20 February 2013: Employment Killer? – Colombian Response

Compandben Pursuit of ‘Legal Entity’ Question –

Official Response from Colombia –

In a recent blog post ‘Legal Entity – An Employment Killer’ we highlighted a major employment problem which applies to most countries in Africa, Asia and South America (as well as a couple in Europe): Advice will often be given that in order to employ staff a full legal taxable entity is required – for example  a branch, or subsidiary. We declared our plan of action to take this up with Embassies and Chambers of Commerce around the world.

This is a response we received to one of our approaches to official sources. It concerns Colombia:

“Thank you for your email and interest in Colombia.  Please find below our comments regarding your query:

• It is not necessary to have an establishment in Colombia in order to hire employees or being subject to tax withholding. Labor relations executed in Colombian territory are subject to Colombian labor law.

• However, our commercial regulations establish that it is necessary to establish a branch (or constituting a company/a subsidiary), in order to carry on permanent business in Colombia (article 471 of the Commercial Code).

There is no statutory definition of permanent activity. The following is a non exhaustive list of permanent activities (Article 474 of the Commercial Code): (i) opening commercial establishments or business offices, even if they only offer consulting services; (ii) participation as a contractor in projects or the provision of services; (iii) participation in any way in activities related to the management or investment of funds obtained from private savings; (iv) participation in any of the segments or services of the extractive industries; (v) the allocation of a concession from the Colombian Government, a transfer of or participation in the exploitation of the object of this concession in any manner; and (vi) holding shareholder, partner or board of directors meetings, or managing or administrating in Colombia.

• It follows that if the foreign company intends to develop permanent activities in Colombia, it is necessary to establish a branch (or constituting a subsidiary).

Please do not hesitate in contacting me if you need further information.

Kind regards ……”

I have written back:

Thank you very much. I sent e-mails to several countries’ representatives and you are the only one who has replied.

Typically our clients:

• Want to appoint just one or two employees
• They want the employees to work from home
• The employees do not have any executive authority – that is they cannot:
  

1. sign contracts (they can recommend a deal to their “head office” of course)
2. offer or amend prices
3. offer or amend credit  terms
4. hire or fire anyone
5. set up an office in the name of their employer
6. sign up for a car hire or a mobile phone in the name of their employer
7. have any signature authority on bank accounts.
   

I habitually tell firms that of course there is nothing to stop the fiscal authorities of any country from taking an interest in their company and ultimately deeming it a “Permanent Establishment” – retroactively too – but that provided they run their business in line with the above rules they can reasonably say that the company is just carrying out marketing and prospecting for business and does not therefore have to set up a Branch. This is routine in many countries: France Germany, Italy,  Portugal Spain UK, and even in Canada, Kenya, Mali, Zimbabwe, Malaysia, Hong Kong, but I have quite a difficulty getting any Colombian accounting or payroll firms to accept it !

John Tinsley