By: Cristina Román and Mateo Vásquez

 

Foreign direct investment (“FDI”) is extremely important for the national economy. During 2019, FDI grew by 25%, reaching the highest figure in the last six years (USD 14,493 million). In the first four months of 2020, even in spite of COVID 19, the Central Bank (“BR”) reported that Colombia received USD $3,533 million in FDI, which represents an increase of USD 1,655 million over the same months in 2019. In the same week of that report, Procolombia announced that 45 new non-mining energy investment projects are being developed for an approximate value of USD 1,477 million

 

According to Article 15 of the Framework Law on Foreign Exchange (Law 9 of 1991), the National Government is the authority of the International Investment Regime in Colombia, and consequently regulates its characterization, implementation processes and registration deadlines. Thus, the international investment regime is currently enshrined in Decree 1068 of 2015, amended by Decree 119 of 2017.

 

According to the aforementioned Statute, FDI is defined as the one carried out by residents abroad in national companies and branches, trust businesses, real estate located in the country, private equity  funds, acts or contracts without participation in the capital and intangibles, the latter being incorporated into the regime in 2017.  In this same Decree, purchase of shares listed in the Colombian Stock Exchange (normally classified as portfolio investment) was authorized for registration as FDI, provided that the investor states its intention of permanence.

 

Decree 119 of 2017 substantially modifies the regime by eliminating the limited modalities or forms in which international investments could be made, and replacing them with two simpler concepts: (i) in currencies dully transferred through the exchange market, by means using exchange market intermediaries or a compensation accounts and (ii) any lawful act, contract and operation. This second concept has allowed the registration of international investments of operations that before its effectiveness, were not susceptible to be registered as such, including, among others, donations, inheritances and the capitalization of services and operations not controlled by the exchange regime. 

 

In fact, the processes of registration of international investments have been simplified over the years, especially since the issuance by the Foreign Exchange Department of the BR of the External Regulatory Circular Letter DCIN 83, which introduced in 2003 the concept of "automatic registration", initially associated with investment in foreign currencies in companies and branches and, over the years, applicable to other investment destinations.

 

This process implies that foreign exchange forms for international investments automatically generate registration with the BR. Likewise, the incorporation of errors in said forms causes the records to be incomplete, distorted or not in accordance with the reality of the transaction, some of which are subject to amendment.

 

The BR incorporated a similar concept in the international investment registries that are processed directly before the Foreign Exchange Department, in cases of investments by virtue of any act, contract and legal operation or substitutions and cancellations of FDI.  The BR substantially simplified the registrations in the year 2015, eliminating certifications and supporting documents, limiting the procedure to the presentation of the corresponding Forms. Additionally, the registration processes can be requested by the legal representative of the entity receiving the investment and the inclusion of electronic notifications, essential in these times of confinement.

 

Despite the fact that Decree 119 of 2017 made the concepts of investment more flexible and eliminated some registration deadlines, it also reduced the registration deadline to six months in cases of substitutions and cancellations of registration, even when these are generated in the context of a business reorganization. In the same year, the regulation of advances of international investments was modified, and they are now treated as a category of foreign loan, which means that they are subject to prior registration and compliance of external debt procedures, and that the capitalization term is not limited by law. The lack of compliance of these deadlines and procedures may have material sanctioning effects for the foreign investor. 

 

FDI registrations are essential for the protection of foreign investors' rights. In Colombia, investors duly registered with the BR are guaranteed their foreign exchange rights, i.e. the right to repatriate capital and profits or reinvest in the country. In Colombia, both Law 9 (Article 15) and Decree 1068 (Article 2.17.2.2.3.2) provide that these rights cannot be affected, but only temporarily when the country's international reserves amounts less than three months' worth of imports, a condition that is very relevant in times of COVID-19.

 

Within the sanctioning framework of the exchange regime, according to Decree 2116 of 1992 (Art. 5), the SS is empowered to verify international investment records and impose sanctions in case of violations. Unfortunately, according to Decree 1746 of 1991 (Art. 3), the SS could impose penalties of up to 200%, although in practice these are graduated based to the severity of the infraction, in percentages that may be more reasonable.  In addition to the penalties, the SS could also order the annulment of the automatic registration in the case of records that do not correspond to reality, investments that have not been formalized or not completed without being returned abroad. 

 

Thus, conducting records in an adequate and timely manner, processing amendments in case of errors, and being aware of changes in foreign investments rules, their enforcement and regulations, are extremely important to meet investigations and requirements on international investment records made by the SS.