Advises on Colombian Commercial, Social Security, Labor and Tax Law for foreign branch offices 1: Foreign employees and freelance workers assigned to the branch

Hi, everyone:

With this post, I'm going to explain some insights on the most common alternatives for a foreign company who wants to incorporate in Colombia a branch office, particularly, in the topic of foreign employees and freelance workers assigned to the branch

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, as a result of the attorney's advice; the company has decided to open a branch in Colombian territory. 

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

What will be the consequences for the main office's employees in France, who go on work to Colombia periodically? If their wages are paid in France, can be all these expenses allocated to the branch, or to the head office? (Idem for fees paid by tha main office to French freelance or foreign freelance personnel assigned to the branch in Colombia)

First of all, we are going to answer the question about the eventual allocation of wages, social security, and fringe payments, etc., as costs allocated to the branch accounting in Colombia, for the income and complementary tax deduction purposes:

1)      As a preamble, we must remember the provision of Section 488 of the Code of Commerce: foreign companies must keep accounting books of the business celebrated in our country, registered in the same Chamber of Commerce of their domicile in Colombia, and in the Spanish language, with compliance with Colombian laws. Likewise, they must send to the respective Superintendence and to the same Chamber of Commerce, a copy of their general balance sheet, at least at the end of each year.

This must be understood, remembering that the intended branch will not be subject to surveillance or control of the Superintendence of Companies, on a general basis. So there is no need to present financial statements to this Superintendence, unless specific causes explained in the previous post and in the answer to a question regarding the assigned capital and supplementary investment, explaining in deep some situations that require prior authorization of this authority when a reduction of assigned capital is needed.

2)      Obviously, as explained as well in the previous post, the foreign company must register on the Business Register (RUES) of the Chamber of Commerce, its financial statements (including the general balance sheet), as a prerequisite for evaluation during the public bidding/tender (in the Registro Único de Proponentes, RUP).

As said by the Superintendence of Companies, in Official Letter 220 – 29311, of June 10, 2005: “First of all, it must be said that in a public bidding process, it must be observed the prerequisites set in the terms of reference. So, in the case of a foreign branch who competes in the tender, where one of the requirements is the presentation of their financial statements, it’s evident that this information is the one which must be analyzed.”

3)      In accordance with the previous explanation, it must be said that “the accounting and its accounting books [related to the branch] must be kept in the domicile of the branch because foreign companies are obliged to keep accounting books in Colombia, registered in the Chamber of Commerce of the place chosen for the branch and in the Spanish language, as well as to keep accounting of the business celebrated in the country, in compliance with national laws (Section 488 of the Code of Commerce). (…) Hence, accounting and its accounting books must be kept in the domicile of the branch because of the elaboration and preparation of financial statements corresponds directly to the branch in the country.” (Superintendence of Companies, Official Letter 220 – 102415 of August 8, 2013)

The act of keeping the branch’s accounting and accounting books in the domicile of the branch implies to hire a certified accountant in Colombia, regardless adjustments needed for harmonization of accounts with the branch, due to cost center’s provisions, etc.

That’s why Paragraph of Section 87 of Act 1607 / 2012 requires a documented study about functions, assets, risks, and personnel involved in the raising of incomes and occasional gains attributed to the branch as support to its accounting in Colombia; as we will explain below in this document.

In addition, it must be said that Decree 19 of 2012 (our latest anti – paperwork law) abolished the registration of accounting books in the Chamber of Commerce, as well as it authorizes to keep these books in electronic files.

4)      About this topic, we must add the following: “in order to recognize the economic facts realized by a branch of a foreign company undergoing its entrepreneurial activity is needed the use of auxiliary accounting books, in addition to the one that some companies call “Cuenta y Razón”, [in Colombia, Libro Diario, and Libro Mayor y Balances] which allows chronologic registration of all operations, individually o by global resumes of no more than one month, in compliance with provisions of Decree 2649 of 1993.” (Superintendence of Companies, Official Letter 115 – 210384 of May 12, 2013)

Decree 2649 of 1993 regulates about accounting in general and contains the accounting principles or regulations generally accepted in Colombia.

5)      Therefore, as stated in the previous opportunity (see pages 10 and 11 of the previous report, Tax Law), Article 85 of Act 1607 / 2012 (our latest tax reform) states as a general rule that foreign companies and entities are income and complementary taxpayers exclusively in relation to their income and occasional gains of domestic source, no matter if they perceive such incomes and occasional gains directly or through branches of permanent establishments located in Colombian territory (Art. 20, Tax Statute).

Article 86 of Act 1607 / 2012, states that a permanent establishment is a fixed business' place located in Colombian territory, into which a foreign company, or even a foreign national nonresident in Colombia performs all or part of his entrepreneurial activity. Foreign branches are expressly included in this definition.

Article 87 of the same Act 1607 / 2012 repeats exactly this provision when referring to taxes applicable to foreign branches, adding the following:

“[Foreign companies who have a permanent establishment of a branch in the country] will be taxpayers of the income and supplementary tax with respect to their incomes and occasional gains of national source attributed to their permanent establishment or branch”.

Foreign companies who have a branch office in Colombia (or any other kind of permanent establishment) are obliged to keep separate accounting records, according to Article 87, Act 1607 / 2012 (which added Section 20 – 2 of the Tax Statute), with clear description of incomes, costs and expenses, and supported by a documented study about functions, assets, risks, and personnel involved in the raising of incomes and occasional gains attributed to them (Paragraph or the aforementioned Article 87).

This means that the branch must keep a “separate” or “decentralized” accounting, in order to allow taxpayers and eventually to tax authorities (both in Colombia and France) clear and easy determination of incomes and occasional gains, on the one hand, and costs and expenses, on the other hand.

Therefore, payroll and professional fees services can be considered as “expenses” for the purposes of an income tax deduction, which must be allocated to the branch accounting because of the service provided (by the employee of the freelancer) will be rendered in our national territory.

As a conclusion, all the cost and expenses directly related (i.e., having a cause and effect relation) to the branch payroll (direct employees and freelance personnel) can be allocated to the branch for accounting and tax deduction purposes.

As I explain in another post of this series,  deductions are expenses incurred during the tax period in connection with an income-producing activity, which has a cause-effect relationship with that activity and must also be necessary and proportionate. Need and proportionality are determined on the basis of commercial judgment, in accordance with customs and the limitations established by law.

Costs are expenditures directly related to the acquisition or manufacturing of goods or the provision of services. These costs directly related to the taxed income – producing activity of the taxpayer are deductible from the income tax, provided they are necessary, proportionate and accrued or paid during the relevant taxable year.

As a general rule, it is understood that legally acceptable costs are incurred when they are actually paid in cash or in-kind, or it is terminated in any way which is legally equivalent to its payment. In consequence, costs incurred in advance are excluded (Articles 58 and 104, Tax Statute). For all legal and accountant purposes (cost causation), obligation to pay arises, even if payment has not been made (Articles 59 and 105, Tax Statute).

Costs incurred by taxpayers that keep books of account on the accrual basis are deemed to be incurred in the year or period in which they are accrued (Article 58 and 104, Tax Statute), i.e., when the obligation to pay for them arises, although they have not yet been paid, as previously explained.

Expenses are expenditures that contribute to the development of the taxpayer’s taxed activities, such as administration of the economic entity. Expenses must fulfill the same criteria set for costs regarding causality, proportionality, and necessity. They are recognized upon payment or credit to the account.

These are the general rules for a tax deduction. Under these rules, the branch office can apply for some costs and expenses related to foreign personnel, such as board and lodging, if they are agreed between the employer and the employee, expressly and by written, as exempted from the salary base as follows:

1)      Board, room or clothing provided by the employer to the worker or his / her family as part of the ordinary compensation for the service rendered is regarded as wages in-kind or species (Salario en Especie), except as otherwise agreed as contemplated under Article 15 of Act 50 / 1990; and should be expressly appraised in the labor contract and otherwise they are appraised by experts.

2)      In this regard, Section 127 of the Substantive Labor Code statutes: “It’s considered as salary not only the ordinary remuneration, fixed or variable, but also everything received by the worker in money or in kind as to direct remuneration [“contraprestación”] for his / her services, no matter the form or name adopted, such as (…).”

Typical examples of salary in kind are board and lodging. So, accommodation in hotels, or rooms, houses or flats leased for that purpose (for the worker and his / her family if needed), enrollment for postgraduate studies, life or health insurances, voluntary health plans, etc., will be considered as part of the salary unless explicit and written agreement between the employer and the employee, in considering these items as excluded from the salary base.

It must be said that the aforementioned agreement (Pacto de Exclusión Salarial) is not a way to “exclude” items which, by imperative law are considered as salary in kind, but an agreement to alleviate labor costs for employers, allowing the exclusion of these items as part of the salary base for the computation of fringe benefits, contributions to the social security system and parafiscal entities, and eventually, indemnities.

Thus, the aforementioned items must be explicitly identified as part of the agreement, which must be made in written for evidence purposes contributions to the social security system and parafiscal entities (SENA, ICBF), and of course, to tax authorities.

On this regard, the Colombian Supreme Court of Justice has been said that for the legal existence and the validity of the pact of Section 15 of Act 50 / 1990, the formality of the written form is not essential, and the employer can prove this agreement using all the rules of evidence allowed by procedural law (Sentence of the Labor Cassation Court, File No. 35579 of July 28 of 2009, M.P.: Eduardo López Villegas).

Obviously, our advice about this agreement always is having it written.

It must be also considered legal impossibility to agree on the exclusion of a payment which has been expressly defined as salary, like commissions or bonuses for sales, as said by the Colombian Supreme Court of Justice in several opportunities (e.g., Sentences of the Labor Cassation Court, File No. 13671 of September 20, 2000; and File 22069 of September 27, 2004, M.P.: Elsy del Pilar Cuello Calderón).

3)      Section 128 of Substantive Labor Code, on the contrary of Section 127 ibidem, statutes: “It’s not considered as the salary the amounts received by the worker occasionally and by way of a mere liberality, such as (…) and the amounts received in money or in kind, no for his / her own benefit, nor for the enrichment of his /her own equity, but for fully carry out his / her mission, such as fees and travel expenses, means of transport, work items and other of the like. (…).”

This topic includes the leasing of vehicles, laptops, mobile phones, and internet monthly plans, visas, air tickets and other reasonable transportation expenses, etc., if relevant for the fully carrying out or the service rendered.

4)      The benefits which are not salary are the habitual or occasional ones established by agreement or contract or granted by the employer beyond those contemplated in the law, provided that the parties have expressly agreed upon the amount of the salary in money or in kind, which does not constitute salary (Pacto de Exclusion Salarial) as explained in another post of this series (Labor Law).

In addition, considering the noticeable differences between Colombian and French regulations about the working day is recommended that your foreign personnel should be of managerial positions (Empleados de Dirección, Confianza o Manejo), in order to prevent eventual conflicts derived from the divergences between French and Colombian legislation (13 hours of difference at the week), allowing avoidance of paying overtime in both jurisdictions. Remember the dictates of our case law about these kinds of employees:

·         Directives (Trabajadores de Dirección) are those who perform top managerial positions.

·         Trust workers (Trabajadores de Confianza) are those who, without being top managers, are especially entitled to perform super vigilance activities for the employer; and

·         Management workers (Trabajadores de Manejo) are typically those whose scope of activities involves custody of money, trade secrets of confidential information, and other managerial functions.

In summary, labor contracts signed with foreign nonresidents in Colombia must have explicit clauses about the complete definition of the salary in kind, and the aforementioned agreement to exclude these kinds of allowances from the base salary (Pacto de Exclusion Salarial, Art. 15, Act 50 / 1990), allowing thus the income tax deduction.

Obviously, there will be cases in which it’s not convenient for the foreign worker to accept these suggestions, because they imply a modification of the contract (mostly, the stipulation of the integral salary), but this situation is a matter of case by case analysis. And it’s not advisable to evade strict provisions on this issue if you cannot want to face legal action in France in the future. But, with the correct feedback with your French lawyer, these problems can be easily overturned with addendums to the French employment contracts, if needed.

By the way, the general statute of limitations (Prescripción Extintiva de las Obligaciones) in Labor Law is three (3) years counted from the date of enforceability of each obligation (Sections 488 of the Substantive labor Code, CST; and 151 of the Procedural Code of Work and Social Security, CP del T y la SS).

However, for salaries and fringe benefits, Tax Code establishes special provisions, as follows:

1)      Salaries paid or accrued to employees are deductible provided the employer has applied the relevant withholdings and has paid all payroll taxes (ICBF, SENA, family welfare) and the entities that constitute the Integral Social Security System (Article 108, Tax Code), i.e.:

·         General Retirement Pension System (foreign workers who contribute to this item in their respective countries are exempted);

·         General Health Social Security System (EPS); and

·         General Occupational / Labor Hazards System (ARL).

Receipts issued by these entities are considered as evidence of payment.

General explanations about these payments are made in another post of this series, in which, we also explained the following, about foreign employees and freelance workers who are going to work (occasionally or one time only) in Colombia:

·         According to Section 15, Act 100 / 1993 (modified by the Section 3, Act 797 / 2003), everyone who is working by means of a labor contract is bounded to be mandatory affiliated to the general retirement pensions system.

·         Nevertheless, foreigner workers who by means of a labor contract stay in the country and are not affiliated to any retirement pension system in their country of origin o anyone else and freelance workers are considered as voluntary affiliated to the Colombian general retirement pensions system (Numeral 2, Section 3, Act 797 / 2003).

·         According to Section 157, Act 100 / 1993, everyone who is working by means of a labor contract (regardless of his / her nationality), retired persons and freelance workers with payment ability must be affiliated to the general health social security system, in the contributive system (Régimen Contributivo). Foreign workers are not exempted.

·         As said by Section 2, Act 1562 / 2012, everyone who is working by means of a labor contract (regardless of his / her nationality), is bounded to be mandatory affiliated to the general occupational hazards system; as well as freelance workers hired for more than a month or whose activity has been classified as hazardous by the Ministry of Labor, retired persons who are working with a labor or a freelance contract, internships, and other individuals.

Therefore, in practice, all foreign workers (freelance or with labor contract) are bounded to be affiliated to the General Health Social Security System and to the General Occupational Hazards System; and don’t need to be affiliated to the General Retirement Pensions System, if they prove their affiliation to the equivalent entity in their country of origin or in general, in another country.

2)      As explained in another post of this series, severance payments (Auxilio de Cesantía), which is a labor benefit different to salary, and completely different from the indemnity for termination of labor contract without just cause (Section 64 of Substantive Labor Code); is an annual obligation of the employer, due to its employees, whose payment must be made as follows:

·         To liquidate a salary at December 31 for each year of service and proportionately per fraction to workers with regular salary; and subsequently,

·         To deposit this payment in a Severance Private Fund in Colombia, before February 15 of the next year); under penalty to pay the sum equivalent to one (1) day of salary from February 15 to the day of effective payment; or to the day of the termination date of the contract, if the employer never fulfill this obligation during the life of the work relation (Numeral 3, Section 99 of Act 50 / 1990).

3)      According to this, severances effectively paid are deductible for tax purposes, as long as they are not the ones consolidated and deduced in previous years or taxable periods (Section 109, Tax Code). Which means that the severances paid before February 15 of the year 2020 (liquidated as December 31, 2019) will be eligible for a tax deduction.

The branch office, as a taxpayer who keeps books of accounts by the causation system, must deduce the severances consolidated and paid to its workers between the relevant year, or taxable period (Section 110, Tax Code), as explained before.

Payments made to pension funds in Colombia (not applicable to foreign workers), ICBF and SENA (parafiscal payrolls) are income and supplementary tax-deductible, by express provision of Sections 111 and 112 of Tax Statute.

In this regard, Section 37 of Act 1607 / 2012, added a paragraph to Section 122 of Tax Code, excluding employers from contributions to ICBF and SENA related to workers with salaries of ten minimum legal wages in force (10 SMMLV) or less. On the other hand, parafiscal payments continue in full force in regard to workers with salaries of more than ten minimum legal wages in force (10 SMMLV).

4)      You must remember that, notwithstanding the mandatory provisions of labor law which establishes labor benefits, when a worker earns an ordinary salary exceeding ten (10) legal minimum monthly salaries, it is valid to stipulate in writing an integral or consolidated salary (Salario Integral), which in addition to paying for the ordinary work, compensates in advance the social benefits, surcharges, and allowances, such as those corresponding to night work, overtime work and work on Sundays and holidays, the legal and extra-legal bonuses, the severance pay and interest thereon, the subsidies and allowances in kind, and in general, those included in the agreement, other than vacations. In no case, shall the integral salary amount be less than ten minimum legal monthly salaries plus the factor corresponding to the benefits, which may not be less than thirty percent (30%).

Accordingly, an integral salary is an option for the remuneration of key personnel, whose monthly salary exceeds the amount of 10 SMMLV. The employer pays to the worker a total sum which includes the monthly salary (no less than 10 SMMLV), and the allowance factor (Factor Prestacional), a lump sum that compensates in advance the social benefits, surcharges and allowances mentioned above (no less than 30% of the salary). Thus, in practice, a “minimum” integral salary can’t be less than 13 SMMLV.

An important consequence of the adoption of integral or consolidated salaries for foreign workers is the authorization to paying severances to the employee directly as part of the allowance factor explained above, without incurring in the penalty of Numeral 3, Section 99 of Act 50 / 1990, as an exemption of the payment of severance defined as a general rule by Section 99 of Act 50 / 1990.

In summary, salaries, severances and other fringe, social security and payroll contributions to workers can be tax deductible. Our advice for foreign employees, for practical administrative and accounting purposes is the following:

·         To agree and enshrine, in written, integral or consolidated salary for foreign employees (in accordance with prior provisions of the original contract signed in France, if the worker has been previously hired and its contract is in full force before the commission to working in Colombian territory).

This allows foreign employees to comply with Colombian regulations without incurring in the inconveniences of depositing the severance in a Private Fund in Colombia (to take money out when the commission in Colombia is fulfilled, etc.) and avoiding the severe penalty of the omission in depositing the amount in the Severance Private Fund (Numeral 3, Section 99, Act 50 / 1990).

·         To agree and enshrine, also in writing, the “desalarization” agreement of Section 15, Act 50 / 1990 (Pacto de Exclusión Salarial) for foreign employees (in accordance with prior provisions of the original contract signed in France, if the worker has been previously hired and its contract is in full force before the commission to working in Colombia).

This allows foreign employees to comply with Colombian regulations without incurring in problems when defining the salary base for parafiscal and social security contributions, and, eventually, when discussing the value of the indemnity for termination of the contract for the employee, and other indemnities in charge of the employer.

Another important advantage is the possibility to consolidate some factors like mobile phone and internet plans, transportation in Bogotá, room and lodging of personnel (leasing of a flat near the place of work, or in a hotel with special discounts), etc., making easier the proof of the expenses to our national authorities.

As an example, you can lease an apartment for the accommodation of your personnel in Colombia, during annual (or lesser) periods considering the term of the public contract. By the way, in Colombia, Act 203 of 2003 regulates leasing of real estate for urban living, setting some rules that your company must be aware of:

o   It’s absolutely forbidden to require deposits or other securities or bonds to the tenant in these kinds of contracts (Section 16, Act 203 of 2003).

o   If the tenant, leaseholder o lessee wants to terminate the contract without just cause, during the life of the contract or its renewals, it’s mandatory to submit to the lessor a three (3) months notice, and to pay an indemnity to the landlord or lessor, equivalent to the amount of three (3) rental (monthly) payments (Section 22, Numeral 7). Of course, this indemnity can be subject to negotiation between contractual parties, lessee and lessor (at anytime the contract can be terminated by mutual agreement, Section 21, Act 203 / 2003), if needed (or simply not renewing the contract, without forgetting anyway the three (3) months' notice).

o   The increment of the rental payment can be never of more than the equivalent to the percentage of increment of inflation, a measurement known in Colombia as the Consumer Price Index, Índice de Precios al Consumidor (IPC), according to Section 20 of the aforementioned Act 203 of 2003.

·         To try avoiding the commission of foreign personnel with wages of less than 10 SMMLV, for the reasons, explained above. With the organizational scheme required by the public entity, lower post (engineers, drafters, inspectors, etc.) can be hired in Colombia directly by the branch (or even better, be left in charge of the Colombian partner in the consortium), leaving some administrative posts for Colombian personnel (assistants, accounting, legal consultant, fiscal auditor, etc.) to our national workers (employees or freelancers), that's because of many of them (accountant, lawyer, fiscal advisor) must be professionals legally credited in Colombia (i.e., with professional card) for entering their professions.

In regard to freelancer workers (consultants), it’s important to note that Colombian (and also French) courts are able to reclassify a consulting contract into an employment contract, if the consultant or freelancer has a subordinate relationship to the hiring business if the consultant spends most of his / her time working for the hiring business or if the consultant has no other clients. In such a case, the relationship between the two parties would be reclassified as an employment contract and subject both parties to all of the corresponding provisions of both the Colombian and the French Labor Code.

As well as employees, freelance workers are required to contribute to the entities that constitute the Integral Social Security System, as follows:

·         General Retirement Pension System: as well as foreign employees who by means of a labor, contract stay in the country and are not affiliated to the retirement pension system in their country of origin o anyone else, freelance workers are considered as voluntary affiliated to the Colombian general retirement pensions system (Numeral 2, Section 3, Act 797 / 2003).

Therefore, foreign freelance workers don’t need to be affiliated to the General Retirement Pensions System, if they prove their affiliation to the equivalent entity in their country of origin or in general, in another country.

·         General Health Social Security System (EPS): everyone who is working by means of a labor contract (regardless of his / her nationality), retired persons and freelance workers with payment ability must be affiliated to the General Health Social Security System, in the Contributive System (Section 157, Act 100 of 1993). Foreign workers are not exempted.

·         General Occupational / Labor Hazards System (ARL): as said by Section 2, Act 1562 / 2012, everyone who is working by means of a labor contract (regardless of his / her nationality), is bounded to be mandatory affiliated to the General Occupational Hazards System; as well as freelance workers hired for more than one month or whose activity has been classified as hazardous by the Ministry of Labor, retired persons who are working with labor or a freelance contract, internships, and other individuals.

Decree 723 of 2013 regulates Act 1562 of 2012 (the latest modification to the General Labor Hazards System), with regard to affiliation of freelance contractors who go on work for more than one (1) month, with a formal (written) contract and specification of situations of mode, time and place where the work is done (Numeral 1, Literal a, Section 2, Act 1562 / 2012).

Affiliation of both employees and independent contractors (freelancers) is chargeable to the employer (for freelancers, Section 5, Decree 723 of 2013). The contribution is always chargeable to the employer with relation to its employees and, with regard to freelancers; it may be chargeable to the employee (occupational hazard I, II or III) or the employer (occupational hazard IV and V, the higher levels of occupational risk), according to Section 13, Decree 723 of 2013).

In general, the occupational risk for consulting activities is the lowest (Type I) of the hazard chart. Affiliation to the ARL per se, doesn’t configure a labor relationship between the client (the foreign company) and the freelancer (Article 25, Decree 723 of 2013), and demonstration of it becomes essential in practice, for the payment of advances from the public entity and the admission of the branch’s personnel into the premises of the workplace.

Article 18 of Act 1122 / 2007 (modifications to the General Health Security System) states that freelancers must contribute to the General Health Security System under a maximum base equal to the forty percent (40 %) of the monthly amount of the contract. The contractor can authorize to the entity client the discount and payment of the contribution (chargeable to the freelancer) without configuration per se of a labor relationship between the parties. In reference to the Family Subsidy Funds (Cajas de Compensación Familiar), affiliation of employees is mandatory and chargeable to the employer (Article 7, Act 21 of 1982). Freelancers are voluntary affiliates to these entities.

Finally, if the company suggests the intention of paying the foreign workers wages in France. Obviously, if you need more specific answers, we would like to know some examples of how the company wants to deal with the matter, but in general terms, we can conclude and advise the following:

1)      Section 135 of the Substantive Labor Code states that compensation agreed in foreign currency may be demanded in Colombian legal tender at the official rate of exchange of the date on which payment must be effected. Of course, payment in euro, instead of Colombian peso or even US dollars is the most desired option for French workers, because the cost of life in Colombia is lower than in your country, and the euro is a much stronger currency.

It should be noticed, that the Court of Labor Cassation of our Supreme Court, has stated the following in regard to payments of labor claims originated as a consequence of the termination of the labor contract: in this event, the payment may be demanded in Colombian legal tender at the official rate of exchange of the termination date, not the date on which payment has been effected (after several years of litigation, for example). Appeals of April 6 and December 7, 1988; June 13, 1990; and February 11, 1994.

Section 138 CST states that unless written agreement on the contrary, wages’ payment must be made in the place where the worker renders his / her services, during the working day or immediately at its termination. The payment must be made directly to the worker, or to the person entitled by him/her expressly and in writing (Section 139 CST).

2)      Of course, there must be some cases in which the employer agrees with its employee to pay the wages in a different country than the one where the services are rendered (if you have such cases, please let us know). But in practice, it’s much better for the foreign company to pay the wages and related expenses in Colombia, for several reasons:

·         It’s much easier for the branch to allocate these wages as expenses for the income tax's deduction, in a consolidated way into its account books.

·         It’s easier for the employer to pay the wages using the same bank account if the branch is obliged to have one, something that we must take for sure because in practice the branch must have a current account for its operation:

o   The branch needs a local currency or savings account for payment of wages, social security and parafiscal payments, etc.

Payments of wages or fees can be made via bank deposits/transfers in employees and freelancers (foreign and national) savings accounts. Payment of social security and parafiscal payments are made using portal authorized for that purpose. The Planilla Integrada de Liquidación de Aportes, PILA, electronic Integrated Form for Liquidation of Contributions to Parafiscality and Social Security is run by the concession of the State to private contractors, like the URSSAF (Union pour le Recouvrement des cotisations de Sécurité Sociale et d'Allocations Familiales) does it in France.

o   The public entity surely requires the existence of a local bank account, for paying up advances of the public contract through its contractual life.

Hence, using a local bank account for the branch is the expedite way to constitute evidence of incomes and expenses, for tax declaration and deduction purposes.

The branch receives the advance payments from the public entity; pays the wages, fees and social security / parafiscal contributions to its employees, freelancers, and entities related, pays other cost and expenses related to the operation, and transfers the remaining revenues to the head office, in such a way that allows easy keeping of accounting books, while offers financial backing, stability, and credibility to third parties in Colombia, needed for running its business.

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


Camilo García Sarmiento