General Incentives

Colombia has one of the most stable economies in the region. Inflation rates have been kept below 30% even during the worst periods. This comparative stability, together with measures that have recently been introduced to open up the Colombian economy (such as the relaxation of exchange controls), is the principal incentive for foreign investors (see Chapter 3 for a discussion of foreign investment and exchange control policy). Various changes in the labor law have also enabled employers to exercise much better control over labor costs than was possible in the past.

The government maintains a policy of open foreign investment. The foreign investor has the same privileges as a national investor and full access to all available sources of financing.

To promote foreign capital flows, Colombia is in the process of supplementing its legal framework with international agreements that protect investments against noncommercial risks. Particularly important in this regard are the activities of the US Overseas Private Investment Corporation (OPIC), the consultations made for the operation of the Multilateral Investment Guarantee Agreement (MIGA), the activities of the International Center for Settlement of Investment Disputes (ICSID), and the development of bilateral agreements for investment protection and promotion.

Tax Incentives

A number of tax incentives are available in Colombia.

Free Trade Zones

To permit the processing and reassembly for the reexport of imported goods, Colombia has established areas known as free trade zones. These zones are regarded as being outside the country's customs territory, even though they are within it geographically. This legal distinction permits goods imported into a zone to receive special treatment under customs, foreign exchange, foreign investment and trade, and tax regulations. For example, no customs duties or value added tax applies until the merchandise is transferred from the zone to Colombian territory for consumption. When free trade zone users export products or services produced in the free trade zone, they may be exempt from income and remittance taxes.

Free trade zones may deal with goods and services, be industrial zones for technological services, or be industrial zones for tourist services. Free trade zones are located in Barranquilla, Bogota, Buenaventura, Cartagena, Cocuta, Palmaseca, Rionegro, Santa Marta, and Uraba. The production and commercial use of goods for export, as well as other services linked to international commerce, are allowed in these zones.

Duty-Free Operations

Duty-free operations are related to merchandise purchased at airports by people traveling internationally. The buyer receives the purchased goods upon boarding the airplane before its departure. These goods are tax and contribution free.

Plan Vallejo

Under a scheme known as Plan Vallejo, imported goods entering the country for the purpose of assembly or transformation in Colombia are exempt from customs duties if the goods will eventually be exported.

Rio Paez

To help the area of the Rio Paez, located in Colombia's southern region, recover from damage caused by an avalanche, the government created a tax haven there that grants new companies incorporated in the region a ten-year holiday from income tax, remittance tax, and customs duties. This exemption is also extended to shareholders.

Portfolio Investments

In the computation of income tax on profits generated in a portfolio investment, the law permits the devaluation of the initial investment and management overhead to be deducted.

Turnkey Projects

The remittance tax applicable to turnkey projects performed by a branch of a foreign company is just 1% of the total value of the project.

Leasing in Infrastructure Projects

If certain requirements are met, a lease in connection with an infrastructure project qualifies as an operating lease. Therefore, such lease payments, including equipment acquisition and interest payments, are fully deductible from income tax when they are paid.

Other Incentives

Tax incentives are also provided for the mining industry, forestry, and agriculture

Banking and Financing

The financial sector consists of the central bank, commercial banks, finance companies, insurance companies, mutual savings and loan associations for housing, public warehouse storage companies, money exchange houses, financial intermediary companies, issuers of credit cards and traveler's checks, and factoring companies.

The responsibilities of the central bank include regulating the nation's money supply, holding the required reserves of member banks, and reviewing the stability of member banks. The Colombian financial system is monitored by the central bank's board of directors. The board establishes economic monetary policies and creates and maintains a favorable economic environment.

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.

For further information contact Mario Andrade, Deloitte & Touche, Santafe de Bogota, Colombia on Tel: +57 1 256 1548, Fax: +57 1 256 1557