In general, business structuring in Colombia is made through the establishment of Corporations or Local Branches of Foreign Corporations. Yet, there are some hybrid entities available for international business purposes. These entities are not separate legal entities from their partners and thus they are considered “transparent” for tax purposes pursuant to Colombian law.

They could be divided into two different groups: (i) Joint Venture Agreements; and (ii) Trust-investment fund type entities.

Joint Venture Agreements (JVs)

Colombian investors can enter into several types of JVs according to Colombian law:

Consortiums and Temporary Unions

Consortiums (Article 7 Law 80 of 1993 - Consorcios) are Joint Venture type agreements in which two or more persons jointly present a single proposal for the awarding, execution and performance of a contract, being jointly liable among them for the obligations arising from the proposal and the contract. Consequently, actions, acts and omissions that occur within the development of the proposal and the agreement will affect all members that comprise it.

Temporary Unions (Article 7 Law 80 of 1993 - UnionesTemporales) are Joint Venture type agreements in which two or more persons jointly present a single proposal for the awarding, execution and performance of a contract, being jointly liable among them for the full compliance with the proposal and the agreement. Nevertheless, the penalties for breach of the obligations arising from the proposal and the contract will be imposed according to the participation of each of the members of the joint venture in the execution of the contract.

Consortiums and temporary unions are not independent legal entities from their joint venture partners and they are commonly used in State contracting and in the development of infrastructure projects.

These agreements require the appointment of a representative who acts before third parties on behalf of the Joint Venture and the agreement shall clearly distinguish the role and participation of each party.

Foreign corporations contending for the development of a project in Colombia may be part of a Consortium or Temporary Union in order to present a proposal and to execute a contract with a governmental entity. Nevertheless, it has to be clear that in most of the cases the terms of reference of bid procedures require foreign corporations to register a Local Branch if the contract is awarded. In other cases, no local branch needs to be established if the purpose is to execute a specific project and no permanent business activities are performed in Colombia.

Finally, in accordance with article 18 of the Tax Code and 20 of law 1607 of 2012, the Temporary Unions and the Consortiums are transparent for tax purposes meaning that: (i) they are not liable to pay income tax or CREE; but (ii) the members or partners in these agreements will be in principle taxable persons pursuant to the general applicable rules.

Participation Accounts Agreements (Contrato de Cuentas en Participación)

This is a type of joint venture agreement that does not create a separate legal entity from its members. It is specifically regulated by Colombian Commercial Code as an agreement executed by 2 types of partners in order to pursue a common entrepreneurship: a silent partner and an active partner. The silent partner makes a contribution to the agreement which is useful for the common enterprise and the active partner conducts the joint business. Thus, the Commercial Law considers the active partner as the sole owner of the business and its responsibility has no limitation; he conducts the business in his name and on his own account and risk. On the other hand, the responsibility of the silent partner is limited to his contribution to the common enterprise, third parties are not aware of his existence and they have no legal recourse against him.

Since the agreement does not create a separate legal entity, it is not subject to income tax or CREE in Colombia. Furthermore, there are not specific tax rules that regulate the tax effects of this type of agreement. This has led to some legal uncertainty on the matter. Nevertheless, the tax authorities have issued several rulings¹ that have concluded the following²:

Since the active partner is considered the sole owner of the business, he has to register all the profits and losses from the business as his own for tax purposes.
The silent partner is responsible for the tax obligations derived from the agreement.
The withholding tax operated by third parties on income paid to the active partner can be used only by him.
The profits corresponding to the silent partner according to the agreement will be distributed by the active partner and constitute an allowable expense for the latter that under the general rules.
The profits corresponding to the silent partner according to the agreement are a taxable income for him. Therefore, the active partner has to withhold with the accrual or the payment, whatever is first.

Non-Specifically Regulated JVs

Companies or individuals are allowed to execute non-specifically regulated JV in order to pursue a common entrepreneurship. Such agreements will not create a new legal entity and will be ruled by what is stated in the respective agreement and by general Commercial Law.

As these joint venture agreements are not considered separate legal entities and are transparent for tax purposes, the parties in the contract will pay taxes taking into account: (i) the general Colombian tax rules; (ii) their participation in the profits and losses of the common enterprise; and (iii) the specific rules agreed upon them.

Trust /Investment Fund Type Entities.

Trusts

Trust Agreements ( contratos defiduciamercantil) are those agreements under which a person called a trustor or settlor ( fideicomitente), transfers one or more specific property to another person, called fiduciary ( fiduciario), who undertakes to manage or dispose of said property in order to comply with a specific purpose determined by the settlor.

These agreements are commonly used in order to develop real estate businesses and only credit institutions and trust companies can operate as fiduciary or trust administrators.

As a general rule, trusts are not liable to pay general income tax or CREE as they are transparent for tax purposes in Colombia. Therefore, their profits will need to be included in the income tax return of their investors or beneficiaries even if the trust does not distribute them. Depending on the type of investor, they will also be liable for paying CREE tax over income generated by the fund.

Investment Funds

Investment Funds (Article 3.1.1.2.1 Decree 2555 of 2010 - CarterasColectivas) are vehicles that serve for the purposes of pooling and managing resources or other type of assets. They are created with the contributions of a plural number of investors and the resources are managed in order to obtain collective economic results. Furthermore, they do not create a separate legal entity.

For tax purposes, investment funds are not liable to pay general income tax or CREE. Nevertheless, profits paid to investors might be subject to such taxes depending on the tax status of the investor and the type of the investment.

With respect to general income tax, investors will need to apply the rule pursuant to which such profits will be taxed as if they had directly performed the activity that generated the taxable income. Furthermore the administrator of the fund will withhold in the moment profits are paid to the investor in accordance with the rules contained in article 368-1 of the Tax Code and Decree 1848 of 2013.

¹E.g., Rulings 41483/2004, 3653/2008, 7795/2013 and 57913/2013.

² Please note that the tax rulings of Colombia’s Tax Administration do not have the binding force of the law, meaning that taxpayers do not have to observe them. Nevertheless, such rulings are binding for the tax authorities. This means that such rulings give legal certainty to taxpayers as the tax authorities may not challenge the position taken by tax payers if they act within their scope.

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