Advises on Colombian Commercial, Company and Tax Law: Incorporation of Foreign Branches in Colombia

Hi, everyone:

With this post, I'm going to explain some insights on the most common alternatives for foreign companies who want to incorporate in Colombia, for the typical purposes of competing for public bidding.

For the purposes of this explanation, let's assume that you are a foreign company (the result of the merger of two other companies during years 2008 – 2012), incorporated under the laws of France. As a business entity, the company is set up as a joint-stock corporation (Societé Anonyme, S.A.), which is equivalent to the Sociedad Anónima in the Republic of Colombia. This modality of the company must have at least seven (7) shareholders (the founders can either be individuals or legal entities) and an initial share capital required of $37.000 EUR for company formation. The capital is divided into shares and the shareholders have limited liability to the extent of their share contribution.

The hypothetical company's corporate purpose covers engineering and project management consultancy services in the building construction, infrastructure and environment sectors; including into this scope of business activities project management, civil engineering constructions and supplying (manufacturing, imports, exports) of highly specialized equipment.

This company doesn’t have the need or intention of getting into joint ventures of partnerships with Colombian individuals or legal entities. Its Board of Directors has the power to incorporate branches outside the French territory. If a branch in Colombia is the choice for incorporation, the capital of the branch will be 100% own. The initial capital proposed for incorporation in Colombia is US $13.000,oo, and it could be increased if required for legal o business purposes. 

The public contract of the company's interest is intended to sign with our Corporación Autónoma Regional (CAR) – Regional Autonomous Corporation of Cundinamarca – CAR Cundinamarca, being the object of the contract: consultancy services on a) Project management for the detailed design; b) construction of public works; c) supply and installation of equipment; d) start-up operation and assisted operations of optimization and expansion of a Residual Waters Treatment Plant. Budget of the project is COP$27.600.000.000,oo, plus taxes.

In this context, the company asks us which are the alternatives considered for its future incorporation. A question that allows me to illustrate the reader about legal considerations for the incorporation of foreign company branches in Colombia (legal definition, corporate name, incorporation procedure, the term of duration, registered office, inspection, surveillance and control, documents required for incorporation, branch organs, corporate decisions, assigned capital, financial statements, special triggering causes of dissolution and liquidation, power of attorney, registration of the company, profit, taxes, and foreign currency, and special consideration for the bidding process), the topic of this post.

So, let us begin with the explanation on the issue:

In order to achieve its goals, a foreign company has to establish itself in Colombia as a legal entity. Article 6 of our Act (Law) 80 of 1993 (General Statute of Public Contracting) allows any person legally able to acquire obligations to celebrate contracts with our public administration.

Art. 6, Act 80 / 1993 also states that all legal entities (foreign or national) must demonstrate that its term of duration will not be less than the term of the public contract and one (1) year plus.

The terms of reference of the bidding for the public contract in which the foreign company of our example wants to compete, demands that the winner company has to establish itself in a permanent manner, without specifying any especial type of corporation o legal form of association.

Art. 6, Ac. 80 / 1993 allows also public contracting with consortiums (Consorcios) and joint ventures (Uniones Temporales) between two or more companies interested to participate together with a cooperation agreement by which liability responsibility is shared jointly and severally (Consorcios), or shared according to the level of involvement of each partner into the fulfillment of the contract (Uniones Temporales).

The last two options (Art. 8, Act. 80 / 1993) are not recommended when the foreign company doesn’t need to go into partnership with other national or foreign companies, in order to compete for the public contract of its interest.

Without prejudice of the foregoing, the law in Colombia provides several vehicles through which foreign companies can engage in permanent commercial operations in our country. The two most commonly legal vehicles are:

1)      The opening of a foreign company branch (Sucursal de Sociedad Extranjera), which is legally an extension of the head office and thus considered the same legal person for several purposes under Colombian law.

2)      The incorporation of a simplified share corporation (Sociedad por Acciones Simplificada, S.A.S.), a newly recognized type of corporation (established in Colombian commercial law as of 2008), inspired in the Societé par Actions Simplifiée in French legislation.

The simplified share corporation’s legal structure and mode of operation is very similar to its equivalent in France and other countries, and we won’t go any more deeply into this topic apart from quoting that  the main feature is its simplicity for purposes of incorporation and of its basic functions (decisions, meetings, liquidation, etc.). Anyway, the SAS ameliorates expenses associated with the formation (it can be created simply with a private document that is registered afterward in the local Chamber of Commerce), offers flexibility on the operation of its board of directors, statutory auditors, multiple managers, and helps with other formalistic requirements.

We dismissed other societal types (Sociedad anónima and Sociedad Limitada, which are very similar to their French equivalents, Societé Anonyme and Societé á Responsabilité Limitée). They are too bulky for the purposes intended, and the last type brings up difficulties derived from the partner’s responsibility towards labor and taxes law.

So, another option is the opening of a foreign company branch (Sucursal de Sociedad Extranjera, from now on, FCB), whose legal parameters we are going to explain below.

According to our Colombian Statute or Code of Commerce (Código de Comercio), companies formed in accordance with the laws of another country that have their main domicile abroad, are called foreign companies (Art. 469, C. de Co.).

The FCB is a business establishment of a foreign company created by its parent company and lacks independent legal existence. As FBCs do not have a distinct legal existence from the parent company, the FBC is given the same name as the foreign company, with the addition of the expression Sucursal Colombia (Colombia Branch).

If a foreign company wants to do permanent business in Colombia, it must incorporate a branch in the national territory (Art. 471 C. d Co.), and to that effect shall fulfill the following requirement: to record in a Public Notary Office of the jurisdiction chosen for its domicile in the country, authentic copies of its act of incorporation, by – laws, resolution or decree of the competent corporate body which decided its establishment in Colombia and of those documents evidencing the existence of the company and the representation of the persons acting on its behalf.

As the first step for incorporation is to prepare and submit to a Public Notary Office a draft public deed (articles of incorporation) containing the company’s bylaws, as explained earlier; the public deed must be signed by each of the founding shareholders, personally of by proxy. The home office must also provide the minutes of the meeting adopting the branch’s bylaws and the parent corporation must establish in the resolution of the corporate purpose for creating the branch.

As a rule of thumb, we recommend five (5) years as the intended duration of the establishment of a foreign company branch, for several reasons:

·        The minimum duration of three or four years, including one additional year as required by law (Art. 6, Act 80 / 1993).

·         The possibility of participating in other biddings for contracts in the public or private sector during business operations in Colombia, and other public relations purposes.

The branch must register in the Chamber of Commerce of the desired city for domicile (Bogotá, D.C., is the obvious choice); two addresses (which can be the same): a) For business purposes (dirección comercial), and b) for judicial notification purposes (dirección de notificación judicial).

All the branches of foreign companies doing permanent business in Colombia are subject to the inspection and control of the Colombian State, which will be carried out by the Superintendence of Companies (Superintendencia de Sociedades) if the FCB commits administrative irregularities (abuses of its bodies of direction or management, serious or repeated violation of the law, false information to the public or the authorities, performing operations not included in its corporate purpose, namely the aim or business that the head office shall carry out in our country), or in its accounts (Art. 470 C. de Co.; Art. 124, Inc. 3, Act 1116 / 2006; Art. 84, Act 222 / 1995, D. 4350 / 2006; D. 2300 / 2008; among other regulations).

In addition, FCBs reporting total income or assets of more than 30.000 SMMLV (our monthly minimum wage currently in legal force), are equally subject to the inspection and control of our Superintendence of Companies (Art. 1, D.R. 4350 / 2006). 

The resolution of the competent body (and its modifications, if any; Art. 479, C. de Co.) of the foreign company whereby the company decides according to current law where it is incorporated, to set up permanent business in Colombia must state the following (Art. 472, C. de Co.):

1)      The business it plans to carry out, which has to be concrete, pursuant to the Colombian law requirement of the specification of the corporate purpose.

2)      The amount of capital allocated to the branch and the capital originated from other sources, if any.

3)      The place chose as the domicile of the branch.

4)      The duration of its business in the country and the causes for the termination thereof.

5)      The appointment of a general representative with one or more alternates, who may represent the company in all the business that the FCB intends to carry out within the country.

6)      The appointment of a fiscal or statutory auditor (Revisor Fiscal), who shall be a registered accountant in our country, and an individual permanent resident of Colombia.

For the applicability of the requirements (Art. 474, C. de Co.) of having to incorporate in Colombia a branch of a foreign company, among others, the following are classified as a permanent business:

1)      The opening within Colombian territory of commercial establishments or business offices.

2)      To participate as a contractor in the performance of works or in the rendering of services.

3)      To receive from the Colombian state a concession or to have it assigned under any title, or participate in any form whatsoever therein, and the running of its shareholders’ meetings, boards of directors, management or administration within the national territory.

If the foreign company is going to participate as contractor in the performance of works or in the rendering of consultancy services, the corporate purpose (Objeto Social) of the branch must be the same as the home office, rendering its range of activities in the Chamber of Commerce using the same Classes declared in France, according to the International Standard Industrial Classification of all Economic Activities (ISIC; in Colombia, Clasificación Industrial Internacional Uniforme, CIIU).

Regarding the organs of a branch, it is important to consider that because it is a commercial facility, its organs are the same as the head office.

However, for purposes of representation, the FCB is required to have a general agent (with legal representation faculties) who represents the branch, manages the establishment, and counsels foreign company in transactions with third parties. Only in the case of exploitation, management of public services or activities of national security, the general representative and his or her alternates of the FCB must be Colombian national citizens.

Therefore, In the case of the foreign company, if the branch is dedicated to consulting activities (despite the different activities related to the general object of the public contract), its representative and alternates can be, of course, foreign citizens.

The general representative will have the power of signing contracts without prior and express authorization of the competent body of the home office (in the resolution of FCB’s incorporation, this power or authority can be limited to a specified amount, advisably quantified in terms of SMMLV), legal representation in administrative, extrajudicial and judicial proceedings (including arbitrage and other alternative mechanisms of dispute resolution).

The legal representative (which normally is the general manager of the branch and usually is given the title of Gerente) is appointed for given periods (at least, two years is recommended) and may be reelected indefinitely or removed at any time.

The persons who are recorded in the registry of commerce as managers and alternate managers are regarded as the representative of the branch for all legal purposes, until a new appointment is recorded.

For practical purposes, is advisable to have a general representative (or at least, his or her alternates) of foreign citizenship, in which the foreign company has absolute trust in, with credited experience on doing business in Colombia and Latin America, in the public and the private sector, as well as on our local costumes.

Must be noticed that legal representation is not a post compulsorily reserved to branch managers or partners of the home office; although is advisable to designate legal representatives and his / her alternates from the managerial highest staff, whose salaries or professional fees include fair retribution for carrying out the post. This means that, eventually, you can designate a person not related (employee) with the home office for the post. Otherwise, there is no limitation on the number of possible alternates for this post (it is advisable to designate two substitutes).

We consider that signing a public contract is an act that should demand prior and explicit authorization of the Board of Directors, through a resolution of the home office, submitted with compliance of legal formalities (official translation, apostille, etc.).

Otherwise, contracts of lesser account can be signed by alternates of the legal representative according to their rank in the branch managerial organization. Limitations of authority or powers of legal representatives (of paramount importance, authority for signing contracts without prior permission of the Board of Directors of the home office) can be agreed in the FCB’s resolution of incorporation.

Art. 203 of C. de Co., provides that branches of foreign companies are obligated to appoint a statutory auditor (Revisor Fiscal), designated by the executive body of the home office according to its bylaws (Art. 204, ibíd.), who is different from the accountant of the branch, and must fulfill the same functions as those appointed by corporations (Art. 207), playing an independent, impartial and permanent role of inspection and control of the operations (auditing financial, internal control and legal compliance), and giving legal authorization of financial statements with his / her signature and a written report (Art. 208), among other important functions.

Fiscal auditing can be provided by a natural person or a legal entity specialized in this activity. As a person, an auditor must be a registered accountant in Colombia, usually hired as a freelancer, although he/she can be also an employee (not recommended, because it doesn’t fit with the characters of independence and impartiality, which are essential for the post’s fulfillment).

It’s advisable to designate a substitute in order to guarantee continuity on services, because he/she has the legal authority to attest financial and taxes statements (income tax return, VAT forms, customs declarations, bill of entry, etc.), that must be signed by him/her (Decree 624 of 1989, so-called Tax Statute, Arts. 596, 599, 602, 606), under penalty of fine for the branch for failure to comply with such order.

The fiscal advisor is freely appointed and removable by the competent body of the foreign company (see its bylaws), but once he/she accepts the post and its appointment has been registered in the local Chamber of Commerce, such post doesn’t end until the convention or decision about his / her removal is registered already in the Chamber of Commerce (Art. 164, C. de Co.). His / her period is the same as the specified in bylaws for the board of directors in the foreign corporation (Art. 206, ibídem).

Except for decisions that the general agent is authorized to make in relation to administration and the ongoing the ordinary course of business, in the FBC all decisions of importance are adopted by the corresponding body of the home office in accordance with the laws that govern the corresponding corporate establishment in the country of origin, in this case, France.

In order to set up the branch, the foreign company shall submit to the respective Superintendence (in the case discussed, the Superintendence of Companies) evidence as to that the capital amount allocated by the parent company has been paid up (Art. 475, C. de Co.). This capital assigned by the home office essentially serves as a guarantee for the liabilities incurred in Colombia. The assigned capital stated in the branch’s documents of incorporation must be paid in full at the time of the branch’s establishment.

The home office may also provide its branch with an investment supplementary to the assigned capital, which consists of a balance sheet accounts for the available assets, foreign currency or services that remain in the current accounts of the home office during the year corresponding to the earnings or contributions. The account’s credit balance corresponds to the amount that must be recorded as a supplementary investment to the assigned capital.

By registering the supplementary investment to the assigned capital with the Banco de la República (our Central Bank), the company obtains foreign exchange rights and, consequently, can repatriate both the investment capital and the earnings generated by the investment.

The practical difference between the assigned capital and the supplementary investment to assigned capital is that if the company decides to increase the capital assigned to the branch, it must amend the opening certificate, have it formalized through a public deed, and register it with the relevant Chamber of Commerce. These steps are not necessary for the case of supplementary investment.

The branch of a foreign corporation has also to be registered with the Chamber of Commerce of the place chosen as de domicile of the branch. For instance, the FCB can be established in Bogotá, D.C., the capital city of Colombia, so the Chamber of Commerce of Bogotá will be the local authority for these purposes.

Branches of foreign companies shall set up the reserves and fund provisions which the commercial law requires for stock corporations (Sociedades anónimas) and shall comply with all other requirements provided for the control and supervision thereof (Art. 476, C. de Co.).

This legal reserve is mandatory at least on the fifty percent (50%) of the amount of paid capital of the FCB, made up with the ten percent (10%) of liquid revenues of each accounting year.

The FCB’s assigned capital can be increased or paid back freely, but it cannot be reduced without fulfilling the proceedings explained earlier (Art. 488, C. de Co.). If the assigned capital diminishes in more than its fifty percent (50%), the legal representative will be jointly and severally liable for the branch operations while the FCB fails to comply with this disposition, previously required by the Superintendence of Companies (Art. 490, C. de Co.).

Financial statements are intended to provide information to those who have no access to a company record’s because confidential matters are involved.

Obviously, the public contracting party will have an interest and the power to inspect the accounts of the branch, at any time, in order to exert its power of supervision, surveillance, and control over public resources.

As a part of the accounting, the purposes of the financial statements are to serve as means of information to learn about controlled resources, changes experienced by those resources and results obtained during an accounting period.

In this respect, the law provides that commercial companies (in this case, the home office) must close their accounts and prepare general purpose financial statements at least once each year, on December 31, without barring to partners or shareholders the possibility of providing the bylaws a date other than (and additional to) December 31, each year, for preparation of general-purpose financial statements.

General-purpose financial statements are those prepared at the close of an accounting period for the information of undetermined users, in order to satisfy the common interest of the public as to assessing the capacity of a business entity to generate favorable cash flows.

The balance sheet, the statement of income, the statement of changes in owner’s equity, the statement of changes in financial position and the statement of cash flows are general purpose financial statements, which must be registered in the Chamber of Commerce, and will be checked by the public contracting party and national authorities, if needed.

It’s to be said that Colombia has implemented IFRS (International Financial Reporting Standards, Normas Internacionales sobre Información Financiera, NIIF), as of July, 2009 (Act 1391 / 2009). 

The causes for liquidating branches are the same as those for liquidating the home office, given the existence of the branch depends on the existence of the company to which it belongs. Also, because branches are seen as similar to business companies, they are subject to the general causes of the dissolution of Colombian companies that are compatible with the legal nature of the branch. For example, where the home office (or the corporate body charged with this function in the bylaws) decides to close the business or where authorities determine that the assigned capital has fallen below 50% and that measures to restore it have not been taken.

Dissolution is a stage preceding the liquidation (i.e., extinction) of the branch in the Colombian territory, characterized by termination of the period agreed by the partners or shareholders as the company’s (or branch) lifetime or by the emergence of certain legal or statutory circumstances that prevent the continuance of exploitation of the business purpose, such as a decision of either the company’s top body or a competent authority, the extinction of the thing whose exploitation constitutes the company’s business purpose in Colombia, etc.

Liquidation of the branch may be voluntary or mandatory. Once the branch is dissolved and placed in a liquidation state, its business purpose is restricted to one sole purpose: to realize its assets in order to pay its liabilities, if any.

There is no impediment to close the branch before the expiration date stipulated in its act of incorporation (the five year’s period proposed in this document), or to extend the fixed term of duration prefixed by the board of directors, if needed, without penalties.

The only limit, relevant to a public bidding process, is the prevision of Art. 6, Act 80 / 1993: the branch’s term of duration will not be less than the term of the public contract and one (1) year plus.

If the future partners or shareholders cannot be present or available in the country in order to attend to the procedures required by Colombian authorities, they must prepare and grant a written power of attorney for the creation of the branch in Colombia. The legal representative of the home office may also issue this power of attorney.

The home office must legalize before a notary public the documents that show the bylaws of the home office and its good standing (its valid existence and legal representation). The home office must also, provide the minutes of the meeting adopting the bylaws of the branch in Colombia and its opening, the designation of its general agent, his / her alternate, and the statutory auditor.

Revenues obtained by foreign branches shall be liquidated in accordance with the results of the consolidated balance sheet. The branch cannot pay in advance or make bank drafts to the home office, for future revenues or incomes (Art. 496, C. de Co.).

The public deed, the acceptance letters of the persons appointed for the management and administration of the FCB, and the RUT (Registro Único Tributario or Single Tax Registration—the form used to register companies with the tax authorities) must be filed with the Chamber of Commerce together with the other forms issued by this entity, for public exposure purposes (third party opposition right).

In order to participate in public contracting, foreign and national companies must be registered in the Unified Register of Bidders (Registro Único de Proponentes, RUP) of the local Chamber of Commerce, which is different from the business register (Registro Único Empresarial y Social, RUES) run also by the same institution.

Must be noticed that the legal requirements about the future incorporation or an FCB in order to participate in public or private contracts are mandatory only when the contract is awarded to the home office and the bilateral agreement is signed.

The intention of bidding for a contract is not per se a permanent activity for the purposes of Art. 474 C. de Co., while the participation as a contractor in the performance of works or in the rendering of services (Núm. 2, ibídem) is the opposite because, in the first event, the foreign company ignores if the intended venture has to come to fruition, as that depends on the results of the bidding (Superintendence of Companies, Of. 220 – 39105, June 7, 2000).

One of the most essential criteria that private entities wishing to contract with the Colombian government is that the entity must meet specific requirements for experience in that private contractor’s industry.

Here there are other two specific reasons to choose FCB as an option:

·         Under current Colombian law the FBC should only be subject to tax on Colombian source income, whereas a SAS would be subject to tax on its worldwide income.

·         Being the case that the branch office is an extension of the foreign company and thus the same legal person, an FCB may avail itself of the experience of the head office, as if it were its own, which is not the case with the SAS or a subsidiary of a foreign corporation, which cannot avail itself of the experience of the foreign-affiliated company, since the Colombian subsidiary (as well as the SAS or other kinds of corporations) would be a different legal person with its own experience and features.

The last reason is crucial for success on a bidding process, because usually, foreign companies need to be recognized as an expert in its field when competing with other leaders in the relevant sector. Colombian law (L. 1150 / 2007, D. 1510 / 2013) has developed a system of qualifying requirements (Requisitos Habilitantes) to which every bidder must comply in order to be considered able to participate in public contracting.

Qualifying requirements merely indicate that the bidder has the ability to comply with the purpose of the public contract, and therefore, is able to compete for its adjudication.

These requirements are intended to measure bidder’s experience, financial (financial statements of the last five years and key financial indicators: current liquidity ratio, the leverage ratio, coverage of interest’s ratio) and organizational abilities (profitability of assets and net worth). Hence, they don’t serve to grant any other score, except in regard to the consulting experience.

You must be aware that during the bidding process for the public contract, foreign companies can invoke the principle of reciprocity (Art. 20, Act 80 / 1993), in order to compete for equal opportunities with national companies.

For instance, in the case of economic and business relations between Colombia and France, as you surely know, there is an international free trade agreement (FTA) signed in Brussels, Belgium, on June 26, 2012.

By Colombia’s side, this international treaty was approved through the Act. 1669 of July 16, 2013, sanctioned already by our President of the Republic, Juan Manuel Santos, but pendant of final approval by the Constitutional Court.

Until our Constitutional Court emits the final decision, the President of the Republic gave a provisional application to this FTA, with effect from August 1, 2013 (Decree 1513 of 2013).

According to this, a French company should invoke this principle of reciprocity as a consequence of the provisional application of the FTA between Colombia and the European Union (France included), adopted by L. 1669 / 2013, in provisional effect by D. 1513 / 2013.

Under current Colombian law, the FBC should only be subject to tax on Colombian source income.

Net income generated by the branch of a foreign company may be entirely remitted abroad, subject to compliance with the requirements set by law.

Foreign currency must be managed through compensation accounts registered before the Central Bank (Banco de la República) or duly authorized financial institutions in Colombia. Consequently, foreign exchange declarations must be filed with the Banco de la República in order to convert foreign currency into domestic currency.

If the investment is made in foreign currency (not in assets) then the filing of the declaration will be sufficient to register the foreign investment. On the other hand, if the investment is made in assets, the applicable procedures are different.

These subjects will be discussed in much more detail, in a future document, that will be presented soon to your comments and consideration.

Thanks a lot to everyone, and we'll see you soon in a new post.



Camilo García Sarmiento