys existence and legal status of itsrepresentatives abroad.


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3.1.6. Simplified Shares Corporation. (SAS)The SAS can be incorporated in Colombia with only one shareholder.

In every case the incorporation of a SAS gives rise to a new legal entity completely independent ofits shareholders or shareholder. The equity of the SAS is completely independent of theshareholders equity.

The liability of the shareholders of SAS is limited to the amount of the capital contributed; theshareholders of a SAS will never be joint and severally liable for tax or labor liabilities

It is possible to create different kinds of shares, such as shares with fixed dividends. Those areshares that grant the right to receive a fixed dividend notwithstanding the percentage ofparticipation of the shareholder and without resign to the voting right.

The SAS only requires a statutory auditor if the bylaws indicates so, or when the assets are greaterthan 5,000 mlw (US$ 1,355,263 enforceable in 2010) or the revenues are higher that 3,000 mlw(US$ 813,157 for 2010).

The SAS will be under the surveillance of the Companies Superintendence if its surveillance doesnot correspond to any other Superintendence (official entity of enforcement) and the assets orrevenues are greater than 30,000 (mlw) (US$8,131,518 for 2010).

The structure of the SAS is simple i) the SAS does not need a board of directors unless otherwiseexpressed in the bylaws of the company. All the management and representative activities can becarried out by the legal representative appointed by the shareholder assembly (which could beconstituted by single or multiple shareholders); ii) the shareholder assembly could execute directly

decision activities as to approve the financial statements, the dividends distributions, all thecorporative accounts, etc, nevertheless the shareholder assembly could assign this kind of activitiesto a board of directors or to the legal representative.

The SAS can be incorporated with a private document; it is not necessary to grant a public deedbefore a notary public except if the shareholders will contribute real property to the SAS

At the moment of the incorporation, the subscription and paid of the capital does not have to fulfilla specific proportion, thus it could be made in conditions, proportions and deadlines other thanthose provided in the Commercial Code for Corporations (S.A.). Nevertheless, in no case, thedeadline for the payment of the shares could exceed of two (2) years.

4.

LABOR LAW OVERVIEW

Colombian legislation establishes a regular working day of 8 hours per day - 48 hours perworkweek, Monday through Friday or Monday through Saturday. The regular work day is from6:00 a.m. to 10:00 p.m. Workers on shifts between 10:00 p.m. and 6:00 a.m. earn 35% more of thehourly wage.


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The maximum length of the regular work day is 8 hours per day 48 hours per week, except somespecial cases mentioned by the labor regulation.

Hours worked in addition to the normal working day are compensated as overtime. Overtime duringthe regular work day is paid 25% more per hour. Night overtime is paid with a 75% overcharge.

Overtime is not paid to employees in managerial or trustworthy positions.

4.1.1. Foreign employeesPursuant to Colombian Labor Code, any employer that has hired more than ten (10) employeesshould respect the following proportion: 90% of their ordinary employees have to be Colombiansand at least 80% of the reliable and qualified personal should be Colombian.

Therefore, if a company expects to hire a foreign employee, in order to get the correspondent kind

of visa, it must request a certificate issued by the Colombian Ministry of Labor attesting that theadmission of the foreigner as employee of the Colombian company respects the proportion rule,established by the Colombian Labor Code.

4.1.2. Kinds of Labor AgreementsPursuant to Colombian Labor Code the labor contract is the agreement through which an individualagrees to render services to another individual or to a company, on the basis of the employeescontinued dependency or subordination in exchange for some compensation.

The labor contract can be verbal or written, and depending on its duration can be one of thefollowing kinds of agreements:

Fixed-term ContractThis kind of contract can be signed for a period up to three (3) years and is renewable indefinitely.If the period of the agreement is less than one (1) year is important to bear in mind that after three(3) times of having renewed the contract the employer will have to sign a new agreement at least fora period not less than of one year

If the employer wishes to finish the contract due to the expiration date, it should notify theemployee thirty (30) days before the expiration date. On the contrary, the agreement will berenewed automatically.

Open-ended contract

This kind of contract does not include an expiration date, because is not determined by the parties orthe type of work performed.

It is really important to take into account that if the parties do not agree a specific term, it will beunderstood that the contract is an open- ended kind.


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Agreement for the duration of the workIn order to be under an agreement for the duration of the work, the parties must sign a writtencontract that should include a detail description of the activity or work to be preformed by theemployee, because the duration of the agreement is determined by the time required to carry out thework.

Transitory ContractThis kind of contract is used when the employer must hire occasional work that will last less thanone month.

Employees hired under this contract are excluded from receive those labor benefits arising fromwork accidents and professional illness, severance payments, life insurances, funeral expenses andservice bonus.

4.1.3. Kinds of WageThere are two types of salary compensation in Colombia as follows:

Ordinary Salary: Under this modality the employee will have the right to receive besides a fixedor variable amount as monthly salary the following labor benefits:

a. Severance Payment (Cesanta, called in Spanish): This payment is due during the enforceabilityof the labor contract and at the termination of it. Consists on one month salary per year of workbased on the last monthly wage provided it has not been modified in the last 3 months of theyear. If the salary has suffered modifications then, the average of the last 12 months is taken

into account to determine the annual severance payment.

This labor payment has to be deposited in an individual account on behalf of the employee in aCesantias Fund chosen by the employee, until February 15Th of the following year to the oneon which the cesantia was accrued, for instance, 2009 severance (corresponding to onemonth of salary of 2009) should have been deposited in the Cesantias fund until February 15 of2010.

b. An annual 12% interest of the outstanding balance of the "cesanta" at December 31st of eachyear. It is payable directly to the employee in January of the following year to such when thecesanta was accrued, or on a pro rated basis at the end of the labor contract.

c.

Service Bonus (Prima Legal): Consisting on one month salary per year payable 50% on Juneand 50% on December. The bonus is paid proportionally for the time served in a calendarsemester.

d. Vacation: Consisting on a fifteen (15) working days salary per annum or proportionally to thetime that the employee has been working.


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Integral Salary: When the employee earns a salary higher than ten times the minimum monthlysalary (Colombian minimum monthly salary is COP $515.000 in force year 2010, approx US $ 271per month), the employee may agree with his/her employer a wage so called integral salary, whichcan not be lower than ten (10) minimum salaries, plus a benefit factor amount equivalent to the 30%of said salary.

The benefit factor includes all the social benefits already mentioned for the ordinary salary, exceptvacations; this means that if the employee agrees with the employer upon payment an integralsalary, all social benefits accrued through the time of such agreement shall not be estimated andpaid off, and thereafter no labor benefits will be payable on independent basis.

4.1.4. Social security regimeEmployers and employees (including independent contractors) are obliged to contribute to thesocial security system. In addition to paying their own contributions, employers must withhold and

remit the contributions of their employees. The system includes subsidies for Colombian citizenswho cannot afford to make social security contributions.

All contributions are computed as a percentage of the employees salary or wage. The ceiling forcalculating the contributions that have to be paid by both employers and employees is 25 times themonthly minimum salary. This means that the taxpayers earning more than 25 times the minimumsalary will contribute to the social security system having as a contribution base this fixed amount(the excess of it is not taken into account). For the case of employees with integral salary, themaximum base is the 70% of the salary that in any case could exceed the cap already mentioned.

The rates for calculating the employers contributions under the social security system are:

Fund Employers Contribution Percentage

Health insurance 8.5 %General pension scheme (old age, disabilitysurvivorships pension and administrativeexpenses)

12%

Work accident insurance21 0.5 % (approx)

4.1.5. Payroll taxAll employers must contribute, as family allowances for low-income earners, 9% of their monthlypayroll. The total revenue of this contribution is allocated as follows:

3% to the Colombian Institute for Family Welfare (ICBF); 2% to the National Service for Learning (Servicio Nacional de Aprendizaje, SENA) 4% to the family allowance money desk (Cajas de Compensacin Familiar).21 This contribution is only payable by employers and varies per job type, depending on the risks associated

with the type of business performed by the employee.


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4.1.6. VisasChosen the kind of Visa that an investor or a foreign employee will need depends on the nature ofthe activities that the individual will perform in Colombia. Therefore, following are the maincharacteristics of the most common types of visas.

Type of Visa Characteristics

Business

Visa

Requester:

Legal representatives, directors or executives of foreign business, industrialor services companies with economic ties with a national or foreigncompany in Colombia.

Merchants, industrialist, entrepreneurs or marketing students bearing averifiable economic connection with a national or foreign company inColombia.

Characteristics:

Holders of this visa may conduct in Colombia entrepreneurial activitiesinherent to the interest they represent such as attending a board of directormeetings, do business, and supervise the management of the company locatedin Colombia.The holder of this visa may not establish a residence in Colombia and theactivities conducted may not generate any fee or salary payments insideColombian territory.Time Granted:

This visa works is for multiple entries and will be valid for a four (4) yearperiod. The holder can remain in the country for up to six months per entry.

Investor's

Resident

Visa

Requester

This visa is granted to foreigners that makes a direct foreign investment ontheir behalf, of at least one hundred thousand dollars (USD $100.000) fulfillingthe requirements set forth in the exchange market regulations.

Temporal

Employee

Visa

Requester

This visa is granted, among others to foreigners who:

Are hired by a public or private company, agency or institution and mustbe entering the country or remaining therein, to carry out a job or activityin his/her field of specialty, or to provide technical training.

Are foreign journalists hired /commissioned by a national or internationalnews or information agency.

Characteristics:

Temporal Employee Visa has to be requested by the Company that is hiring theforeigner because the Visa will be issue under its liability.

On the other hand, if is the first time that the foreigner apply for this kind ofvisa the request must be filed personally by the foreigner in any ColombianConsular Office, which means that the foreigner can not be in Colombianterritory at the moment of the application.Time Granted:

Please take into account that Temporal Employee Visa will be issued for aperiod of time of two (2) years, with the possibility of many entrances toColombia. However the Visa will expire if the foreigner leaves the country for


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Type of Visa Characteristics

a continuous period of time that exceeds one hundred and eighty (180) days.Before the period of two (2) years has come to an end the renovation of theVisa may be requested, but in that case the application can be filed inColombia.

Visitor's

Visa

Requester:

This visa is granted to foreigners who enter the country without the intention ofestablishing a residence and only for purposes established in the Law.Characteristics:

There are three categories:(i)Tourist Visa (just certain countries), (ii) Temporary Visitors Visa and (iii)Technical Visitors Visa.If is the first time that the foreigner apply for this kind of visa the request mustbe file personally by the foreigner in any Colombian Consular Office, whichmeans that the foreigner can not be in Colombian territory at the moment of theapplication.Time Granted:

This Visa will be issued for a period of time of one hundred eighty (180)calendar days (maximum), with the possibility of many entrances to Colombia.If this Visa is granted to a person who is traveling to Colombia in order torender trainee services, the visa will be granted for a period of 45 days.

5. FOREIGN EXCHANGE CONTROLS5.1.1. Foreign investment in Colombian CompaniesColombia has an exchange market regulation that applies to the foreign investment. Hence, the

foreign currency transfers of capital investment into companies or non profit associationsdomiciled in Colombia would be considered as an investment of foreign capital in Colombia, thatshall be wired through the exchange market by means of an exchange market intermediary (localbank) or a registered foreign currency bank account.

Since December 1st, 2003, foreign currency transfers of capital investment into companies or non profit associations domiciled in Colombia will be automatically registered upon the filing of theExchange Form No. 4 to convert the funds into local currency (Colombian pesos).

Once the investment is registered, the registration holder is entitled to:

Remit abroad proven net profits that the investment periodically generates. Reinvest profits or retain them as surplus undistributed profits Capitalize amounts with remittance rights. Remit abroad income received from selling the investment in the country, from liquidating the

company, from portfolio, or from reducing the companys equity.


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It is also important to point out that the registration of the foreign investment through the formmentioned above it will be just a procedural issue; nevertheless, it is important to do it correctly, onthe contrary penalties due to wrong information or wrong filled could be imposed.

Other kind of foreign investments must be registered before the Central Bank within the term ofthree months, such as the investment in real estate or trusts.

Finally, the change of foreign investor, due to purchase of the investment or others, must beinformed. On the contrary, the new investor will lose the registration rights mentioned above.

5.1.2. Supplementary investment account of Branches of foreign companiesThe Colombian branches of foreign companies are entitled to receive the initial capital investmentfrom its main office, which should be classified as assigned capital investment.

Additionally, they may receive foreign currency as supplementary investment. In both cases theforeign currency must be wired through the exchange market by means of an exchange marketintermediary (local bank) or a registered foreign currency bank account and be registered filing theExchange Form No. 4 to convert the funds into local currency (Colombian pesos).This registry isautomatic.

5.1.3. Foreign IndebtednessAccording to exchange regulations Colombian residents are only authorized to obtain credits onforeign currency from local or foreign financial entities registered before the Central Bank.

Before the disbursement of the amount of the credit, it is required to perform a deposit in

Colombian pesos or North American Dollars. This deposit must be performed before a Colombianexchange intermediary that will file the corresponding documents to the Colombian Central Bank.The deposit does not accrue any interests in favor of the debtor.

If the deposit is withdrawn before the 6 months deposit period established, the Colombian CentralBank has stated discounts proportional to the time of the deposit. It is possible even to pay just thepenalty when the retirement of the deposit is going to be performed on the same day of theconstitution.

Currently, the deposit is 0% of the credit granted.

Finally, all foreign credits have to be registered before an exchange intermediary (bank) using the

Form No. 6 which is also used to report any changes of the credit after the registration has beenperformed; if the disbursement is simultaneous with the registration this form will be enough, if notForm No. 3 has to be used to report any disbursement. .


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5.1.4. Imports and exportsImports and exports of goods are subject to the exchange market regulations, thus all paymentsrelated to those operations must be wired through the exchange market by means of an exchangemarket intermediary (local bank) or through a registered foreign currency bank account.

Taking into account the aforementioned, it is not allowed the offset of obligations derived fromforeign trade transactions. If these provisions are not complied with, the parties will fall in aninfringement of the exchange regulations that according to Decree 1746, 1991 could be the sourceof fines up to 200% of the proved infringement.

Imports

Imports which its FOB value exceed USD $10.000 and that have been financed for a period longerthan six (6) months should be registered before the Central Bank by filling the Exchange Form

No.6. The financier could be the foreign supplier or a financial entity.

Exports

Colombian residents are allowed to grant terms for the payment of its exports. However, if suchterms are longer than twelve months (12) or the purchaser of the exports is taking a longer period tomake the payments, counting from the Export Return, the transaction must be registered before theCentral Bank by means of Exchange Form No.7, as long as the export transactions exceed USD10.000.

In addition to that, exporters are entitled to obtain loans from local or foreign financial entities, inorder to fund its exports; in this case, the exporter must register the indebtedness before the Central

Bank and before the disbursement of the amount, a deposit in Colombia Pesos or North AmericanDollar will be required. Currently this deposit is of 0%.

5.1.5. Special RegimeThere is a Special Exchange Regime in Colombia that is applicable to branches of foreigncompanies that perform activities related to the exploration and exploitation of oil, gas, coal oruranium or those that render services exclusively to the hydrocarbons sector.

This special regime allows these branches not to reimburse the foreign currency coming from itssales (as the other companies must do it) and they can not purchase foreign currency in theColombian Exchange Market (CEM). Likewise, they should reimburse to the CEM the foreign

currency as necessary to cover the expenditures in Colombian pesos of these branches.

Regarding the foreign investment, the initial capital investment from the parent companies of thiskind of branches should be wired through the CEM and registered before the Central Bank using theExchange Form No.4. On the other hand, the supplementary investment must be registered any timebefore March 31st and after December 31st (that should be the closing of the financial year) by filingthe Exchange Form No. 13. The foreign investment should be updated every year before June 30,using the same Exchange Form No. 13.


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6. TRADE AND CUSTOMS6.1.1. Free Trade ZonesWith the purpose of promoting trade, investment, creation of employment sources in some areas ofthe country, as well as, implementation of the standards, and obligations imposed by the WorldTrade Organization WTO-, the Colombian Congress approved Act 1004 enacted on December of2005.

This Act established a legal framework for the Free Trade Zone Regime in which the incentives onrevenues are not only tied to export markets but also to the domestic market.

Additionally, the government issued Ruling Act 383 on February 2007 and Ruling Act 4051 onOctober 2007, with the aim to unify under a single set of rules all matters related to the Free TradeZone Regime and to clarify certain aspects of the aforementioned Act.

Some of the main tax and customs benefits are:

Tax- related:The new regime allows Users, whether Industrial User of Goods or Industrial User of Services for acorporate income tax rate of 15%, resulting in a tax saving of 18%. The reduced corporate incometax rate does not apply to Commercial Users located in a Free Trade Zone and from taxable year2010 onwards, the 15% income tax rate established for industrial users of Free Zones can not beapplied simultaneously with the special deduction stated in Section 158-3 of the Colombian TaxCode, i.e. the 30% deduction over the amount of the effective investment in fixed tangibleproductive assets.

Customs related:Exemption from payments of the customs duties and VAT on the introduction of merchandize fromoverseas to the Free Trade Zone, as long as it remains within the Free Trade Zone. In other words,the importers can maintain stocks of merchandize in warehouses in the zone without paying dutiesand VAT until items are brought into the national customs territory. Additionally, the sales of goodsfrom the National Colombian Territory to an Industrial User of Services or Goods established in aFree Trade Zone are not subject to VAT, provided these are necessary for the development of thebusiness objective of these users.

6.1.1.1. Types of Colombian Free Trade Zones.Colombia has many kinds of Free Trade Zones, as follows:

Permanent Free Trade ZoneArea -of at least twenty (20) hectares- that has a certain infrastructure, required to operate forIndustrial Users of goods/services and Commercial Users.


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Special Permanent Trade ZoneAreas created for special projects with high economic and social impact for Colombia and tostimulate new investment and employment projects that increase the competitiveness of the FreeTrade Zone. The Special Free Trade Zone allows companies that are physically located outside of ageographic Free Trade Zone area to operate as a Free Trade Zone User and enjoy theaforementioned benefits.

Transitory Fee Trade ZoneLocations where trade fairs, exposition, conferences and seminars that are considered important forColombias economy and international economy will take place.

6.1.1.2. Colombian Free Trade Zones UsersThe following is a description of each kind of users that can operate in a Free Trade Zone

OperatorsLegal entities authorized to direct, manage, supervise and develop one or several Free Trade Zones,as well as to qualify their users.

Industrial UsersThese legal entities can be classified as follow:

a. Industrial Users of GoodsLegal entities installed exclusively in one or several Free Trade Zones, authorized to produce,transform o assemble goods by processing raw materials or semi-manufactured products.

b. Industrial Users of ServicesLegal entities authorized to render services exclusively, in one or several Free Trade Zones.

Among others, the activities that can carry out an Industrial User of Services are:

i) Logistics, transportation, manipulation, distribution, packaging, labeling, classification;

ii) Telecommunications; Scientific and technological research;

iii) Medical, dental and general health assistance;

iv) Tourism.


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Commercial UsersLegal entities authorized to carry out activities such as: trading, marketing and storage orpreservation of goods. In addition, the Commercial Users can not hold simultaneously bothqualification (with Industrial User of Goods or Services qualification).

6.1.2. Trading Companies (Comercializadoras Internacionales)The international trading company or sociedad comercializadora internacional (hereafter C.I.,due to its initials in Spanish) is a company dedicated to trading and sale Colombian products abroadwhich were purchased in the local market or manufactured by related or unrelated local companiesor partners of such company, with the only purpose of being exported.

The C.I. must be a legal entity established under any type of Colombian companies, regulated bythe Commerce Code, and should include within their business scope the possibility to import raw

materials to supply the local market or to manufacture finished goods to be subsequently exported.

In order to get the benefits explained below, a qualification as C.I. must be obtained before theColombian Tax and Customs Authorities (DIAN), proving the fulfillment of specific requirementset forth in the law.

The benefits granted by the tax law due to the C.I. qualification are the followings:

The purchase of merchandize made by the C.I. in the local market and set aside to be export isVAT exempted.

Payments done by C.I. to local market suppliers of goods that hereinafter will be exported donot accrue income tax withholdings on purchase, which normally tax rate is 3.5%.

The manufacture services rendered to C.I., regarding goods that are going to be exported, areVAT exempted.

7. CORPORATE TAXATION7.1. IncomeTaxCompanies domiciled in Colombia (hereinafter Colombian companies) are subject to corporateincome tax on their worldwide income. Foreign companies are subject to this tax only on theirColombian source income.

A company is domiciled in Colombia for tax purposes if it was incorporated under the Colombianlaws and its principal domicile is Colombia.

As general rule, companies must keep their accounting records and pay their taxes using the accrualmethod.


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Taxable Income

Colombian companies should determine its final income tax liability at 33% rate on its net taxableincome. The taxable income will be the result of the following procedure:

Gross revenues

(-) Restitutions, mark downs (rebates) anddiscounts

(-) Non-taxable revenues

= Net revenues

(-) Costs

= Gross income

(-) Deductions

= Net income

(-) Exempted income= Taxable income

There is an alternative method for the computation of the taxable income based on deemed incomecalculated on the net equity of the taxpayer, but it only applies when the ordinary income is lowerthan this alternative method.

7.1.1. Gross revenueThe concept of Revenue is broadly defined by the tax law, in order to include all ordinary andextraordinary earnings derived from the taxable period that upon collection can produce a netincrease in the taxpayers net worth, unless specifically exempt. Colombian taxable period goesfrom January 1st to December 31st of every calendar year.

For income tax purposes, it is understood that revenues are realized when they are effectivelyreceived in money or in kind in a manner that can be considered as a payment, or when the right todemand them is extinguished by any other means other than the payment as i.e the offset of doubts.

However, bear in bind the following exceptions to the previous rule:

The income or revenue obtained by the taxpayers with accrue system accounting, who have todeclare then income accrued in the tax year or tax period, except for the cases of sales withterms.

The income or revenue coming from dividends from corporations or profits due to participationsin limited liability companies or assimilated companies, are understood as received by therespective partners, stakeholders, associates, etc, when the they have been distributed and itspayment can be demandable.

The revenue received due to the selling of real estate, will be accrued on the date of the publicdeed through which the sale is formalized (it is mandatory in Colombia for real estate), exceptfor those sales that includes installments.


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The income is accrued when has arisen the right to demand a payment, notwithstanding it has notbeen charged yet.

7.1.2. Non-taxable revenuesAs an example of non-taxable income that must be showed in the income tax return without havingany fiscal impact for the taxpayer, it can be mentioned the premium on share placement (in the caseof corporations), which is exempt from income and complementary taxes at the time of thecapitalization (however, this value will constitute a corporations taxable income at the moment ofits distribution), and the revenues receives from the insurers corresponding to the indemnity ofactual damages (does not include the revenues due to lost on profits).

7.1.2.1.Special cases of non-taxable revenuesa. DividendsThe income received from Colombian companies as dividends or participations in limited liabilitycompanies will be non-taxable revenues if corresponds to profits on which tax has already beenpaid, on behalf of the Colombian company distributing it.

If the dividends or participations correspond to profits on which tax has not already been paid onbehalf of the Colombian company distributing it, these revenues will be taxed.

b. Sale of SharesAccording to Section 36-1 of the Tax Code, the income due to the sale of shares registered in theColombian stock exchange is non-taxable, provided the shares sold in the tax year by the seller are

less than 10 percent of placed shares of the company.

7.1.3. CostCosts can be defined as those expenditures that are used directly in the acquisition or production ofa good or to render a service. The following are some examples of how the cost of certain goodsmust be determined.

7.1.3.1. Inventory Cost movable assetsMovable assets are defined as those assigned to be sold in the normal course of the business and areusually treated as the Inventory of the company.

The cost of the inventory for those companies that must file its income tax return with the signatureof an accountant of a tax statutory auditor should be determined through the inventorys permanentsystem using FIFO or LIFO, Retail, Average or the Specific Identification method.

If the taxpayer wants to use another system should file a request before the Tax Authority in orderto obtain its authorization.


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7.1.3.2. Fixed assetsThe Tax Code provides with specific rules regarding how the cost of the different kind of fixedassets must be determined. Some examples are:

The tax cost of movable goods is the acquisition prices plus all the improvements and fiscalreadjustments made until 1991 and the inflation adjustments made until December 31st, 2006,less the depreciation.

The cost of real estates may be the value that was included in the previous year real estate taxreturn or the valuation made by the cadastre authorities.

7.1.4. Deductions7.1.4.1.General aspectsExpenses are deductible to the extent that they are:

Necessary for the production of income The expenses have a causal relationship with the activity that generates the income. The expenses are proportional with the income according to a commercial criterion.Deductible items include among others, business expenses, depreciation, interest payments, wages,social security payments, industrial and commercial tax (gross receipts tax), real estate tax, 25% offinancial transactions tax (GMF) -in the cases of taxes, the deduction is regarding the amount

effectively paid-, etc.

7.1.4.2.Special Deductionsa. Cost and expenses accrued abroadCosts and expenses accrued abroad in order to obtain national source income may be deductedwithout exceeding the 15% of the net income tax, calculated before having credited suchdeductions. Nevertheless, this limit does not apply if:

The expenses are capitalized according to accounting techniques in order to be further onamortize

Or the withholding taxes are duly practiced when necessary. Or for payments made to commission agents abroad for the acquisition or sell of goods, rough

materials or other types of goods as long as these payments do not exceed a percentage over thevalue of the operations during the taxable year settled by the Ministry of Treasury and PublicCredit.


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Other special payments as stated by the tax regulation.b. Payments to the head office or other related companies located abroadColombian companies are entitled to deduct from its income the payments made to its main officesdue to management expenses or royalties, as long as they have exercised the correspondingwithholdings when taxable in Colombia. If these operations are not subject to withholdings, becausethey are not taxable in Colombia, but they were carried out fulfilling with the transfer pricingregulation, their deductibility is subject to the 15% limitation mentioned before. Otherwise, suchpayments are not deductible whatsoever.

Payments due to other concepts are subject to the previous rule.

c. DepreciationDepreciation occasioned by the normal wear and tear of assets used in business activities must becomputed at a maximum annual percentage that will be deductible from the companys income.Depreciation should be calculated under the straight-line method (that includes an Act thatestablishes the period of time that must be used for every kind of assets), the decline-balancemethod or the diminish-balance method.

Other depreciation methods can be used; however, a prior approval form the Tax Authority isnecessary.

d. AmortizationPursuant to Sections 142 and 143 of Colombian Tax Code, the necessary investment, other than the

one made on real estate, made in order to achieve the aims of the business or activity, should beamortized in a period of five years or longer and in this proportion will be deductible every year (ifthere are not other particular provisions regarding the specific investment).

Nevertheless, the abovementioned period could be lower if the business nature or its durationrequires so.

Amortization of Intangible assetsThe aforementioned articles are applicable to the cost of intangible assets.

Amortization for Oil and Gas Industry and other natural resources industriesThe amortization of ordinary and necessary investment can be treated as a deduction in thecalculation of the taxable income of the oil and gas industries. The amortization must be alsoclaimed in a period of at least five (5) years, unless a shorter period can be justified.

These kinds of investment may be amortized using either the straight-line method or the units-of-production method.


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In case of unsuccessful exploration the investment can be amortized in the same year of the failureor within the following two years against the profits of other wells.

7.1.4.3.Special Deductions Tax incentivesa. Agricultural investments22The individuals or companies that invest directly in agricultural plantations dedicated to thecultivation of fruits, anchovies, rubber and cacao as well as on drills that benefits the agriculturalproducts can deduct in its annual tax return the value of these investments. However, this deductioncan not exceed 10% of the taxpayer taxable income.

b. Environmental investmentsIt is also deductible the amount of the new investments made on environmental enhancements or

controls, if such investments have been accredited before the Environmental Authority. Thededuction can not exceed 20% of the taxpayer taxable income determined before having creditedsuch deduction.

Investment in certain kind of scientific research

Taxpayers are entitled to a 125% deduction of the amount that they have invested directly orthrough technological or research non-profit entities on research of developments projects oractivities duly recognized by The National Council of Science.

This deduction can not exceed 20% of the taxpayer taxable income determined before havingcredited such deduction.

c. Investing in real fixed productive assetsWhen the net taxable income has been determined, companies and branches that have acquiredfixed real productive assets during the fiscal year can deduct thirty percent (30%) of the investmentmade.

However, pursuant to the tax regulation the deduction only applies if the fixed real productive assethas not been part of any transaction between (i) the rest of the direct subsidiary companies or (ii)share binding companies or (iii) companies with the same majority shareholder and the purchasercompany. Furthermore, the assets must be depreciated using the straight-line method.

Additionally, this benefit is transferred to the shareholders or partners of the company whichapplied for such special deduction of productive assets.

22 Tax Code, article 157


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d. DonationsPursuant to Colombian Tax Code, the taxpayers that must file an income tax return in Colombiawill be able to deduce the donations made during the tax year without exceeding the 30% of theirnet income tax, calculated before having credited such deductions, if the donations fulfill thefollowing requirements:

The donee must be a non-profit foundation which its main corporate purpose should be thedevelopment of social programs and the activities carried out by the non-profit foundationshould be of general interest.

The donee should have been recognized as a non-profit entity and must be under the supervisionof a State Authority.

The year previous to one when the donation was done the donee should had filed an income taxreturn.

If the donation is currency, it should have been made by check, credit card or through anauthorized financial entity.

The donee should manage the donations that receive through an authorized financial entity. The donee should have provided the donor with a certificate stating the destination, type (if was

currency or goods) and amount of the donation and the fulfillment of all the requirementsmentioned above. This certificate must be signed by the statutory auditor of the foundation.

This tax benefit does not apply if the donations are shares, quotas or securities.

7.1.5. Exempted Income Tax incentivea. Agricultural investmentThe income generates due to fruit, rubber, oil palm and cacao cultivations considered of late yieldwill be exempt of income tax for a period of ten (10) years, as long as the company fulfils certainrequirements.

b. Investing in hotelsFor a period of 30 years the income received due to hotel services rendered in new hotels built since

Law 788 of 2002 until 2017, will be exempted from income tax.

Besides the previous tax incentive for the tourism sector, there is another rule in the Tax Code thatestablishes that for a period of 30 years, the income received due to hotel services rendered inremodeled hotels, which its remodeling was performed since Law 788 of 2002 until 2017, will beexempted of income tax in proportion to the amount invested in remodeling or enlarging the hotel.


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7.1.6. Tax Losses7.1.6.1.Ordinary lossesSection 147 of the Colombian Tax Code states that companies can offset its tax losses (fiscallyreadjusted) against the taxable income obtained in the following tax periods with no limitation oftime.

It is important to mention that the possibility of offset the tax losses without a limit of time andamount was introduced by Law 1111 of December 2006, before Law 1111 tax losses could beoffset within a 8 years period, limited annually to the 25% of the loss value.

Based on ruling C 508 of 2008 of the Constitutional Court, the offset of losses shall be made asfollows:

Losses Realized between year 2003

and December 31st of 2006.

Realized from 2007 onwards

Period of time 8 years Without a limit of time

Amount 25% of the loss per year Without a limit of amount

In order to carry forward the losses, such tax losses should have been declared in the income taxreturns of previous years. Additionally, the ordinary losses should had been in accordance with theeconomic and tax reality of the entity; which means that should had been the result of the differencebetween the operating income against costs and expenses related to the operation of the company.

No carry-back is allowed in Colombian tax regulation.

7.1.6.2.Capital gains lossesCapital losses incurred upon the transfer of fixed assets that were held by the company for morethan two (2) years are deductible only from capital gains that results from similar transactions.Capital gains coming from the transfer of fixed assets that were part of the company for less thantwo years are treated as net income, thus the aforementioned rule will be not applicable for thesecases.

7.1.7. Presumptive incomeA presumption of income (presumptive income) is calculated every year, at 3% on the taxpayers

net worth as of the end of the preceding taxable year. Some assets could be excluded of the networth for this purpose.

If the calculation of the presumptive income is higher than the taxable income determined accordingto the procedure that has been mentioned before ordinary procedure, the taxpayer should pay itsincome tax over the presumptive income.


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In this last case, the amount by which the taxpayers deemed income exceeds his net incomecalculated according to the ordinary procedure, may be deducted from his gross income in thefollowing five years (the amount may be fiscally adjusted).

7.2.Income tax treatment of leasing agreementsFinancial leasing agreement is legally defined as an agreement through which a leasing company(the lessor) (which in Colombia can only be Financing Commercial Companies or Compaas deFinanciamiento Comercial) or an international lessor (that could be the provider), delivers to anindividual or corporate entity (the lessee) the possession of a productive asset (capital goods)acquired to be leased, and selected by the lessee for his use and enjoyment. In exchange, the lesseemakes a regular payment over an agreed period, at the end of which, the lessee will be entitled toacquire the asset against payment of the purchase option. Periodic or monthly payments include aportion of the price of the goods and therefore the option price is the residual price.

For accounting and tax purposes, leasing agreements with purchase options entered after January 1,1996 are classified as either operating leases or financial leases.23

Operating lease treatment is applicable to leasing contracts on real property, (except land) enteredfor 60 months or more, lease contracts on machinery, equipment, furniture and fittings for 36months or more, and lease contracts on productive vehicles and computer equipment for 24 monthsor more.

Leasing contracts on land, leaseback agreements, and leasing contracts on assets with shorter termsthan those indicated above, are treated as financial leases for accounting and tax purposes.

It is important to note that all leasing contracts signed after January 1, 2012 should be treated as

financial leasing, regardless of the nature of the lessee.

7.2.1. Financial leasing LessorA finance lease is treated as an ordinary loan. The leasing company records a monetary asset in theaccount leased assets for the net present value of the leasing payments and the purchase option.All leasing payments should be split out between amortization and financial cost; the amortizationshould be recorded as a reduction of the leased asset and the financial cost as operating income.

When the lessee company exercises the purchase option, it should pay the outstanding balance of

the leased asset. If the purchase option is not exercised, the leasing company transfers theoutstanding balance of the leased asset to the account assets for placement under lease.

23 Pursuant to section 127-1 of Tax Code


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LesseeThe asset is recorded as a non-monetary asset subject to tax readjustment and depreciation and amatching liability is also recorded. The asset and liability must be the present value of the leasingpayments plus the initially agreed price of the purchase option.

Leasing payments are split into amortization and financial cost. The amortization is recorded as areduction of the liability and the financial cost as a tax-allowable expense.

When the purchase option is exercised, its agreed value is used to cancel the balance of the liabilityand any difference between the amount paid and the liability balance goes to the financialstatements.

7.2.2. Operating leasingOperating lease agreements receive the same accounting treatment as ordinary rental agreements.The leasing company records the assets as non-monetary items subject to tax readjustments anddepreciation, and the received payments as operating income.

The lessee records operating leases in the same way as an ordinary rental agreement. The asset doesnot appear in the balance sheet and payments are charged to expenses.

7.3.M&A taxation7.3.1. MergerUnder Colombian law, a merger of companies is a complex legal transaction by which one or

several companies are dissolved, but not liquidated, to be absorbed by another company (ies) or tocreate a new company (ies).

The merger is achieved by means of an equity transfer representing all the assets and liabilities ofthe absorbed companies into another absorbing company, which may be newly formed or pre-existing.

In this situation, the absorbing company or the new company acquires the rights and obligations ofthe dissolved companies as they were at the time of the execution of the merger agreement.

Tax effect of mergers

In accordance with the provisions in Section 14-1 of the Tax Statute, the merger of companiesimplies neither alienation nor a sale of assets between the merged companies. For this reason, thiskind of transaction does not generate income tax effect for those companies participating in it, andneither value-added tax (VAT) nor income tax arises for the involved companies.

Tax regulations provide that the absorbing or new company originating from the merger isresponsible for paying the taxes, advances, withholdings, sanctions, interests and other taxobligations existing in the merged or absorbed companies.


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The absorbing or new company may compensate its own net taxable income against tax losses ofthe absorbed entities but limited to the percentage resulting from taking the absorbed companys netequity divided by the absorbing companys equity and the absorbing entity must have the same lineof business of the absorbed company.

7.3.2. Spin-off or de-mergerIn accordance with the commercial regulation (Act 222, dated December 20, 1995), there are twokinds of spin-off companies:

When a company, without being dissolved, transfers in a block one or several portions of itsnet worth or patrimony to one or more existing companies, or uses such portion(s) to set upone or more new companies.

When a company is dissolved, but not liquidated, and splits its net worth or patrimony intotwo or more portions that are either transferred to several existing companies or used to set upnew companies.

Tax effect of spin-off

Pursuant to Section 14-2 of Colombian Tax Code the spin-off of companies does not implyalienation or a sale of assets between the spin-off companies. For this reason, this kind oftransaction does not generate income tax effect for those companies participating on it and also novalue-added tax (VAT) will arise due to this transaction.

However, tax regulations provide that the spin-off company and the new company originating fromthe de-merger are jointly liable for those taxes, advances, withholdings, penalties, interests and any

other tax obligations existing or due at the moment of the spin-off, as well as any other taxobligation that could arise after the spin-off process but related to the fiscal periods previous to it.

7.3.3. Acquisition of sharesAny acquisition, in Colombia or abroad, of shares of a Colombian company by residents or non-residents generates a tax liability in Colombia for the seller.

The taxable income is the positive difference between the sale price and the tax cost of the sharessold. The sales price cannot differ in more than 25 percent of the market price of the shares on thesale date. The tax cost is calculated as the acquisition cost, plus tax adjustments. If the transaction ismade within related parties, the transfer pricing rules are applicable.

The portion of retained profits already taxed at the Colombian company level and corresponding toshares to be sold can be subtracted from the taxable income. However, the excess of retained profitsthat has not been taxed at the Colombian company level would be taxable, unless such profits arecapitalized.


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If the shares are acquired from a foreign investor the proper register with the Central Bank must bedone (as is explained in a previous point) and the seller must file an income tax return within themonth following the sale, regardless if there is or there is not a tax to pay (tax due).

On the other hand, if a share transfer to a new owner abroad is the result of a merger or de-mergertransaction, the transfer does not generate income tax effects in Colombia.

7.4.Transfer pricing regimeColombian regulations regarding Transfer Pricing (TP Rules) are consistent with the spirit of theOrganization for Economic Co-Operation and Development (OECD) Guidelines and are seen aspart of a large Government effort to prevent tax avoidance. TP Rules include specific issues such asfinancial transactions, application of the inter-quartile range and adjustments to the median, whenthe taxpayers margins or prices fall out of the range and considerations of the industry and/or lifebusiness cycles. TP Rules apply to income taxpayers engaging in cross-border transactions with

foreign related parties.

The concepts of related economic party or related party, upon which the TP Rules are based, shouldbe considered synonyms and are basically defined by reference to other rules that include situationsranging from statutory to economic dependency and control of companies by individuals(Commercial Code, Sections 260, 261, 263 and 264; Section 28 of Law 222 of 1995 and Tax Code,Sections 450 and 452).

Regarding formal obligations, income taxpayer obliged to fulfill TP Rules requirements are thosewho perform transactions with related parties located abroad who exceed the established caps ofgross equity higher than (100.000 UVT - COP$2.455.500.000, in tax year 2010 which isapproximately USD $1,292.368)) or gross income higher than (61.000 UVT - COP$1.497.855.000,

in tax year 2010 that is approximately USD $ 788.344).

For the enforcement of the transfer pricing obligations, taxpayers should report on the informativereturn all operations entered into with foreign related parties.

However, for supporting documentations purposes, only those operations exceeding 10.000 UVT -$245.550.000 Colombian pesos in fiscal year 2010 (approx USD$ 129.236) should be subject to thetransfer pricing analysis. The supporting documentation should be prepared and made available tothe tax authorities no later than June 30, following the related fiscal year. When requested by the taxauthorities, it must be filed within a period of at least 15 days from the notification date.

Pursuant to the Act 4349 of 2004 the transfer pricing return must contain, among other information,

the following: form fully completed; taxpayers fiscal identification; income tax ID and country ofdomicile of the related parties involved in the controlled transactions; transfer pricing method usedto determine the prices or profit margins; inter-quartile range obtained in the application of thetransfer pricing methodology; assessment of sanctions, when necessary; electronic signature of thetaxpayer or its legal representative, its agents or the special agents.

In cases of control or holdings, when the controller or headquarter or any of its subordinated entitiesmust file the individual informative return, the controller or head office will have to file a


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consolidated informative return listing all operations, including those involving affiliates that arenot required to file the individual informative return.

Following the spirit of the OECD guidelines, TP Rules specify the methods for the transfer pricinganalysis, as well as the comparability factors that should be taken into account when assessingcontrolled transactions to those performed by independent third parties in comparable transactions.In Colombia Section 260-2 of Tax Code specifies six transfer pricing methods.

Finally, it is worth to mention that these rules only impact the income and complementary taxcomputation regarding ordinary and extraordinary income and expenses (costs and deductions) andfor the determination of assets and liabilities between related parties. Therefore, TP Rules will notaffect the determination of other taxes under such transactions, such as industry and trade tax (grossreceipts tax), VAT, Custom tariffs (custom duties), etc.

7.5.Withholding Tax7.5.1. Income withholding taxPursuant to Section 367 of Colombian Tax Code, the purpose of the income withholding tax is tocollect in a gradual way and during the taxable year the income tax.

Therefore, withholding tax applies on gross payments made to national and foreign companies(these ones, regarding just its Colombian source income).

7.5.1.1.General rates and conceptsThe withholding tax rates vary depending on the kind of payment; following are some examples of

these rates.

Taxable company Concept Rate

National Company

(including branches)

Services 4%

Purchase of goods (excludingcars and real states)

3.5%

Fees and commissions 11%

Prizes due to Lottery, bets andothers

20%

Foreign Companies

Interests, commissions,royalties, leases, generalservices and payments due to

copyrights or know how

33%

International transportation 3%

Other cases different fromthose specially mentioned

14%

Turn key contracts and CivilWorks

1% over the gross amount ofthe total payments made.


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Regarding the withholdings that must be practiced to foreign companies it is important to considerthat if the Colombian source incomes received by these companies are not entirely subject to thesome withholdings stated by law, or are subject to the 14% withholding rate mentioned above, theforeign companies will have to determine its final income tax liability at a 33% rate on net taxableincome and file an income tax return. In this last case, the withholdings done can be treated as anadvance payment and used as a tax credit against the final tax liability.

7.5.1.2.Special casesThe following are some cases of income withholding tax applicable to payments made to foreigncompanies that have special rates or taxable bases.

a. DividendsThe payment of dividends to foreign shareholders who do not reside or are not domiciled in

Colombia in their capacity as partners or shareholders of a company incorporated in Colombia issubject to income withholding tax at the following rates:

If the dividend corresponds to profits on which tax has already been paid at the Colombiancompanys level at the moment of its distribution, no income withholding tax will applied.

If the dividend corresponds to profits on which tax has not already been paid at the Colombiancompanys level that distributes such dividends, the applicable rate is 33%.

b. Software License PaymentsAlthough the applicable rate to those payments due to the granting of software licenses by a foreign

company are subject to income withholding tax at a rate of 33%, the withholding should be appliedonly over the 80% of the gross payment.

c. Technical and Technical Assistance Services and Consulting ServicesAs stated on the paragraph 2 of Section 408 of the Colombian Tax Code, the payments or accrualsfor consultancy, technical services and technical assistance, supplied by entities not domiciled orwithout residence in Colombia, shall be subject to income tax withholding at the 10% rate. Wehighlight that this withholding shall be applied either the services are rendered in Colombia or fromabroad.

d. Interest considered foreign source incomeAs a general rule interest derived from loans possessed in Colombia or economically binding to thecountry are considered Colombian source income, therefore are subject to income tax withholding,as it was mentioned in the previous table.

However, pursuant to Subsection 5 of Section 25 of Tax Code, interests derived from loansobtained abroad by Colombian, foreign or mixed companies organized or incorporated in thecountry or by trust funds managed by trust companies organized or incorporated in Colombia,


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which activities are considered of interest for the economic and social development of Colombia,according to the policies stated by the National Council of Economics and Social policies(CONPES, due to its initials in Spanish), are not considered Colombian source income.

Therefore, the payments of such interest shall not be subject to income withholding tax.

7.5.2. VAT withholding taxWhen a foreign company performs services subject to VAT, the Colombian company that hiredthose services shall self-assess the 100% of the VAT accrued and pay it to the Colombian TaxAuthority by means of a withholding tax return.

Likewise, if the Colombian company that is making the payment is a VAT liable, the VAT paid canconstitute an input VAT, if related to VAT taxed operations.

In case that this services has a direct relation with goods and services produced or rendered by theColombian Company and excluded from VAT, the VAT accrued due to the payment to the foreigncompany will constitute a higher cost of these goods or services.

This rule also applies in some cases between Colombian residents but only regarding 50%24 of theaccrued VAT.

7.6.VATThe Colombian value added tax is levied on (i) the sale of inventories corresponding to tangiblegoods, (ii) the importation into Colombia of taxed goods, (iii) the sale or running of gamblinggames (excluding the lottery) and (iv) the rendering of services within the Colombian territory,

VAT is computed in bimonthly periods using the subtraction method which means crediting theVAT input generated due to the payment of said tax on the purchase of goods, the acquisition ofservices or the import of some goods against the tax liabilities arising of the levied activitiesperformed by the taxpayers.

Following is a table that includes a general description of the tax elements.

Taxable transaction Taxable person Taxable amountThe sale of inventoriescorresponding to tangiblegoods.Tax regulation considers as asale any transaction thatsupposes the transfer of theproperty, with or without a salesprice. Thus, it does not matter ifthe sale operation is for free.

Merchants regardless thestage of the production anddistribution cycle in whichthey participate.

The amount of the transaction.Moreover, for cases of free sale ofgoods transactions, the regulation hasestablished a minimum tax basewhich corresponds to the commercialvalue of the goods involved in thetransaction.

The render of services (except Those who render taxable The tax is calculated on the entire

24 Tax Code, Section 437-1


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Taxable transaction Taxable person Taxable amountfrom those specifically exempt) services. value of the transaction including the

direct financial expenses, accessory

expenses, transportation, installation,insurance, commission fees,guaranties and other complementarypayments, even such payments wereinvoiced or agreed upon separately,or are not subject to tax considered ina separately way.

The importation into Colombianterritory of movable tangiblegoods

Importers, whether they actas such habitually oroccasionally

The tax is computed on the CIF valueof goods (Cost, Insurance and Freightvalue representing the landed valueof goods at the first port of arrival),plus customs and import taxes.

Type of Rate Concept RateStandard rate This is the general rate applicable for the

rendering of services, as well as the sale ofgoods located in Colombia.

16%

Increased rate These rates apply to certain cars andmotorcycles. Mobile phone services are taxedat 20% rate.

20-25-35 %

Reduced rate This rate applies in certain mass consumptiongoods and services.

10%

Reduced rate This rate applies for cleaning and surveillanceservices, temporary employ services andservices rendered by cooperatives.

1.6%

Exemptions For exportation of goods and services andcertain domestic supplies.Certain Transactions are subject to VAT at azero rate and concede the taxpayer thepossibility of recover the related input VATpreviously paid in the purchases andimportations.

0%

7.7.Financial Movements Tax (bank debit tax)Financial Movements Tax is accrued by the performance of financial transactions through which adisposition of resources is made. The rate of the tax is four per thousand (4x1000).

The taxable base is the total value of the financial transaction and taxpayers are the users and clientsof financials entities, controlled by the Finance Superintendence and the Superintendence ofSolidarity Economy.


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According to these provisions, Colombian corporations will be levied with the FinancialMovements Tax whenever they dispose of its resources through financial transactions. The 25% ofthis tax is deductible.

7.8.Net Worth TaxThis tax is established only for tax year 2011, taking as taxable event the net wealth owned onJanuary 1st, 2011, for taxpayers whose net equity is greater than COP $3.000.000.000 (USD$1.500.000 approximately).

The tax rate is 2.4% for net equity between COP $3.000.000.000 (USD $1.500.000) and COP$5.000.000.000 (USD $2.500.000). For net equity greater than COP $5.000.000.000, the tax ratewill be of 4.8%. The tax to be paid can be divided in eight (8) equal quotas payable during the years2011, 2012, 2013 and 2014.

The net equity value of the shares and stock shares held in Colombian entities and the first COP$319.215.000 (USD $159.600 approx.) of the value of the taxpayers house for living are excludedof the taxable base.

Other exclusions are provided for compensation family funds, employee funds and associations; forimmovable fixed assets acquired and assigned to environmental improvement and control amongstothers.

It also indicates that non profit corporations, foundations and associations, and other public entitiesare not subject to this tax, nor the entities under liquidation, reorganization or restructuring laws.The Equity Tax is not deductible for income tax purposes

7.9.Stamp TaxThe stamp tax was gradually abolished. The tax rate upon taxed documents entered as of January1st of 2010 is cero (0%) percent rate.

7.10. Industry and Commerce Tax (gross receipts tax)The Industry and Commerce Tax is a municipal tax that is levied on industrial, commercial andservices activities carried out, permanently or occasionally, with or without a businessestablishment, within a municipality territory of Colombia.

The tax rates vary depending on the kind of activity performed and the municipality; however, the

rates applicable for municipalities other than Bogota City should be between 0,2% and 1%

25

and forBogota between 0,414% and 1.04%.26

25 Law 14 of 1983, article 33.26 Acuerdo 065 of 2002.


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8. INDIVIDUAL TAXATION8.1. Income tax8.1.1. TaxpayersFirst of all it is important to clarify that only for tax purposes, the residence consists of thecontinuous permanence in the country for more than six (6) months in the year or taxable period, orthat are completed within it, as well as the non continuous permanence for more than six months inthe year or taxable period.

In addition to this, Colombian citizens whose family live in Colombia or whose main place ofbusiness is Colombia are considered Colombian residents, in spite of they remain in the country ornot. This rule does not apply to foreign citizens.

Taking into account the aforementioned, individual taxpayers can be summarized as follows:

Taxable person Income

Colombian Residents Are subject to income tax in respect of their worldwideincome.

Non Resident individuals Are subject to income tax only in respect of theirColombian source income.

Foreigners that are residents During the first 4 years of their stay in Colombia theyare subject to income tax only in respect of theirColombian source income. Thereinafter they will betaxed on their worldwide income.

8.1.2. Taxable IncomeThe taxable income of an Individual is the sum of all of their ordinary and extraordinary revenues,unless specifically exempt, obtained during the taxable period that upon collection can produce anet increase in the taxpayers net wealth.

In order to obtain the taxable income, the base is reduced by applicable deductions and allowances.Also there are some types of income that are not considered to be taxed and will diminish thetaxable income.

As a general rule, taxpayers should report their income and pay their taxes on a cash basis.


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8.1.3. RatesIndividual income tax rates are progressive in accordance with the level of taxable income obtained,as follows:

Taxable Income in UVT (tax value unity) Tax Rate0 up to 1.090 UVT (COP $26.764.950 or USD$14.086 approx)

0%

From 1.090 UVT up to 1.700 UVT (from COP$26.764.950 up to 41.743.500 - USD $14.086 upto USD $21.970 approx)

19%

From 1.700 UVT up to 4.100 UVT (COP$41.743.500 up to COP $100.675.500 USD$21.970 up to USD $52.987)

28%

From 4.100 and over(COP $90.422.000

USD $38.322)

33%

8.2. IncomeWithholding Tax8.2.1. Income withholding tax for Colombian residentsColombian source income coming from employment, investments and capital gains obtained byresidents is usually subject to withholding income tax over the gross income.

If the taxpayer is not compelled to file an income tax return the withholdings practiced to hispayments will be considered his income tax. On the contrary, the withholdings of taxpayers thatmust file an income tax return (at the moment of filing it) can be treated as an advance payment andused as a tax credit against the final income tax liability.

8.2.2. Income withholding tax for non-residentsAs we have previously mentioned non-residents are subject to income tax only in respect of theirColombian source income, and the tax generate due to this income is usually collected by means ofthe income tax withholding.

Therefore, most of the payments made by Colombian residents to non-residents are subject toincome tax withholding over the gross income and only if th

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