Investing in Colombia: A General Overview

Today, Colombia is one of the leading destinations for global foreign direct investment. Colombians are known for liking to do business and being practical and resilient people who value the principles of legality, entrepreneurship and equity. Colombia’s political and economic stability,  privileged geographical location, the skills of its resilient workforce, strong innovations, varied ecosystems, and dynamic and growing economy are important factors that may benefit foreign investors.

With respect to international trade, the Colombian government has designed a strategy to fill the international showcase with Colombian products. In order to do so, Colombia fosters the facilitation of trade and the use of free trade agreements such as the Pacific Alliance to reach strategic new markets.

Importantly, Colombia has signed and enacted free trade agreements that enable it to reach over 1.6 billion consumers in 60 different countries in the Americas, Europe and Asia. These agreements cover 97 percent of the countries of the Americas, enabling Colombia to access the hemisphere’s largest markets. By being located in the middle of the hemisphere, Colombia has the ability to reach different ports within a short period of time and at a relatively low cost. As a result, Colombia has the potential to be a good export platform.

Indeed, Colombia’s geographical location offers several advantages. It has 16 maritime ports spread in both the Pacific Ocean and the Caribbean Sea, 14 international airports and land borders with Venezuela, Brazil, Peru, Ecuador and Panama.

As discussed below, Colombia has a free trade zone regime with one of the region’s most attractive incentive packages that offers a progressive reduction of the corporate income tax rate, a deduction of the value added tax paid on real fixed assets, special benefits for distribution centers and income tax exemptions for different sectors of the economy, among others.

Foreign Trade Instruments in Colombia

Colombia offers a variety of foreign trade instruments, including:

Free Trade Zones

Colombia operates free trade zones where taxes, tariffs, customs, financial or regulatory advantages are offered to companies established in those zones. Colombia’s free trade zones are indispensable to attracting foreign investment as well as promoting the export of different national products to foreign markets. Free trade zones offer several advantages that may include a reduced income tax rate; exemption from customs taxes; storage of goods for an unlimited period of time; no charge of value added tax on local purchases; and free movement of goods between free trade zones and ports, among others. Moreover, free trade zones grant origin for free trade agreement purposes by allowing investors to bring raw materials or intermediate goods from other countries into Colombia and then become Colombian in order to source the domestic market, the Pacific Alliance market or other markets in which Colombia has free trade agreements. 

Plan Vallejo

Colombia further has the “Plan Vallejo,” with the purpose of increased efficiency in customs procedures, suspended payment of duties for the importation of capital goods and spare parts and deferred payment of value added tax on temporary importations of capital goods and spare parts.

Regulatory Incentives

Furthermore, Colombia has an authorized economic operator with fewer inspections, both physical and documentary, and consolidated payment of customs duties. This further benefits foreign investors by not requiring them to provide guarantees for customs obligations and reduces global guarantees of up to 20 percent.

Colombia’s Legal Framework

Colombia has a free foreign investment regime in all sectors with no additional permits required for foreign investors. It further has a modern and flexible corporate regime allowing for a variety of agreements between shareholders, such as joint ventures, among others. Foreign investors may own 100 percent of the entities and their directors may be foreigners. 

Pursuant to its rule of law, Colombia offers a strong and flexible contractual framework with modern contracts in which the will of the parties normally prevails. This contractual framework allows for foreign choice of law. It also provides for enforcement of foreign arbitral awards through judicial decisions. 

Furthermore, Colombian law allows outsourcing or intermediate work through agencies, independent contractors and simple intermediaries, as long as the worker is autonomous in his work and there is no relationship of subordination.

Infrastructure, Energy and Oil and Gas

The Colombian government has recently launched a 5G investment program valued at approximately $953 million with three tenders currently open: the road network in Valle del Cauca; navigability of the Magdalena River; and the rehabilitation of Canal del Dique.

The government’s strategy to diversify Colombia’s energy matrix and to have alternative sources generating 25 percent of the required energy by 2050 has promoted projects seeking foreign investment from countries with experience in renewable energies. Currently, there are 158 registered generation projects accounting for an installed capacity of 10,166 MW.

Colombia’s high wind potential areas have winds that reach ranges between 5 m/s and 11 m/s throughout the whole year, offering wind power opportunities. It further has an average irradiation of 4.5 KWh/m2/d, which exceeds the world average of 3.9, offering solar power opportunities.

Importantly, 96 percent of the Colombian population lives in interconnected areas in 34 percent of the national territory. The remaining 4 percent of the population lives in noninterconnected areas. In these areas, the supply of electricity represents high costs associated mainly with transportation costs and diesel consumption. These areas present an opportunity for the implementation of renewable energy which would eliminate the need to build transmission lines over long distances to centers of demand, decreasing the risk of harm to the environment and society.

Moreover, the Colombian government offers several incentives for investment in nonconventional energy projects. These incentives include a 50 percent deduction of the investment; accelerated depreciation of assets; exclusion of value added tax for national or imported equipment, elements, machinery and/or services; import duties exemption, and others.

Additionally, the need for liquefied natural gas supplies in Colombia to cover the current and future national energy demand has required its government to prioritize the construction of regasification plants and port infrastructures for the importation of LNG, as well as the required pipeline transportation to the areas of demand.

Technology in Colombia

Colombia presents an opportunity to invest in a new generation of technologies such as cybersecurity, smart cities, blockchain and artificial intelligence by enabling foreign investors to establish strategic partnerships within Colombia.

Taking into account Colombia’s experience and recognition in the region focusing on fintech, aggrotech, edtech and telemedicine, Colombia encourages the establishment of partnerships for the development of different types of software.

Investing in Colombia’s Agriculture

Colombia offers foreign investors the opportunity to establish strategic partnerships with local fruit and vegetable owners and producers in order to benefit from the broad agricultural capability in the country.

Furthermore, foreign investors are also encouraged to establish strategic partnerships with the Colombian agricultural industry for greater technological and productive developments in the country, as well as for the opportunity to increase exports from the sector.

Pharmaceutical Products and Medical Devices

Colombia is increasing the use of biological drugs, especially in the treatment of noncommunicable diseases. Biotech drugs currently represent 35 percent of the Colombian pharmaceutical market. This offers an opportunity for investors to set up sophisticated drug, biotechnological and biosimilar production centers.

Similarly, Colombia is the third largest hospital endowment market in Latin America, a region that is highly dependent on imports. Therefore, production of materials and finished products of different technological levels is an opportunity for investment.

Metallurgy and Construction Materials in Colombia

The growth of the construction, automotive, shipyard and metalworking sectors, among others, represents potential investment opportunities in the manufacturing of metal structures, tools, machinery and the like. As a result, foreign investors have an opportunity to set up plants for the transformation of iron and steel products.

Additionally, investors have an opportunity to set up plants for the production of cement, ceramic and prefabricated products to supply the local and export markets. Additionally, Colombia has a portfolio of housing construction, road infrastructure and air transport projects that makes it an attractive destination for companies in these sectors.

Investing in Colombia in a COVID-19 World 

Colombia has been the country in Latin American that has invested the most as a percentage of its GDP to mitigate the effects of the pandemic. As a result, Colombia has an economy with the capacity to withstand the crisis of 2020, being the third least affected economy among the large economies in the region.

Furthermore, its economy’s dynamism has enabled Colombia to continue to have outstanding indicators despite the global economic impact of COVID-19. It’s expected that Colombia’s economy will grow between 3.6 percent and 4 percent in 2021 and retain a low inflation rate of 1.5 percent in 2020.

A few months ago, Colombia launched a full economic recovery plan for the trade and tourism industries that includes several measures that will benefit foreign investors, including strategic support for investors in all stages of the investment cycle.

Colombia’s Tax Overview

In general terms, Colombia’s taxation is relatively simple. It is unitary and not federal, and the main taxes, such as income tax and value added tax, are charged at the national level. For fiscal year 2020, the corporate income tax rate in Colombia is 32 percent, which will be reduced progressively in the following years to 31 percent for fiscal year 2021 and 30 percent for fiscal year 2022 and onwards.

Moreover, financial institutions with taxable income above approximately $1.2 million will be subject to 4 percent surtax for 2020 and 3 percent surtax in 2021 and 2022. Thus, the combined tax rate would be 36 percent for 2020, 24 percent for 2021 and 33 percent for 2022. The general income tax rate of 30 percent will apply for 2023 and onwards.

Of particular interest to foreign investors, free trade zones offer a corporate income tax rate of 20 percent. A rate of 9 percent is applicable to certain cases such as new and refurbished hotels, ecotourism and agritourism.

Colombia has a treaty network of 14 tax treaties enforced and others under negotiation. Furthermore, Colombia is subject to the transfer pricing methods of the Organization for the Economic Cooperation and Development (OECD).

Net operating losses may be carried forward for a maximum of 12 years. For net operating losses up to 2016, there is a transitory rule that allows indefinite carryforward.

With respect to value added tax, such tax is imposed on the importation of goods, the provision of services in the Colombian territory or from abroad when the beneficiary is located in Colombia, and on the sale of goods within the Colombian territory. The sale of fixed assets does not trigger value added tax.

The standard rate for value added tax in Colombia is 19 percent. However, some essential categories of goods and services are subject to a 5 percent value added tax. In addition, certain goods and services are exempt from the value added tax.

Investing in Mexico: A General Overview

Mexico is the fifth largest country in the Americas and the 14th largest in the world with a total area of 2 million square kilometers. Despite being part of North America, due to its culture and its language, Mexico is also a part of Latin America.

Furthermore, Mexico has a privileged geographical location that offers an extensive 11,000 kilometers of coastline in the Atlantic and Pacific oceans, facilitating access to major consumption locations.

Mexico has a great diversity of natural resources, with nine of the 11 different types of ecosystems that exist in the world. It has around 200,000 different species and is home to an approximate 12 percent of the world’s biodiversity. Consequently, Mexico has an important number of natural resources that contribute to the development of productive and industrial activities.

It is also the world’s 11th most populated country with 126 million people and a predominantly young population. The working age population is higher than that of the economically dependent population, having a direct impact on the country’s economic and productive potential. In the following two decades, the population of working-age Mexicans will reach 80 million people, the equivalent to 60 percent of the entire population. Mexico’s unemployment rate has been lower than 6 percent, which may increase because of the pandemic.

Mexico is one of the most open economies in the world with over 32 investment agreements and 13 free trade agreements with 50 countries, offering access to over 1.3 billion consumers that represent 61 percent of the world’s GDP. It is also part of different multilateral agencies such as the G20, the OECD and the World Trade Organization, among others.

Despite the current situation caused by the COVID-19 pandemic, Mexico has seen macroeconomic stability. Its macroeconomic stability along with its dynamism of exports, controlled inflation rates and structure of debt are some of the factors that make Mexico an attractive country for foreign investors.

Furthermore, Mexico’s open economy offers general economic growth in the country further supported by its monetary policy and its credit rating, making Mexico an attractive investment destination for foreign investors. Mexico’s economy is expected to strengthen through an increase of private investment in infrastructure and strategic sectors, along with a higher level of public investment, which will provide for more exports.

Since 1994, Mexico’s Central Bank has autonomously defined the monetary policy, and its decisions help guarantee the purchasing power of the Mexican peso based on inflation control and the monetary exchange rate.

Mexico is the seventh largest exporter in the world with more than $470 billion of exports in 2019. Almost 19 percent of these exports are manufactured goods. Mexico is a leader in the global manufacturing market, being the sixth largest producer of light vehicles in the world and the fourth largest exporter of light vehicles. Moreover, 90 of the 100 most important auto part companies in the world operate in Mexico.

Similarly, Mexico is the second largest exporter of flat television screens and the world’s third largest exporter of computers. Mexico accounts for nine of the 10 main electronic manufacturing companies.

As a recent development, the United States-Mexico-Canada Agreement, which took effect on July 1, 2020, offers a unique opportunity for foreign investors seeking to participate in trade in North America, making Mexico an attractive destination for strategic investment.

According to reports by the World Economic Forum and the World Bank, respectively, Mexico is ranked 48th out of 141 countries to do business with, and in 2019 Mexico was ranked 16th out of 109 in the global classification on doing business.

Mexico’s Legal Framework

Mexico has a robust and solid legal framework that allows investors to participate and partner with the Mexican government through different means and mechanisms, such as concessions (used mainly for roads, airports and ports), financed public works (used generally in the electric sector), joint ventures and public-private partnerships (used mainly for hospitals, maintenance and hydraulic infrastructure, among others).

Infrastructure in Mexico

Mexico is globally considered an attractive destination for private infrastructure investment. There are several macro projects in Mexico. Some of the most important are:

1. The Port of Manzanillo Project, which involves the 1800 hectare expansion of the port, including the integration of two ports through roadways and tunnels, with an estimated investment amount of $1.1 billion;
2. The Port of Progreso, with an estimated investment amount of $155 million:
3. The Mayan Train, with an estimated investment amount of $7 billion;
4. The Port of Veracruz, with an estimated investment amount of $1.5 billion; and
5. The Tehuantepec Isthmus, which involves investment in several sectors such as railways, ports, roads, gas pipelines, refineries, electric power and telecommunications, among others.

Mexico’s Federal Government CCE

The Mexican Business Coordinator Counsel and the Mexican federal government have signed an agreement for economic reactivation and an investment of $14 billion that involves 39 infrastructure projects and is expected to have at least 50 percent private investment.

Mexican Tax Overview

Mexico has a wide tax treaty network with over 60 double tax treaties in force.

Mexican tax resident companies are subject to a 30 percent corporate income tax rate on their taxable income. Mexican companies are required to maintain contemporaneous documentation for transfer pricing, namely transfer pricing reports every year as established by the OECD. Net operating losses may be carried forward up to 10 years, while losses from the sale of shares may only be used to offset income from the sale of shares.

Furthermore, Mexican employers are required to distribute mandatory profit sharing to employees equal to 10 percent of the taxable base of the corporate income tax excluding tax losses.

Similarly, value-added tax has a general rate of 16 percent on the following activities carried out within Mexico: (i) selling of goods; (ii) rendering of independent services; (iii) granting of the temporary use or enjoyment of goods; and (iv) importation of goods or services.

Of particular interest to investors, if value-added tax paid to suppliers exceeds the value-added tax collected from customers, a favorable balance is created, which may be recovered by the taxpayers. Additionally, the value-added tax rate on exportation of goods and services, if certain requirements are met, may be zero percent.

Investing in Peru: A General Overview

Peru’s legal regime promotes foreign investment. Foreign investors may invest in almost any economic sector without requiring the government’s prior express authorization. There are no foreign exchange controls; there is unrestricted use, convertibility and remittance of foreign currency, among other advantages.

Furthermore, Peru offers key protections at a constitutional level. Foreign investors are entitled to the same treatment as domestic investors and there is access to international dispute resolution mechanisms. Private property is guaranteed and there have been no ideology-driven expropriations in more than 30 years.

Peru has over 25 bilateral investment treaties, over 15 investment chapters in free trade agreements, over 20 free trade agreements with over 50 countries and multiple double taxation agreements. Some of the countries that invest the most in Peru are Spain, the United States, Chile, China and the United Kingdom.

Consequently, Peru has experienced a steady growth of exports. In 2019, Peru’s total exports reached $47 billion with a surplus of $6 billion. Nearly 25 percent of the foreign direct investment is in mining, while almost 50 percent is in the communications and energy sectors.

Importantly, during 2019, Peru’s government approved two plans that offer investment opportunities. These plans are the National Plan of Infrastructure for Competitiveness (PNIC) and the National Plan of Competitiveness and Productivity (NPCP).

The purpose of the NPCP is to develop a high quality economic and social infrastructure, while the PNIC contains a large list of 52 projects to be implemented in the short, medium and long terms, each selected for their impact on improving the quality of life for the population.  Implementation of priority projects of the PNIC may also be accelerated. These include projects related to different sectors such as transportation, sanitation, health, water and telecommunications, among others.

The measures to boost the PNIC’s implementation include the establishment of provisions to identify, appraise and acquire necessary areas; allow exemption from authorization license; speed up the release of interference; and prioritize PNIC projects in the resumption of phase 1 activities.

For the period of 2020-2021, the project pipeline under the public and private participation mechanism includes 21 projects worth more than $5.6 billion of investment; the main sectors are transportation, water and sanitation, education, energy and hospitality, among others.

Legal Stability Agreements

Over the past few years, the Peruvian government realized that in order to attract foreign investment, it had to provide to foreign investors a mechanism that offered stability to them by providing constant rules that would not be unilaterally changed by the government.

As a result, investors are entitled to execute contracts with the Peruvian government that guarantee stability to investors through nondiscrimination, a stabilized dividend tax regime, unrestricted exchange rate, and availability and remittance of foreign currency, among others.

Peru’s legal stability agreements offer stability for the recipient company through their income tax regime and their recruitment regime, which includes foreign personnel. These agreements have an investment requirement of $5 million―except for mining and oil and gas projects, which require an investment of $10 million―and offer a stability term of 10 years in general, and for the life of the project for public and private partnership projects.

Additionally, legal stability agreements allow for the submission of disputes to international arbitration in Washington, D.C., so foreign investors are not necessarily subject to Peruvian courts.

Major Projects in Peru

There are different projects to be developed in Peru, including:

1. The Huancayo-Huancavelica Railway, with an approximate investment of $232 million;
2. Distribution of natural gas to central and southern Peru through a gas pipeline, with an approximate investment of $200 million;
3. Headworks and conducting works for drinking water supply in Lima, with an approximate investment of $600 million;
4. High performance education schools, with an approximate investment of $60 million; and
5. The ANCON Industrial Park, with an approximate investment of $650 million.

The Peruvian government has realized that while the government can develop ideas to attract foreign investment, private parties can often do so in a faster and better way. Consequently, every single governmental asset, except for security and defense assets, is available for private parties to propose projects to the government. If a private party proposes a project, and should the government deem such project of interest, then government will tender the project. If no third party is interested in developing the project, then the government would award the project to the private party that came up with the proposal.

Additionally, Peru offers government-to-government projects. Government-to-government works take place when the Peruvian government wishes to tender a project and it hires a governmental development agency of a foreign government to run the tender procedure and the process to take the project into the next stage.

The Peruvian government further allows the payment of taxes by undertaking works. There is a long list of projects to be done, and private parties may also come up with their own projects.

Importantly, due to Peru’s political situation with elections taking place in April 2021, it is likely that private projects are going to be the driving projects until that date. Within these projects, infrastructure projects stand out, mainly with large investments in ports and mining, among others.

M&A in Peru

The volume of M&A deals has been constant despite the COVID-19 pandemic. The size of these deals has constantly increasing over the years, with at least one billion-dollar deal per year.

Historically, Peru has been a seller’s market in terms of prices. However, because of the pandemic, prices have decreased and investors are likely to find more price matches between buyers and sellers because of the lower pricing expectations.

More Asian and Latin American investors have entered Peru’s M&A market because of increased interest in investing in this region. There are large investments from China, Korea, Japan, Colombia and Chile, among others.

Peru is now transitioning its merger control regime from only focusing on the power industry to having merger control in every single industry regardless of where the investment is. The timing of this is imminent and is expected to happen in the first quarter of 2021. The regulation is still incomplete as the transition is ongoing, and the thresholds for merger control for regulatory approval and antitrust approval are fairly standard in terms of international markets.

Investment Focus

Due to Peru’s large mining industry, its permanent focus has and will continue to be mining. Other important investments areas in Peru are infrastructure and energy.

Recently, due to the large increase of the Peruvian middle class and its spending power, all consumer-facing health and education industries have become important areas of focus for investment in Peru.

Additionally, and not only as a result of the pandemic, agribusiness has recently attracted many investors.

A new focus to Peru is the medicinal cannabis industry. Peru allows the growth of cannabis and there is and will continue to be investment in this industry.

Furthermore, it is likely that the next investment focus will be in the area of real estate through tax benefiting trusts known as FIBRAS, which provide tax benefits for real estate projects. 

Impact of COVID-19 in the Peruvian Economy

Peru timely implemented one of the strictest policies in the world in terms of mobility. Peru’s fiscal strengths allow for the implementation of one of the most important economic plans in the region. Furthermore, Peru’s macroeconomic advantages have been crucial in combating the effects of the disease, with one of the most important plans in the region equivalent to 20 percent of the Peruvian GDP, which includes business credits to the private sector, credit guarantees to rescue small and medium enterprises and cash transfers to cover 8.5 million households.

Despite the impact of the COVID-19 pandemic, the Peruvian economy experienced a rapid recovery after having registered historic declines. Even though the Peruvian economy is expected to shrink about 10 percent this year, the economy is expected to rebound between 8 percent and 10 percent in 2021, provided that Peru does not face a second pandemic wave. However, as a result of its quick response and strict measures, the advance of COVID-19 in Peru has been progressively decreasing.

Importantly, as a result of the pandemic, Peru is not only interested in promoting regular infrastructure projects, but also those considered as social infrastructure projects such as schools and hospitals. 

Peruvian Tax Overview

Peru’s double tax treaty network comprises eight tax treaties. Peruvian tax resident companies are subject to a 29.5 percent corporate income tax rate on their taxable income. Peru also follows the transfer pricing methods of the OECD.

With respect to net operating losses, the Peruvian Income Tax Law entitles domiciled companies to offset their corporate loss recorded in a fiscal year by using one of two systems provided by such law.

Regarding value-added tax, this tax has a general rate of 18 percent that applies on a national basis to several operations, which include the sale of goods within Peru; services rendered within Peru; services rendered by nonresident providers and economically used within Peru; construction contracts; the first sale of real estate by the constructor; import of goods, among others. The export of goods is exempt.