Investing In Colombia

Market Entry Strategy

• Secure an agent, representative, or distributor in Colombia, which requires a contract that meets the provisions of the Colombian Commercial Code.
•  Focus on formality, personal relationships and trust when negotiating agreements and contracts.
•  Direct marketing and personal visits supported by such factors as technological advances in internet communications, printing and distribution of materials to prospective customers are already popular in Colombia.
•  Communicate with the U.S. Commercial Service of the U.S. Embassy in Bogotá for specific concerns.
• Keep good after-sales service arrangements, not only in the original buying decision, but also in maintaining the sales relationship. Warranties on imports are important factors that support after sales service in Colombia.
• Products and/or service quality, financing, and price supported by extensive advertising campaigns play an important role in Colombians’ buying decision.

Using an Agent or Distributor

Foreign firms interested in exporting to Colombia’s private sector are not required by law to secure local representation, however, Colombians prefer to deal with those companies with local representation to secure after-sales servicing. For sales to the government, however, whether direct or through international tenders, Colombian law requires that foreign bidders have legal representation in Colombia.

Securing an agent, representative, or distributor in Colombia requires a contract that meets the provisions of the Colombian Commercial Code. This contract must be registered with the chamber of commerce where the agent/representative is located. Agency or representation agreements do not require government approval. An agent or representative differs from an appointed distributor. The former is legally associated with the principal and may enter into legal agreements on the principal's behalf, while the latter may act totally independently from the principal. Distributors may purchase items from a foreign supplier, wholesaler or jobber, and then sell them locally at their own discretion and risk.

When negotiating agreements and contracts, one should focus on formality, personal relationships and trust. Colombians want to know their supplier or partner personally before deciding whether he or she is trustworthy. U.S. companies seeking agents, distributors or representatives in Colombia should consider the broad range of CSoffered services developed to help U.S. firms enter new markets.

Establishing an Office

The most common forms of business in Colombia are corporations, limited liability partnerships, and branches or subsidiaries of foreign corporations. The process of establishing a business in Colombia has been simplified considerably by a new program of the Bogota Chamber of Commerce, with the sponsorship of the Inter American Development Bank/IDB and several Colombian public and private entities. CS Bogota advises U.S. firms to obtain legal advice from a Colombian law firm or accounting firm. A list of attorneys and accountants is available from the U.S. Commercial Service of the Embassy.

Branch of a Foreign Corporation: A branch operates under the rules applicable to Colombian corporations. Its liability is limited to assigned capital. It must be registered with a Notary Public in its place of domicile. The following documents also must be registered with the Notary Public: copies of its incorporation document, its bylaws, the resolution or act agreeing to the establishment of the branch, and documents evidencing its existence and legal representation.

All companies (including branches of foreign companies domiciled in Colombia) must register themselves and their accounting books, minutes, and other required documents by law in the Commercial Register of the chamber of commerce in the cities where they
are located. A few steps should be followed in establishing a business in Colombia:

• Appointing a legal representative in Colombia who will be responsible for preparing documents and carrying all necessary steps with a Notary Public and Chambers of Commerce. There should be a corresponding Act for this appointment and duly registered with a Notary Public.
• By-laws (Escritura Publica) should be prepared and registered with the Notary Public, stating the purpose of the firm, capital, legal rep, etc. This step would take two to three days and about 0.0027 percent fee (fees in general will depend on the amount of capital being registered) plus a 16% Value-Added tax will be charged.
• Registration and legalization with a Chamber of Commerce may take about four days including the time for obtaining an Income Tax Identification Number (NIT), and subject to a 0.7 % fee on the capital registered plus other minor charges.
• There will be forms and other paperwork with minimum charges and processing time, opening of bank accounts, transfer of foreign currency, etc. In total, it should not take more than three weeks to incorporate in Colombia.

Franchising

Franchising is gaining importance in Colombia as a business development and marketing system. The Colombian market, which encourages foreign investment and international trade, offers good business opportunities for U.S. companies in the franchising sector.

Relationships between franchisers and franchisees are regulated by the terms of freely negotiated contracts, provided that they are consistent with the Colombian Commercial Code and the applicable legal framework. Emphasis is given to the clear description of the parties’ mutual rights and responsibilities. Competent legal advice is essential during all steps of a franchising negotiation.

Currently, there are approximately 107 franchises in Colombia. The United States is the foreign franchise leader in Colombia with an estimated thirty percent market share. Colombia is first with sixty-two percent, and other countries total about eight percent. Colombian and foreign franchising companies generate approximately 11,000 direct and 45,000 indirect jobs through approximately 1,200 outlets. COINVERTIR, a Colombian government institution that promotes investment in Colombia is a good contact for finding prospective partners and franchisees.

Direct Marketing

Direct marketing is rapidly gaining popularity in Colombia. Its growth has been fueled by such factors as technological advances in printing and distribution, an increased use of credit cards and changing lifestyles. Also, more women are entering the job market and seeking ways to save time in making household purchases. Many stores and large distributors are producing their own catalogs for phone, mail orders, e-mail or the web with products that can be paid for with cash, check, debit or credit cards.

E-commerce is a potential marketing alternative. CS Bogota suggests that U.S. companies obtain legal advice before entering into e-commerce sales or contractual agreements. Internet users, Internet and catalog sales in Colombia are rapidly growing. Although on-line shopping has not spread as quickly as in other countries, courier services are available for legal credit card purchases in the U.S. to be shipped to addresses in Florida and then on to Colombia. Direct shipping to Colombia is also being done.

The popularity of International direct marketing is growing in Colombia. U.S. firms can take advantage of improved legislation on postal, express or courier shipments. The Colombia Customs Code contains Postal and courier shipping rules. Certain postal shipments (correspondence, postcards, and printed materials) are exempt from licensing requirements and payment of duties. Courier or express shipments with a value of less than $1,000 and a weight of under 20 kilograms are freely imported and classified under HS 98.03.00.00.00, but are subject to a 10 percent CIF tariff and 16 percent VAT on the CIF-duty-paid value of shipments. Rules apply to both air and surface shipments.

Joint Ventures & Licensing

Globalization has created a pressing need for a range of new technologies in Colombia. Although joint ventures and licensing agreements have been important business practices in Colombia, they have become even more important recently as businesses strive to become more competitive.

Leasing is playing an important role in developing and modernizing domestic industry, including several joint export-oriented units. Colombian industry urgently needs to modernize many of its processes (which imply product diversification for alternative markets through changes in production facilities) and to upgrade obsolete equipment. To reach these goals, Colombia needs to acquire new capital equipment and state-ofthe-art technology.

Leasing is also an important mechanism utilized in Colombia for productive financing, as reflected in the amounts of the total portfolio market of the financial sector. The importance of leasing is also reflected in the formation of gross capital assets. One of the essential characteristics of leasing, as a financial service within the framework of the Colombian economy, is that it is an adequate tool for investment financing under industrial re-conversion policies.

Selling to the Government

Government entities, institutes, industrial and commercial enterprises must follow the provisions of Law 80 of October 31, 1993 which regulates purchases made and contracts entered into by the government and state industrial and commercial enterprises. Under Law 80, Colombian government contracting agencies must select contractors through a public competitive bidding process. There are a few exceptions to this rule, which are clearly established in Article 24 of Law 80. Some of the exceptions under which a direct contracting procedure is allowed are:

Contracts for minor amounts - - minor amounts are expressed in multiples of the established Colombian legal minimum monthly salary (currently about $166 – without the additional benefits and/or compensation pay). A minor amount may range from 25 minimum monthly salaries to 1,000 minimum monthly salaries, depending on the annual budget of the contracting entity. For instance:

1. If the annual budget of the contracting entity is less than or equal to 6,000 minimum monthly salaries, under direct contracts it is allowed to acquire goods and services that do not exceed 25 minimum monthly salaries in value;
2. If the annual budget of the contracting agency is equal to or exceeds 1,200,000 minimum monthly salaries, under direct contracts it may purchase goods and services that do not exceed 1,000 monthly salaries in value;

Loan agreements: inter-agency administrative contracts; professional, scientific and technological services; and evident emergencies and whenever bidding is not awarded for reasons such as: a lack of proposals; when the bids do not meet the terms of reference or specifications; when there is only one bidder; when products originating in or destined to agriculture or livestock breeding are offered through legally organized commodities exchanges; and in contracts executed by state (government) entities for the rendering of health services.

Foreign individuals not domiciled in Colombia or foreign private legal entities without a branch in Colombia that are interested in government contracts must provide a copy of their registration with the corresponding registry in their country of origin. They must also submit documents proving their existence and incumbency whatever is the case. In addition, they must appoint an agent or legal representative, domiciled in Colombia, which is duly authorized to bid on and execute the contracts as well as to represent the foreign enterprise in and out of court.

Under Law 80, Colombian bidders enjoy preferential treatment. Given equal contracting conditions, domestic goods and services are preferred. The Colombian government has strongly recommended those all-official entities, and decentralized government industrial and commercial organizations “buy Colombian.” Under similar conditions, for all Colombian government acquisitions preference must be given to Colombian products and services whenever competitive prices and quality are found versus “foreign” products and services. The same procedures must be followed in connection with concession and association contracts signed with Colombian government entities. When foreign firms bid under equal conditions, the contract is awarded to the firm that includes a greater number of domestic workers in its workforce, more domestic content in its products, and better technology transfer conditions.

As a general rule, all individuals and legal entities wishing to enter into contracts with state entities must register with the chamber of commerce in their jurisdiction in order to be qualified, classified, and rated in accordance with the provisions of Law 80. Foreign bidders and/or suppliers of equipment and services are also required to register with a Colombian chamber of commerce under the so-called “Registro Unico de Proponentes” (Bidders Register) and, in most instances, must be pre-classified and pre-qualified by the chamber and, in some cases, by the Colombian government contracting agency. The requirement for both the "Bidders Register" and the "Merchants Register" with a local chamber of commerce is to be replaced by a "Sole Entrepreneurial Register" (Registro Unico Empresarial/RUE), which comprises a more complete profile on all business people, businesses, enterprises, contractors and bidders for qualifying for executing contracts with government entities.

A system known as SICE/Sistema de Informacion de Contratacion Estatal (State Contracting Information System) is a database that was introduced on May 1st, 2002. Its purpose is to register and obtain a certificate for all foreign and domestic suppliers of all types of commodities and services, their products and prices in order to be able to enter into contracts with state agencies and industrial and commercial enterprises. One can also register via Internet in accordance with CUBS/Catalogo Unico de Bienes y Servicios (The Sole Catalog of Goods and Services) which is a listing of goods and services classified, standardized and codified with the products that may be acquired by government entities. Registration is subject to a minimal fee. SICE is expected to become a database with 3,000 municipal, state and national entities and more than 100,000 suppliers. For additional information on SICE and on registering, interested parties can access the following web sites: www.sice-cgr.gov.co; and www.telecom.com.co.

Although Law 80 has made the government contracting system more dynamic, Colombia is still not a signatory (it acts as an observer) to the WTO (World Trade Organization) government procurement code. There have been frequent complaints of a lack of transparency in the letting of major government contracts. The RUE and SICE systems explained above are expected to become useful tools for better transparency in the process of contracting with government entities.

The Colombian government and congress are also studying possible changes to be introduced to the contracting statute. Presently a bill introduced by the Uribe administration is working its way through the Colombian Congress to introduce changes to this code. This bill, purportedly submitted among other reasons, to meet the nation’s commitments to the IMF, seeks to give greater power to the Comptroller’s Office (Contraloría) to nullify contracts and ensure transparency in all phases of a project. Also, the bill would derogate provisions exempting certain sectors or entities from submitting to general contracting regulations. The bill also would establish on a national level the Information System on State Contracts, Sice, which aims to give the general public more information on the contracting process, thereby reducing opportunities for corruption. Cali was the first city to implement this online system in July 2004.

The Colombian Government procurement statute seeks to establish simple procedures based on the principles of transparency and objective selection; it provides equal treatment to foreign companies on a reciprocal basis. Although liberal, the procurement statute impedes complete access by imposing a requirement for certifying reciprocity. The principle of reciprocity embodied in Laws 80 and 816 ensure national treatment under the same conditions for Colombian bidders in other countries. The U.S. Government is unable to provide such a certificate, as each of the fifty U.S. states acts as a separate commercial jurisdiction. In the meantime, the Department of State provides a certificate that U.S. companies may offer in lieu of a statement certifying reciprocity. Certificates can be obtained from the Economic section of the U.S. Embassy in Bogota. Companies requiring this document should be prepared to provide the following information: their company name, tender name, tender number, name of the Colombian entity letting the tender and the general purpose of the tender.

Distribution & Sales Channels

Colombia offers a full range of sales channels to consumers, with various distribution methods depending on the type of product offered. These methods range from traditional ones in which wholesalers sell to traditional shops which then sell to the public, to more sophisticated methods, such as large department stores and hypermarkets, which have rapidly gained popularity.

While most imported items, especially capital equipment and raw materials are still purchased through agents and distributors; some large domestic manufacturing companies import most of these items directly. Furthermore, some major distributors, wholesalers and end-users are opening purchasing offices and warehouses in the United States and contacting suppliers and manufacturers via the Internet, thus avoiding intermediaries in Colombia.

Consumer products from countries worldwide are available in Colombia at acceptable price levels, but still many enter the country as open and technical contraband can be attributed, in part, to the high cost of importing. The Colombian government has attained encouraging results in its effort to reduce contraband. Free trade zones and bonded warehouses are commonly used for imported merchandise and processing of exportoriented goods.

Selling Factors & Techniques

The United States traditionally has been Colombia’s main trading partner as it is a “natural” market for U.S. products and services. Among the factors favoring U.S. exports are: the geographic proximity of the two countries; most Colombians who study abroad prefer to study in the U.S.; the large number of U.S. firms operating in Colombia; and the technological leadership that the U.S. maintains in many key industrial sectors. U.S. suppliers should be aware, however, that their ability to compete in Colombia could be hampered by unfair business practices such as contraband, counterfeiting, intellectual property rights violations, under-invoicing, money laundering, and dumping. If a company has specific concerns, it should check with the U.S. Commercial Service of the U.S. Embassy in Bogotá.

Quality, profitability, functions, financing, and price play an important role in the buying decision. The after-sales service arrangement is significant, not only in the original buying decision, but also in maintaining the sales relationship. U.S. suppliers must either have their own representative with adequate operations or obtain a Colombian representative who can offer sufficient after-sales service. To obtain better prices, guarantees, parts, and after-sales servicing, Colombians prefer to deal directly with manufacturers rather than through outside representatives, jobbers, or trading companies.

Regarding major projects, the earliest possible involvement by U.S. firms in Colombia's upcoming major infrastructure programs are of the utmost importance. U.S. manufacturers and construction, service and engineering companies should initiate contact as soon as possible with government entities and private firms, which have indicated plans, or even just interest, in developing projects. Once a project has gone to tender, it is usually too late to be competitive if the supplier company has not already in some way become involved. As mentioned in the section “Selling to the Government”, a local agent or legal representative is required for all government contracts. Therefore, U.S. companies interested in government procurement or contracts should appoint an agent or representative as quickly as possible.

Electronic Commerce

E-commerce development prospects are promising in Colombia since congress approved it. The U.S. and Colombia also have signed an e-commerce agreement that emphasizes open and fair e-trade. E-commerce has reached a stage in which it is critically important to agree on international standards in the areas of electronic signatures and authentication to avoid the emergence of discordant standards as to what constitutes a "digital signature" or what constitutes valid certificates in different jurisdictions. Decree 1747 of 2000 regulates Law 527 of 1999 and establishes rules on certification entities, certification and/or certificates, and digital signatures. The Superintendent of Industry and Commerce has been given full responsibility on authorizing certification entities, carrying out their inspection and control, and on imposing necessary penalties. It also oversees that they comply with the law. Guaranteed security is a critical factor for consumers considering an on line transactions.

Several institutional and societal factors have combined to restrain more rapid growth of e-commerce in Colombia. However, U.S. e-commerce companies should note the overall potential offered by the Colombian market. Colombia’s B2B (about 90 percent of the E-Commerce market) will likely offer U.S. companies the greatest opportunities for export sales. Most Colombian e-commerce will take place through North American vendors, and great opportunities exist for large and small U.S. companies and the home office community that can efficiently utilize e-commerce technology to their benefit.

Trade Promotion & Advertising

The introduction of new consumer products to the Colombian market usually requires an extensive advertising campaign. Companies’ marketing strategies frequently include media ads, and printed technical and sales articles in a combination of media -- radio, television, cable TV, newspapers, periodicals, trade magazines, and the Internet--announcing sales and special offers. As a major entertainment form for Colombians, television is also one of the most effective media for advertising in Colombia. Some companies also are effectively using a variety of marketing techniques to promote consumer products, including raffles, discount coupons, and accrual of points to exchange for a variety of products and/or services. Credit card holders are also entitled to market promotions and discounts, as well as subscribers to some newspapers, magazines or cellular services. Promotional seasonal “sales” have also become popular in Colombia throughout the year, usually on special holidays such as Valentine’s Day (which is a different day in Colombia than in the U.S.), Father’s Day, Mother’s Day, etc. Overnight shopping in most malls during long weekends is being introduced in major urban centers.

Colombia has about thirty important daily newspapers (the three principal daily papersare in Bogotá), a large number of trade and  business papers and magazines, nationwide and regional television networks, AM and FM radio stations, and private local cable TV companies. Also available is a great variety of business, industrial and trade publications from most Colombian industrial and trade associations and private publishers.

Pricing

Colombian consumers buy many imported products, but the cost of importing can be high. Consumers may pay between 80 percent and 120 percent above the FOB price of imports. The landed price of most consumer goods with local production is calculated by estimating 15 percent of the FOB price for freight & insurance, warehousing and other documentation costs, 20 percent CIF import duty, plus a 16 percent value-addedtax/ VAT (assessed on the CIF-duty-paid value of most imports), thus putting their price at an additional 60 percent over the FOB price.

Additional import costs for capital goods and raw materials are much less (between 33 percent and 53 percent) with import duties for these items of between zero percent and five percent for capital goods, and 10 percent to 15 percent for raw materials. Department stores and supermarkets extend concession contracts to individuals and companies by permitting promotional space in their facilities to promote and sell consumer goods. These promotions include both known and unknown labels, and the goods are offered at discount prices in some cases. If the products are unknown in the market, the department stores or supermarkets may place them in the stores on a demonstration basis for a given period of time and will only place new orders if the products are well accepted by the public and sell relatively quickly. The largest supermarkets also carry their own labels at discount prices.

Suppliers to large store chains, supermarkets, and hypermarkets must provide certain guarantees on the continuity of products offered to avoid foreign surplus stock or remnants entering the Colombian market (i.e., foodstuffs, textiles, apparel, appliances, etc.). Imports of old or used clothing, closeouts, irregulars, off-season or expired merchandise are prohibited.

Sales Service & Customer Support

After-sales service and customer support is a decisive purchasing factor in Colombia. Government and private firms often request that their potential suppliers provide testimonials regarding satisfaction of other clients with equipment and after-sales service.

Warranty imports is an important factor that supports after sales service in Colombia. Warranty imports including replacement parts and components under warranty by a foreign manufacturer or supplier are exempted from the payment of Colombian import duties. Decree 2685 of December 28, 1999 is the new Colombian Customs Code that took effect on July 1, 2000. Per Section IV, Article 141 of this Code, all merchandise orgoods that have been repaired abroad or new ones that will replace items previously exported because they were found to be damaged, imperfect, having malfunctions or with an unsuitable end-use, and are under warranty by a foreign manufacturer or supplier, may be imported into Colombia without the payment of import duties. All original import and re-export documentation should be kept and presented with replacement imports to clearly identify goods, together with a valid warranty document, transport documentation, etc. A warranty import process must be completed and import declaration documents presented within a maximum of one year from the date the items subject to repair or replacement were exported.

In some instances, Colombian Customs may authorize the importation of replacement goods without the requirement of having previously exported the damaged goods or parts for replacement and/or repair. However, Customs will require a surety or warranty bond equivalent to 100 percent of custom duties paid, valid for one year from the date replacement goods are being imported. This would ensure that damaged goods would then be exported within the following month from the date replacement goods was reimported. Article 141 does not mention replacement parts - it refers to goods or products. However, the Customer Services Division of Colombian Customs has confirmed that this article covers all procedures for warranty imports including replacement parts and components. When processing damaged parts exports and replacement parts imports, the parts must be precisely identified, i.e. description of the items, their serial numbers, reference, etc.

Protecting Your Intellectual Property

Economic liberalization (a process known as “Apertura”) opened the Colombian economy to international trade and capital inflows by slashing tariff duties, eliminating non-tariff barriers, actively negotiating free trade agreements, and reforming foreign exchange and tax legislation, labor regulations and the foreign investment regime. The “Apertura” has led to the privatization of state enterprises, ports, railroads, and banks. Liberalization has progressed furthest in telecommunications, accounting/auditing, energy, and tourism. It has occurred to a lesser extent in legal services, insurance, distribution services, advertising, and data processing. There is a constant, if gradual, attempt underway to liberalize areas where restrictions remain in force.

Due Diligence

Secure the best international partners to grow your sales. U.S. small and medium-sized businesses can save time and money by contracting the U.S. Commercial Service’s International Partner Search (IPS) to find pre-qualified global partners who are already interested in their products and services.

Initiate and manage your international business relationships with confidence. Have the U.S. Commercial Service generate a customized International Company Profile (ICP) on your potential business partners. Researched and prepared by our trade specialists, ICPs enable U.S. small and medium-sized businesses to more effectively evaluate overseas companies. To contract for an IPS or an ICP, visit www.export.gov/cs to find the U.S. Commercial Service office nearest you.

On October 21, 1995, President Clinton signed Executive Order 12978 entitled "Blocking Assets and Prohibiting Transactions with Significant Narcotics Traffickers,” which blocks all property subject to U.S. jurisdiction in which there is any interest of members of the various Colombian drug cartels. In addition, the order blocks the property and interest in property of persons who have been determined to play a significant role in international narcotics trafficking centered in Colombia or determined to materially assist in or provide financial or technological support for, or goods or services in support of, the narcotics trafficking activities of persons designated in the Order. It is illegal for U.S. citizens to buy, sell, trade, give away or otherwise engage in transactions involving persons and companies designated pursuant to the Order, who are referred to as SDNT's (Specially Designated Narcotics Traffickers). A list of the names of such persons and companies is available from the Office of Foreign Assets Control (OFAC), Department of the Treasury, Washington, D.C. 27220, Tel: (202) 622-2520, or via Internet: http://www.treas.gov/offices/eotffc/ofac/sdn.

U.S. companies and individuals doing business in Colombia should be aware of the above Executive Order aimed at curtailing the money laundering operations of the Colombian drug cartels. SDNTs include entities or individuals directly involved in the drug trade, companies or front companies they own, and companies or individuals, which supply or do business with any of the preceding. U.S. companies found doing business with SDNTs will be notified by OFAC to cease and desist. Failure to do so can result in financial penalties and criminal prosecution. Most established Colombian companies are not involved in the drug trade. Nonetheless, in addition to doing financial background checks on potential business partners, U.S. companies should also contact OFAC to obtain the most current listing of SDNTs.