Tips on Colombian company and public bidding law: Incorporation of a foreign branch in Colombia, and legal aspects about consortiums

Hi, everyone:

With this post, I'm going to explain other insights on topics relevant for a foreign company that wants to incorporate in Colombia a branch office, this time, regarding the incorporation of the foreign branch, and legal aspects about consortiums.

For didactic purposes, we are going to assume the same foreign (French) company interested in establishing in Colombia with the intention to participate in public bidding. In that order, the hypothetical client asks the following: 

Is it mandatory for a foreign company to incorporate a branch in Colombia, considering his intention to compete for the public contract in joint venture with a Colombian company, by means of the contractual modality called consortium?

Yes, it is essential to incorporate a branch, but it isn’t necessary at the moment of presenting itself as a member of the consortium, during the bidding process. It will be mandatory only when the public contract has been awarded already to the consortium, as a prerequisite for signing the contractual agreement with the public entity.

The complete explanation of this, as follows:

1)      Colombian business law states that, in order to do permanent business in Colombia (and a prerequisite to do it), all foreign companies must incorporate a branch in our territory (Section 471, Code of Commerce).

And also states that, for the purposes of Section 471 aforementioned, the following activities are considered as “permanent business”: “To open in the Colombian territory trade establishments of business offices, even if they have only a technical of consultancy character” (Paragraph 1, Section 474), and “To participate as contractor in the execution of works or the rendering of services” (Paragraph 2, ibidem).

2)      So, it’s mandatory for a foreign company to have a branch incorporated in Colombia, at least when the public contract has been already awarded to your company.

Our Superintendence Companies has explained this situation as follows:

“When talking about the legal obligation for a foreign company to establish a branch in the country, we have the following:

1. When presenting an offer in public or private bidding is only intended.

The interest to contract for in the country, proved through an offer in bidding, is not considered per se as a permanent activity, in the terms of Section 474 of the Code of Commerce, because of the requirement alludes to the intervention as a contractor, that is to say, as a subscriber of a contract for the execution of a work or the rendering of services, as explained in the Official letter 004408 of March 28, 1978: “When a company domiciled abroad is determined to participate in public bidding in Colombian territory, in no way, can be compelled, as a prerequisite to present his offer, to comply with the procedures for the branch’s incorporation, of course because at this moment he still ignores if he is going to be in the situation of having to perform his business purpose in the country, as long as that depends on the granting or not to him of the public bidding.”

2. Once the biding has been granted and the contract is signed.

In this case, regardless of being a contract subscribed with a public or a private entity, paragraph 2 of section 474 of the Code of Commerce is clear enough on stating as a permanent activity the fact of participation of the foreign company as a contractor in the execution of works or the rendering of services.

So, always that a contract of this kind is signed, at this office’s judgment, the foreign company must incorporate in the country one branch, because the aforementioned rule doesn’t establish any additional requisite concomitant to the status of a contractor, such as that the activity must be performed in Colombia or abroad, or that the service rendered must be uninterrupted or permanent.” (Superintendence of Companies, Official letter 220 – 39105, June 7, 2000)

In summary, for the purposes of presenting the offer/proposal, it’s not mandatory for the foreign company to prove the establishment of his branch in Colombia, at the time of presentation of the offer.

Only when the public contract has been awarded to the foreign company, it emerges as mandatory the incorporation of the branch, in compliance with the rule set by Section 471, Code of Commerce.

3)      Being mandatory by law the eventual incorporation of the branch in Colombia, this rule applies regardless of foreign company’s participation alone, or as a part of a consortium.

Why? Because unlike the partnership; a consortium is only a contract (which regulates the temporal association or a cooperative arrangement between two or more partners engaged into achieving a common goal), unable to generate a juridical person different than the constituent members of the joint venture.

For business law (in Colombia, Section 98, Code of Commerce), partnership (sociedad) is a polysemic concept, which represents both:

·         A modality of contract defined by law – with the inseparable conjunction of four (4) essential elements: a) one or more partners; b) contribution of each partner to the partnership, in money or in kind; c) the expectation of future losses and benefit’s sharing; and d) the mutual intention to go into partnership (animus contrahendi societatis, animus societatis), and

·         A legal consequence (and economic benefit) of the business contract, when it has been constituted in strict compliance to law: the creation of a juridical person (business entity) different from the partnership’s members considered alone.

The latter is a consequence of the contract’s celebration, and also a benefit, set by law, that allows the delegation of responsibility to a third person (the company) as a subject of legal rights and obligations in the performance of business activities (a legal person with the attributes of corporate name, legal capacity, domicile, assets and nationality).

A consortium, like a marriage (the expression “consortium” derives from Latin “consors”, itself from “con”, together, and “sors”, fate; meaning partners, companions, “consorts”, literally as husband and wife), is a cooperation agreement in order to achieve a goal in common, a joint venture. It’s a contract, but without the legal effect (the juridical person).

Joint ventures, and particularly, consortiums and temporary unions (uniones temporales) are not defined as contracts by commercial law. Section 7, Act 80 of 1993 (Public Contract Statute), is the rule of law that defines these forms of the joint venture, as follows:

“For the [legal] purposes of this Act, it’s understood as:

1. Consortium: when two or more persons present altogether the same proposal for the adjudication, celebration, and fulfillment of a [public] contract, being jointly and severally liable for all and every one of the obligations derived from the proposal and the contract. Therefore, acts, deeds and omissions arising in the course of the proposal and the contract, will affect all the constituent members.

2. Temporary Union: when two or more persons present altogether the same proposal for the adjudication, celebration, and fulfillment of a [public] contract, being jointly and severally liable for all and every one of the obligations derived from the proposal and the object of the contract, but penalties for breaching of obligations derived from the proposal and the contract will be imposed according to the participation in the fulfillment of each one of the constituent members of the temporary union.

Paragraph 1: The bidders will indicate if their participation in a consortium or temporary union’s capacity and, in the latter case, they will indicate the terms and extension of their participation in the offer and its fulfillment, which cannot be modified without the previous consent of the public contracting entity.

The consortium and temporary union’s members shall designate the person that, for all [legal] purposes, will represent the consortium or temporal union, and shall designate the basic rules that govern relations and responsibility between them.

Paragraph 2: [repealed, Section 285, Act 223 of 1995].

Paragraph 3: In the cases by which companies are incorporated under anyone of the modalities prescript by law with the only business purpose of presenting an offer, and to celebrate and execute a public contract, the responsibility and its effects will be reign by the dispositions foreseen by this Act for consortiums.”

For the public contract statute’s purpose of a consortium (joint venture) is understood to be a form of association whereby two or more persons jointly present the same proposal for the award, signing and execution of a contract, making themselves responsible in solidum for all and every one of the obligations derived from the proposal and the contract.

The concept of temporary unions is identical, except as regards the sanctions for non-compliance with the obligations derived from the proposal and the contract, which will be imposed in accordance with the participation in the execution of each of the members of the temporary union. Accordingly, in this type of contract, there must be stipulated the obligations that are borne by each of the members of the temporary union.

In summary, the conformation of a consortium or a temporary union doesn’t bring juridical life to a new legal entity different than the constituent members, among other aspects, because it doesn’t constitute a company as a consequence of not comply with the legal and formal requisites foreseen by the Code of Commerce.

In addition, it must be said on the matter:

4)      Section 18 of Tax Code states that consortiums and temporary unions are not taxpayers of income tax. The constituent members must keep in their own accounting books and to declare to the tax authorities their respective incomes, costs and deductions separately, in accordance with their participation on incomes, costs and deductions of their consortium or temporary union.

Section 368 of the Tax Code identifies consortiums and temporary unions as withholding or responsible agents (see explanation in a previous post, Tax la) of sales (value-added) tax (VAT), when required by law.

Section 33 of Decree 836 of 1991, in regard to the determination of taxable income of the constituent members of the consortium allows two alternatives for tax clearing:

·         The constituent members will keep in their accounting books and to declare to tax authorities their income, costs and deductions separately, in accordance with their participation on incomes, costs, and deductions of their consortium, or

·         The consortium will account for incomes, costs, and deductions derived from the respective contract, and information to each constituent member the amount of their own in such values, in order to precede each one to separate accounting and income declaration to tax authorities.

5)      In consortiums and temporary unions, according to the Superintendence of Companies (External Circular 115 – 000006 of 2009) can be agreed on several forms and structures depending on the rights and obligations arisen from the contractual an agreement, like:

·         Joint operations: it’s an agreement that implies the use of the constituents’ assets and other resources, with destination to fulfill a predefined business activity (in the context of the execution of the public contract).

Each one of the constituent members uses his own assets, goods, equipment, etc., assuming his own obligations, costs, and expenses. The contractual agreement sets the basis for the distribution of common revenues, costs, and expenses.

·         Joint assets: it’s a contract where the constituents have rights on the assets jointly acquired, and frequently, are co-owners. Each constituent acknowledges the agreed a part in the costs and expenses incurred to operate the asset, and also in the revenues generated. Constituents can be obliged, individually or jointly, to pay obligations and expenses derived from the contractual agreement.

Constituent’s rights over the part in the common asset must be proved, among others, when:

o   He has the legal right to sell his participation on the asset.

o   He has legal right to use the asset for his own purposes during one part or all its useful life.

o   He has legal right to mortgage his participation in the asset in order to refinance his own financing/funding.

o   He appears as the owner of the assets, when its ownership is subjected to public registry.

o   He is contractually bonded to pay his part on the cost of the joint assets and, therefore, he has contractual rights over this part of the assets.

·         Joint venture (in a strict sense): when the business association is fulfilled through the constitution of an economic entity different than the consortium constituents (a new company, a trust, cuentas en participación, a de facto society, etc.). In this case, they exert joint control, without legal rights on the individual assets, or the obligations for the venture costs and expenses. Instead, each constituent has right over one part of the results of the venture.

6)      All individual or companies aspiring to sign contracts with Government entities, as well as consulting, supplying and purchase/sales of movable goods contracts, must register their names at the Chamber of Commerce of their jurisdiction, and classify and quality themselves to the parameters of experience, financial capacity, technique, organization and equipment availability established by the National Government.

Based on the registered information, Chambers of Commerce will issue certifications as to existence and representation of the contractor, faculties of its legal representative, and qualification and classification of the inscribed person or entity.

The registration at the Chamber of Commerce, in the Unified Register of Proponents (Registro Único de Proponentes, RUP) must be renewed annually, completing the forms and documents set forth by the National Government for that purpose.

The Unified Register of Proponents (RUP) began by 2009, and is currently regulated by Sections 8 to 14, Decree 1510 of 2013, as follows:

·         All natural and juridical persons, foreign or domestic, with domicile (or a branch, in regard to foreign companies) in Colombia and with interest in participating on contractual proceedings called by public entities must be registered in the RUP, unless exemptions are foreseen in a restricted way by law (Section 8).

·         The inscription in RUP must be renewed annually, at the most the fifth (5) working day of April. Anyway, information regarding experience and juridical capacity can be updated anytime, as well as the registry can be canceled at any moment (Section 8, Decree 1510 of 2013).

·         In order to register and to update and renovate the registry, it’s mandatory to issue an application with the following information (Section 9, Decree 1510 of 2013, set for juridical persons, including foreign companies):

o   A relation of goods, works, and services intended to offer to public entities, identified using the United Nations Standard Products and Services Code (UNSPSC) in the third level – the first six (6) digits of a total of eight (8) – .

o   A certificate issued by the legal representative and the fiscal auditor (if the juridical person is obliged by law to have fiscal auditing), or the company’s auditor or accountant, stating that the interested company is not a part of a group of companies, it’s not exerting control over other companies (or a situation of control is not exerted on the company). If otherwise, the certificate must be stated identification of the members of the group, the situation of control and companies controllers and under controls.

o   Financial statements of the corporation or company, and consolidated financial statements of the group of companies when required, with financial notes and annexes, signed by the legal representative and fiscal auditor (if the juridical person is obliged by law to have fiscal auditing), or otherwise, signed by the legal representative and the company’s auditor or accountant, including a) main detailed accounts of the balance sheet; b) main detailed accounts of a statement of income; c) contingency accounts on debits and credits.

o   If the applicant (in the case of foreign companies, their head offices) doesn’t have enough antiquity to have financial statements audited by December 31, he must register quarterly financial statements signed by the legal representative and the auditor or accountant, or aperture’s financial statements.

o   Experience certificates on the provision of goods, of works, and services to offer to the public entities, issued by third parties recipient of the respective goods, works or services; or copies of the contracts when impossible to obtain the certificate; indicating the classification of corresponding goods, works or services according to UNSPSC. If the incorporation of the applicant is below three (3) years, he can prove the experience of their shareholders, partners or constituents.

o   Certificate issued by the legal representative and the fiscal auditor (if the collective person is obliged by law to have fiscal auditing), or otherwise by the company’s auditor or accountant, regarding the company size (small, medium or big company), according to Colombian law.

o   Foreign branches must present for registration financial and accounting information of their correspondent head offices. Financial statements of foreign companies must be submitted in compliance with accountancy and legal rules applicable to countries of issue.

7)      When foreigners not domiciled in this country or private juridical foreign persons that do not have a branch in Colombia are involved, and seek to present proposals or enter into public contracts for which is required the presentation of registration in the business register (RUES) and public bidders register (RUP) of the Chamber of Commerce, they must appoint an individual in Colombia, duly empowered to present the proposal and to sign the contract, as well as to represent them judicially and extra judicially.

Documents signed abroad must be presented duly legalized in the manner prescribed in current rules on this subject: official transcription, apostille (footnote), etc.

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


Camilo García Sarmiento