This article has been written by Romit Nandan Sahai pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
In the eighties, Latin America was characterized by an economic crunch; almost all of the countries were roped in with huge external debts, sluggish and often receding GDP, and very little influx of Foreign Investment. However, for one particular country, this was not the story, at least not for long. Colombia walked away from the economic crisis that was plaguing its neighboring countries through deliberate changes in its fundamental economic wisdom. Throughout the nineties, Colombia took an active step to move away from its old protectionist / Closed Economic Model to streamline itself with the Open Commercial Market Model that was prevalent in the West to attract FDI.
The backdrop of the investment scenario in Colombia
Colombia, for much of the period since 1945, was sustaining its economic growth on unskilled labour and export of its wealth of natural resources. During this time, Colombia’s FDI inflow was non-existent, averaging at around $50 million USD till the 1970s; this was mainly owed to the restrictive stance of its legislation on foreign investment. However, it was the 1980 external debt crisis that propelled Colombia’s FDI to grow three folds in the next few decades. By 2005, Colombia was the fifth largest economy in Latin America with a staggering GDP of $102 Billion and an average per person GDP of $2,277 USD.
Development of foreign investment legislation in Colombia
This section will trace the legislative history of the investment laws in Colombia to highlight the change in Colombia’s attitude from regressing foreign investment to embracing it.
Decree 444 of 1967 of Colombia
On a plain reading, one would think that foreign investment was not possible in Colombia prior to the 1980s. But that was not the case; FDI did exist in Colombia as long as back in 1967 but with lots of strict regulations.
The first legislation that originated FDI in Colombia was the Decree 444 of 1967. It laid down the requirements that Foreign Investors had to meet before they could invest in Colombia like:
- Getting the Prior Approval of the National Planning Office
- Registration of Investments in the Exchange Office
- Repatriation of any Profits gained on investment. (The profit remittance was limited to only 10% of the capital, and there was no increase in repatriation even if there was an increase in the investment).
- Passing the evaluative standards for determining if the Investment would be Convenient in terms of:
- Employment generation,
- Net Effect in Balance of Payments,
- Use of Raw Materials & other Domestic Products & By-Products
- Whether the Investments intends to increase exports & export diversification.
This first legislation of Colombia as evident was quite restrictive, it did not allow investors to remit profit and the main standard that the investment was put against for approval was whether it would be beneficial to Colombia or not.
Decision 24 of 1973 of the Andean Pact
As the economic crisis was brewing in Latin America, the Andean Common Market Group, more commonly known as the Andean Group, was established in attempts to avert the crisis by promoting innovation & industrial progress. Under the Pact, a Common Foreign Investment & technology Licensing Code was enacted, better known as Decision 24 of 1973, which was supposed to promote economic growth among the Andean Countries through Regional Cooperation.
The Andean Commission was of the view that it was FDI that was responsible for Latin America’s nearing economic doom, and through the Pact, they aimed to remove the ‘negative effects of FDI’ so as to better their economic state. Decision 24 was enacted to give effect to this very same object by imposing even more restrictions in foreign investment like:
- Foreign Investment was completely restricted in any area that was already being carried out by Domestic Corporations.
- Any Foreign Enterprise already established in any Andean Country had to sell 51% of its stake to the Nationals of that Country in order to stay in the Free Trade Scheme of the Andean Group.
- Remittance of Profits was limited to just 14% of the net investments.
- FDI was also completely restricted in the Banking, Insurance & Public Utilities sector.
The Andean Commission took a contrary stance on foreign investments, it viewed it as an evil that depreciates a country’s growth and economic prowess. It instead wanted to make the Andean countries self-sufficient on their own and thus restricted FDI even more.
Decision 220 of 1987 of the Andean Pact
After the Economic Debacle of 1986, the Andean Group realized that completely shutting down Foreign Investments in favour of Closed Regional Cooperation was a bad idea, and so they repealed Decision 24 and replaced it with Decision 220 a year later. The new law removed several restrictions and overhauled areas of FDI, Registration Requirements, Repatriation of Profits. Key changes introduced under its ambit were:
- Foreign Investors could be allowed after approval from the Country to acquire Shares of Domestic Corporations & Investors.
- Remittance of Profits on Foreign Investments was allowed up to 20% of the net investment and can be modified to a higher percentage on approval.
- The requirement of selling a 51% stake was removed by Colombia.
This was the turning point from where not only were foreign investments permitted but were also now being encouraged as the Andean Commission had realized how important FDI is for technology enhancement and economic growth acceleration.
Decision 291 of 1991 and Economic Liberalization ‘Plan Apertura’
The Andean Commission, after loosening its restrictions on Foreign Investment in 1987, completely removed all of them in 1991 with Decision 291 in attempts to stimulate the inflow and circulation of capital. Under it:
- All Andean Countries now had complete freedom to formulate and adopt rules governing FDI in their countries.
- Freely transferable & convertible foreign exchange was introduced for repatriation and remittance of all profits.
- Sale or reduction of investment or liquidation was made easier and tax-free.
- Further, Foreign Investors were vested with the same rights as National Investors.
Following suit with the changes made under the Andean pact, Colombia undertook more initiatives in order to change its Foreign Investment Schemes. In 1991 Colombia introduced its Economic Reform Plan called Apertura, which introduced significant changes that played a pivotal role in Colombia’s Foreign Investment growth:
- It removed its tariff barriers,
- It also removed a significant portion of its licensing and registration restrictions,
- It introduced new regulations to make foreign exchange & investment easier,
- And it undertook the promotion of ‘Internationalisation of its Economy’ by integrating Colombia with Latin America and the Caribbean.
With Apertura, Andean countries were finally free to decide and tailor the FDI policies according to the needs and requirements of their country. And it was this very move that had resulted in Colombia becoming the hub of FDI in South America.
Scheme of foreign investment in Colombia
This section will focus on the present stature and principles of the Colombian Government in regards to foreign inflow, investment, and foreign investors. It will highlight not just the regulatory authority but also the means and modality of investment and the rights and assurances to the Investors.
Establishment of COMPES
The development of the Foreign Investment landscape in Colombia was done through the enactment of Law 9 of 1991, which gave the Colombian Government’s Executive Branch wide-reaching powers to regulate and foster the Foreign Investment Landscape. Law 9 introduced several changes like:
- Under it, a Government Agency called Consejo Nacional de Política Económica y Social (COMPES) was established to regulate the schemes of investment.
- It mandated that Foreign Investors will be treated the same as National Investors.
- Conditions of remittance of Profits will be standard for all investors; there will be no disfavor or favour to Foreign Investors or National investors.
With COMPES, the government delegated the policy regulation to them and this would ensure that foreign policies were not only being regularly updated but also that they were up-to-the international standards.
Resolution 51 of COMPES
In exercise of the powers given to COMPES, Resolution 51 was brought into force which is the Heart and Soul of Colombia’s Foreign Investment Scheme. Resolution 51 is the Colombian Statute for Foreign Investment, and it has undergone several revisions and modifications.
Article 3: Principles guiding foreign investment in Colombia
Colombia’s Foreign Investment Policy is tailored around three pivotal principles. They form the genesis of foreign investment in Colombia and are as follows:
- Principle of Equal treatment: It mandates that Foreign Investments in Colombia will be subject to the same treatment as National or Domestic Investments. It prohibits preferential or discriminatory treatment.
- Principle of Universality: It states that Foreign Investments may be made in any proportion in all sectors of the Colombian Economy except those sectors which are prohibited.
- Principle of Autonomy: It provides Automatic approval for investment: Foreign investors may invest without prior authorization in all sectors where FDI is permitted.
These principles form the absolute core of every single foreign policy. Any new law or policy change brought by COMPES would have to be deliberated on these three principles.
Which investments are categorized as foreign investments?
Much like everywhere else, Colombia also classifies its investment into two categories based upon the nature and scope of investment. They are categorized as follows:
- Foreign Investments in Colombia are called Foreign Capital Investments.
- Article 2 states that Foreign Capital Investments in Colombia made by Individuals, not residents of Colombia & Colombian Residents Abroad are Foreign Investments.
- Article 4 states that Foreign Investments include Portfolio Investments (investments in Colombian Stock Exchanges) & Foreign Direct Investment.
What are the methods of Foreign Direct Investment in Colombia?
Colombia is also quite expansive in its modalities of foreign investment, and as such, FDI in Colombia can take place in the following ways:
- Article 7(a) Capital Contributions: These Contributions may be Tangible like goods, imports of machinery, equipment’s or Intangible like R&D, Technology, Trademarks, Patents, etc.
- Article 7(b) Monetary Contributions: These include import of Foreign Currency Exchange, Foreign Currency Convertibles or acquisition of shares & rights.
- Article 7(c) Contributions made by the import of Convertible Foreign Exchange for Purchase of Real-Estate.
Foreign investments allowed in which sectors?
It is also very pertinent for foreign investors thinking of investing in Colombia to take note of where Foreign Investment is allowed. The majority of the sectors in Colombia permit foreign investment, but such investments are also automatically approved. The few sectors which are not as open are:
- Article 9: It states that Foreign Investment is allowed in most sectors without any prior approval except those sectors enumerated in Article 8.
- Article 8: It prohibits Foreign Investments in the following areas:
- Défense & National Security
- Processing & Disposal of Dangerous or Radioactive waste not produced in Colombia
COMPES is also authorized to identify any sector and prohibit investment in it.
- Besides the sectors listed in Article 8, there are two sectors that are subject to special provisions they are:
- Financial Sector and
- Hydrocarbons & Mining Sector.
Colombia thus has very few sectors where FDI is prohibited or requires prior permission. This has allowed investors to be able to quickly invest in the country without fear of change in circumstance or economic stability.
Approvals & registration requirement
While foreign investment in Colombia does not require prior approvals, there still are few requirements that need to be met out. But such requirements can be fulfilled even after an investment is made. Some of the requirements are:
- Article 9: Provides that in all sectors where Foreign Investment is allowed is approved automatically and does not require any conditions or complicated procedures.
- Article 15(a) states that registration is a necessary requirement for all Foreign Investments. Any Foreign Capital Investment, including any increase or modification or reinvestment of profits, has to be registered with the Central Bank (Banco de la República).
- The registration must be requested by the investor within three months after the date when the investment is made.
- However, the registration period can be extended to 6 months upon the request with reasons for it by the interested party.
- Any investment that fails to register will not be allowed to remit and sum invested or any profits from it to abroad. But it will allow reinvestment of the funds in Colombia.
Exchange rights & guarantees to foreign investors
Foreign Investors who have invested in Colombia, besides the assurance of being treated equally and having autonomy, have certain more guarantees by the Colombian Government which shall not be taken away. These are:
a. Chapter IV of Resolution 51 provides certain rights & guarantees to all investors for their investments made in compliance with the law.
b. Article 16 states the following rights of Foreign Investors:
- Foreign Investors have the right to freely remit abroad the convertible currency and net profits produced by their investment based on their balance sheets.
- Foreign Investors have the right to reinvest their profits, to retain remissible profits which have not been distributed.
- Foreign Investors also have the right to capitalize on any remissible profits.
- Foreign Investors have also been vested the right to remit abroad freely any sums received from the sale, liquidation, or reduction of their investments.
Article 17 provides the guarantee that the remittance of profits and reimbursement of investments will not be changed to the disadvantage of the investors except when the international reserves are less than the last three months of imports and that too the change would be temporary.
In order to not repeat the previous policy mistake of prohibiting or restricting remittance of profits, the Colombian government, learning from their mistakes, engraved a legal guarantee to investors for remitting their profits back.
Applicable laws & dispute resolution jurisdiction on foreign investments
The laws that would be applicable to foreign investments in Colombia are based on preference to international treaties, agreements, and standards and only where no such international law exists will the laws of Colombia apply.
- Chapter VII deals with the laws which will be applicable to the Representations made by Foreign Investors, to any Sanctions on Foreign Investors, and for the Control & Supervision of Foreign Investments.
- Article 23 provides that the Colombian Legislations will be applicable for the resolution of any disputes related to the Statue of Foreign Investment.
- It also furthers states that if there are any International Treaties or Agreement for the same, then those will apply.
- The Colombian Courts & Colombian Arbitration Rules will have jurisdiction on every dispute related to Foreign Investment unless there are international treaties or agreements for the same.
Conclusion
It is very evident that Colombia’s active measures to overhaul and streamline its Foreign Investment Scenario has paid off. Colombia, since the adoption of Resolution 51, has witnessed a steady attraction and growth of Foreign Investment. Its provisions of Automatic Approvals, barrier-free entry, prohibition in very few sectors, and Free remittance of sums & profit abroad have greatly helped in overcoming the issues it earlier faced due to its closed and restrictive approach toward foreign investment.
References
[1] Jocelyn S. & Jessie R., Latin American Debt Crisis of the 1980s, (November 22, 2013) Federal Reserve History <https://www.federalreservehistory.org/essays/latin-american-debt-crisis>.
[2] United Nations, Investment Policy Review: Colombia, (July, 2006) United Nations Conference on Trade and Development <https://unctad.org/system/files/official-document/iteipc200511_en.pdf>.
[3] Global Tenders, Economy and Business Opportunities from Colombia, (June 12, 2021) < https://www.globaltenders.com/economy-of-colombia.php/>.
[4] Steven J. & Alfonso W., Andean Pact, (June 1, 2021) Encyclopaedia of Latin American History & Culture <https://www.encyclopedia.com/humanities/encyclopedias-almanacs-transcripts-and-maps/andean-pact>.
[5] Santander, Colombia Foreign Investment, (August 13, 2021) <https://santandertrade.com/en/portal/establish-overseas/colombia/investing>.
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