Article by Adrian F Rodríguez1 and Andrés González2, Lewin&Wills Abogados, Bogotá Colombia.
The Investment stability Act, that allows investors to maintain the legal framework that motivated them to invest by establishing that as long as such framework was included into an agreement signed with Government it will not be adversely modified, could be subject to important reforms in the following weeks.
Since 2006 the Government has signed more tan 65 Investment Stability Agreements with individual investors.
Investment Stability Act Background.
In an effort to promote an increase in both domestic and foreign investment in 2005, Colombian Congress enacted the Investment Stability Act. [Investment Stability Act: Colombian Congress, Act No. 963-2005]
Pursuant to this act the Congress authorized the Colombian Government to enter into individual Investment Stability Agreements with new and already existing investors, both domestic and foreign. The purpose of these agreements is to guarantee to each individual investor a specific legal framework deemed by the investor as determinative for her new investment or for increasing an already existing investment. The duration of the agreement must be at least 3 years and no longer than 20 years. Portfolio investments do not qualify for this treatment.
Although its scope can go beyond the tax framework, this type of Investment Stability Agreements can cover all the sorts of issues related to national level direct taxes, ranging from applicable rates to tax incentives, and even positions adopted by the Colombian Tax Service in its rulings. Nevertheless, indirect taxes, welfare regime, and temporary taxes enacted under State of Economic Emergency (and other extraordinary constitutional states), cannot be subject to Investment Stability Agreements.
With the execution of an Investment Stability Agreement the Government guarantees to the specific investor the permanence of the selected legal and tax framework for a specific period of time, even if such framework changes in the future. In exchange, the investor must make or increase an investment in the minimum amount of US$2.2 million3 and pay to the Governmental Finance Agency a consideration equal 0,5% (unproductive periods) or 1% (productive periods) of the amount of the investment.
The legal framework that the investor wants to benefit form during the duration of the agreement needs to be included in the Agreement. Rules, regulations or rulings left out, will be deemed as not covered by the benefit.
The Proposed Amendments.
On April 28, 2011 the Colombian Congress approved the 2010-2014 Colombian Development Plan Act; in order for the Act to be enforceable it is only pending presidential sanction and its further publication. The Colombian Development Act intends to modify the 2005 investment stability Act concerning both the definition of "new investments" and the consideration that the investor must pay to access the benefit.
Currently, the Investment Stability Act covers investments completed before the agreement is executed. Conversely, the Colombian Development Plan Act indicates that in order to access the benefit, the investment must be completed after the execution of the agreement.
Additionally, according to the Investment Stability Act, in order to benefit from the Investment Stability Regime, an investor needs to pay a consideration equivalent to 0,5% (unproductive periods) and 1% (productive periods) of the invested amount. The Colombian Development Act modifies the way of assessing such consideration by indicating that as of its entry into force, the consideration will be determined based on a new methodology to be defined by the Government that must take into account the risk that the State is assuming and the legal framework that the investor wants to include in the agreement.
The purpose of the amendments is to limit the access to the Investment Stability Regime only to significant investments able to generate benefits in Colombia.
1. The Co- author is a partner with the law firm Lewin &Wills Colombia. He is admitted to practice in Illinois, New York and Colombia and holds an LLM in International Taxation from NYU, he can be reached at email@example.com.
2. The co-author is a tax associate with the law firm Lewin &Wills Colombia. He holds an LLM in International Taxation from Leiden University, he can be reached at firstname.lastname@example.org
3. Exchange rate USD$1 x COP$1.800
Article prepared to be featured in the upcoming issue of Global Tax Briefing, a CCH – Wolters Kluwer publication, as part of a collection of articles written entirely by members of the Latin American Tax and Legal Network (LATAXNET). LATAXNET, is a network of top tax and legal specialists all over Latin America. For more information about LATAXNET please go to www.lataxnet.net.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.