The Advantages of Duty-Free Zones in Colombia
Colombia has 106 free-trade zones, of which 67 are special permanent single-company zones. It is noteworthy that between 2010 and 2014 there was a marked increase in the number of applications received to operate free zones in Colombia, not only as a mechanism to attract foreign investment, but also to facilitate the management of foreign trade, improve competitiveness and develop the regions where they are located.
The free zone regime in Colombia was established and consolidated by Act 109 of 1985, where they were defined as “national public establishments created to promote foreign trade; generate jobs and foreign exchange flows; and promote regional development.” In 1996, Decree 2233 redefined the industrial free-trade zones, granting them status of extra-territoriality, i.e., exemption from import duties.
In order to comply with the commitments made by Colombia before the World Trade Organization and to attract foreign investment, the national government passed Act 1004 of 2005, which was regulated by Decrees 383 and 4051 of 2007, putting into place the existing regulatory regime in Colombia for managing free zones.
The scope of Act 1004 is defined in Article 1 where it states that “the Free Zone refers to the geographic area encompassed within the national territory, where industrial activities of goods and services or commercial activities are carried out under special regulations on tax, customs and foreign trade. Goods entering these zones are considered outside the national customs territory for the purposes of taxes on imports and exports.”
Article 2 of the Act indicates that free zones in Colombia aim to:
1. Provide an instrument for creating jobs and attracting new capital investment.
2. Represent a development center that promotes competitiveness in the regions where they are established.
3. Develop highly productive and competitive industrial processes, under the concepts of security, transparency, technology, clean production and good business practices.
4. Promote the generation of economies of scale.
5. Simplify the procedures for trade in goods and services to facilitate their sale.
The regime of single-company or special permanent free-trade zones confers the status of a free zone anywhere in the country to a new legal entity (for one company) for the development of an investment project that has a high economic and social impact.
It is important that the entrepreneur interested in accessing this mechanism is very clear about the steps and procedures to apply for authorization as an operator of a special trade zone, which can be granted within their own facilities or as users of a free zone in a location properly delimited, where the beneficiary must go in order to receive the benefits granted within these delimited areas.
In order to understand, it is important to look at what a free zone is: a place previously defined by the interested parties, with a delimited area within a predetermined location, considered a space or free port, where the customs legislation of the country is applied in a differentiated or exempted manner facilitating the entry of goods from external origins for sale or processing without payment of import duties and taxes or customs, for the domestic market or export.
Under the Franco regime, the entry of raw materials, inputs and products are made in the national customs territory are considered an export transaction, as such they are entitled to direct or indirect grants or subsidies that the state grants exports.
A Colombian exporter can access varied forms of assistance, such as:
1. Credit lines granted by BANCOLDEX at market rate, reducing the risk, with easy and timely access.
2. Export promotion through ProColombia, including access to services like opening of new markets, market research, participation in fairs, cooperation to participate in business rounds and advisory services to effectively utilize the benefits of trade agreements negotiated by Colombia.
3. Access import-export systems under the Vallejo Plan mechanism, which is temporary admission free of duties for raw materials, intermediate goods necessary for the production of goods destined for foreign markets.
4. Access to the benefits granted to high export user (ALTEX), Permanent Customs User (UAP) and Special Export Programs (PEX).
5. Create international sales companies.
The benefits of a special free-trade zone
The benefits granted a company operating in a free-trade zone are:
- Partial Income Tax Exemption. A flat rate of 15% is levied in the concept of income tax, representing a benefit of over 57%, given that the general tax within the national customs territory in Colombia is 25%.
The tax is levied on the gross profits of the financial year from January 1 to December 31 of each year. The Colombia tax and customs authority (DIAN) establishes dates for submitting sworn income statement and the months in which taxes must be paid.
Companies located in a free zone and users must be registered with the Mercantile Registry monitored by DIAN to verify company and user fulfillment of their tax obligations.
- Exemption from the import duty and VAT Tax. Raw materials, machinery, furnishings, supplies, packaging, parts and accessories, intermediate and final goods entering the areas of free zones are exempt from import duty and VAT taxes.
The average tariff in Colombia is 8.2% on the CIF value of the goods, a considerably higher level than the world average of 3.4%. In Colombia there are four tariff levels (5%, 10%, 15%, 20%) for most products, and 35% for the automotive sector. For some agricultural products considered sensitive, consolidated within the framework of the World Trade Organization (WTO), there is a 120% duty.
There are three levels of Value Added Tax (VAT) on goods paid by the consumer: 0%, 5% and 16%, the latter a general tax.
- Exemption from income tax for equality, CREE. Tax reform established by Law 1739 of 2014 establishes that companies located in free zones are exempt from the tax income for equality (CREE). The rate defined for this tax is 9% applied on taxable income.
- Exemption from Remittance Tax. Foreign companies’ remittance of profits if they are located in one of Colombia´s free-trade zones are exempt from the 7% tax.
All foreign companies located in a free zone do not pay remittance tax—calculated as a percentage on the amount of profit to turn to drafted abroad—which they would pay if located anywhere else in the country.
- Foreign exchange freedom. Companies can freely manage the foreign currency exchange for their operations in the free zone or may monetize them in pesos according to the regulations that apply to the foreign exchange market, according to Central Bank regulations.
- Temporary admission to the national customs territory. Companies in free zones can send goods that require further processing to the national customs territory for temporary admission, where they can remain for up to a three-month renewable period. This mode applies to industrial users, authorized by the operator in the area.
- Reap the benefits of international treaties signed by Colombia. The products obtained in free zones qualify for discounted duties negotiated in FTAs, after complying with the requirements of origin.
- Taxes on the external value of the goods intended for the domestic market. Goods sold to the domestic market pay import duty tax and VAT on foreign components.
- Elimination of customs procedures. – Procedures relating to shipments and exit of goods are simplified and more agile; no import or export declaration is needed.
- Internal credits. Free-zone users have access to credit in the country.
- Legal certainty. The conditions, rules and benefits is maintained as long as the company holds the status of a user in the free zone.
- Lower costs associated with security and public services. Users can negotiate as a block with the operator for better rates.
- Goods can be stored indefinitely.
- Customs transit and multimodal transit operations available from international ports and airports to free zones and between zones.
- Re-ship abroad without re-loading or re-exporting procedures, without policy or consular visa.
- No official permits required for operations other than those required for the type of activity.
- Percentage of nationalization of goods produced waived
- Percentage of local purchased inputs waived.
In order to use Colombia’s free zones, you must fulfill the following requirements:
- Be a legal person in the country or operate as a branch of a foreign company (notarized documents must be submitted).
- Submit a written request to the operator of the free zone user, attaching resumes of the representative and alternate representative, members of the board of directors and partners.
- Submit a description of the project to be developed.
- Prepare financial and economic feasibility study of the project.
- Capital structure linked to the project, indicating their national or foreign origin.
- If applicable, a favorable opinion of the corresponding entity regarding the project’s environmental impact.
- Comply with documentation and certificates required based on to the activity to be necessary
For permanent “single-enterprise” free-zone status, a company must submit their application to DIAN and, as of December 2015, to the Ministry of Commerce, Industry and Tourism as well. The application must meet the following requirements:
- Been legally constituted for at least six months before submitting the application.
- The investment must be made after receiving approval of the free trade zone
- The new investment should be at least US$ 38.6 million and create at least 150 direct jobs. For every additional US$ 5.9 million in investment, the number of jobs required is reduced by 15 (maximum reduction: 100 jobs).
- Submit to the Technical Secretariat of Free Zones Intersectoral Commission, the master plan, feasibility study and if necessary request plan prior concept of the project area from DIAN.
- Financial feasibility study to determine if the project is viable.
- Market research to identify strategies and opportunities for the project.
- Nominate an operator in the free zone.
- Present a program for closing the company’s facilities.
- Approval of the application: prior to December 2015, DIAN issued a resolution; as of December, the Ministry of Commerce, Industry and Tourism approves applications.
The regime is very interesting for exporters and importers alike. If you are interested in learning more about this topic, take advantage of the benefits of your MasterCard Biz membership and submit a consulting inquiry—free of charge—an exclusive service for MasterCard Biz customers in the Caribbean.
© C&A GROUP SAS, Carlos Camacho. Published with permission granted to MasterCard and RGX.