Modernisation of the Colombian foreign investment regime
March 2015 | EXPERT BRIEFING | FINANCE & INVESTMENT
The Colombian economy continues to attract foreign investment. For the purpose of facilitating and promoting this trend, the Colombian Ministry of Commerce, Industry and Tourism has proposed measures to bring the existing Colombian foreign investment regime up to date. The goal is to develop rules that are consistent with international standards and with Colombia’s international commitments. Draft regulations designed to replace the current regime, Decree 2080 of 2000, have been made available to the public and its text is currently subject to discussion among the government, business associations in Colombia and interested sectors of the economy.
Currently, Decree 2080 of 2000 defines two types of foreign investments: investments made by Colombian residents abroad, and investments made by non-Colombians residents in the country. Both types of investors, residents and non-residents, must register their investments before the Colombian Central Bank. This registration provides currency rights, which, inter alia, allow investors to legally remit abroad profits generated by the investment and the funds derived from the sale or liquidation of it, or to repatriate foreign investments made by Colombian residents abroad and profits obtained from such.
Investments are defined as transactions made by residents or non-Colombian residents. However, currently it is not clear when a person is a Colombian resident for currency purposes. This has led to a variety of interpretations that produce lack of certainty to the investment regime. The proposed regulation clarifies this concept by defining a natural person, Colombian or foreign, as a Colombian resident if she or he remains in the country on a continuous or interrupted basis for more than 183 calendar days during a period of 365 consecutive calendar days. By defining what residency means, the draft clarifies who is subject to its obligations and, therefore, who has access to currency rights.
Another change that the new bill intends to introduce is related to investments made by non-Colombian residents in the country. There are two categories of investments: portfolio and direct investments. A portfolio investment is defined as any investment made in mutual funds or in securities registered with the National Registry of Securities and Issuers, or with a foreign securities settlement system. In contrast, the definition of a direct investment includes a list of six transactions, though there are several transactions that can lead to the ownership of an asset in Colombia that are not included in the list. As a result, they are not considered foreign investments and consequently do not have the rights and obligations that come with this designation.
The newly proposed regulation broadens the definition of a foreign investment by defining it as any asset located in the Colombian territory and acquired by a non-Colombian resident under any agreement, act or legal transaction. Additionally, the proposed regulation includes borrowing and lending operations between parent companies and their branches as direct investments. Furthermore, the new regulation distinguishes portfolios from direct investments by considering the percentage of participation in the company which is the subject of the investment and the intention of the investor to create a long term, strategic relationship in Colombia. For example, the ownership of more than 10 percent of the shares of a company traded on the national exchange is considered a direct investment rather than a portfolio investment under the current regime. These changes coincide with the definitions adopted by the International Monetary Fund and the Organisation for Economic Co-operation and Development. Consequently, by adopting these definitions, Colombia would be adapting to international standards.
As stated above, registration before the Colombian Central Bank gives rise to currency rights. As a result, registration is crucial for investors. The easier the registration becomes, the easier and more attractive it will be to invest in Colombia. Currently, the funds for a portfolio, or for a direct investment, must come into the country through a commercial bank. The commercial bank reports the transaction to the Colombian Central Bank. This registration is automatic, relatively simple and does not represent any additional steps for the investors. However, not all investments require the transfer of funds. For example, the acquisition of shares through a merger does not necessary mean that the investor is transferring funds to acquire the shares. In such cases, the registration is not automatic and requires the investor to take additional steps. The bill intends to make the registration of this type of investment automatic, as well, by implementing a reporting system in which the investor is only required to notify the Central Bank about the investment.
Additionally, the proposed regulation introduces changes to the fines regime. The superintendence of corporations may impose sanctions when there is a breach of the duties imposed by the exchange regime. With the purpose of reducing the amount of penalties imposed by the superintendence for ministerial errors, the new regulation intends to reduce the number of obligations that would trigger a sanction. For instance, the new regulation does not treat registration as an obligation. Therefore, under the proposed regulation, if an investor does not register, his or her investments will not be subject to any additional sanctions. However, without registration, the investment loses its currency rights, accordingly the investor would not have the right to remit abroad in freely convertible currency the profits and sums derived from the sale or liquidation of the foreign investment.
It is important to note that the proposals discussed in this article have not been approved and therefore are subject to changes. However, it seems that the intention of the government is to meet international standards and to simplify the currency regime. We must still await the final text.
Enrique Gómez-Pinzón is the executive partner in the Bogotá, Colombia office, and Viviana Prada Rey is an associate, at Holland & Knight. Mr Gómez-Pinzón can be contacted on +57 1 745 5722 or by email: email@example.com. Ms Prada Rey can be contacted on +57 1 745 5720 or by email: firstname.lastname@example.org.
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Enrique Gómez-Pinzón and Viviana Prada Rey
Holland & Knight