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stability agreements

stability agreements in Colombia: now is the time

Upcoming tax changes mean anyone considering investing in Colombia is advised to secure a stability agreement with the government now, argue partner Juan guillermo ruiz and associate Carlos alberto Parra of Posse herrera & ruiz in bogot

he Colombian government has been actively promoting investments in Colombia for a number of years, and one of the instruments used to attract investors has been the stability agreements. However, there is an upcoming tax reform that would seem to change the scope of some tax benefits currently applicable. There is a broad scope of rules subject to stability under the law but, among them, tax rules are key for any financial investment model projection and a principal objective in contracts. a fixed set of rules One of the main difficulties from an investment perspective is the constant change of applicable rules. As a response to this, the Colombian government has agreed to execute contracts with investors in order to guarantee, for a period of time, a legal framework of specific rules critical to make an investment in this country. Such contracts look to avoid any adverse modifications which would be applicable to the investor during the contract term. However, if the legal provision changes in favour of the investor, it will apply. For these reasons, the agreements have proven crucial for investors. Some 40 contracts have been signed and currently there are major companies filing requests for approval of new contracts. As a result, there is a long wait for approvals of stability agreements we are talking about at least a six-month waiting period. In light of a probable tax reform being enacted in the second half of 2010, this means that stability agreements should be requested and executed now. Taking into account the fact that as the tax reform is presented by the government and debated in Congress, it is probable that no further stability contracts will be approved, then the sooner the better for investors.
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In Colombia this type of agreements are known as stability agreements and provide a term of protection from three to 20 years, depending on, among other elements, the value of the investment. The price of the contract is 1 per cent of the investment value, reduced to 0.5 per cent of the investment during pre-operational periods of the project.The price of the contract is calculated based on financial projections presented by the investor. In order to be eligible for this type of agreement, individuals, companies or even joint ventures must invest an amount no less than US$1.5 million. The investor can maintain the terms and application of laws, executive orders, and even interpretations from governmental authorities, regarding certain tax, commercial and even some labour legal provisions. Maintaining them means, as a general rule, the avoidance of the application of any amendment made to legal provisions covered by the stability agreement. It should be noted that with respect to labour legal provisions, changes in law or applicable regulations are immediately applicable, but the entity affected by these changes can claim compensation from the state. An example of rules covered in the agreements already executed are: corporate income tax rate; rules of amortisation of tax losses; tax benefits on investments; tax exempt income; general tax deduction rules; tax rules for mergers and spin-offs; and rules applicable to non-Colombian source income, among others. It is also worth highlighting other tax rulings covered in stability agreements, such as: tax treatment in Colombia of crossborder derivatives; the tax base to liquidate minimum presumptive income tax; and deduction of interest related to certain foreign loans.

However, based on matters of public interest, there are certain laws and rules not eligible for stability agreements, such as provisions related to employee benefits, indirect taxes, financial regulation issued by the Central Bank (Banco de la Republica), and public services pricing. the main tax draw From a Colombian tax perspective, one of the main and most important elements which can be subject to a stability agreement is the 40 per cent tax-free deduction for investment in fixed real productive assets, which has proven of particular interest and benefit to investors. Currently, investors can take this additional tax-free expense, in relation to investment made on fixed real productive depreciable assets.The benefits are for both the company as well as for the shareholders, when commercial profits corresponding to such tax benefits are distributed. This deduction applies even to cross-border purchases of assets between related companies. The benefit also applies to the value of investments made by concessionaries of certain public roads and to assets under leasing. If this tax-free deduction generates tax losses, they can be carried forward without any limitation. However, this tax-free deduction is thought to be one of the benefits that may cease to exist in the near future. From an investor perspective, not being able to take an additional tax expense in order to reduce its taxable income base seems to be a hard blow against the favourable investment climate created by the government over recent years. Currently Colombia offers a suitable and fortunate tax climate for investors worldwide. It is of our view that despite the worldwide turmoil this is the time for investors to take a look of the potential activities in Colombia and protect applicable law through stability agreements. 35