Doing Business in Latin America

Doing Business in
Latin America
2013
1717 Pennsylvania Avenue NW Suite 1200 Washington DC 20006
P 202 659 6601 F 202 659 6641 www.scglegal.com
TABLE OF CONTENTS
Argentina
1
Brazil
17
Chile
35
Colombia
45
Dominican Republic
63
Ecuador
89
Panama
105
Venezuela
143
This publication is intended to provide general information for those interested in learning more about conducting
business in various jurisdictions throughout Latin America. The contents are intended to provide general
information and not to apply to specific problems. Because the facts in each situation vary, the legal authorities
discussed may not be applicable to specific circumstances. Readers of this publication are urged to consult their
own attorneys concerning specific legal questions. No one should rely on the materials included in this publication
without first determining whether the pertinent provisions have been amended, repealed or overruled.
ARGENTINA
BRAZIL
CHILE
COLOMBIA
Allende & Brea Abogados
Peixoto e Cury Advogados
Ossandón Abogados
Prieto & Carrizosa
Valeriano Guevara Lynch
Jose Ricardo de Bastos Martins
Roberto Ossandón
Claudia Barrero
vgl@allendebrea.com.ar
josericardo@peixotoecury.com.br
rossandon@ossandon.cl
cbarrero@prietocarrizosa.com
Phone: 54 11 4318 9900
Phone: 55 11 3218 8455
Phone: 56 2 3681000
Phone: 571 326 8600
DOMINICAN REPUBLIC
ECUADOR
PANAMA
VENEZUELA
Guzmán Ariza
Paz Horowitz Robalino Garces
Patton, Moreno & Asvat
Torres, Plaz & Araujo Abogados
Fabio J. Guzman
Maria Edith Jativa
Ivette Martinez
Guillermo de la Rosa S.
fguzman@drlawyer.com
mjativa@pazhorowitz.com
imartinez@pmalawyers.com
grosa@tpa.com.ve
Phone: 809 255 0980
Phone: 593 2 398 2900
Phone: 507 306 9600
Phone: 58 212 905 0211
ARGENTINA
Valeriano Guevara Lynch 1
1. FOREIGN INVESTMENT
The legal regime for foreign investment is governed by the Foreign Investment Act (Ley de Inversiones
Extranjeras) enacted in 1993. For the purposes of this law, there is no distinction between national and foreign
investors, irrespective of the type of business they get involved in. Foreign investors have the same rights and
obligations as local investors under the parameters stated by the National Constitution regarding the
development of lawful economic activities in Argentina.
There are no limitations on the participating percentage of foreign ownership in a local entity regardless of
the type of vehicle chosen.
Argentina has executed a number of Bilateral Investment Treaties with third countries and is a member of the
Multilateral Investment Guarantee Agency, the Overseas Private Investment Corporation, and the
International Centre for the Settlement of Investment Disputes. Treaties in force entered into by Argentina
with third countries for the avoidance of double taxation are developed later in the Tax Matters section.
2. FOREIGN TRADE
Argentina, Brazil, Paraguay, and Uruguay are parties to the Mercosur Treaty with the purpose of creating a
single market among the four countries with a common external tariff. Venezuela has recently become full
member to the Mercosur and is currently in the process of implementing Mercosur standards under a special
convergence chronogram. Bolivia, Chile, Colombia, Ecuador, and Peru are associate members to this treaty.
The objectives of the Mercosur Treaty are (i) the free transit of production goods, services, persons, and
capital between member states by eliminating customs duties and lifting non-tariff restrictions on the transit
of goods, along with other measures with similar effects; (ii) the fixing of a common external tariff (Tarifa
Externa Común or TEC) and the adoption of a common trade policy with regard to non-member states; and
(iii) the coordination of policies of member states relating to foreign trade, agriculture, industry, taxes, the
monetary system, monetary exchange rates, capital investments, customs, services, transport, and
1
Valeriano Guevara Lynch is a partner at Allende & Brea.
1
communications and any other issues that may be agreed upon, in order to ensure free competition among
member states.
No import duty is payable in the case of goods originating from a Mercosur member state when imported
into Argentina, to the extent they comply with one of the following requirements: the product must be
manufactured in one of the member states, or the product must suffer a significant transformation process in
one of the member states. Depending on the case, this significant transformation process shall be evidenced
by a tariff shift in the Mercosur’s Common Nomenclature Schedule, a minimum value added in the Mercosur,
both a tariff shift plus a minimum value added, or specific composition requirements.
Argentina and the other three Mercosur member countries have adopted the Harmonized System for the
Tariff Classification of Goods and are parties to the World Trade Organization. The GATT/WTO
regulations on customs valuation, labeling, and fair trade practices (antidumping, safeguard measures, and
countervailing duties, among others) are therefore applicable to Argentina.
Pursuant to Argentine customs regulations, most goods may be freely imported into Argentina, subject to the
prior payment of import duties and taxes. Approximately 80% of the goods are subject to Mercosur’s
common external tariff, which ranges from 0% to 28% depending on the product. The remaining 20% of
goods that are not included in the TEC are subject to import duties that range from 0% to 35%.
A specific levy known as tasa de estadística (the statistical tax) is levied at a rate of 0.5% and is applicable on all
imports of goods other than those from Mercosur member states. The maximum amount payable for this tax
cannot exceed certain amounts.
Imports are also levied with Value Added Tax (VAT). The general rate is 21%, but a preferential rate of
10.5% applies to certain capital goods specifically listed in the regulations. The VAT paid at the time of
importation constitutes fiscal credit for the importer. The foregoing fiscal credit may be offset against fiscal
debit arising from business activities carried out in Argentina and subject to VAT. Notice that some tax
prepayments (VAT, income tax, turnover tax) could also be applicable at the time of the importation. In such
cases, the prepayments would constitute fiscal credit for the importer.
In addition to the import duties and taxes and depending on the specific merchandise, there could be other
restrictions on the importation of goods—for example, quotas on the quantity of motor vehicles imported
and a requirement that fresh food, chemicals, pharmaceutical goods, cosmetics, cleaning products, and others
be authorized by the relevant Argentine governmental authority before entering the country. Certain goods of
2
used condition could be subject to higher import duties and affected by a ban or could be required to be
refurbished for their import.
In 2002 and due to the economic crisis in Argentina, the government resolved to levy export duties on the
exportation of goods. Export duties are expected to be a temporary measure. The applicable rate depends on
the product. The majority of the products are levied at a 5% rate on the FOB value. Oil, agricultural products,
hydrocarbons, metal wastes, and other specific products are taxed on special taxable basis or at higher rates,
resulting in higher export duties.
In addition, exporters are entitled to obtain credits for VAT and sometimes could be entitled to export
incentives and tax refunds.
Both import duties and taxes and export duties are calculated in U.S. dollars and are payable in Argentine
pesos at the free exchange market rate corresponding to the date of payment.
3. CORPORATE MATTERS
Foreign companies may operate in Argentina either through a branch or through a wholly or partially owned
subsidiary. Such a subsidiary may operate under any of the several types of corporate entity available. The most
common entities are (i) the stock corporation (Sociedad Anónima or S.A.) and (ii) the general partnership (Sociedad
de Responsabilidad Limitada or S.R.L.).
Establishing a Branch: To comply with the requirements applicable to the registration of a branch in
Argentina, a foreign corporation must abide by the rules of the Ley de Sociedades Comerciales (Argentine
Corporations Law) by filing a registration application with the Inspección General de Justicia (Public Registry of
Commerce or IGJ) together with documents evidencing the existence and good standing of the foreign entity.
The foreign corporation must also provide written evidence of the disclosure of its shareholders and
compliance with at least one of the following conditions outside Argentina: (i) the existence of one or more
agencies, branches, or permanent representations; or (ii) the ownership of equity interests in other companies,
which under Generally Accepted Accounting Principles would be considered non-current assets; or (iii) the
ownership of fixed assets at its place of incorporation, the existence and value of which shall be proved as the
equity interests mentioned in (ii) above.
3
The branch may be managed by one or more officers appointed by the Board of Directors of the foreign
corporation. The officers of the Argentine branch shall be subject to the same standards and rules pertaining to
liability as those applicable to managers of local companies.
Corporation: The incorporation of a corporation is made under the form of a Sociedad Anónima and requires
filing a request with IGJ, including the name reservation and proposed articles of incorporation and bylaws.
When the corporate name contains the expressions “of Argentina” or “Argentina” that might indicate its
ownership by foreign companies, it will be necessary to evidence the existence of said companies and their
authorization to use the corporate name. On the other hand, a deposit for at least 25% of the subsidiary’s
capital, if payable in cash, must be made. In addition, a foreign corporation willing to have an interest in an
Argentine subsidiary must file with the IGJ similar documents to those mentioned above for the registration of
a branch. Foreign shareholders and branches must comply with an annual reporting obligation with the IGJ by
showing that their main activity is performed outside of Argentina.
The articles of incorporation and bylaws of a new subsidiary must contain (i) the corporation’s name and
domicile; (ii) duration of the corporation and a precise description of its corporate purpose; (iii) corporate
capital, which may not be less than AR$100,000 (equivalent to approximately US$12,000); (iv) appointment of
the members of the Board of Directors and, as appropriate, the statutory auditor or the members of the
Supervisory Committee; (v) performance guarantee required from the directors: AR$10,000 for each director;
(vi) rules governing profits and losses; (vii) procedure for dissolution or liquidation; and (viii) a list of
shareholders (a minimum of two is required) showing the respective amount of shares subscribed and paid-in by
each of them.
A Sociedad Anónima must have a Board of Directors consisting of one or more members appointed at the annual
shareholders’ meeting. Under certain circumstances, a minimum three-member Board is mandatory. Directors
may be Argentine nationals or foreigners and need not be shareholders. Although the Board may have members
with residence outside Argentina, the majority of the directors must reside locally. If there is more than one class
of stock, the bylaws may provide for the election of one or more directors by the holders of each such class.
The Argentine Corporations Law provides minority shareholders the right to appoint up to one-third of the
total members of the Board of Directors through cumulative voting. Cumulative voting shall not be available;
however, when the bylaws of the company expressly provide that, due to the existence of different classes of
shares, holders of each class of shares are entitled to appoint a specific number of directors.
Directors are responsible for the management of the corporation and have broad powers on all matters except
those reserved for shareholders. The nature and extent of the duties and liabilities imposed on directors under
4
the Argentine Corporations Law may not be reduced under bylaw provisions or by a shareholder’s decision.
Directors may be removed by a shareholders’ meeting. Directors are subject to the standard of loyalty and
diligence of a good businessman. Failure to meet such standards (e.g., for mismanagement or violation of the
law or the company’s bylaws, fraud, or negligence) will normally result in being held jointly and severally liable to
the corporation, its shareholders, and third parties. Although the general rule is that directors may not be held
personally liable for the obligations of the Sociedad Anónima, they may face liability in connection with unpaid
taxes, import and export duties, and social security contributions.
Depending on the matters to be dealt with, shareholders’ meetings may be ordinary or extraordinary.
Shareholders must hold an ordinary meeting at least once a year within four months after the end of its fiscal
year to consider and, should they so agree, approve the financial statements, the Board of Directors’ Annual
Report, the Report from the Statutory Auditor, and the appointment of the members of the Board of Directors
and Statutory Auditors. Extraordinary shareholders’ meetings are called to consider special matters (e.g.,
amendment of bylaws, capital increase, redemption of stock, merger, and liquidation), which are subject to
greater quorum and majority requirements.
The shares of the company may be ordinary or preferred. Preferred shares receive special benefits such as a
fixed dividend or a repayment privilege in the event of liquidation. The shares of nominative, non-endorsable, or
registered form should be followed by a written notice to the company in order to have the transfer registered in
its Stock Registry.
Limited Liability Company: A limited liability company (Sociedad de Responsabilidad Limitada or S.R.L.) has
elements in common with both a corporation and a partnership. The number of members cannot exceed 50,
and the partners’ liability is limited to their capital contributions. The advantage of an S.R.L. over a Sociedad
Anónima is that its operations are subject to fewer formalities.
Upon execution of the agreement of association, all the capital must be subscribed, and the portion in cash paid
in by each partner may not be less than 25%. If the capital is not contributed in cash, it must be fully paid in.
The capital must be divided into quotas of equal value, which shall be freely transferable unless the agreement
imposes restrictions thereto. A clause prohibiting the transfer of the quotas, however, shall be deemed null and
void.
An S.R.L. is managed by one or more managers, partners or not, who have the same rights and duties as
directors of a corporation. The S.R.L. can choose to have a supervisory committee, but if the capital of the
corporation exceeds a certain amount, the supervisory committee becomes mandatory.
5
Joint Venture: A joint venture agreement in Argentine legislation is known as UTE, which is a contract that has
to be registered with the Public Registry of Commerce, whereby two or more existing companies pool their
resources without creating a legal entity for a specific venture. UTEs may adopt a corporate structure (as an
operative joint venture) or a fractioned or parceled one (instrumental joint venture). This structure will finally
depend on how the parties to the agreement want to perform the contract—either by sharing the final result of
the specific work (service or supply) or by simply executing it individually, with each party assuming its own
outcome.
The Argentine Corporations Law states that both Argentine and foreign companies registered with the Office of
Corporations, as well as individual businessmen domiciled in the country, may join to perform a specific work,
service, or supply inside or outside Argentine territory by entering a UTE agreement. To form part of a UTE,
foreign corporations must previously establish a branch or permanent representation in Argentina and comply
with the local registration procedures described previously. To form a UTE, the interested parties must enter a
written private or notarized agreement, which should include the identity of the members, the purpose for the
formation of the UTE, the capital contributions to be made by the members to a common operating fund (fondo
común operativo), and the means of financing their common activities. Joint and unlimited liability is not legally
presumed for activities to be performed by the members of the UTE and for obligations assumed with third
parties. All agreements or resolutions taken by the members of the UTE must be based on unanimous
decisions, unless otherwise stipulated in the basic contract. Bankruptcy, incapacity, or death of any member does
not cause the termination of the UTE, which may continue its activity upon agreement between the remaining
parties regarding the consideration due to the principal.
Failure to register the UTE with the Office of Corporations does not render it illegal per se, although the UTE
will be deprived of any standing vis-à-vis third parties and will be considered a mere private agreement valid
exclusively among the parties involved. The registration of UTEs with the Office of Corporations enables this
agency to disclose clauses agreed to by the UTE members. As a direct consequence of this, some interested
parties usually choose either not to comply with registration proceedings or to submit a basic agreement keeping
the main arrangements undisclosed, and thus unregistered.
4. LABOR MATTERS
A general Employment Contract Act (ECA), complemented by additional laws and statutes related to specific
activities, governs employment conditions throughout the country, together with the relevant Collective Bargaining
Agreements, depending on the employer’s activity.
6
The Argentine labor law provides the following alternative contracts as modes of hiring personnel:
(i) permanent; (ii) part time; (iii) fixed term; and (iv) temporary, for specific activities. Case (i) is the general
rule, whereas the other three are aimed at special and exceptional situations than do not fall within a
permanent relationship.
Argentina has fairly complex labor legislation designed to protect the rights of employees and workers, by
setting special rules concerning the employment of women, as well as rules governing working conditions and
working hours, providing for payment of salaries during illnesses, setting surcharges on salaries for overtime and
unhealthy work, establishing annual vacations, and requiring the payment of indemnification in the event of
wrongful dismissal. Labor accident compensation has been replaced by compulsory insurance that must be
taken out by any employer. The amount of the premium payment depends of the kind of activity conducted by
the employer. This means that those employers offering safer labor conditions are supposed to bear a lower
premium or contributions to the system.
A minimum wage has been established and is adjusted from time to time. However, the minimum wage is
generally exceeded by the basic salaries established in the collective bargaining agreements. These basic salaries
vary from one activity to another. Employees are entitled to a statutory annual bonus, called Aguinaldo. It is
payable in two semiannual installments, falling due on June 30 and December 31, and each installment is equal
to 50% of the highest monthly salary accrued during the corresponding semester. Employers must pay
compulsory life insurance for all employees.
Employees are entitled to an annual vacation period when their service with their employer has been rendered
for over six months. Vacations are compulsory, and the employer must grant them between October 1 and
April 30. The vacation duration ranges from fourteen days for employees with less than five years of service, to
thirty-five days for those with more than twenty years of service, unless increased benefits are established in the
applicable collective bargaining agreement or in the employment agreement, if any. The compensation
corresponding to the vacation period is slightly higher than normal salary.
National holidays must be observed, and the corresponding salary should be paid twice whenever services are
actually performed during those days. Presently, there are 12 statutory holidays during the year. There are other
compulsory leaves of absence on the grounds of childbirth, marriage, mourning, or educational examinations.
Dismissal of employees is subject to specific rules. Although there are some ceilings for highly paid employees,
any employee is entitled to one month’s salary per year of service plus one or two months as prior notice, the
7
latter depending on the employee’s seniority. Those amounts do not apply in case of dismissal for just cause.
Employees on a trial period, i.e., during the first three months of employment, are not entitled to severance
payment, exception made to prior fifteen-day notice, which, if not given, must be paid to the employee.
An unfair or wrongful dismissal entails the employer’s obligation to pay the employee the following:
(i) severance indemnification (a monthly salary per year of service or fraction over three months capped to
three times the salary of the applicable collective bargaining agreement—note that there are certain Supreme
Court cases that declared this limit unconstitutional), (ii) indemnification in lieu of notice (notice to be
provided between 15 days and 2 months in advance, depending on the seniority of the employee),
(iii) pending days through the end of the month of dismissal, (iv) indemnification for unused vacation, and
(v) statutory annual bonus (proportional amount of the thirteenth salary aguinaldo described above).
Trade unions and employers’ associations encompass all types of labor activities and handle not only matters
directly connected with labor relations, but also health services, recreational amenities, and other activities.
Workers are guaranteed the right to organize themselves into unions, and individual workers have rights to
choose whether or not to join.
Unions and federations must keep the Labor Ministry informed of data concerning their assets, names of
members and officers, etc., and may be audited by the authorities. Official recognition is granted only to the
most representative union for an activity, but a rival group may replace it when it has a significantly greater
number of members. Only the officially recognized union may engage in collective bargaining and collective
agreements.
Argentina has subscribed to the I.L.O. Resolution dated June 3, 1981, relating to collective bargaining.
Officers and delegates of officially recognized unions may not be dismissed from their jobs while they hold
office and for one year thereafter. When they work full time for the union, the employer should not bear the
cost of their remunerations and payroll contributions while they hold office, but they must be re-engaged
afterward.
The right to resort to strikes on the part of the unions is guaranteed by the National Constitution. However,
prior to the declaration of a strike, it is mandatory for the parties in conflict to submit to a conciliation process
that is handled by the Ministry of Labor. In addition, essential services like those rendered by hospitals or
affecting the population’s health are subject to specific rules in this regard.
8
Under the regulations currently in force, all employees over the age of 18 are covered by a national retirement
pension scheme funded through employee withholdings of 11% of their gross salary and employer fixed
contributions; the percentage of the employee’s contribution depends on the type of activity. Employees are
subsequently entitled to collect a pension when they reach retirement age (65 years for men and 60 years for
women, in most cases). Healthcare plans exist for all employees, entitling them to free medical treatment and
hospital care. These are funded through employer contributions amounting to 6% of salaries and employee
withholdings of 3%.
In case of an employee’s death or disability, insurance coverage mandatorily acquired by the employer with a
labor risk insurance company known as ART applies, with the insurer giving financial aid and assistance to the
injured employee. Only accidents in connection with labor duties and a restricted list of occupational diseases
are covered by this regime.
5. TAX MATTERS
Argentine taxes are levied at federal, provincial, and municipal levels.
Federal taxes, especially VAT and Social Security Contributions, which are collected by the federal
government and distributed to the provinces, yield most of the revenue. In addition to these taxes, the federal
government imposes the following principal taxes: income tax, excise taxes, tax on assets, tax on deemed
minimum income, customs duties, and tax on financial transactions. The provinces levy taxes primarily on
gross business receipts (turnover tax), stamp tax on instruments, and tax on real estate. Jointly with
municipalities, they levy charges for services. As from the 1998 income tax reform, residents (whether
individuals, corporations, or any other type of entity) are taxed on their worldwide income. Non-residents are
taxed only on Argentine-source income.
An Argentine company is allowed to deduct from gross revenue the expenses incurred in producing taxable
income, with some restrictions on royalties and technical assistance fees and interest payable to beneficiaries
abroad. Also, some restrictions apply such as those arising from transfer prices rules, thin capitalization rules,
and deductibility of interest on a cash basis as opposed to an accrual basis, among others.
An income tax withholding applies on payments to non-residents (interest, technical assistance fees, royalties,
etc.). Taxable base is a deemed net amount of Argentine source income. Such amount of deemed income
depends on the nature of the payment, as well as the applicable withholding rate.
9
Corporations and branches of foreign companies pay income tax at a rate of 35% on their net taxable income at
the end of each fiscal year. Income or similar taxes paid abroad on income obtained therein may be credited
against Argentine income tax. The credit is limited to the amount of Argentine tax that would be imposed on
that foreign-source income if no credit for foreign tax were given.
Note that to some jurisdictions (e.g., the United States) a limited liability partnership (Sociedad de Responsabilidad
Limitada) may be considered as a pass-through entity and therefore allowed for consolidation of profit and
losses with the foreign parent company.
Net operating losses (NOLs) of a fiscal year may be carried forward up to five years, but they cannot be
carried back. NOLs originating in the transfer of shares or interests in other companies may only be used to
offset income stemming from the same transactions. NOLs of foreign source may only be used to offset
income of the same origin. NOLs originated abroad in the transfer of shares, derivatives, or interest in other
companies may only be used to offset income stemming from the same transactions.
Corporations may deduct from gross income all ordinary and necessary expenses incurred to obtain,
maintain, and preserve taxable income, to the extent that the expenses’ amount is reasonable.
Depreciation of buildings used to generate taxable income may be deducted at a 2% annual rate on the cost
of the buildings. The tax law does not provide standard depreciation rates. Amortization of goodwill,
trademarks, and similar intangible assets is not deductible.
Write-offs and provisions for bad debts have been restricted by specific regulations enacted by the Federal
Tax Authorities.
Interest expense on loans, plus related exchange loss, may be taken as a deduction. In addition, expenses
incurred in obtaining, renewing, and settling loans are deductible. For loans granted by a foreign-related entity
(e.g., a home office or an affiliate), arm’s length terms and conditions are required.
Argentina’s thin capitalization rules restrict the deductibility of interest paid on loans except in the case of
banks and financial institutions. In effect, in case of loans granted by controlling individuals or entities located
abroad, interest payments are non-deductible in the proportion concerning the amount of liabilities existing at
the fiscal year end, which amount exceeds twice the amount of the shareholders’ equity (net worth) as of that
very same date (2:1 ratio). The interest objected to shall be recharacterized as dividends for tax purposes and
10
shall not be deductible. Thin capitalization rules do not apply to interest payments subject to an effective 35%
income tax withholding.
National and local taxes are generally deductible, except from income tax and tax on personal assets on
shares. Royalty payments to non-residents are deductible up to 80% of the gross payment. Payments for
technical assistance from abroad are deductible up to 3% of sales on which the fees are based or 5% of the
investment made as a result of the assistance.
In general, all payments are fully deductible made by an employer for the benefit of employees and their
dependents. Contributions to private retirement plans managed by authorized entities are also deductible, up
to fixed amounts established by the tax law.
Research and development expenses may be deducted as they are incurred, or they may be capitalized and
subsequently amortized over a period not exceeding five years at the taxpayer’s option.
Transfer pricing rules apply when an Argentine company enters into business transactions with (i) a related
company located abroad, (ii) a non-related company located in a low tax jurisdiction, or (iii) a non-related
company located abroad for import/export transactions for amounts higher than AR$1,000,000
(approximately US$200,000 per year).
The rules intend that the prices are arm’s length for tax purposes. An arm’s length price is the price
independent parties would have agreed upon under the same or similar circumstances and that therefore
reflect normal market practices. In case the price is not arm’s length, the Federal Revenue Administration can
make transfer pricing adjustments to the Argentine local party.
Any income stemming from the sale of shares of an Argentine corporation (Sociedad Anónima) by non-resident
stockholders is not subject to income tax. However, the transfer by non-residents of quotas of a limited
liability company (Sociedad de Responsabilidad Limitada) may be subject to income tax.
Payment arising from blacklisted jurisdictions or regimes or from tax havens will be deemed as unjustified
revenue of the Argentine taxpayer. Such unjustified revenue, plus a 10% presumed income, will be regarded
as taxable income for the pertinent fiscal year for income tax and VAT purposes. Nevertheless, the Federal
Revenue Administration permits the taxpayer to bring evidence to the contrary.
11
An inflation adjustment on the working capital is deductible for tax purposes; on a negative working capital,
an inflation adjustment also is applied and added to the taxable results.
Through a tax-free reorganization process, tax losses and balances (including VAT balances) and other assets
and tax breaks can be transferred from one company to another, without triggering taxable events, provided
that a number of requirements are met and a special process is followed. To transfer NOLs and tax breaks,
among other requirements, it is required that the owner of the former companies must have held at least 80%
of the share capital, during a period not less than two years prior to the reorganization date. This requirement
does not apply when the former company or companies offer shares in equity markets for the same period.
Income from individuals who are partners in a general partnership is first computed for the partnership as a
whole and is then generally allocated to the partners in accordance with their capital or profit-sharing
agreement. Capital gains are not subject to a specific tax. Taxable gains are included in the scope of income
tax, and consequently, companies are subject to a 35% rate, as applied to ordinary income.
Argentine or non-resident individuals are taxed with a transfer tax on the sale of real estate at a 1.5% rate on
the price. Non-resident beneficiaries are liable to 35% income tax withholding on a deemed net income, which
must be paid to the Federal Revenue Administration. Income derived from a non-Argentine source must be
included in the resident company’s taxable gross income. However, Argentine legislation does not allow the
deduction of the foreign income tax liability that might have been paid overseas. Notwithstanding a tax credit of
such foreign income, tax liability effectively paid is allowed up to the increase in the assessment of the Argentine
tax liability, which arises from including foreign income in the company’s taxable income.
Argentine individuals are taxed at a progressive rate from 9% to 35% as follows. Non-resident individuals are
liable for Argentine income tax only on their Argentine-sourced income. This tax is levied as a final and lumpsum withholding tax at various effective rates, depending on the particular type of income.
Tax on minimum presumed income is levied at a 1% rate on those assets, located either in Argentina or
abroad, owned by companies, branches of non-resident companies, permanent establishments, rural real
property owned by natural persons and undivided estates and non-financial trusts and common investment
funds set up in Argentina that do not make public offerings.
The tax is applied on the tax value of the above mentioned assets. Taxable assets for which aggregate value
does not exceed AR$200,000 are exempted from this tax. If such a value exceeds the foregoing amount, then
12
100% of the value is taxed (and not just the excess over AR$200,000). Expenses incurred to obtain or
preserve the revenues arising from the sale may be deducted in order to obtain the taxable gain.
Those individuals or companies vested with the disposal, deposit, custody, safekeeping, and/or
administration of assets entailing a permanent establishment must act as substitute taxpayers.
Taxable basis of Argentine banks (or other financial entities authorized by Argentine Central Bank) or duly
authorized insurance companies is limited to 20% of their assets. For consignees of livestock, fruit, and
farming products, the taxable basis is limited to 40% of the assets exclusively used for such activity.
Among other exemptions, the following assets are exempted or not computable from the taxable base:
(i) assets owned by registered mining companies affected to the mining activity; (ii) shares and interest in
other companies or establishments subject to this tax; (iii) unpaid balances of capital contributions made by
the shareholders; (iv) the value of brand-new fixed assets (except automobiles) in the fiscal year of its
purchase or investment; (v) the value of the construction of (or improvements in) real state in the fiscal year
in which they are made and in the following one, and (vi) dividends and profits received from other
companies or permanent establishments. Taxes of a similar nature paid abroad on assets located outside
Argentina are taken into consideration as a tax credit.
Income tax assessed for the same fiscal year may be computed as a payment on account of this tax. Any
balance of this tax on minimum presumed income may be carried forward, up to a maximum of ten fiscal
periods, to absorb any income tax payable on such future fiscal periods.
Tax on personal assets (impuesto a los bienes personales) is imposed on assets existing as of December 31 each
year held by (i) resident individuals and estates over assets located in Argentina and abroad and (ii) nonresident individuals and estates over assets located in Argentina.
Foreign individuals who are located in Argentina because of labor reasons properly proved, and ask for
Argentine residency for a period of no more than five years, will be subject to the Argentine tax on personal
assets only on their assets located in Argentina. If they remain in Argentina for more than five years, they will
also pay on their assets located abroad.
Tax on personal assets is applied on the aggregate value of the assets existing as of December 31. Taxable
assets for which aggregate value does not exceed AR$305,000 are exempted from this tax. If such a value
13
exceeds the foregoing amount, then 100% of the value of all the taxable assets is taxed (including the first
AR$305,000). This tax is paid at a progressive rate from 0.5% to 1.25%.
Non-resident companies and individuals will pay an annual 0.5% tax on their shareholdings, or interest in
capital, in Argentine companies and branches. Even though this tax only applies to individuals, the law
establishes an irrefutable presumption for non-resident companies holding shares in local companies.
Treaties for the avoidance of double taxation entered into by Argentina may prevent the application of tax on
shareholdings or interest in capital, owned by residents of any of the treaty countries. The effect of any treaty
in force on this tax should be analyzed on a case-by-case basis.
Argentina has signed and has in force treaties for the avoidance of double taxation and fiscal evasion with
Australia, Belgium, Bolivia, Brazil, Canada, Chile, Denmark, Finland, France, Germany, Italy, the Netherlands,
Norway, Russia, Spain, Sweden, and the United Kingdom. No tax treaty is in force between Argentina and the
United States.
Argentina is not a member of the Organization for Economic Co-operation and Development (OECD).
Treaties with Latin American countries follow mainly the Andean Group model, whereas the rest follow in
general terms the different OECD and U.N. Model Conventions.
VAT is levied on all sales of goods or performances of services made within the territory of Argentina in the
course of business, unless they are specifically VAT exempt. VAT is also levied on all imports of goods and
services into Argentina. The general rate for VAT is 21%, but a differential increased rate of 27% is applied to
a few services such as the supply of certain communications services, power, natural gas, and water. There is
also a reduced rate of 10.5% applied on certain other items, including among others many goods
characterized as property, plant, and equipment such as industrial equipment, computers, etc.; on certain
household staples; on the interest on loans from abroad given by financial entities that meet certain
requirements; and on loans given by domestic banks.
On the other hand, performances of services that have taken place in Argentina but that are put to an
economic use overseas are considered exportations of services, and they are not VAT taxed. Despite the
previously mentioned, exports are exempt with a VAT credit. This means that exporters do not have to
charge VAT, while they are given a credit for the VAT that has been charged to them on their purchases of
the goods and services necessary to manufacture the exportable goods. A wide system of withholdings and
prepayment regimes is also applicable.
14
A tax on debits and credits is imposed on bank accounts and other transactions that, due to their special
nature and characteristics, are similar or could be used in substitution for a checking account, such as
payments on behalf of or in the name of third parties, procedures for the collection of securities or
documents, and drafts and transfers of funds made by any means, when these transactions are performed by
entities regulated by the Financial Entities Law. The generally applicable rate of this tax on debits and credits
is 6%, but it doubles for the combination of debit and credit transactions above. It should be noted that it
may be possible to take a portion of this paid tax as a payment on account of income tax or the tax on
deemed minimum income.
Argentine provinces and the City of Buenos Aires levy turnover tax (impuesto a los ingresos brutos) on the gross
revenue of any enterprise that carries out commercial, industrial, agricultural, financial, or professional
activities. Turnover tax legislation does not allow the computation of a tax credit on account of payments of
other taxes. Tax rates vary depending on the type of activity and the turnover tax act of each jurisdiction, but
the average rate is 3%. The provinces and the City of Buenos Aires have signed an agreement (the so-called
Multilateral Agreement) to avoid double taxation of activities performed in more than one jurisdiction.
As part of a fiscal pact among the federal government and the various jurisdictions, productive activities are
excluded from turnover tax. State jurisdictions have been allowed to select the activities to which this benefit
is granted, but they have reacted in different ways.
The stamp tax is a local tax levied on public or private documents, executed in Argentina or abroad, when
their effects are produced in one or more relevant jurisdictions within Argentina (provinces and the City of
Buenos Aires). In general, the stamp tax applies to all acts and agreements (i) executed within the province’s
jurisdiction; (ii) executed outside the province’s jurisdiction but when their effects are produced within it;
(iii) executed in private form, in public deeds, or through correspondence, in the cases indicated by law; and
(iv) also to monetary operations, registered in accounting records that represent delivery or reception of sums
of money that accrue interest, made by financial entities. Tax rates vary depending on the type of transaction
and the regulations of each jurisdiction, but the general rate is 1%. In general, the rate is assessed on the
economic value of the transaction. When an agreement produces effects in different jurisdictions, in principle
the tax should be applicable in all the involved jurisdictions. However, some jurisdictions have issued special
rules to avoid double taxation.
15
This page intentionally left blank
16
BRAZIL
José Ricardo de Bastos Martins and Rafael Villac Vicente de Carvalho 2
1. CORPORATE MATTERS
Although there are numerous types of corporate entities in Brazil available for foreign investors, two are
more commonly used: limited liability companies (sociedades limitadas or Ltda.) and stock corporations
(sociedades anônimas or S.A.), both very similar to their respective counterparts normally seen in common law
jurisdictions (i.e., limited liability companies and stock corporations). Recently a new type of corporate entity
was created in Brazil: the individual limited liability company (empresa individual de responsabilidade limitada or
EIRELI), which is outlined in section 1.3.
1.1.
Limited Liability Company (Sociedade Limitada )
1.1.1. Overview
This corporate type is the most common in Brazil, and it is regulated by Law No. 10,406 dated January 10,
2002 (the Brazilian Civil Code). Sociedades limitadas are incorporated and organized by the code’s articles of
association, which provide, among other things, for equity ownership (there must be at least two quota
holders, which can be either a person or a legal entity). The articles of association must state (i) the corporate
name (which will contain, in Portuguese, the main purpose of the company); (ii) the name and identification
of all quota holders and their legal representatives (in case of a legal entity); (iii) the corporate purpose, as
specifically as possible; (iv) the address of the head office; (v) the amount of the corporate capital, number of
quotas, par value (usually one Real (R$1.00) each), and form of its contribution (which can be by cash, credit,
or appraisable property); (vi) management structure; (vii) corporate representation; (viii) closing date of the
fiscal year (generally coinciding with the calendar year); (ix) quorum for corporate decisions; (x) rules on
dissolution, exit of quota holders, including in case of death, possibility of participation of heirs, etc.; and (xi)
dispute resolution (in court or by arbitration).
After the registration of the articles of association with the board of trade of the state in which the head
office is located, the company must be enrolled with federal, state, and municipal authorities and with other
governmental entities, depending on its corporate purpose. Sociedades limitadas that only render services are not
required to register before state authorities.
2
Partner and senior associate of Peixoto e Cury Advogados.
17
1.1.2. Legal Aspects
The rules for sociedades limitadas are defined in the Brazilian Civil Code, according to which the liability of each
quota holder is restricted to the corresponding equity interest, once the company’s capital is fully paid-in. The
capital of the company is divided into quotas of equal par value, and unless otherwise provided for in the
articles of association, the quota holders may assign all or part of their quotas to other quota holders without
the need for consent from the others and to third parties in the absence of opposition from those quota
holders holding one-fourth of the capital.
The company must have at least one officer, who may or may not be a quota holder, but must legally reside in
Brazil.
The articles of association may provide for the supplementary applicability of Law No. 6,404, dated
November 15, 1976 (Corporation Act), which regulates stock corporations and deals with matters that are not
provided in the Brazilian Civil Code such as shareholders’ agreement and board of directors, among other
matters.
The Brazilian Civil Code also provides for specific quorum for some specific deliberations:
•
•
•
By those holding three-quarters of the capital:
o
To amend the articles of association
o
To perform a merger, consolidation, dissolution, or liquidation.
By those holding the majority of the capital:
o
To appoint and dismiss officers
o
To decide on their remuneration
o
To request the company’s insolvency.
By a majority of those in attendance unless a higher quorum is required:
o
To approve the accounts of the management
o
To appoint and dismiss a liquidator and evaluate the corresponding accounts.
Different from a stock corporation, in a sociedade limitada the quota holders may decide, if so provided under
the articles of association, to distribute dividends disproportionally from their respective equity holdings in
the company.
1.2. Stock Corporation (Sociedade Anônima)
18
1.2.1. Overview
Stock corporations are regulated by Law No. 6,404/76, and they are incorporated through an incorporation
meeting to approve and execute the bylaws, which will provide for the (i) corporate name; (ii) corporate
purpose; (iii) head office address; (iv) capital; (v) form of payment and equity interest held by the
shareholders; (vi) types and classes of shares; (vii) management bodies; (viii) rules on dividend distribution;
(ix) fiscal year; (x) dispute resolution; etc.
To operate as a legal entity, the corporation must have its bylaws registered with the board of trade of the
state in which the head offices are located. After such registration, the corporation must enroll with federal,
state (except for service providers), and municipal entities, among other governmental bodies, depending on
its corporate purpose.
1.2.2. Legal Aspects
In a stock corporation, the liability of the shareholders is also limited to their equity contributions. Different
from a sociedade limitada, a corporation may be publicly traded on the stock market.
The capital of a stock corporation is divided into shares and may be paid for in cash, credit, or appraisable
property. Different from a sociedade limitada, in a stock corporation, whenever the capital contribution is paidin with property, there must be an appraisal by three experts or by a specialized company. It is also worth
noting that at least 10% of the total initial capital must be paid-in at the moment of its incorporation.
The shares may or may not have a par value and may be common or preferential. Preferential shares may or
may not carry voting rights, subject to one or all preferences attributed to them in the Corporations Act, and
they shall not exceed 50% of the total number of the issued shares.
The shareholders’ general meetings must be held once a year within four months after the close of the fiscal
year to discuss the matters provided by the Corporations Law (i.e., approve the accounts, approve dividend
distribution, and elect the management). Special meetings can be convened to discuss other matters whenever
necessary. The management bodies of the company are the (i) board of directors (which is only mandatory
for publicly traded corporations or corporations that have authorized capital) and (ii) board of officers, whose
members must reside in Brazil. A corporation may also have an audit committee.
1.3. Individual Limited Liability Company (EIRELI)
Since January 2012, it has become possible to incorporate an EIRELI in Brazil, according to Law No. 12,441,
which amended the Brazilian Civil Code, creating this new corporate type. It is important to highlight that the
rules applicable to limited liability companies regulate this type of legal entity on a supplementary basis.
19
1.3.1. Overview
The major change brought by this law is the enabling of a single person to incorporate a limited liability
company, moving away from the previous mandatory need of a minimum of two quota holders to
incorporate a limited liability company.
1.3.2. Legal Aspects
The EIRELI may be incorporated by a Brazilian or a foreign person, although each owner must only
participate in one EIRELI and must be an individual (legal entities cannot incorporate an EIRELI).
The corporate name must contain the term EIRELI (an abbreviation of empresa individual de responsabilidade
limitada) after the business name, which shall also contain a designation of the activity of the company in
Portuguese. The corporate capital must correspond to not less than one hundred times the Brazilian
minimum wage in effect on the date of incorporation. The owner’s liability is limited to the amount of the
corporate capital, although the corporate veil may be pierced in limited circumstances (i.e., the same
circumstances applicable to sociedades limitadas and corporations: fraud, acts performed in discordance with the
bylaws or articles of association, and the commingling of assets).
The EIRELI may have as an officer a Brazilian or a foreigner (if granted with the proper visa) who may or
not be the owner of the company.
It is important to point out that it the EIRELI may be converted into a limited liability company (with more
than one quota holder), and vice versa.
2. POWER OF ATTORNEY
Any foreign investor that holds equity in a Brazilian legal entity must appoint an attorney-in-fact residing in
Brazil to represent that foreign investor before such legal entity. The attorney-in-fact must be expressly
empowered to exercise voting rights on the grantor’s behalf for corporate decisions; to act as a representative
before the appropriate governmental authorities, before the Central Bank of Brazil; and to receive service of
process in Brazil.
If the foreign investor resides and signs the power-of-attorney in a jurisdiction with which Brazil does not
have a bilateral treaty, the document shall be locally notarized and legalized in the nearest Brazilian consulate,
before it can be sent to Brazil to be sworn translated and registered at a local Notary Office. It is worth
noting that Brazil is not a signatory of the Hague Convention that deals with apostille.
20
3. INVESTOR REGISTRATION WITH THE SECRETARIAT OF INTERNAL REVENUE (RFB)
All foreign investors (whether individuals or legal entities) holding equity in legal entities in Brazil must be
enrolled with the RFB.
In such case, the foreign investor shall also appoint an attorney-in-fact residing in Brazil to represent the
foreign investor before the RFB, with express powers to receive service of process in Brazil in matters
involving local taxation.
4. FOREIGN LABOR
To enter Brazil, a foreigner must obtain a visa with a Brazilian consulate and have it registered in his or her
passport.
There are numerous types of visas suitable for each purpose in the following categories: transit, tourist,
temporary, permanent, official, and diplomatic.
The most appropriate visas for a foreigner intending to work in Brazil are the temporary and the permanent
visas.
A temporary visa is applicable in case of (i) cultural travel or study mission for up to two years, (ii) business
travel for up to five years with stays of ninety days per year, and (iii) artists or sports figures for up to ninety
days.
A permanent visa may be granted to foreigners that come to Brazil on a permanent basis (but not indefinitely)
in case they are elected as officers of a local company. In this case, the company abroad that sends the
foreigner to an officer position in Brazil must evidence an investment in the Brazilian company of at least
R$600,000.00 or R$150,000.00, the latest subject to the employment of ten Brazilians in the next two years.
In both cases, such investment must be registered with the Central Bank of Brazil as set forth later under
section 6. However, a foreigner who has invested his or her own funds in a local company in the amount of
R$150,000.00 is also eligible to obtain a permanent foreign investor visa. Such investment must also be
registered with the Central Bank of Brazil.
21
5. INTELLECTUAL PROPERTY
5.1. Trademarks
Under Brazilian law, a trademark is any distinctive, visually perceptible mark that identifies and distinguishes
products and services from others that are analogous, but of a different origin, and that certifies their
conformity to certain standards or technical specifications.
Once the company has been registered and enrolled with the appropriate governmental bodies, it is important
to have its trademarks registered with the Brazilian Industrial Property Office (INPI) for its local protection.
The trademark ownership is protected through valid registration with the INPI, which assures the owner the
exclusive use throughout Brazil.
Trademarks may be used for products or services, and they can be presented in the following forms: word,
figure, or mixed (a combination of word and figure).
The validity of a trademark registration is ten years from the date the trademark registration was granted. This
period may be extended at the request of the owner for equal and successive periods.
There are some obligations concerning the ownership of a trademark. For example, the owner is obliged to
use the trademark in order for its registration to remain valid, and the trademark has to be used within five
years counted from the date the registration was granted. If a third party tries to register a registered
trademark, the owner will have to evidence its use.
The registration may be assigned, and the assignment must include all registrations or applications, in the
assignor’s name, of equal or similar trademarks related to an identical, similar product or service, under the
risk of cancellation of the registrations or denial of the assignment.
The INPI will have the assignment registered on the certificate of registration for the assigned trademarks.
The registration will be effective in relation to third parties on the date of its publication in the official gazette
of INPI (Revista da Propriedade Industrial or RPI).
Registered owners or applicants may execute agreements to license the use of the trademark, without
prejudice to their right to effectively control the specifications, nature, and quality of the respective products
or services. The license agreement must be registered with INPI to be effective in relation to third parties.
22
5.2. Patents
A patent, on the other hand, is the official document issued by INPI that provides for the ownership of a
person or legal entity over what has been created or invented.
There are some types of patents in order to protect either an invention (a new product or manufacturing
process) or a utility model (a known object to which modifications are made to improve the intended
function).
Inventions that meet the requirements of novelty, inventive activity, and industrial application are patentable
in Brazil.
Patent owners or applicants may execute patent license agreements, which must be registered with INPI to be
effective in relation to third parties.
A patent of invention is valid for twenty years, and a utility model patent is valid for fifteen years after the
date of filing with INPI. During these terms, the owner is allowed to avoid third parties from acting without
the owner’s consent to produce, use, offer for sale, sell, or import a:
•
Product covered by the patent
•
Process or product obtained directly through the patented process.
6. CENTRAL BANK OF BRAZIL
Brazilian monetary policy and foreign exchange rules prohibit the transfer to other countries of sums that are
not registered with the Brazilian Central Bank. Therefore, for all remittances into or from Brazil, foreign
investors shall obtain a Taxpayer’s Number (CNPJ for legal entities or CPF for individuals) and an Investor’s
Number (CADEMP and RDE-IED) from the Brazilian Central Bank.
Accordingly, after the inflow of foreign capital into Brazil as capital contribution or as loans to persons or
entities located in Brazil, it is necessary to proceed with the registration of such investment or loan with the
Brazilian Central Bank.
It is only after registration with the Brazilian Central Bank that dividends and/or interest can be remitted
offshore and capital can be repatriated to the country of origin.
23
7. SOCIAL SECURITY AND LABOR ASPECTS
7.1. Overview
Employment relationships in Brazil have specific features—the most important could be considered the fact
that only subordinated work is governed by labor law and protected by specific labor legislation. An
additional peculiarity of this type of agreement is its informality. In other words, an employment agreement
may exist explicitly, whether in writing or orally, or implied, without the parties’ express intention to create a
labor relationship.
Social security is funded by charges collected from both employee and employer. Payroll charges payable by
the employer are due on a monthly basis at 20%, plus occupational insurance and contributions to other
government-related bodies from 6.8% to 8.8%.
The company is also expected monthly to deposit with a government bank (Caixa Econômica Federal) 8% of
the employee’s salary as Unemployment Compensation Fund (FGTS). Such deposits are made in addition to
other charges that the employer shall pay, such as annual paid vacations, plus one-third of a salary, thirteenth
salary, and all the benefits established under the collective bargaining agreement executed with the respective
workers’ union.
7.2. Main Features of the Employment Agreement in Brazil
An employment agreement must provide the following information.
An employment relationship must have five simultaneous requirements: individual (i) has to be a natural
person; (ii) shall earn a salary; (iii) shall work under subordination; (iv) shall render services on a regular basis;
and (v) shall personally render the services, which means that the employee is not replaceable by another
individual during the employment relationship. In relation, the company is forbidden to implement
contractual amendments in detriment to the employee, such as salary and/or benefit reduction.
As a general rule, employment agreements are effective for an indefinite term. Notwithstanding, local labor
laws adopt four exceptions: (i) probation agreement (not to exceed ninety days); (ii) if the company’s purpose
is the performance of transitional activities (not to exceed two years); (iii) if the employee will render services
on a provisory basis (not to exceed two years); (iv) under an agreement executed with the respective workers’
union (not to exceed two years); and (v) temporary agreement.
Brazil has a special code governing labor-related laws known as CLT (Brazilian Labor Code). Nevertheless,
the Constitution has a chapter specifically providing for labor laws, and there are specific rules issued by the
Executive and by the Ministry of Labor and Employment (particularly providing for occupational safety and
24
inspection related issues). In addition, there are agreements executed with the workers’ unions with rules that
are exclusively applicable to the group of employees connected to the professional category represented by
the respective workers’ union.
7.3. Basic Employee’s Rights
An employee is entitled to enjoy thirty days of paid vacation every twelve months of work. The vacation
payment corresponds to the employee’s monthly salary accrued by 33.33%. Employees should also be
annually paid thirteen salary payments.
The employer also pays social security contribution generally corresponding to 28.8% (in case of industry) or
26.8% (in case of service providers) over the salaries paid to the employees.
The constitution provides for eight daily working hours and forty-four weekly working hours, with the option
of offsetting and reducing working hours under a collective bargaining agreement.
Upon termination of the employment agreement by the employer without cause, the employer shall give a
termination notice with at least thirty days in advance (this period may vary according to the term of the
employment agreement), pay proportional vacation (corresponding to one-twelfth per month worked within
a period of twelve incomplete months), and a proportional thirteenth salary payments.
On termination without cause, 10% of the total in the employee’s FGTS account is also payable to the
government.
7.4. Salaries
There are two categories of salary in Brazil: direct and indirect. In case of direct salary, at least once a month
the employee must be paid his or her salary, in local currency, consisting of a fixed amount, commissions, or
a mix of both (fix amount plus commissions). Regardless, employees will be ensured a minimum amount,
which is the minimum wage (or minimum union salary, whichever is higher).
The indirect salary, however, contains all indirect benefits granted by the employer ex gratia and on a usual
basis to the employee. The indirect salary will also reflect the aforementioned payroll charges and social
security contributions.
In Brazil, there is no law providing for salary policy (adjustments on its amount, form, and periodicity), which
means that the employer is not bound by law to grant salary adjustments at certain and specific times. The
25
free negotiation of the parties prevails. Notwithstanding, once a year (in the so-called data basis month),
companies are obliged to discuss bargaining agreements with the respective employee’s unions, which
agreement always include a salary adjustment.
The constitution prohibits any reduction of either salaries or benefits. The sole exception for implementing
salary reduction is through a collective bargaining agreement executed with the union.
7.5. Forms and Legal Consequences Arising from the Termination of the Employment Agreement
Under the labor laws, employees are not entitled to job tenure. Accordingly, the employer has the unilateral
right to terminate the agreement whenever it deems convenient, and it suffices that the employer makes the
severance payments mentioned above. There are some legal exceptions for employees eligible for tenure,
established by law or under union agreements—for example, union leaders (during their terms of office and
for one year more after the end thereof) and pregnant employees (as of the acknowledgement of pregnancy
and up to five months after the childbirth).
7.6. Beware of Outsourcing
Outsourcing is permitted in Brazil. However, three aspects must be paid special attention to: purpose, reach,
and liability.
Outsourcing is intended for the performance of services and not the mere and simple lease of manpower. In
case of misuse, a direct employment relationship will be deemed to exist (on an implied basis) between the
company obtaining the services and the service provider.
Brazilian labor courts understand that outsourcing is applicable for the company’s support activities as
opposed to main activities.
Additionally, a company that uses outsourcing will always be jointly liable with the company providing the
outsourcing services in connection with labor and social security related issues.
7.7. Temporary Agreement
Temporary agreements may be executed with employees according to Law No. 6,019/74. Rendering services
under a temporary agreement is permissible (i) whenever a company’s employee must be replaced on a
temporary basis or (ii) due to an extraordinary service increase, which must be duly evidenced.
26
Meeting the legal requirements in the case of extraordinary service increase is expected to be thoroughly
supported by evidence. The maximum term of a temporary agreement is three months, with renewal for an
equal term being admitted only upon express consent from the Ministry of Labor.
Under a temporary agreement, when the final date is reached, the employee, if not permanently hired, will not
be entitled to the payment of termination notice, or the 40% penalty over the deposits made to the FGTS.
If the agreement is terminated by the employer earlier than the previously established date, the employer is
expected to pay the employee half the amount of the compensation that would otherwise be payable until the
final term of the agreement. If the termination is by the employee, the employer shall be compensated for the
losses resulting from termination.
8. TAX ASPECTS
A company is subject to a great variety of taxes in Brazil, outlined as follows.
8.1. Federal Taxes and Contributions
8.1.1. Legal Entity Income Tax (IRPJ)
IRPJ is a federal tax on profits earned by legal entities. Profits are classified as actual profits (accounting
profits with certain adjustments defined by law), deemed profits (percentage on gross revenue), or arbitrated
profits (determined by the tax authorities). Profits are ascertained quarterly or annually (with monthly
payments) at the rate of 15%, plus an additional 10% on profits above R$60,000.00 in the quarter or
R$240,000.00 in the year.
8.1.2. Contribution on Net Profits (CSLL)
CSLL is a federal contribution levied on the profit of legal entities, ascertained and calculated in the same way
as IRPJ, at a 9% rate (except for financial institutions, which are subject to a 15% CSLL tax).
8.1.3. Contribution on Social Integration Program (PIS)
PIS is levied on the gross revenue of legal entities and due monthly at a 1.65% rate, with the possibility of
setting off the value monthly due with the amount charged on certain inputs purchased by the company to
manufacture its products or render its services (noncumulative system). Other companies follow a different
system whereby the rate of 0.65% applies to the entire calculation base, without entitlement to the credit.
8.1.4. Federal Contribution to Finance Social Security (COFINS)
27
COFINS is levied on the gross revenue of legal entities and is due monthly at a 7.6% rate, with the possibility
of setting off the value monthly due with the amount charged on certain inputs purchased by the company to
manufacture its products or render its services (noncumulative system). Other companies follow a different
system whereby the rate of 3% applies to the entire calculation base, without entitlement to the credit.
8.1.5. PIS and COFINS Contributions on Imports
PIS and COFINS are federal contributions that are levied on the importation of foreign assets or services
from abroad, at rates of 1.65% and 7.6%, respectively. The calculation basis for such taxes is either the
customs value of the assets or the payment, credit, delivery, use, or remittance of amounts to individuals or
legal entities residing or domiciled abroad in consideration of services provided. The contribution is a burden
to the importer in Brazil, and the taxpayer subject to PIS/COFINS on a noncumulative system may set off
contributions on importation with those due on the gross revenue, if the assets or services imported are used
as inputs for the importer or for the resale. COFINS on imports will be 8.6% for some specific activities,
until December 31, 2014 (see section 8.1.9).
8.1.6. Excise Tax (IPI)
IPI is a federal tax that is due monthly and applies to the exit of manufactured products from industrial or
similar establishments (mainly as a result of sales). The rates vary according to the essentiality of the
respective product. The taxpayer may offset the amount owed against the amount charged on the input
materials purchased by the company to manufacture its products.
8.1.7. Import Tax (II)
II is levied on all imports by companies or individuals domiciled in Brazil, without prejudice to cases of
exemption or zero rate as provided for by law. The calculation basis for this tax is the value of the imported
product, and the rate varies according to the classification in the Mercosul Nomenclature of Goods
(harmonized system). A zero rate applies, for example, to a great variety of machinery and equipment.
8.1.8. Contribution for Intervention in the Economic Domain (CIDE)
CIDE is levied at a 10% rate on the amounts paid, credited, delivered, used, or remitted by a legal entity
headquartered in Brazil to beneficiaries residing or domiciled abroad under agreements for:
•
Transfer of technology
•
Rendering of technical assistance (technical assistance services/specialized technical services)
•
Rendering of technical services, administrative assistance, and similar services
•
Trademark assignment and license
28
•
Patent assignment and license.
CIDE is paid by the company remitting the amounts abroad. From the CIDE paid, applicable on royalties
referring to agreements for patents and use of trademarks, it may be appropriated a credit of 30%, up to
December 31, 2013, which will be used, exclusively, for purposes of deduction of the applicable contribution
in later operations.
8.1.9. Social Contribution on Gross Revenue
A number of specific sectors, defined by the federal government as being important to Brazilian foreign
trade, will be subject, until December 31, 2014, to a new type of social contribution, which will temporarily
replace the contribution on payroll. Such contribution will be calculated at rates of 1% or 2% (depending on
the activity developed) on gross revenue of the benefited activity, thus resulting in a proportional reduction of
the 20% social contribution on payroll. Please note that such activities will have an increase of 1% on
COFINS on imports for the same period (see section 8.1.5).
8.1.10. Tax on Financial Transactions (IOF)
IOF is levied on a number of financial transactions, among them exchange transactions and loans to a
Brazilian individual or legal entity. For loan transactions agreed for liquidation within up to 360 days (or
liquidated before this term, even if agreed for a longer one), the rate on the exchange transaction will be 6%,
while loans for a longer term will have the benefit of zero rate of IOF. The income of values for capital
increase in a Brazilian company is taxed at a 0.38% IOF rate.
Other rates are applicable for internal transactions—for example, loans made by legal entities (even if they are
not financial institutions), which are subject to IOF on a daily basis, limited up to 1.5% per year, plus an
additional 0.38%.
8.2. State Taxes
The State Sales and Services Tax (ICMS) is paid monthly and is levied on the:
•
Exit of goods from manufacturing and commercial premises
•
Importation of goods, including fixed assets
•
Rendering of transport, communication, and power supply services.
In the majority of Brazilian states, the ICMS rate is 18% on the value of the transaction; however, there are
reduced rates for specific transactions. Like other value-added taxes, the ICMS is noncumulative, and the tax
29
paid on the purchase of goods or raw materials may be deducted from the tax levying on the exit of
merchandise goods previously purchased or produced from the raw material.
8.3. Local Taxes
The most important of the various local or municipal taxes is the Local Service Tax (ISS), levied monthly on
the value of the services rendered at a rate set by each municipality (varying between 2% and 5% on the
service value). ISS must be paid monthly.
ISS is also applicable to services from abroad or whose rendering had originated abroad. In such events, the
tax will be payable in the place where the one receiving or intermediating the services is established or, in case
there is no such place, where it is domiciled. In general, the service amount is the basis for the tax
calculation.
8.4. Tax Incentives (Income Tax)
The Brazilian Income Tax legislation gives certain incentives for companies:
•
Incorporated in the north and northeast regions of Brazil (a 75% reduction in the income tax is
granted for the company therein incorporated), depending on prior governmental authorization
(projects presented and approved until December 31, 2018)
•
That carry out cultural projects
•
That carry out projects for support of sports practice
•
That carry out projects involving technological innovation.
Many state and local governments have passed regulations that provide tax incentives to companies that
install themselves in their territories. State governments tend to facilitate ICMS payments, and local
governments often finance the purchase of land and infrastructure for the installation of the companies and
exemption from the Municipal Real Estate Tax (IPTU). Hosting the World Cup in 2014 and the Olympic
Games in 2016 has also stimulated the concession of many tax incentives to companies involved in providing
infrastructure for these events.
8.5. Export Incentives
There are a few tax incentives for exports:
•
For the physical exit of any raw materials or semi-finished or manufactured goods destined for other
countries, export companies enjoy IPI and ICMS exemption.
•
Exemption from COFINS and PIS is granted for products and services exported directly by the
provider and for indirect foreign sales through trading companies, export companies, etc.
30
8.6. Remittances Abroad
Remittances made by Brazilian individuals or legal entities established abroad are subject to a series of taxes,
levied in the occurrence of one of the following events: (i) payment (transfer of money to the beneficiary
located abroad); (ii) credit (recognition of the obligation of the paying source in favor of the beneficiary
located abroad); (iii) delivery (availability of the amount to a representative of the beneficiary); (iv)
employment (use of the amount in favor of the beneficiary); or (v) remittance (sending overseas, by means of
the authorized channels of the Central Bank of Brazil), regardless of their order of occurrence and provided
that the benefit to the counterpart overseas is characterized in any circumstance:
Modality
Withholding
CIDE
PIS/COFINS
Municipal Tax
Income Tax (a)
Contribution on Imports
on Services (ISS)
Profits and dividends
Exempt (b)
N/A
N/A
N/A
Interest
15% (c)
N/A
N/A
N/A
Royalties for the use of
15% (c)
10%
N/A
N/A
15% (c)
10%
9.25% (e)
2–5%
Beneficiary (f)
Paying
Paying Source
Beneficiary
patents in connection
with inventions,
processes, and
manufacturing
formulations, or for the
use of trademarks (d)
Technical services and
scientific, administrative,
or similar assistance
Tax Burden
Source
Notes:
(a) 0% rate applicable to a number of specific situations.
(b) Payment or credit of profits and dividends by a Brazilian legal entity is exempt from income tax for a
beneficiary, whether a natural person or legal entity, located in Brazil or abroad.
(c) 25% for beneficiaries situated in tax havens or tax-privileged entities (see section 8.7).
(d) Deductibility and possibility of remittance is limited by certain percentages of gross revenue, variable
on the activity benefited by the payment of the royalties.
31
(e) Applicable in the payment for services performed in Brazil, or performed overseas, whose results are
verified in Brazil.
(f) Possibility of withholding tax credit for the beneficiary will depend on the internal law of the
respective country and/or whether there is any treaty in force to prevent double taxation.
8.7. Payments Made to Related Parties Abroad
The payments made to related parties overseas in connection with the purchase of goods or the rendering of
services are subject to the transfer pricing legislation, which establishes maximum caps for the remittance of
certain amounts overseas, for the purposes of tax deductibility in Brazil. Such caps are applicable without
prejudice to the conditions of already existing deductibility conditions, relative to the need, usualness, and
regularity of expenses to the source payer.
Transfer pricing legislation provides for maximum and minimum price limits for imports and exports,
respectively, regarding assets, rights, and services, performed by legal entities established in Brazil, with:
•
Individuals or legal entities established abroad and linked with the Brazilian entity
•
Individuals or legal entities established in tax havens (i.e., a country or a dominion that does not tax
income, or taxes it at a rate below 20%)
•
Individuals or legal entities established in a country or a dominion with legal restrictions on the
disclosure of the legal entities’ capital, or of their ownership
•
Individuals or legal entities under “tax-privileged” regimes, i.e., those which national legislation grants
certain tax advantages equivalent to that found in tax havens.
Similarly, interest payable to or receivable from abroad is also subject to maximum and minimum limits.
Additionally, financing transactions commissioned by a Brazilian company with related parties overseas, even
when such transactions are registered with Central Bank of Brazil, have certain limits in relation to the net
worth of the latter, as shown in the following table.
32
Criterion
Counterpart
Related party, located
Related party, located
located in a tax
abroad, with an interest
abroad, with no interest
haven or under
in the Brazilian
in the Brazilian company
a tax-privileged
company
regime
Cap amount of the
30% of the net
Twice the interest amount
Twice the net worth of the
indebtedness on
worth of the
in the net worth of the
legal entity residing in Brazil
the date interests
legal entity
legal entity residing in
are appropriated
residing in Brazil,
Brazil
Total cap amount
considering all
Twice the amount of the
Twice the amount of the
of the sum of
entities in this
sum of interests of all
sum of interests of all
indebtedness on
situation
related parties in the net
related parties in the net
the date interests
worth of the legal entity
worth of the legal entity
are appropriated
residing in Brazil
residing in Brazil (or of the
net worth itself, in case
there are no bound persons
with interest in the capital)
These rules are not applicable to the payment of royalties and those in connection with technical, scientific,
administrative, or similar activities, which are subject to specific conditions, already mentioned.
33
This page intentionally left blank
34
CHILE
Roberto Ossandon
Chile is one of the strongest economies in Latin America and, indeed, one of the strongest among emerging
economies worldwide. Its sustained economic growth and social progress have been highlighted by various
international organizations, and in 2010, Chile became the first South American country to join the
Organization for Economic Co-operation and Development (OECD).
In the eight years from 2004 to 2011, Chile’s Gross Domestic Product (GDP) grew at an average annual rate
of 4.8%, according to the Central Bank of Chile. In 2011, despite the first effects of the European crisis,
which were felt in the latter part of year, GDP expanded by 6.0% to US$248.602 billion, doubling its growth
over the previous six years. As a result, per capita income reached US$14,413, and in purchasing power parity
(PPP) terms, US$16,171. In 2013, the per capita income reached US$19,000 in PPP terms due the latest
economic results and the 2012 census. Also in 2013, unemployment descended to 6%, which is almost full
employment.
According to the Central Bank, Chile’s high growth in 2011 was the result of two strong quarterly
performances—a 9.9% expansion in the first quarter, followed by 6.3% in the second quarter—explained in
both cases by average annual productivity growth of 0.5%. In other words, the economy’s contraction in
2009 in the midst of the international crisis not only was 0.9 points less than anticipated, but its subsequent
recovery has been one of the fastest among emerging economies.
Chile has a consolidated position as one of Latin America’s most competitive economies. This is mainly due
to Chile’s sustained economic growth and openness to trade, which have set it apart internationally as a free
and dynamic market. Chile’s performance is reflected in the rankings of institutions that monitor countries’
competitiveness.
In the 2012 World Competitiveness Yearbook published by the Institute for Management Development
(IMD), Chile took 28th place out of 59 economies, maintaining its leadership within Latin America, due to
the strength of foreign investment, the country’s public finance, and its labor market. As a result, Chile is seen
as an attractive place for producing goods and services.
Chile is, indeed, one of the world’s ten freest countries, according to the Index of Economic Freedom 2012,
published by the Heritage Foundation and the Wall Street Journal. With a score of 78.3 points, it took 7th place
35
in the ranking. Between 2011 and 2012, Chile climbed four places in this index and increased its score by
0.9 points.
Chile’s open economy, combined with an active policy of bilateral, regional, and multilateral trade agreements,
has underpinned a sustained increase in foreign trade in goods and services and in the country’s international
competitiveness, consolidating its position as an active international partner.
Chile’s 22 trade agreements, covering a total of 59 countries, have expanded its domestic market of 16.8
million inhabitants to one of more than 4.3 billion potential consumers around the world (representing 85.7%
of global GDP and 62% of the world’s population). At present, 93% of Chile’s exports take place under the
preferential terms of these trade agreements, which include the following:
•
Free Trade Agreements: Australia, Canada, Central America, China, Colombia, EFTA (Norway,
Switzerland, Iceland, and Liechtenstein), Malaysia, Mexico, Panama, Peru, South Korea, Turkey, and
the United States.
•
Economic Association Agreements: European Union (EU), Japan, and P4 (New Zealand, Singapore,
and Brunei Darussalam, as well as Chile).
•
Economic Complementation Agreements: Bolivia, Cuba, Ecuador, Mercosur, and Venezuela.
•
Partial Scope Agreements: India.
1. FOREIGN INVESTMENT ENTRANCE CHANNELS
Chile’s legislation has two main mechanisms to intern foreign investment. The first one is Decree Law Nº 600
(D.L. 600), and the second is the XIV chapter of the I Title of the Compendium of rules of international
exchange of the Chilean Central Bank (Chapter XIV).
D.L. 600: Known as statute of foreign investment, D.L. 600, is a legislation body based on three principles
regarding foreign investor treatment (the investor): principle of nondiscrimination, principle of free access to
all kinds of activities and markets, and principle of minimum governmental intervention in the investor
activities.
D.L. 600 implies rights and obligations for the investor. These rights and obligations are contained in the
foreign investment contract undersigned in a public deed between the Chilean State and the investor. This
contract has the characteristics of a law contract; thus, it cannot be modified unilaterally by either party,
insuring the investor its rights. Among other rights, the foreign investment contract guarantees:
36
•
The right to bring capital into Chile. This capital can consist of foreign currency, tangible goods,
technology, credit associated to a foreign investment, capitalization of credits and foreign debts, and
capitalization of profits.
•
The right to repatriate the capital invested a year after this has been entered in the country with the
result obtained from the disposal of stocks or rights representative of the foreign investment, or of
the total or partial liquidation of the companies acquired or constituted with that investment.
•
The right to send or reinvest the profits, anytime, without limitations.
•
The right to acquire foreign currency in the Formal Exchange Market (banks) in order to remit
profits and repatriate capital.
•
The optional right to fix the Additional Tax (which is explained later).
The minimum to invest according to D.L. 6000 is US$5,000,000. It is important to state that although the
investor undersigns a foreign investment contract that allows that investor to enter a fixed amount in a
specific period, in the event that the whole investment or a part of it were not paid, Chile’s legislation has no
effect. The only relevant issue is that the investment will be defined by a lower amount.
It is important to emphasize that the 9th article of D.L. 600 guarantees the investor that both foreign
investment and its recipient companies will follow the same legal framework in force for national
investments, because foreign investor discrimination is illegal.
Under D.L. 600, the tax invariability could be applied optionally. It consists of the possibility to make use of a
total effective invariable rate of 42% for a 10-year term.
The tax invariability chosen can be waived only once making applicable the general rules for people without
domicile or residence in Chile. Once making the waiver, it is impossible to return to the regime of
invariability.
If the invariability system is not chosen, the ordinary regime for people nondomiciled or resident in Chile
shall be applied.
37
Chapter XIV: Chapter XIV offers a choice to the entrance of foreign currencies or credits higher than
US$10,000.
According to Chapter XIV, the investor must inform the Chilean Central Bank, through one of the formal
exchange market entities (banks), filling in a form that identifies the investor and describes the investment
purpose.
Likewise, the paid or remittances of currencies concerning capitals, interests, indexations, profits, and all
other benefits caused by the investments carried out, should be informed to the Chilean Central Bank. Under
Chapter XIV, the capital invested in Chile could be repatriated anytime.
Furthermore, it is necessary to inform the Chilean Central Bank, during the following ten days, about every
modification to each act, settlement, or contract that involves the substitution of the investors or the
investment recipients, assignments of rights about the investments, firm name modifications, and other
issues.
The taxation under Chapter XIV is the general legal framework applied, in conformity with the Income Tax
Law, to people nondomiciled or resident in Chile, called Additional Tax. This tax has now a general rate of
35% applied to all the income obtained from Chilean sources, remitted abroad or withdrawn by people
without domicile or residence in Chile. This tax is a credit for the First Category Tax paid.
Chapter XIV consists of the information that must be sent to the Chilean Central Bank, allowing the investor
to withdraw the capital or the profits, when the investor wants.
Differences between These Mechanisms: The main differences between D.L. 600 and Chapter XIV are as
follows:
•
As we have already explained, under D.L 600, a foreign investment contract between the investor
and the Chilean State must be undersigned; this contract warrants that its terms cannot be changed.
However, Chapter XIV mechanisms could be changed if the legislation or the Central Bank rules
were modified. Chapter XIV consists of a form undersigned in a Formal Exchange Market entity,
informing the purpose of investing in Chile. This entity sends this information to the Chilean Central
Bank.
•
Goods that can be invested in Chile under D.L. 600 are currency, tangible goods, technology, and
capitalization of credits or profits. However, goods that can be invested under Chapter XIV are only
foreign credits and currency of social capital contributions.
38
•
In D.L. 600, the tax situation is as follows:
o
To accept the tax legal framework applied to nondomiciled or resident people in Chile. That is
the Additional Tax; its general rate is 35%, serving as a credit against it the First Category Tax
paid by the investment recipient company, or
o
To make use of a total effective, invariable rate of 42% for a 10-year term.
Under Chapter XIV, the same patterns in force for nondomiciled or resident people in Chile are applied. The
Additional Tax of 35%, being a credit against it, the First Category Tax paid by the investment recipient
company (17%).
The investment under D.L. 600 can be entered anytime. The time is agreed upon by the Committee of
Foreign Investment; it is usually a three-year term, counted from the Foreign Investment Contract signing.
In Chapter XIV, however, there is no term established to bring the currency to Chile.
2. CORPORATE AND TAX RELEVANT MATTERS
Foreign investors can invest in a recipient company or in a direct way. It is also possible to establish a foreign
corporation agency fulfilling the requirement stated in Corporations Law, number 18.046, articles 121 and
following.
To incorporate a company in Chile, it is necessary to carry out the following proceedings:
1. The foreign Company must request a taxpayer number in the Chilean Internal Revenue Service and
appoint a company attorney in Chile. To obtain the taxpayer number and to sign the deed of incorporation, it
is necessary that the foreign company grant a special power of attorney to one or two people domiciled in
Chile. Those special powers have to be undersigned or legalized in the presence of the nearest Chilean
Consul, and afterward it has to be legalized in the Chilean Ministry of Foreign Affairs and protocolized in a
Chilean Notary.
2. Deciding the kind of company that will be constituted. The main possibilities are a limited liability
company, corporation, and stock company (SpA).
The first one is a person partnership, in which the partners and the administration form are established in the
bylaws of the organization. According to this, every change of partner or manager has to be made through a
39
modification of the articles of organization, and those proceedings are fairly simple. The second one is a
capital company, which is administrated by a board of directors and stockholders meetings. Stock transfers
are conducted in a simple way. Power and manager changes are carried out by the board of directors. Other
differences are as follows:
•
In limited liability companies, income distribution and loss contribution schemes are pro rata
according to their corporative contribution, unless partners agree on a different distribution. The
distribution form could be agreed upon year to year. However, corporations’ dividends are
proportional to the amount of stock owned (without preferred stocks existence in conformity with
the 20th article of Corporations Law).
•
The deadline to enter social capital in corporations is three years; afterward, it will be understood that
capital was reduced to the effectively paid amount. In limited liability companies, there is no legal
expiration date to enter social capital.
•
In corporations, if it is reasonable, board of directors’ remunerations can be deducted as expenses.
•
Both kinds of companies must pay the First Category Tax 20% of their incomes. It is important to
say that this First Category Tax can be credited against the Additional Tax (35%) that must be paid
by the foreign investor in the moment of remitting income abroad.
•
In the case of social rights or stocks sales, the procedure to determine income or loss for tax
purposes is different. In the case of sale of limited liability company social rights, as a general rule,
the difference between transfer price of the right and their book value (net worth inflation adjusted
plus retained earnings) will represent an excess value, except in sale to related company or related
natural person. In corporations, as a general rule, the excess value will be the difference between the
transfer pricing and the first cost duly inflation adjusted.
Finally, a new kind of company could be used: the stock company (SpA). These companies are formed by
one or more persons whose participation in the capital is represented by shares. By extension, they are
governed by the norms applying to close corporations and, in a requirement that is practically the same as for
a corporation, must keep a shareholder register.
Stock companies are founded through a public deed or a private document signed by the participants (in
which case their signatures must be verified by a public notary who legalizes the document). This must be
registered with the Companies Registry Office corresponding to their domicile and be published once in the
Diario Oficial (Official Newspaper) within a month of the date of signing.
40
A stock company has plenty of benefits for the foreign investor:
•
Its bylaws can be easily changed. This includes the administration of the company, which also can be
freely chosen between a board of directors or a general manager.
•
Only one person is required for the foundation. This is a great opportunity to have a 100%
controlled branch.
•
No minimum capital is required.
•
There is no legal deadline to pay the social capital. If the articles do not settle it, the deadline will be
five years since the incorporation deed.
3. Having made the previous decision, the deed of incorporation must be signed in the presence of a Chilean
Notary; then the deed’s summary must be published in the Official Newspaper and registered in the
government registry of commercial affairs. In the event of corporation constitution, the first board of
directors meeting must take place for the board to designate a President and a General Manager and grant the
social powers. If a limited liability company, the powers are included in the articles of organization.
4. With these documents, the company must obtain a taxpayer number and initiate activities at the Internal
Revenue Service—then the company will be operational. Afterward, invoices and ledgers must be stamped.
3. LABOR RELEVANT MATTERS
The Labor Code regulates the different types of employment contracts and the obligations and rights
between workers and employers.
Chilean labor law limits the number of foreigners that a company may employ. Article 19 of the Labor Code
establishes that, in companies with more than 25 employees, at least 85% must be of Chilean nationality.
Companies with up to 25 employees are exempt from this norm. This percentage is calculated over the total
number of workers that an employer has in Chile, not in each branch separately.
Exceptions to This Norm:
•
Specialized technical personnel not available locally are excluded; the employer must be able to prove
this specialization in the case of an inspection.
•
A foreigner will count as Chilean if married to a Chilean, the parent of Chilean children, or the
widow or widower of a Chilean.
41
•
Foreigners will also count as Chileans if they have been resident in the country for more than five
years, without taking into account involuntary absences.
The minimum working age is 18. However, 16 and 17 year-olds can sign contracts for light work that does
not negatively affect their health and development, providing they do so with the express authorization of the
persons responsible for their care.
They must, in addition, show that they have finished their secondary schooling or are currently in either
secondary or primary schooling. In this case, their work must be compatible with regular school attendance
and their participation in educational programs.
The work contract must stipulate the nature of the services to be provided and the place where this work will
take place; the amount, form, and date of payment of the agreed remuneration; the length and distribution of
the working day; and the duration of the contract. The contract must, in addition, indicate the additional
benefits that the employer may provide such as housing, light, fuel, and food.
It is forbidden to require an absence of economic, financial, banking, or commercial liabilities as a condition
of hiring. Treatment in accordance with human dignity and respect for freedom of work are required at all
times, and any type of discrimination, distinction, exclusion, or preference on the grounds of race, color,
gender, age, marital status, union membership, religion, political opinion, nationality, descent, or social origin
is forbidden. Equality of opportunity and treatment must be maintained, and employees are not allowed to
renounce the rights established by law.
Types of Work Contract:
•
Indefinite Contract: These contracts do not have an end date previously established by the parties
and are the most usual type of contract. They are signed for the useful life of the worker and may be
terminated on the grounds established in the Labor Code.
•
Fixed-Term Contract: The duration of these contracts is set at the time of signing. They have a
maximum duration of one year or, exceptionally, two years in the case of managers or persons with a
professional or technical qualification from a higher education institution. Fixed-term contracts may
be renewed only once, and if renewed a second time, they become indefinite. This rule also applies
when, with the knowledge of the employer, a worker continues to render services once a contract has
expired.
42
In Chile, compensation must be mutually agreed upon by the employee and employer. Compensation cannot,
however, be less than the minimum monthly wage set annually by law for workers between 18 and 65 years of
age. In 2012, this wage reached 193,000 Chilean pesos; for workers over 65 or under 18, it reached 144,079
Chilean pesos.
Employees with more than one year of service are entitled to fifteen working days of holiday a year on full
pay. However, employees in the Magallanes Region and Chilean Antarctica, the Aysén Region, and the Palena
Province are entitled to twenty working days of holiday a year.
Holidays are given preferably in spring or summer and, taking into account the needs of the company, must
be taken in one block. However, periods of more than ten working days can be split up by mutual agreement.
Holidays cannot be exchanged for money.
4. TAX RELEVANT MATTERS
First Category Tax (Business Profits Tax): First Category Tax is a business profits tax levied on income
derived from commercial, industrial, mining, and other activities involving the use of capital.
The amount of this tax is determined based on the liquid earnings (revenue accrued and/or received minus
expenses) obtained by the company. It is declared annually, in April, accounting for all the income received in
the preceding calendar year.
Taxpayers who are involved in agricultural, mining, or transport activities can choose to pay taxes on income
in one of two ways: on estimated income (presumptive regime) or on effective income, provided that certain
legal conditions are fulfilled.
When the owner of an enterprise receives dividends or withdraws capital from the enterprise, the owner is
liable to pay Complementary Global Tax (residents) or Additional Tax (nonresidents). This liability can arise
if the owner is a shareholder in a company limited by shares (sociedad anónima), in a company formed by
persons (sociedad de personas), or in the head office of a permanent establishment. First Category Tax paid by an
enterprise can be used as a credit against Complementary Global Tax or Additional Tax.
43
Tax rates of first category, in force since the year 2004, are as follows:
Tax Years
Tax 1° Category
2004 to 2010
17%
2011
20%
2012 and Following
20%
A special ledger, known as Fondo de Utilidades Tributables (FUT), is required to keep track of retained profits
and the corresponding tax credit.
Additional Tax: Individuals and legal entities that are not resident or domiciled in Chile are taxed on any
income derived from Chilean sources. Depending on the type of income, a tax return must be filed annually
or monthly.
The general rate of additional tax is 35%, with lower rates applying for some types of income.
Dividends, withdrawals, and/or remittance of profits from Chile by public companies limited by shares
(sociedad anónima), companies with share capital (SpA), private companies formed by partners (sociedad de
personas), or permanent establishments are taxed at the general Additional Tax rate of 35%.
To calculate Additional Tax, an amount equivalent to the First Category Tax paid corresponding to the
profits distributed or remitted should be included in the tax base, and the income is thus grossed-up. The rate
of Additional Tax may be deducted from the tax due as a credit.
Value Added Tax (VAT): VAT, Chile’s main consumption tax, is levied at a rate of 19% on the sales of
goods and services, with a few exemptions for some services, and on the sales of real estate by a construction
company if it was built completely by the firm or was partially built on its behalf by a third party. This tax also
applies to fiscal institutions, semi-fiscal institutions, autonomous state institutions, local councils, and the
companies that belong to these entities, or in which they have a stake.
The same general rate applies to imports, habitual or otherwise, made by any individual or legal entity. VAT
must be declared and paid on a monthly basis, and the amount to be paid is determined by the difference
between the tax debit and tax credit. If the tax credit is greater than the debit, the excess can be carried over
to the following month and used as a VAT credit. Exporters are exempt from VAT and are entitled to
reimbursement of VAT on purchases of goods and services that they use as part of their export activity.
44
COLOMBIA
prietocarrizosa 3
1. FOREIGN INVESTMENT
In recent years, Colombia has made considerable progress regarding its foreign investment legislation. Due to
this progress, foreign investment procedures are now more expedited, flexible, and certain. Foreign exchange
transactions are regulated by the Colombian Central Bank, and their compliance is supervised by the
Colombian Tax Authority, the Superintendence of Companies, and the Superintendence of Finance.
What Is Foreign Investment?
Any capital investment from abroad made by a non-Colombian resident that is conducted in Colombian
territory (including free trade zones) is considered a foreign investment. For foreign exchange purposes, a
non-Colombian resident is any corporation that is domiciled abroad and/or any individual who has not
resided in a Colombian territory for more than six months (whether or not continuously, during a twelvemonth period).
Key Principles of Foreign Investment in Colombia
•
Equal Treatment: Foreign investments receive the same treatment as national investments.
Therefore, foreign investors will not be discriminated against, nor will they receive less favorable
conditions than national investors.
•
Universality: Foreign investments may be performed in all sectors of the Colombian economy,
except for the following:
o
National defense and security
o
Management, processing, and disposal of toxic, hazardous, or radioactive waste.
Additionally, foreign investors may not hold more than 40% of the capital of concessionaires of
open television services.
•
Automatic Nature: As a general rule, foreign investors do not need approval from governmental
entities to invest in Colombia, except in the case of investments in the financial and insurance
3
Key contact: Claudia Barrero, Partner at prietocarrizosa.
45
sectors. Investment in the hydrocarbon and mining sector is subject to a special regime and may
require prior authorization from the Ministry of Mines and Energy.
•
Stability: Conditions for the reimbursement of investments and remittance of profits in force on the
date in which investments are registered may not be changed in any way that could be detrimental to
the investor, except on a temporary basis, based on a substantial decrease of the country’s
international reserves (to less than three months of imports).
Foreign Exchange Market
The foreign exchange market comprises all foreign exchange transactions, which must mandatorily be
performed through (i) authorized exchange intermediaries (i.e., banks and certain financial institutions) or
(ii) compensation accounts (accounts opened by Colombian residents in foreign banks that are subject to
registration and periodic reporting to the Colombian Central Bank). Additionally, foreign exchange
transactions that are not required to be channeled through the foreign exchange market, but are voluntarily
performed through a Colombian financial institution, are considered part of the foreign exchange market.
The following foreign exchange transactions must mandatorily be completed through the foreign exchange
market: (i) import and export of products; (ii) foreign debt transactions; (iii) foreign investment in Colombian
companies or investment of Colombian capital in foreign companies; (iv) the granting of guarantees and
security interests in foreign currency; and (v) international derivative transactions.
All other transactions that are not required to be channeled through the foreign exchange market, such as
money transfers and payment of services in foreign currency, are considered “free market” transactions and
are not required to go through Colombian financial institutions or be reported to the Central Bank.
Types of Foreign Investment and Registration Proceedings
•
Direct Foreign Investment: The different types of direct investment are as follows:
o
Capital contributions through the purchase of shares, participation interests, or convertible
bonds
o
Purchase of rights in trust agreements with trust companies supervised by the Superintendence
of Finance
o
Purchase of real estate (whether directly, through trusts or real estate securitization)
o
Contributions in joint ventures, strategic alliances, concessions, and others (which do not entail a
participation in company capital)
46
o
Supplementary investments to the assigned capital of branches of foreign companies
o
Participations in local private investment funds.
Registration of foreign investments with the Central Bank grants the right to remit abroad or reinvest
dividends and/or income arising from the sale or liquidation of the investment or the reduction of
the recipient company’s capital. To register the investment with the Colombian Central Bank, the
investor must complete a form (Form No. 4 Exchange Declaration) at the time funds are received by
the foreign exchange intermediary.
•
Indirect Investments and Others
o
Foreign investors may also perform investments through contributions in kind or capitalization
of profits, liabilities, and equity accounts (which constitute investment amounts with remittance
rights). To register these investments, the investor shall file a written request for registration
within the twelve months following the date of the transaction.
o
Substitutions and Cancellations: When a foreign investor transfers its investment to another
foreign individual or company, it must report the substitution of the foreign investor with the
Central Bank by filing a written request within the following twelve months of the corresponding
transfer. Similarly, if the investment is sold to a Colombian resident, liquidated, or otherwise
cancelled, the investor must report said cancellation of the foreign investment within a twelvemonth period.
•
Portfolio Investments: Investments made by foreign individuals and companies in securities
registered with the National Securities Registry (RNVE) and collective portfolios must be performed
through local administrators (i.e., stock brokerage firms, investment management entities) that shall
be appointed as representatives for the investors and that shall comply with the applicable
registration requirements. The foreign exchange regime also establishes certain special registration
procedures for investments carried out under integration agreements between various stock
exchanges, programs concerning certificates representing depositary receipts (ADRs GDRs), and
exchange traded funds (ETFs). In general, to register foreign portfolio investments made through the
transfer of foreign currency, the administrators will need to file Form No. 4 (foreign exchange
declaration) with a foreign exchange intermediary.
•
Investment of Colombian Capital Abroad: The outward-bound investment by Colombian
residents or companies in foreign companies, assets, and securities issued abroad and the
47
re-investment or capitalization of funds abroad that may otherwise be repatriated (interests, profits,
royalties, etc.) must also be registered with the Central Bank. Registration will grant the Colombian
investor the right to repatriate the investment or any income (dividends, interest, or sale price of the
investment) derived from it.
Special Foreign Exchange Regimes
Colombian foreign exchange regulations provide for a special regime applicable to branches of foreign
companies that engage in activities related to the exploration and exploitation of oil, natural gas, coal,
ferronickel, and uranium, or that provide exclusive services to the oil and gas industry.
Branches that access the special regime have certain special rights, including (i) the right to make and receive
payments in foreign currency to and from other foreign company branches that benefit from the special
regime; (ii) the right to receive payments from the sale of their products or services abroad in foreign
currency; and (iii) the right to reflect negative balances in the supplementary investment account and to
record the availability of goods or services in the supplementary investment account.
However, these branches may not acquire foreign debt with foreign residents or purchase foreign currency in
the Colombian exchange market.
Foreign Debt
Colombian residents may obtain credits in foreign currency from Colombian foreign exchange intermediaries,
foreign companies, and foreign financial entities. Additionally, they may obtain credits in foreign currency by
placing bonds in foreign stock markets. Likewise, Colombian residents are allowed to grant loans to foreign
residents. The entry and exit of foreign currency arising from foreign debt transactions must be channeled
through the foreign exchange market. Both the foreign loan and the payments arising from the loan
(disbursements, payment of capital and interest) must be reported to the Central Bank by filing an exchange
form.
International Investment Treaties
During the past decades, the Colombian government has sought to strengthen and diversify economic and
trade relationships through instruments such as international investment treaties. The main objective of this
international legal framework is to maintain adequate standards for the protection of foreign investment,
48
considered a determining factor in the country’s growth and development. This growth will in turn contribute
to strengthening Colombia as a reliable and attractive country in which to develop business.
For this reason, the Colombian government has endeavored to attract foreign investment and maintain
favorable investing conditions by negotiating, executing, and approving Free Trade Agreements (FTAs) and
International Investment Treaties (IITs). These treaties seek to provide a stable legal environment for
domestic and foreign investment and to create adequate markets for Colombian production. Consequently,
IITs protect and support investors and their investment in the country and aim to avoid the creation of
obstacles for new investors.
To date, the Colombian government has executed and approved the following IITs:
•
Bilateral Investment Protection Treaties (BITs): BIT Peru (2010); BIT Spain (2007); BIT Switzerland
(2009); BIT China (2012); BIT India (2012).
•
International Conventions for Investment Protection: Multilateral Investment Guarantee Agency
(MIGA); International Centre for Settlement of Investment Disputes (ICSID); Overseas Private
Investment Corporation (OPIC); Cooperation Convention for Emerging Markets (PSOM).
2. FOREIGN TRADE
Free Trade Agreements
In recent years, in order to meet the demands of globalization, Colombia has been subscribing to a number of
FTAs. These FTAs have introduced tools that simplify procedures for trading goods and services.
Currently, Colombia has in force FTAs with the United States; Canada; Mexico; Chile; Venezuela; the
countries in the Northern Triangle of Central America – El Salvador, Guatemala, and Honduras; the EFTA
States – Switzerland and Liechtenstein; the Caricom Countries – Jamaica, Trinidad & Tobago, Barbados, and
Guyana; the Andean Community; and CAN-Mercosur.
Additionally, Colombia signed and is waiting to formalize FTAs with the European Union and Korea. It is in
negotiations with Panama, Turkey, Japan, Costa Rica, Israel, and the Pacific Alliance countries – Chile,
Mexico, and Peru.
Under these FTAs, Colombia obtains access to the different industrial markets and a guaranteed access to
necessary capital goods through the elimination or reduction of customs duties.
49
Colombia is expected to become a platform for capital investment to and from different countries and a very
attractive country for the development of foreign trade operations.
Mechanisms to Promote Foreign Trade Operations
To promote foreign trade operations and investments, the Colombian Customs Regime includes different
mechanisms under which it is possible to develop efficient trade operations. The most relevant mechanisms
are free trade zones.
Free trade zones are geographical areas defined within the national territory for the production of industrial
goods, the rendering of services, or the development of commercial activities under special tax, customs, and
foreign trade regimes.
The free trade zones are conceived not only as a mechanism to attract new investments and create jobs, but
also as an incentive for the development of highly productive and competitive industrial processes with
substantial technological innovation components.
As a general rule, in a free trade zone it is possible to develop any industrial or commercial activity, except
for:
•
Businesses involving exploration, exploitation, or extraction of nonrenewable natural resources as
defined in the Mines and Oil Code
•
Financial services
•
State concessions
•
Residential public utilities (except those devoted to electric power generation and new companies
that provide international long-distance telephone services).
To satisfy the particular needs of investors, the Colombian customs regime establishes the following kinds of
free trade zones:
•
Permanent Free Trade Zone: Qualified and adequate area for the development of industrial and
commercial activities by several companies.
•
Special Permanent Free Trade Zone: Areas located outside a geographic free trade zone area,
where a single company develops a special project with significant economic and social impact for
50
Colombia. The activities developed by the company must be performed exclusively within the
determined zone.
•
Transitory Free Trade Zone: Locations where trade fairs, exhibits, conferences, and seminars that
are considered important for Colombia’s economy and the international economy take place.
According to the customs regime, there are different types of free trade zone users:
•
User Operators: Legal entities authorized to manage, supervise, promote, and develop free trade
zones, as well as to qualify other types of users.
•
Industrial Users of Goods: Legal entities installed within the perimeter of a free trade zone
authorized to produce, transform, or assemble goods through the processing of raw materials or
semi-finished goods.
•
Industrial Users of Services: Legal entities authorized to perform the following activities within the
perimeter of a free trade zone: logistics, transportation, handling, distribution, packaging, labeling,
and other production and merchandising related services; also, any service inherent to
telecommunications, data capturing systems, tourism, information technology, scientific and
technological research, healthcare, auditing, consulting, and brokerage.
•
Commercial Users: Legal entities authorized to perform marketing, merchandising, and
warehousing activities, among others, within the perimeter of any free trade zone.
Tax Benefits Derived from the Free Trade Zones Regime
Every permanent free trade zone or special permanent free trade zone must have a user operator. Permanent
free trade zones allow commercial or industrial users of goods and/or services to be located within its
perimeter. Special permanent free trade zones only allow industrial users of goods and/or services.
The most important tax and customs benefits of the free trade zones include the following:
•
Taxes
o
Free trade zone users are subject to a reduced corporate income tax rate of 15%, except for the
commercial users, which are taxed at the general rate.
o
The delivery of goods from abroad into free trade zones is not considered as an import;
therefore, it is exempt from custom taxes (value added tax (VAT) and customs duties) while the
goods remain in the free trade zone. Taxes are triggered when the goods are further introduced
into Colombian territory.
51
o
Purchases of raw materials, inputs, and finished goods from the national customs territory are
VAT exempt, provided that these transactions are among those specified as part of the user’s
corporate purpose.
o
•
Sales to foreign markets are VAT exempt.
Customs
o
Exports made from free trade zones to foreign countries benefit from international trade
agreements signed by Colombia.
o
Goods produced, manufactured, transformed, or resulting from any production process
developed in a free trade zone are recognized as being “of national origin.”
o
It is possible to perform partial processing outside of the free trade zone for up to nine months.
o
Goods can stay indefinitely in the free trade zone.
o
In Colombia it is possible to sell 100% of the goods or services produced in a free trade zone
with customs tariffs and VAT payable only in the percentage of inputs imported from third
countries.
Special Import–Export Systems (Plan Vallejo)
This import system allows for the temporary entrance into Colombian territory, with total or partial
exemption of customs duties of raw materials, machinery, and equipment to be used in the production of
exportable goods and agricultural goods or services.
It is important to keep in mind that the fulfillment of the export commitment can occur (i) in a direct manner
where the party importing the raw materials or inputs is directly in charge of completing the production and
export without any intervention from a third party, or (ii) in an indirect manner where the party importing the
raw materials or inputs is not the same one that is completing the production and export.
International Trading Companies
International trading companies (Sociedades de Comercialización Internacional or CIs) are legal entities whose main
line of business is the marketing and sale of Colombian products abroad—products that they acquire in the
domestic market or are manufactured by producers who are shareholders or members of the CI.
Although the CIs were created to benefit local exporters, foreign investors may benefit from these entities
when exporting Colombian products.
52
For a CI to operate in Colombia, a commercial company must be formed or an existing company must be
transformed into a CI. The company must request qualification as a CI before the Colombian Tax and
Customs Authorities (DIAN).
Purchases made by a CI in Colombia are VAT exempt, provided that the goods are exported by the CI within
the six months following the issuance of a supplier certificate.
3. CORPORATE MATTERS
Common Vehicles for Channeling Foreign Investment
Based on the current Colombian corporate regime, a foreign investor has two main vehicles for channeling
investments in the country: a commercial company or a branch of a foreign company, incorporated in
compliance with all legal requirements.
An individual foreign investor who is not a resident of Colombia may act through a legal representative and
does not need to use any of these vehicles.
Commercial Companies
Commercial companies are those incorporated for the purpose of executing commercial acts and/or
operations.
•
Corporation (S.A.)
o
Incorporation: Bylaws must be registered through a public deed, unless the incorporation meets
the legal requirements established in Law 1014 of 2006 (Micro-enterprises). In both cases, the
document must be registered with the Chamber of Commerce.
o
Required Number of Shareholders: At least five shareholders are required. The law does not set a
maximum number. None of the shareholders can hold more than 95% of the capital. Microenterprises may be incorporated with a single shareholder.
o
Capital: At the time of incorporation, at least 50% of the authorized capital must be subscribed,
and at least one-third of the subscribed capital must be paid.
o
Liability: Shareholders are liable up to the amount of their participation in the company’s capital.
o
Corporate Bodies: A corporation has two main corporate bodies: the general shareholders
meeting and the board of directors. A statutory auditor is also required.
53
•
Limited Liability Company (Ltda.)
o
Incorporation: Bylaws must be registered through a public deed, unless the incorporation meets
the legal requirements established in Law 1014 of 2006 (Micro-enterprises).
o
Required Number of Partners: It requires at least two partners. The law set a maximum number
of twenty-five partners.
o
Capital: Capital must be fully paid at the time of incorporation.
o
Liability: Partners are liable for the amount of their capital contribution, unless the company
bylaws establish a higher liability for some of them.
o
Corporate Bodies: The main corporate body is the board of partners, but it may also have a
board of directors if provided in the bylaws.
•
Simplified Stock Company (S.A.S.): This type of company may be incorporated with a broad
corporate purpose, in such a way that its legal capacity extends to any type of business as long as it is
not prohibited by law.
o
Incorporation: It must be incorporated through a private document, unless the shareholders at
the time of incorporation contribute real property.
o
Required Number of Shareholders: It can be incorporated with only one shareholder. The law
does not set a maximum number of shareholders.
o
Capital: The law offers a two-year limit from the date of incorporation to pay all authorized
capital.
o
Liability: Shareholders are liable up to the amount of their participation in the capital of the
company.
o
Corporate Bodies: The main corporate body is the general shareholders meeting, but it may also
have a board of directors if provided in the bylaws.
Branch of a Foreign Company
A branch of a foreign company allows foreign companies to initiate and pursue their permanent business in
Colombia. The branch of a foreign company has the nature of an ongoing concern; therefore, it does not
have independent legal capacity, being the same legal entity as the parent company domiciled abroad.
•
Incorporation: It must be incorporated through a decision made by the appropriate corporate body
of the foreign parent company.
•
Capital: The amount of capital is determined by the parent company at the time of its incorporation
and the resources allocated to it in the development of the activities for which it was incorporated.
54
•
Appointment: The branch must have a general representative and one or more alternates who will
represent it in all business acts developed in the country. It should also have an auditor.
•
Corporate Bodies: These are the same as those of the parent company. These corporate bodies make
the decisions regarding the execution of the branch’s business.
Common Characteristics of Commercial Companies and Branches of a Foreign Company
•
The public deed and the private incorporation document must be registered with the Chamber of
Commerce in the domicile of the company or branch.
•
They must apply for and obtain a Tax Identification Number before the tax authority (DIAN).
•
The appointment of the general representative and auditor must be registered with the Chamber of
Commerce in the domicile of the company or branch.
Main Differences between Commercial Companies and Branches of a Foreign Company
•
Commercial companies have their own legal entity, whereas branches do not.
•
Commercial companies have their own corporate bodies, whereas branches do not.
•
The shareholders/partners liability is limited to the amount of their capital contributions, whereas
the parent company is liable for all activities and operations carried out by a branch in Colombia.
4. LABOR FRAMEWORK
Laws Applicable to Foreigners
Colombian employment, labor, and social security laws apply to all foreigners and nationals who are
Colombian residents and render services in Colombia.
Nationality Restrictions
There are no restrictions related to nationality when employing individuals in Colombia. However, foreigners
must comply with the relevant documentation required by the immigration authorities (working visa,
temporary permit, etc.).
55
Written Employment Contract
A written agreement or statement is only required in the following cases:
•
If the employment contract is for a definite term.
•
If the employment contract is subject to a limited trial term.
•
If the employee will receive an all-inclusive salary. An all-inclusive salary includes severance (cesantías),
an annual payment equivalent to one monthly salary for each year of service or proportion of it),
interest on severance (intereses de cesantías, 12% per annum), service bonus (one monthly salary for
each year of service or proportion of it), extra work, and surcharges for extra work. Only employees
that receive more than thirteen minimum wages a month may agree to receive the all- inclusive salary.
Implied Terms
Colombian employment and labor laws, as well as social security laws, are mandatory, and the parties may not
agree to any terms that contradict or oppose them.
Collective Agreements
Collective agreements are common, especially in industries such as oil, mining, banking, and air transport.
Minimum Wage
A minimum monthly wage is applicable to all employees, regardless of age and experience as long as they are
rendering services in a full-time job. The minimum monthly wage is updated every year. For 2013, it is
COP$589,500 (approximately US$328).
Working Schedule
There is a maximum of eight working hours per day from Monday to Saturday and forty-eight hours per
week. Overtime has a limit of two hours per day and twelve hours per week.
It is possible to distribute the forty-eight hours from Monday to Friday, without exceeding ten hours per day,
in order to rest on Saturdays. In this case, the additional hours over the first eight are not considered as
overtime, and the employer does not have to pay surcharges.
56
In addition to Sundays, eighteen public holidays are included in the minimum holiday entitlement. This is in
addition to the fifteen working days of vacation per year that are granted to all employees.
Benefits
All employees in Colombia with an ordinary salary are entitled to the following statutory benefits, regardless
of the length of employment:
•
Severance (cesantías): Equivalent to a monthly salary for each year of service, unless the employee
receives an all-inclusive salary.
•
Interest on Severance (intereses de cesantías): 12% over severance, unless the employee receives an allinclusive salary.
•
Service Bonus (prima de servicios): Half of the monthly salary in June and the other half in December,
unless the employee receives an all-inclusive salary.
•
Vacations.
Social Security Payments
The employer must register all of its employees in certain government-mandated payment systems, as listed
later, and pay certain monthly contributions to each.
Contribution to the pension system is equivalent to 16% of the employee’s monthly salary. The employer
must pay 12% and deduct the remaining 4% from the employee’s salary.
If the employee earns more than four monthly minimum wages, he or she must pay an additional percentage
according to the law.
Contribution to the health system is equivalent to 12.5% of the employee’s salary. The employer must pay
8.5% and deduct the remaining 4% from the employee’s salary.
The employer must pay the entire contribution for occupational hazards. The percentage varies from 0.348%
to 8.7% of the employee’s monthly salary, depending on the type of activity to be performed and its risks.
57
Monthly Costs of an Employee in Colombia
The following table indicates the monthly costs of an employee in Colombia. The costs will vary depending
on whether the employee has agreed to an all-inclusive salary.
Only social security and payroll fees are paid monthly. The obligations are paid on specific dates, but are
included in the following table to illustrate the monthly costs of an employee in Colombia in addition to the
specific salary agreed.
Payment
Ordinary Salary
All Inclusive Salary
Service Bonus (Prima)
8.33%
0%
0%
Severance (Cesantía)
8.33%
0%
0%
Interest on Severance
1%
0%
0%
Vacation
4.16%
4.16% of
4.16%
100% of salary
Pensions
12%
12% of 70% of
8.4%
salary
Health
8.5%
8.5% of 70%
5.95%
of salary
Occupational Hazards (this percentage varies
0.522%
depending on the risks of the company)
Payroll Taxes
0.522% of
0.3654%
70% of salary
9% 4
9% of 70% of
6.3%
salary
Total Monthly Cost
51.84%
25.17%
Severance Payments
If the employer unilaterally terminates the employment agreement, it must pay a compensation, which varies
depending on the type of contract, as follows:
Payroll taxes will vary as of April, 2013. According to the tax reform the employer will pay payroll taxes only for employees earning more than ten
minimum wages. Employers will pay a different type of tax for employees earning less than ten minimum wages. This new tax, CREE, will constitute
an additional percentage that will apply to the employer’s income tax.
4
58
•
For indefinite contracts entered into before December 29, 1992, the employer must pay the
equivalent of forty-five days of salary for the first year of service, plus forty additional days for each
subsequent year or fraction of service, prorated to the length of time worked that year.
•
For indefinite contracts entered into after December 29, 1992, compensation varies according to the
employee’s salary, as follows:
o
If the employee earns one to ten times the minimum wage per month, an equivalent of thirty
days of salary for the first year of service, plus twenty additional days for each subsequent year
(or the corresponding fraction).
o
If the employee earns more than ten times the minimum wage per month, an equivalent of
twenty days of salary for the first year of service, plus fifteen additional days for each subsequent
year (or the corresponding fraction).
For a fixed-term contract or for the duration of the job or project, compensation is equivalent to the salary
for the time that remains to complete the time agreed.
5. TAX MATTERS
The following is a summary of the main taxes and the tax-related issues to be taken into consideration by
both Colombian entities and foreign entities operating in Colombia.
Income Tax
From fiscal year 2013 onward, the national income tax in Colombia has three main elements:
•
The basic income tax applicable to Colombian entities and foreign companies acting through a
branch or a permanent establishment is levied at a rate of 25%. For income accrued by a foreign
entity that cannot be assigned to a branch or a permanent establishment, the applicable rate is 33%.
For resident individuals, the rates are progressive (0%, 19%, 28%, or 33%), whereas non-resident
individuals are subject to a fixed rate of 33%. These rates apply insofar as the respective entity is
required to file an income tax return.
•
The income tax for equity (CREE) applies to Colombian and foreign entities that are subject to the
25% income tax rate (bullet above), but not to individuals or to foreign entities that do not have a
branch or a permanent presence in Colombia and are subject to a 33% income tax rate. The CREE
rate is 9% for fiscal years 2013 through 2015 and 8% from 2016 onward. The tax base of CREE is
similar to that of the basic income tax, except that CREE does not allow for certain deductions.
59
CREE taxpayers will be exempt of certain payroll taxes (see the later description of payroll taxes in
Colombia).
•
A capital gains tax is levied on income arising from concepts such as the sale of fixed assets owned
for more than two years, donations, and inheritances, at a rate of 10% for both residents and nonresidents. In the case of capital gains arising from bets, raffles, lotteries, and similar activities, the rate
will be 20%.
Estate and Gift Tax
Colombia has no special estate or gift tax. However, inheritances, legacies, and donations, along with other
special cases, are taxed as capital gains and therefore are subject to a 10% rate and not to the basic income tax
and CREE rates.
Value Added Tax
VAT is levied on the following:
•
The sale of tangible movable goods, not expressly excluded from the scope of the tax, which are
located in the country at the time of the sale. VAT is not triggered by sales of fixed assets, except in
certain cases (such as that of aircrafts).
•
The rendering of services in Colombia. As a general rule, services are deemed to be rendered in the
place of residence of the supplier, except in cases such as the following:
o
Services related to immovable property are deemed to be rendered in the place where the asset is
located.
o
Some services, specifically listed in the Tax Code, are taxed in Colombia whenever they are
rendered in favor of a Colombian entity. This is the case of the licensing of intangibles,
consultancy, advisory and audit, translation, and insurance and reinsurance (except for those
explicitly exempted or excluded), among others.
•
The import of tangible movable goods not expressly excluded.
Merchants and importers are responsible for the collection of the VAT generated by transactions undertaken
by them. However, retail merchants selling goods or rendering services subject to VAT, whose gross receipts
for the previous year do not exceed the legal threshold and who own no more than one commercial
establishment, may ask to be subject to a simplified regime.
60
Unless a transaction is otherwise exempt, VAT is imposed at each stage of production on the basis of the
value added at each stage. Generally, VAT paid on purchases and imports is creditable against the tax
collected on sales, provided that the purchases and imports may be treated as costs or expenses for income
tax purposes. Except in the cases provided for in Articles 285-2 and 489-1 of the Colombian Tax Code, VAT
paid in the acquisition or import of fixed assets is not creditable.
VAT is levied at a general rate of 16% on both goods and services. Special rates of 0% and of 5% apply in
certain cases, outlined in Articles 468-1 and 468-3 of the Colombian Tax Code.
Payroll Taxes
All employers with one or more permanent employees must pay contributions to family welfare,
apprenticeship service, and family compensation funds. The overall contributions amount to 9% of an
employer’s payroll. These taxes are applicable to (i) Colombian entities, foreign companies acting through a
branch or a permanent establishment, and individuals in relation to employees that earn more than ten
monthly minimum wages per month, (ii) nonprofit entities, and (iii) Colombian entities declared as free trade
zones after January 1, 2013.
Entities subject to the income tax for equity, CREE, are exempt from payroll taxes in relation to employees
that earn no more than ten monthly minimum wages per month.
National Consumption Tax
As of January 2013, a national consumption tax is levied on the following:
•
Mobile communication services, which are taxed at a rate of 4% of the value of the service, excluding
VAT.
•
Vehicles, vessels, aircrafts, and other vehicles listed in Articles 512-3 and 512-4 of the Colombian
Tax Code that, depending on their characteristics and value, are taxed at either 8% or 16% of the
total paid value, excluding the VAT. Article 512-5 excludes from the tax the acquisition of certain
types of vehicles, such as those used for public transportation.
•
Services provided by restaurants, cafeterias, bars, and similar establishments are exempt from VAT
and taxed with the national consumption tax at the rate of 8%.
61
Local Taxes
•
Industry and Commerce Tax (Turnover Tax) (ICA): This tax is levied by municipalities on most
commercial, industrial, and service activities performed within their jurisdiction, whether directly or
indirectly, by individuals, corporations, or other legal entities. The tax base for the purposes of ICA is
equal to the gross sales and receipts arising from the taxed activity, minus certain exemptions and
deductions expressly allowed by law and local regulations (e.g., income arising from exports and the
sale of fixed assets). Each municipality is allowed to determine the tax rate, within the thresholds
established by law. These thresholds range from 0.2% to 3% in the case of Bogota (the actual rates
vary between 0.414% and 1.104%.) and from 0.27% to 1% in the case of the remaining
municipalities.
•
Municipal Property Tax: All municipalities are allowed to tax immovable property located within
their jurisdiction at a rate ranging from 0.1% to 3.3% of the real property appraisal. The tax base
cannot be lower than the administrative real estate appraisal, which, according to the law, should not
be lower than 60% of the commercial value of the property.
Registration Tax
The registration tax levies registration of legal acts, contracts, and other legal documents before the Chamber
of Commerce or the Registry of Public Deeds, when according to the law, a private legal entity or an
individual is a party or beneficiary that must be registered before those authorities (this tax does not levy
voluntary registrations, when acceptable).
The base for calculating the registration tax is the amount incorporated in the document, act, or contract. In
the case of incorporation or changes affecting a corporation, the tax base is the total value of the capital
contribution, including the additional paid-in capital. The applicable rate is determined by the local
authorities, within a range of 0.1% to 1%.
62
DOMINICAN REPUBLIC
Fabio J. Guzmán Ariza and Alfredo A. Guzmán 5
1. FOREIGN INVESTMENT
Transformed by globalization, the Dominican Republic has been systematically modernizing its legal and
economic framework to adapt to new competitive standards and encourage the influx of foreign capital. With
the highest Gross Domestic Product (GDP) growth rate in the Caribbean and as current recipient of 53% of
all foreign direct investment made in the Caribbean, the Dominican government supports internationally
accepted financing arrangements and observes international design, construction, and operation standards.
Tourism, telecommunications, mining, and free trade zones have exhibited the greatest investment growth,
but additional opportunities exist in renewable energy, agriculture, construction, aviation, electricity, and
ports.
The Export and Investment Center of the Dominican Republic (CEI-RD) is responsible for the promotion
of foreign investment in the country. The government, through Executive Decree 626-12, recently created a
single investment office (Ventanilla Unica de Inversion or VUI) at the CEI-RD, to allow potential investors to
have the application processes for all permits and licenses related to their investment projects streamlined and
supervised by one single government office. The following sections present the most relevant laws and
treaties in this area.
1.1 The Constitution of the Dominican Republic (Amended January 26, 2010)
The Dominican Republic’s Constitution, in its Articles 25 and 221, expressly entitles foreigners in the
Dominican Republic to the same rights as Dominican nationals, except for participating in local political
activities, and grants equal treatment to both public and private business activities, guaranteeing equal
conditions to both local and foreign investments.
1.2 Law No. 16-95 on Foreign Investments
This law reifies the important equality provision of Article 25 in the new Constitution, providing equal
treatment and nondiscrimination to both national and foreign investments. The statute and its enabling
5
Name partner and senior associate, respectively.
63
regulation (Decree #380-96 as amended by Decree #163-97), grant foreign investors who are contributing
capital to companies operating in the Dominican Republic unlimited access to the Dominican economy,
except for activities that negatively impact the environment or compromise national defense or security.
Capital contributions can be made through several channels and in a variety of forms. Accepted channels of
contributions are (i) direct investment in the Dominican operating company from sources outside the
country, (ii) direct reinvestment of profits derived from the registered Dominican foreign investment back
into that same operating company, and (iii) reinvestment of profits derived from one registered Dominican
foreign investment into a different Dominican operating company. Acceptable forms of contributions as
foreign investment can be liquid currency, contributions in kind, financial instruments, or intangible
technological property and knowledge.
1.3 Regulation 214-04 on Registration and Capital Repatriation
This regulation governs investment registration and grants important benefits to investments that are formally
registered with the CEI-RD within 180 calendar days from the date the investments are made. The benefits of
registration are as follows:
•
Free Fund and Currency Conversion: Investors are granted free access to international currency
and fund conversion through local banks and the Central Bank of the Dominican Republic.
•
Free Repatriation of Dividends and Capital: The foreign investor has the right to remit abroad in
foreign currency all capital invested, as well as capital gains and dividends, after complying with the
existing tax legislation. (The corporate tax rate is 29% for all corporations on net taxable income;
10% withholding on foreign headquarter payments applies—see section 4.) The investor also has the
right to repatriate fee and royalty obligations resulting from a technology service agreement.
•
Expedited Residency Acquisition: Investors who register their investment benefit from a fasttrack procedure if they decide to become residents of the Dominican Republic.
In addition, the Dominican Republic has enacted sector-specific laws that extend generous tax incentives to
investments in said sectors:
•
Free Trade Zones Law No. 8-90
•
Promotion of Tourism Development Law No. 158-01
•
Renewable Energy Incentives and Special Regimes Law No. 57-07
•
Special Border Development Zone Law No. 158-01
•
Film Industry Development Law No. 108-10
64
•
International Financial Zones Law No. 480-08
•
Industrial Innovation and Competitiveness Law No. 392-07.
Finally, the government has supported investors seeking investment guarantees from external agencies by
backing economically significant infrastructure projects with its full faith and credit. Foreign investors in large
projects in the Dominican Republic commonly use capital and political/exchange insurance risk facilities
provided by the Multilateral Investment Guarantee Agency (MIGA) and the Overseas Private Investment
Corporation (OPIC).
2. FOREIGN TRADE
The Dominican Republic is a proactive partner in international trade, embracing a policy of openness and
nondiscrimination to advance internal development, as well as the development of other developing and lessdeveloped countries. Located between Cuba and Puerto Rico, it boasts the largest economy in the Caribbean
with convenient access to markets in the United States, Canada, Latin America, and Europe. It represents the
seventh largest market in the Western Hemisphere for U.S. exports. Bilateral trade between the two countries
is expected to grow, particularly with the U.S. initiative to double U.S. exports between 2010 and 2015. The
primary markets for its goods have been the United States, Haiti, and Western Europe. The predominant
imports have been from the United States, Venezuela, Mexico, and Colombia.
As a member of the World Trade Organization (WTO) since its founding in 1995, the Dominican Republic is
party to several free trade agreements, and regularly explores trade opportunities with other countries that
represent new markets for its goods. Currently, it enjoys advantageous trade with the United States, Europe,
Caribbean countries, and certain Central American countries. Two significant agreements are the free trade
agreement with the United States and Central America (DR-CAFTA) and the Economic Association
Agreement with the European Union (AAE). Both encourage the free flow of trade among the member
states by significantly reducing tariffs, opening new markets, and promoting regional integration.
Furthermore, the country has initiated discussions for free trade agreements with Canada, Mexico, and
Taiwan. These current and potential trade agreements constitute a portfolio of opportunities for any
international investor or business looking to start or expand its operations in the country and export to any of
the member markets.
65
2.1 Dominican Republic and Central American Free Trade Agreement (DR-CAFTA)
The DR-CAFTA was signed on August 5, 2004, and came into effect in the Dominican Republic in March 1,
2007, facilitating trade and investment among member states and promoting regional integration by
eliminating tariffs, opening markets, reducing barriers to services, and advancing transparency. Parties to the
agreement are, in addition to the United States and the Dominican Republic, Costa Rica, El Salvador,
Guatemala, Honduras, and Nicaragua. These states represent the third largest export market for U.S. goods in
Latin America after Brazil and Mexico.
The agreement permanently guarantees the Dominican Republic duty-free access to thousands of goods and
services from the member states, and grants it the ability to export most Dominican products and services to
these states without customs duties. In particular, almost 80% of the consumer and industrial goods from the
United States are duty free immediately, with remaining tariffs to be phased out over a ten-year period.
Apparel made in the Dominican Republic with U.S. fabric and yarn that meets the rule of origin provisions is
duty free and quota free, retroactive to January 1, 2004. In addition, the agreement provides duty-free benefits
to apparel made by a DR-CAFTA state using certain fabrics from Mexico or Canada. Importantly, laws that
once overprotected domestic dealers by locking companies into forced distributorship arrangements have
been loosened.
2.2 Economic Association Agreement (AAE)
Signed in 2007 and adopted by the Dominican Republic on October 15, 2008, this agreement evolved from
an earlier 1975 trade agreement (the Lomé Convention) and the subsequent 2000 Cotonou Accord between
the 27 countries of the European Union (EU) and less-developed countries of Africa, the Caribbean, and the
Pacific. The Dominican Republic coordinates and supervises its projects under the AAE within the
framework of CARIFORUM, which is governed by the Caribbean Community and Common Market
(CARICOM) and its 1998 free trade agreement with the Dominican Republic. Where there is a conflict in
trade treatment between the AAE and CARICOM, the agreement with the least restrictive trade provisions
for the product or sector will prevail.
The AAE makes the unilateral trade programs formerly granted under the Cotonou Accord compatible with
the policies of the WTO of integrating developing countries into the world economy through trade, financial
development, and political dialogue. The AAE offers the Dominican Republic, and by extension its investors,
favorable provisions for cooperative foreign investment by liberalizing trade with the EU countries. This
encourages the Dominican Republic to export nontraditional products and diversify its economy.
66
Access to markets under the AAE is asymmetrical. Provisions for exports from less-developed countries to
the countries of the EU are liberal for eligible products. In contrast, provisions for similar imports from the
EU are subject to restrictions for up to 25 years, while some highly sensitive products are completely
excluded from the scope of the AAE. This asymmetry safeguards certain products and sectors in the lessdeveloped countries from the potential unequal effect of trade with the EU while affording the lessdeveloped member states access to EU products.
2.3 Free Trade Zones
Free trade zones represent a pillar of the Dominican economy and are an attractive investment opportunity
for any investor interested in producing goods or services for overseas markets in government-designated
areas within the country. The Dominican Republic boasts more than 50 zones, comprising more than 500
companies. It has one of the most advanced free trade systems in the world and ranks fourth in terms of
quantity.
The National Council for Export Free Zones regulates the industry dominated by apparel and textiles
(69.1%), tobacco (6.4%), electronics (5.3%), and pharmaceuticals (5.3%). Almost half the free zone
businesses are owned by U.S. investors, more than a third by Dominicans, and the remainder predominantly
by Asians.
Law No. 8-90 provides the following generous array of customs and tax incentives to free trade zone
investments for a period of fifteen years.
•
Exemption from income tax.
•
Exemption from all corporate taxes on tangible and intangible assets and net worth.
•
Exemption from all taxes on construction, conveyance, and registration of real property.
•
Exemption from incorporation and capitalization taxes.
•
Exemption from the ITBIS tax (value-added tax).
•
Exemption from municipal taxes.
•
Exemption from existing export or re-export taxes, except those expressly stated in Law No. 8-90.
•
Exemption from import taxes, customs duties, and related charges on raw materials, equipment,
construction materials, vehicles, office equipment, and any other goods necessary for the
construction, preparation, and operation of a free trade zone business.
•
Exemption from consular duties for goods or services destined to other free trade zones.
67
•
Exemption from import taxes and customs duties on raw materials imported by a Dominican
company for use in finished or semi-finished products destined for export to a free trade zone. This
exemption requires prior authorization from the national regulatory agency.
Also, goods and services from one free trade zone can be sold or transferred to another free trade zone with
prior authorization from the national regulatory agency. However, goods and services sold in the Dominican
market are subject to all import taxes, customs duties, and quota requirements, except those that qualify as a
priority sector under Law No. 56-07 (textile and accessory manufacturing, leather and shoe manufacturing,
and furs), which enjoy more liberal import tax and duty treatment.
3. CORPORATE MATTERS
Foreign companies and individual investors can conduct business or channel their investments in the
Dominican Republic either through a local branch or through a wholly or partially owned subsidiary. Foreign
corporations are not required to register a local branch in the Dominican Republic if their activities will be
limited to acquiring shares in local corporate entities.
To register a local branch of a foreign company in the Dominican Republic, all incorporation documents
must be translated and authenticated either by an apostille or by the nearest Dominican Consulate. Afterward,
the company has to apply for registration at the Mercantile Registry and finally request a tax number at the
Internal Revenue office. Local branches of foreign companies and Dominican companies receive the same
tax treatment.
Members, shareholders, corporate managers, officers, or directors of a local branch or Dominican company
need not be Dominican citizens or residents to form, manage, or serve as directors in the company or acquire
its shares, except in very special circumstances. Foreign investors are, therefore, not required to be residents
or citizens of the Dominican Republic or act through a local legal representative for these purposes.
Company Law (Ley de Sociedades) No. 479-08, effective December 11, 2008, as amended by Law No. 31-11 of
February 11, 2011, governs corporate entities in the Dominican Republic. The law is generally flexible and
imposes few capitalization requirements; however, unlike in some countries, Dominican companies are
subjected to the same tax treatment regardless of their structure. Selecting the proper structure will depend on
the foreign investor’s needs related to the amount of the capital investment, company management,
transferability of shares, and reporting formalities, among other factors.
68
3.1 Company Structures and Characteristics
Four structures are used most often in the Dominican Republic. In these four structures, an individual
member’s liability is limited to no more than the amount of that member’s contribution to the company. In
other words, if a company fails, a member stands to be liable only for the amount invested. None of the
members, individually or collectively, is liable for the debt obligations of the company. Furthermore, the
limited liability protection afforded to members of these structures is strictly observed under the law, except
in the case of fraud or misrepresentation.
3.1.1 Corporation (Sociedad Anónima or S.A.)
The corporation is ideal for large businesses and is the only structure that can raise capital through a public
stock offering. The business name is subject to local availability.
•
Structure: Minimum of two stockholders, no maximum; minimum authorized capital investment of
RD$30 million (Dominican pesos) (approximately US$731,000); minimum paid-up capital
investment of RD$3 million (approximately US$73,000); management is by a board of directors
comprising at least three members (Consejo de Administración), which can in turn be both individuals or
other corporate entities. A management supervisor is required (Comisario de Cuentas).
•
Stock: Nominal, endorsable, or “to the bearer.” Transfer of stock is essentially free except for
restrictions in the bylaws (Estatutos). In the case of a stockholder’s death or divorce, the heirs and/or
spouse of the stockholder will become the stockholders of the company despite restrictions in the
bylaws.
3.1.2 Simplified Corporation (Sociedad Anónima Simplificada or S.A.S.)
The simplified corporation is best for medium to large-sized businesses. Capital may not be raised through a
public offering except through debt instruments. The business name is subject to local availability.
•
Structure: Minimum of two stockholders, no maximum; minimum authorized capital investment of
RD$3 million (approximately US$73,000); minimum paid-up capital investment of RD$300,000
(approximately US$7,300); management is by an individual, another corporate entity, or a board as
established in the bylaws. A management supervisor is not required. Unlike other corporate entities
that have rigid functioning regulations set by the law, shareholders have leeway to regulate its
functioning in a large part through its bylaws.
•
Stock: Nominal only; transfer of stock is essentially free except for restrictions in the bylaws.
Restricting transfer of stock to heirs or spouse of a stockholder is possible.
69
3.1.3 Limited Liability Company (Sociedad de Responsabilidad Limitada or S.R.L.)
The limited liability company is best for small to medium-sized businesses and large, family-owned
businesses. Capital may not be raised through a public offering. The business name is subject to local
availability.
•
Structure: Minimum of two shareholders, maximum of 50; spouses may be sole shareholders;
minimum capital investment of RD$100,000 (approximately US$2,700) paid in full. Management is
by one or more individuals or a board of individuals as established in the bylaws. Management
cannot be by another company. No management supervisor is required, except in special
circumstances.
•
Shares: No stock is issued. Transfer of shares is essentially restricted, and requires 50% to 75% of
the votes of the shareholders for approval. Restricting transfer of shares to heirs or spouse of a
shareholder is possible.
3.1.4 Individually Owned Company with Limited Liability (Empresa Individual de Responsabilidad
Limitada or E.I.R.L.)
This structure is good for individually owned businesses. Capital may not be raised through a public offering.
The business name is subject to local availability.
•
Structure: Maximum of one stockholder who must be the owner and an individual, not a company;
no minimum capital investment is required; management is by the owner, or an owner-appointed
“manager.” No management supervisor is required.
•
Stock: No stock is issued. Transfer of the business signifies the sale of the business.
3.1.5 Less Frequently Used Business Structures
Other business structures are recognized under the law, but are seldom used because they offer no shield to
their members for the liability of a company’s debt and are subject to the same tax treatment as other
companies. These are:
•
Business Partnership (Sociedad en Nombre Colectivo)
•
Limited Partnership (Sociedad en Comandita Simple)
•
Special Limited Partnership (Sociedad en Comandita por Acciones)
•
Joint Ventures (Sociedades en Participación), between both foreign and local investors, usually structured
through one of the first three corporate entities described above.
70
3.2 Company Formation Process
Regardless of the type of entity, the company formation process involves five basic steps.
•
Register the Company Name: Clearing a company name before the National Office of Industrial
Property (ONAPI) can be time consuming, as most commonly selected names are already in use by
others. Therefore, if time is of the essence and the company name is not immediately critical, the
investor can opt to acquire a shelf company that is ready for operation or a shelf numbered
commercial name, and opt to change the name later. In either case, the two-step process will incur
extra costs, but will expedite the registration process with the advantage that the investor will
establish a legally recognized company more quickly.
•
Prepare and Sign Company Documents: The documents required will depend on the particular
structure selected, but will include at a minimum the articles of incorporation and bylaws.
•
Pay the Organization Tax: Be forewarned that Dominican company organization taxes are higher
than those imposed on American companies. This particular tax amounts to 1% of the authorized
capital for S.A. and S.A.S. structures, and paid-in capital for S.R.L. and E.I.R.L. structures.
•
Record the Company Documents with the Business Registry (Registro Mercantil): The
moment the company documents are recorded at the Business Registry, the company is deemed to
legally exist, affording the company access to all benefits granted under the law. Recordation fees are
calculated on the basis of the company’s authorized capital for S.A. and S.A.S. structures, and paid-in
capital for S.R.L. and E.I.R.L. structures.
•
Register the Company with the Bureau of Internal Taxes (Dirección General de Impuestos
Internos or DGII): The newly formed company and each individual member, whether foreign or
domestic, must obtain a tax number by registering with the DGII. The company tax number (número
de registro nacional de contribuyentes) permits the company to open a bank account, acquire real estate,
and operate generally within the country.
3.3 Reporting Formalities
Every Dominican company must comply with the following reporting formalities:
•
Annually, hold a general members’ meeting to review the company’s operation for the previous year.
Minutes of the meeting must be recorded with the Business Registry.
•
Every two years, renew the company registration with the Business Register.
•
For a minimum of ten years, retain company books and correspondence.
•
Company taxes are discussed in the following section.
71
4. TAX MATTERS
Taxation in the Dominican Republic is governed by Law No. 11-92 of May 31, 1992, commonly known as
the Tax Code (Código Tributario), its amendments and regulations (Reglamentos).
Taxes are collected by the Bureau of Internal Revenue (DGII), an autonomous government entity that may
also issue its own regulations (Normas).
Dominican income tax law is primarily territorial. All income derived from work or business activities in the
Dominican Republic is taxable, no matter if the person is Dominican, a resident foreigner or a nonresident
foreigner, or if the entity is Dominican, or is foreign with or without a permanent establishment in the
country (Articles 269 and 270).
Income derived from work performed outside of the Dominican Republic, by Dominican nationals or
entities or foreign resident individuals and entities, is not taxable in the Dominican Republic. The exception
to the principle of territoriality is income from financial sources abroad (Arts. 269 and 271). A Dominican or
a resident foreigner receiving income from financial investments (stocks and bonds, certificates of deposits,
etc.) must pay taxes in the Dominican Republic on their income from those investments (Art. 269). Pensions
and social security benefits are exempt (Art. 2 of Reglamento #139-98). For the resident foreigner, this
obligation only starts three years after obtaining residency (Art. 271); however, those who have obtained their
residence as retirees are exempt from paying taxes on the income they have declared for resident purposes
(Art. 10 of Law No. 171-07).
For tax purposes, any person residing in the Dominican Republic for more than 182 days in a year is
considered a resident (Art. 12).
The Tax Code includes a general anti-avoidance provision whereby the tax authorities may ignore the
existence of legal entities or certain transactions when used to secure a tax advantage (Art. 2).
Law No. 53 of 1970 makes it mandatory for all taxpayers to register with the tax authorities and obtain a tax
or RNC (Registro Nacional de Contribuyentes) number.
The most important taxes in the Dominican Republic are presented in the following sections.
72
4.1 Income Tax
4.1.1 For Corporations and Other Entities
Corporations, companies, and any other for-profit entities or organizations, regardless of their place of
domicile, pay a flat 29% income tax on net taxable income (Art. 297). The flat tax rate of 29% will be reduced
to 28% for 2014 and then to 27% for 2015 and the following years. Unlike in the United States and other
countries, in the Dominican Republic the tax treatment for corporations, partnerships, and limited liability
companies is exactly the same.
Net taxable income is determined after deducting from gross income those advance payment, credits, and
deductions admitted by law (Arts. 284 to 287). Deductions allowed include:
•
Interest payments on debts
•
Expenses related to the creation, renewal, or cancellation of debts
•
Other taxes paid over goods linked to the generation of the taxable income that are not considered as
credits or advance payments
•
Insurance premium payments
•
Extraordinary losses “force majeure”
•
Depreciation
•
Amortization expense of intangible assets (copyrights, intellectual property rights, contracts,
franchises)
•
Bad debts according to the authorized provisions
•
Charity donations (up to 5% of the period’s net taxable income)
•
Research and development expenses not related to mineral extraction
•
Net operating losses (carried forward up to five years)
•
Contributions to approved employee pension funds (up to 5% of the period’s next taxable income).
Only those expenses and net profit losses incurred to obtain the local taxable income can be deducted; taxes
paid abroad derived from income of a foreign source cannot be credited against Dominican taxable income.
Net operating losses of any given fiscal year may be carried forward up to five years, but not carried back.
These deductions can only be made for up to 20% of the total value of the losses for each of the first three
years. For the fourth and fifth years, the 20% deduction can only be made up to 80% and 70%, respectively,
of the net taxable income for those years. Losses derived from other entities with which the company has
been involved in a corporate restructuring process cannot be deducted.
73
Income tax is paid monthly or quarterly in advanced installments based on the previous year’s earnings.
Income tax is annual and filed with the DGII even if the company had no income or business activity. For
companies operating on a calendar year, returns must be filed on or before April 30. For companies operating
on a fiscal year, tax returns must be filed within 120 days from legally prescribed year-end dates. Returns must
be accompanied by financial statements audited by a certified public accountant.
4.1.2 For Individuals
Individuals obtaining income from a Dominican source or from financial investments abroad shall pay taxes
according to the following scale (Art. 296), in Dominican pesos (RD$) 6:
•
Income up to RD$399,923.00 annually: Exempt
•
RD$399,923.01 to RD$599,884.00: 15%
•
RD$599,884.01 to RD$$833,171.00: RD$29,994.00 plus 20% of income above RD$599,884.01
•
Income above RD$833,171.01: RD$76,652.00 plus 25% of income above RD$833,171.01.
This scale is adjusted for inflation every January based on the rate of inflation calculated by the Central Bank
of the Dominican Republic. This adjustment has been recently suspended for the period 2013 to 2015 (Art. 3
of Law No. 253-12).
Employers must retain and pay to the DGII, within the first ten days of each month, any income tax due on
the salaries paid to their employees the previous month (Art. 307). Individuals who receive incomes from
nonwage sources must file a tax declaration every year, on or before March 31 (Art. 110 of Regulation
#139-98).
4.2 Capital Gains Tax
Capital gains are defined as the difference between the sale price of an asset and the acquisition or production
price adjusted for inflation (Art. 289). Capital gains are taxed as regular income.
An example: If a wholly owned subsidiary of a foreign company (subject to a 29% flat rate income tax)
purchases the shares of another Dominican company for US$4 million and sells it two years later for
6
Exchange is currently RD$41:US$1.
74
US$6 million, while inflation during the two-year period is a cumulative 15%, the tax due on capital gains is
calculated as follows:
US$6 million – US$4.6 million (US$4 million + 15%) x 29% tax = US$406,000.
Taxes are levied based on the capital gains calculated in Dominican pesos.
4.3 Tax on the Transfer of Industrialized Goods and Services (ITBIS)
The ITBIS is a value-added tax applicable to the transfer and importation of most goods and to most services
(Art. 335). The rate of the ITBIS is 18% (Art. 341). For imports, the ITBIS is charged on the CIF value of the
goods plus applicable duty (Art. 339). There are many exemptions to the ITBIS tax (Arts. 342 and 343),
including exported goods, some basic foodstuffs, medicines, fuels, fertilizers, books and magazines,
educational materials, financial services, transportation services, home rentals, utilities, and educational and
cultural services.
The 18% IBIS must be added to every bill for goods and services that are not exempt. The individual or
entity receiving the ITBIS must disburse it to the DGII within the first 20 days of the following month (Art.
353). Noncompliance is subject to a 10% surcharge for the first month and 4% for each month thereafter, in
addition to 2.58% interest for each month or fraction of a month (Art. 252). From the total ITBIS received,
the individual or entity is allowed to deduct any ITBIS paid to suppliers, customs, etc. (Art. 346).
4.4 Selective Consumption Tax (ISC)
The ISC is applied to the acquisition or import of certain goods and services, such as the following (Arts. 361,
381 to 383): motor vehicles, guns, tobacco products, alcohol products, jewelry, electronic products, longdistance phone calls, and insurance.
The ISC rate varies according to the good or service taxed.
4.5 Tax on Assets
Businesses and corporations must pay a 1% annual tax on assets (Arts. 401 and 404) in two installments due
on April 30 and October 30 (Art. 405). For the purposes of this tax, all assets are taken into account, minus
depreciation and amortization, except (i) stock holdings in other corporations, (ii) real estate in rural areas,
75
(iii) real estate used for agriculture or animal husbandry, (iv) tax advances, and (v) provisions for bad debts
(Art. 402).
The tax on assets operates as a kind of minimum income tax. If the income tax paid by the business or
corporation is equal to or higher than the amount of the tax on assets, then the business will have no
obligation to pay the tax on assets (Art. 407). If the income tax paid is less than the amount of tax on assets
due, the business must pay the difference.
New capital-intensive businesses may obtain a temporary exemption from this tax if certain conditions are
met.
The tax on assets will be eliminated in 2015. Also, the tax rate for 2014 will be reduced to 0.5%. After 2015,
real estate properties held by corporate entities will pay the same property tax as individuals (1% of the
government-appraised value of the property).
4.6 Transfer Pricing
Dominican transfer pricing rules will apply when a resident company or individual enters into a commercial
or financial operation with (i) a related company abroad or (ii) companies or individuals domiciled in states or
territories with preferential tax systems (low or zero taxation) or blacklisted jurisdictions, regardless of them
being or not related parties, and the prices agreed in said operations do not reflect the amounts that would
have been charged between independent parties in similar operations (Art. 281).
4.7 Withholding or Retentions at the Source
The Tax Code establishes the following withholdings:
•
Payments abroad to persons or entities not domiciled or resident in the Dominican Republic are
subject to a 29% withholding on the amount paid (Art. 305). This withholding is considered as final
and definitive payment of the taxes owed for the operation. No deductions are allowed. The only
exceptions to this provision are interest payments to financial institutions abroad, which are subject
to a 10% withholding instead (Art. 306).
•
Also, payments abroad by a branch office domiciled in the Dominican Republic to its headquarters
abroad are subject to a 10% withholding (Art. 308).
76
•
Payments to Workers: Employers must retain income taxes per the table published by the DGII (Art.
307).
•
Dividends: Corporations must retain 10% of the dividends paid to shareholders (Art. 308).
•
Rentals: Payments to individuals (not corporations) are subject to a 10% withholding (Art. 309).
•
Fees for Services and Commissions: Payments to individuals (not corporations) are subject to a 10%
withholding (Art. 309).
•
Prizes: All payments are subject to 10% to 25% withholding, depending on the amount of the prize.
•
Government payments to suppliers are subject to a 5% withholding.
4.8 Real Estate Tax
A 1% annual tax is assessed on any real property owned by individuals, based on the cumulative value of the
properties owned by the same individual, as appraised by government authorities (Arts. 1 to 3 of Law No.
18-88). Properties are valued without taking into account any furniture or equipment to be found in them.
For built lots, the 1% is calculated only for values exceeding RD$6.5 million. For un-built lots, the 1% tax is
calculated on the actual appraised value without the RD$6.5 million exemption. Individuals must pay this tax
every year on or before March 11, or in two equal installments: 50% on or before March 11 and the
remaining 50% on or before September 11.
The RD$6.5 million threshold is adjusted annually for inflation.
The following properties are exempt from this tax:
•
Built properties valued at RD$6,500,000 or below
•
Farm properties
•
Property whose owners are 65 years old or older, have owned it for more than 15 years, and have no
other property in their name
•
Properties subject to the tax on assets.
4.9 Real Property Transfer Tax
A 3% tax is assessed on any transfer of ownership of real estate (Art. 20 of Law No. 288-04). The transfer tax
is paid based on the market value of the property as determined by the appraisal conducted by the DGII, not
on the price of purchase stated in the deed of sale. The deed of sale cannot be filed at the Title Registry
77
Office without paying this tax. The transfer tax must be paid within six months of the date of the deed of sale
(Art. 7 of Law No. 173-07). Noncompliance is subject to fines.
Properties worth less than RD$1 million acquired through a bank loan are exempt from the transfer tax (Art.
20 of Law No. 288-04). The RD$1 million exemption is adjusted annually for inflation.
4.10 Tax on Mortgages
A 2% tax is levied on all mortgages recorded in the Dominican Republic (Art. 8 of Law No. 173-07).
4.11 Tax on Transfers of Motor Vehicles
A 2% tax is levied on any change of ownership of motor vehicles (Art. 9 of Law No. 173-07). The transfer
tax must be paid within three months of the date of the acquisition. Noncompliance is subject to fines.
4.12 Inheritance and Gift Taxes
The estate of any person, Dominican or foreign, whose last domicile was in the Dominican Republic is
subject to Dominican inheritance taxes. The inheritance of property located in the Dominican Republic is
subject to Dominican inheritance taxes, irrespective of the nationality or domicile of the deceased (Art. 1 of
Law No. 2569 of 1950).
Law No. 288-04 lowered inheritance taxes to 3% of the value of the estate, after deductions, as determined by
the tax authorities. Medical and funeral expenses, as well as outstanding debts and mortgages, are some of the
allowed deductions. Beneficiaries must file a declaration with the tax authorities within 90 days of the death of
the decedent. An extension for an additional three and a half months is possible in complex cases (Art. 26 of
Law No. 2569). Delays in filing are subject to a 2% per month penalty, up to a maximum of 50% of the tax
owed (Art. 9 of Law No. 2569).
Gifts are taxed at a 25% rate (Art. 6 of Law No. 2569) except the following, which are exempt:
•
Gifts of less than RD$500
•
Gifts to government institutions or recognized nonprofit organizations
•
Gifts to the family homestead (bien de familia).
78
5. LABOR MATTERS
Labor relationships in the Dominican Republic are governed by Law No. 16-92 of May 29, 1992, commonly
known as the Labor Code, which is characterized by its strong and sometimes inflexible protection of the
rights of the individual employee.
5.1 Hiring a Workforce
There are several details to pay attention to and obligations to comply with when hiring a workforce.
5.1.1 The Employment Contract
As a general rule, any and all relationships in which one person obliges himself or herself to provide any form
of service to another, in exchange for remuneration and under the direction and/or supervision of the latter,
are considered to be employment contracts and subject to the provisions of the Labor Code (Arts. 1 and 2).
Such contracts, which may be verbal or written, are presumed to exist in every such case, unless proven
otherwise by the employer. Given this presumption, it is quite possible for a person considered a private
contractor in other jurisdictions to qualify as an employee in the Dominican Republic.
Any party to an employment contract may require the other to prepare and/or sign a written version of a
previously verbal agreement (Art. 19). If in writing, any modifications made to it must also be in writing (Art.
20). Written agreements are recommended since they foster a clear and sound work relationship.
Any work carried out by a foreigner on Dominican soil is subject to the provisions of the Labor Code since
Dominican labor laws are territorial in nature (Principle V of the Labor Code).
5.1.2 Restrictions and Obligations
Certain limitations apply to the terms of the employment contract and the persons being employed.
There is also a series of employer-exclusive obligations that arise from hiring a workforce.
5.1.3 Working Hours and Shifts
Normal working hours may not exceed eight hours a day or forty-four hours a week (Art. 147). Employees in
executive or managerial positions are considered an exception to this rule and may work up to ten hours a day
(Art. 150).
79
Daytime work hours range from 7:00 a.m. to 9:00 p.m. (Art. 149). A work shift is considered a daytime shift
as long as no more than three hours exceed the 9:00 p.m. limit. Otherwise it is considered a night shift, which
entails an increase in remuneration. The weekly work shifts normally end on Saturdays at noon, giving the
employee thirty-six hours of uninterrupted rest. Any other arrangement must provide the same minimum
uninterrupted rest period of thirty-six hours.
5.1.4 Employee Nationality
At least 80% of an entity’s workforce must be Dominican (Art. 135). Likewise, no less than 80% of the
payroll, with the exception of salaries for technical or executive positions, must correspond to wages earned
by Dominicans (Art. 136). Distributions of Dominican and foreign workers for workforces of less than ten
persons are provided for expressly under the Labor Code (Art. 137). Employees carrying out exclusively
executive or managerial duties and those in technical positions for which there is no available Dominican
substitute are exceptions to these rules (Art. 138).
5.1.5 Employee Age
A person is considered of legal age for labor purposes at 16. However, an employment contract may be
entered into by a minor for nonhazardous work provided that the minor has reached the age of 14 and has
obtained authorization of his or her parents (Art. 17). Work hours for minors may not exceed six hours a day
(Art. 247). Employment of minors is prohibited in establishments selling alcoholic beverages (Art. 253).
5.1.6 Bookkeeping and Filings
Employers are required to keep the following records on a permanent basis: (i) employee, wage, and schedule
listings; (ii) vacations listings; (iii) overtime listings; and (iv) inspection visit records (Art. 16). Keeping these
records and duly registering with authorities are crucial for employers, given that the records are the only valid
evidence that may be presented by them against employees in many cases.
5.2 Wages
Wages must be paid in cash and cannot be below the established minimum wage (Arts. 192 and 193). The
interval between salary payments cannot exceed one month (Art. 198). Nonpayment of wages by the
employer is considered a criminal offense punishable by a fine and up to five years in prison (Arts. 198 and
211).
•
Minimum Wage: Minimum wages are established by the National Salary Committee, a dependency
of the Ministry of Labor, and vary according to the different types of businesses and their
installations and/or holdings.
80
•
Overtime: Every hour above the 44-hour weekly limit is to be paid at 135% of the normal hourly
wage (Art. 203). Every hour in excess of 68 hours a week is to be paid at 200% of the normal hourly
wage. Night hours are paid at an additional 15% (Art. 204).
•
Christmas Salary: In addition to regular salary, every employee in the Dominican Republic receives,
on or before December 20, a so-called “Christmas salary” equal to one-twelfth of the total regular
salary earned during the year (Art. 220). To calculate the Christmas salary, only the regular salary
received is taken into account, excluding tips, overtime, and benefits received from profit sharing.
The Labor Code establishes a maximum Christmas salary of five times the minimum wage. However,
many employers waive this limitation and pay employees who have worked the whole year a full extra
monthly salary. The Christmas salary is exempt from income tax (Art. 222).
•
Profit Sharing: Employers must share 10% of their net profits with their employees. The Labor
Code, however, allows employers to cap the amount distributed as follows: an employee with less
than three years on the job will receive a maximum of forty-five days of salary; an employee with
three years or more will receive a maximum of sixty days of salary (Art. 223).
5.3 Time Off
The Labor Code contemplates several forms of time off for employees, such as leaves of absence, vacations,
and holidays.
•
Leaves of Absence: An employee has the right to paid leaves of absence in the following cases (Art.
54): (i) marriage, five days; (ii) death of grandparent, parent, offspring, or spouse, three days; (iii) wife
or companion giving birth, two days, and (iv) maternity leave, six weeks before the birth of the child
and six weeks after.
•
Vacations: Employers must grant their employees a yearly minimum of fourteen working days of
paid vacation (Art. 177). After five years on the job, vacation time increases to eighteen working days
per year. An employee acquires the right to vacation after a year on the job. Vacations cannot be
fractioned for periods shorter than a week and may not be replaced with additional payment or any
other form of compensation (Art. 182). The salary for the vacation period must be paid by the
employer on the day prior to the beginning of vacation (Art. 181).
81
•
Holidays: Public holidays in the Dominican Republic are listed on the following table:
Holidays in the Dominican Republic
New Year’s Day
January 1
Three Kings’ Day
January 6
Day of the Virgin of Altagracia
January 21
Birthdate of Juan Pablo Duarte
January 26
Independence Day
February 27
Good Friday
Variable (March or April)
Corpus Christi
Variable (May or June)
Labor Day
May 1
Restoration Day
August 16
Day of the Virgin of Mercedes
September 24
Constitution Day
November 6
Christmas
December 25
5.4 Termination
Termination implies a permanent break in the effects of the employment contract. Several types of
termination are contemplated under the Labor Code.
5.4.1 At-Will Termination (Desahucio)
Any party to an employment contract has the right to terminate it unilaterally without the need to specify a
cause (Art. 75). The terminating party must give 7, 14, or 28 days of advance notice of this decision to the
other party depending on whether the agreement has been in force for more than 3, 6, or 12 months
respectively (Art. 76). A late notice or no notice at all will entail a penalty of one day’s salary for every day of
noncompliance (Art. 79). Employers that exercise their right to terminate their employees without cause must
make severance payments to the terminated employee, as detailed in section 5.4.4 (Art. 80).
82
5.4.2 For-Cause Termination (Despido and Dimisión )
Employers may dismiss their employees alleging one or several of the specific causes listed under Article 88
of the Labor Code. For-cause termination by an employer (despido) requires evidence of the commission by
his or her employee of one or several of the listed grounds for termination (Art. 87). It also requires that the
employer give notice of the termination and the grounds on which it is based to the Department of Labor
within forty-eight hours of the dismissal (Art. 91). Failure to prove cause or to render the notice within the
stated forty-eight hours will make the employer liable for payment of severance to the employee (Arts. 93 and
94). The right of the employer to base the dismissal on a specific cause for termination expires fifteen days
after the employee has committed the act alleged as grounds for termination (Art. 90).
The advice of legal counsel is strongly recommended before proceeding to terminate an employee for cause.
An employee may resign from his or her job for cause (dimisión). For-cause termination by employees also
requires evidence of the commission of one or several of the listed grounds for termination (Arts. 96 and 97).
If proven, the employee has the right to receive severance from the employer (Art. 101).
5.4.3 Termination Due to Incapacity or Death of the
Employee
In the event of incapacity or death of the employee, the
employer shall pay the employee, or his/her heirs,
economic assistance in the amounts shown in the table to
the right (Art. 82).
5.4.4 Severance Pay
Severance pay, due in the circumstances described here,
ECONOMIC ASSISTANCE
Time Employed
Assistance
3 to 6 months
5 days’ salary
6 to 12 months
10 days’ salary
Over 1 year
15 days’ salary per year
SEVERANCE PAY
varies depending on the duration of the employment
Time Employed
Severance
contract as shown (Art. 80). When applicable, any sums
3 to 6 months
6 days’ salary
owed by the employer must be paid within ten days of the
6 to 12 months
13 days’ salary
termination (Art. 86). Noncompliance entails a penalty of
1 to 5 years
21 days per year
one day of salary for every day of delay (Art. 86).
Over 5 years
23 days per year
5.4.5 Maternity Protection
The Labor Code provides special protection for employees who are pregnant or have recently given birth
(Arts. 231 to 243). At-will termination by the employer is strictly forbidden during the pregnancy of the
employee and up to three months after birth (Art. 232). The pregnant employee has the right to paid
83
maternity leave during the six weeks that precede the probable birth date and the six weeks that follow it (Art.
236). The employee has also the right to three rest periods of twenty minutes each workday to breast-feed her
child (Art. 240).
An employer who terminates a pregnant employee at will or without justifying cause for dismissal will be
liable to pay the employee, in addition to the standard severance, the equivalent of five months’ salary (Art.
233).
5.4.6 Suspension
An employment contract may be suspended either by the mutual consent of the parties or due to one of the
other causes expressly provided by the Labor Code (Art. 51). Under a suspended employment contract,
neither employer nor employee has to comply with their respective obligations for the duration of the
suspension.
5.5 Unions
Dominican law acknowledges the right of employees to associate into unions in order to defend their
interests. Unions must have a minimum of twenty members (Art. 324). Union officials receive special
protection from termination by their employer (Art. 391).
Strikes: The Labor Code recognizes the right to strike by unions. Strikes can only involve the peaceful
interruption of the work carried out by the employees (Art. 402). Strikes in essential services, such as utilities,
communications, and hospitals, are illegal (Arts. 403 and 404).
Before striking, unions must give a ten-day notice to the Ministry of Labor stating the following: (i) the
economic conflict or infringement of rights that the strike aims to solve; (ii) how previous attempts to solve
the conflict without striking have not been successful; (iii) that the strike has the approval of at least 51% of
the union members; and (iv) that the services affected by the strike are not essential to the public (Art. 407).
5.6 Withholding and Taxes
•
Income Tax: All employers must withhold income taxes from their employees’ salaries and pay
them monthly to the tax authorities (Art. 307 of the Dominican Tax Code).
84
•
Social Security: The Dominican social security system established by Law No. 87-01 contemplates
insurance for health and labor risks and an incapacity/retirement fund, to be funded by salary-based
contributions to be made by both employee and employer in the following proportions:
Concept
Employee
Employer
Total
Contribution
Contribution
Contribution
Health Insurance
7.09%
3.03%
10.13%
Labor Risk Insurance
—
1.25%
1.25%
Incapacity/Retirement Fund
7.10%
2.87%
9.97%
Employers are responsible for payment of social security contributions, withholding their employees’
share from the payroll. Contributions are capped at twenty times the minimum salary. Any amount
above this cap is not taken into account to calculate the monthly contribution.
•
Instituto de Formación Técnico Profesional (INFOTEP): INFOTEP is a public institution
created by Law No. 116 of 1980 to provide training and continual education to Dominican workers.
INFOTEP is financed by a 1% tax on the payroll of all private businesses payable monthly.
6. RELOCATION OF FOREIGN WORKFORCE
Employee relocation matters are subject to Immigration Law No. 285-04 and Immigration Regulation No.
631-11.
Foreign companies wishing to relocate their employees to the Dominican Republic are required first to have
them apply for Dominican residency. Foreign nationals seeking residency in the Dominican Republic fall into
two categories: those who may apply immediately for permanent residency and those who first must apply for
temporary residency.
The following applicants may apply immediately for permanent residency status without having to previously
obtain temporary residency status:
•
Investors of at least US$200,000 in local businesses (including free zones and government contracts)
or in local financial instruments
•
Retirees with a monthly pension of at least US$1,500 (plus US$250 per dependent)
•
Applicants with monthly income of at least US$2,000 for five years or more (rentistas)
85
•
Applicants related to Dominicans or to foreigners with permanent residency status in the Dominican
Republic (spouses and children).
Foreign nationals are prohibited by statute from entering the Dominican Republic for residency purposes in
the following cases:
•
Contagious illness threatening to public health, except, under certain requirements, when sponsored
by relatives living in the Dominican Republic
•
Mental illness or physical disabilities, with certain exceptions
•
Conviction for a crime (drugs, human trafficking, prostitution, terrorism, and other serious offences)
•
Previous deportation without reentry permit or prohibition from entering the country.
The application process is essentially the same for both temporary and permanent residency, except for some
additional documents required in permanent residency applications. The first step is to apply for a residency
visa at the Dominican Consulate nearest to the applicant’s domicile.
Requirements for the visa application may vary depending on the particular Consulate where the visa
application is filed. Residency applications may include dependents such as a spouse and children, provided
that the proper documentation is attached (birth certificates, marriage certificate, passports, pictures, etc.).
Criminal record certificates are only required of dependents of legal age.
The Consulate, upon granting the residency visa, will deliver the file to the applicant with the original
documents, which should be brought down by the applicant to the Dominican Republic to begin the
residency application process. Upon arrival, the applicant will need to have medical tests performed (X-ray
and blood and urine samples), sign the necessary forms, and register his or her fingerprints at the Department
of Immigration. This must be done within thirty days of entry into the Dominican Republic. When the results
are obtained, the formal residency application is filed at the Department of Immigration.
Temporary residency is granted for one year. Temporary residents may apply for permanent residency after
five years, within forty-five days before the expiration date of their temporary residency card.
Permanent residents must renew their residency card after one year; subsequent cards will be renewable every
four years, except for retirees and rentistas who must renew every two years. After ten years, permanent
residents will be issued a definitive residency card, not subject to renewal. An annual residency fee, however,
will still have to be paid.
86
Permanent residents may apply for citizenship after two years as permanent residents. Investors and spouses
of Dominican nationals may apply after six months.
It is illegal for nonresidents to work in the Dominican Republic. Employers of nonresident workers will be
subject to fines. Illegal workers are subject to deportation.
87
This page intentionally left blank
88
ECUADOR
Paz Horowitz Robalino Garcés, Abogados
1. FOREIGN INVESTMENT
1.1 Principles of Foreign Investment
The Ecuadorian legal system provides vehicles for foreign investment, but prioritizes national investment
under some circumstances. The Constitution of Ecuador and the Organic Code for Production, Trade and
Investments (Código Orgánico de la Producción, Comercio e Inversiones or COPCI) are important laws that govern
income and the protection of foreign investment in Ecuador.
A member of the Andean Community (Comunidad Andina or CAN), Ecuador provides equal and
nondiscriminatory treatment to investors of Member Countries (Decision 291) and benefits to qualifying
Andean Multinational Enterprises owned by Andean Investors (Decision 292).
The COPCI indicates that foreign investment enjoys the same conditions as investments from Ecuadorian
individuals or legal entities. This means that foreign investments are not subject to prior authorization by the
government of Ecuador. However, the COPCI does distinguish between foreign and domestic investors in
“strategic” areas such as fisheries, mining, and hydrocarbons.
The current Ecuadorian Constitution grants certain exclusive rights to the state for the provision of public
services and for the use and management of “strategic” sectors such as energy, telecommunications,
nonrenewable natural resources, transportation and refining of hydrocarbons, biodiversity, genetic heritage,
and radio-electricity. Therefore, private investment in these areas is subject to permits, concessions, or other
restrictions that apply to both national and foreign investors.
The Ecuadorian regulatory framework extends to any type of capital transfer to Ecuador from abroad, by
foreign individuals or legal entities, for the production of goods and services. This definition includes
financial resources in freely convertible currency and other tangible and intangible assets such as trademarks
and industrial designs.
89
In principle, there are no restrictions on the methods of investment in Ecuador by foreign investors.
However, both domestic and foreign investors in the oil sector are bound to contract with the state-owned oil
company.
The COPCI and Decision 291 of the Andean Community guarantee foreign investors the right to transfer the
profits generated by their investments to locations abroad. In most cases, investors may also freely transfer
resources obtained through the liquidation and sale of stocks, shares, or rights abroad. Public contracts in
energy and infrastructure are an exception and subject to a change-in-control notice. Please be aware that
these and other investment incentives provided by the COPCI are not applicable to investments from
jurisdictions considered tax heavens.
1.2 Registration of Foreign Investment
The Central Bank of Ecuador is the entity that records foreign investment in Ecuador. The Central Bank
creates an investment registration record once an investment is made. According to government authorities,
the record is kept for statistical purposes. Domestic investors are not required to register with the Central
Bank. Registration is a simple process, but it is necessary to comply with some formal requirements. The
investor may delegate management of the registration to a representative. According to the type of
investment, one or more of the following documents are required to complete the registration: a copy of the
deed, a proof of sale of foreign currency, the importation document, and the documents authorizing the
transfer of shares.
1.3 Stability Contracts
The COPCI allows foreign investors to request an “investment contract” agreement with the Ministry of
Production. This type of agreement is a stability contract with protective provisions. Stability contracts can
have a fifteen-year term and may be renewed for the same additional period. The possibility to pursue
international arbitration is among the most important provisions of the stability contract.
1.4 Bilateral Investment Treaties
Over the past few decades, Ecuador has entered into more than 20 BITs with countries all over the world.
Recently, the Constitutional Court has declared several BITs unconstitutional; however, the majority remains
valid.
90
It is important to note that Ecuador is not a signatory to the International Centre for Settlement Disputes
(ICSID) Convention since its denouncement in July 2009.
1.5 Promoting Foreign Investment
The Ministry of Industry and Productivity, COMEX, and CORPEI are the entities responsible for
implementing policies to promote and encourage foreign investment. CORPEI is recognized by Ecuador as
the official agency dedicated to the promotion of exports and investments. It is a private nonprofit
organization created in 1997 by the Foreign Trade and Investment Law. The organization develops Ecuador’s
image abroad and organizes investment missions, outreach programs, and other opportunities for investment.
The Commercial and Foreign Services of Ecuador, the Chamber of Industry, and various provincial
commissions dedicated to the promotion of exports and investments work together with CORPEI to
stimulate investment.
The current government of Ecuador has a strong interest in attracting foreign investment to develop its
mining industry, especially for exploration and extraction of copper, gold, and iron. A potential mining
reform bill is expected to provide tax benefits to investors and the possibility of entering into investment
protection contracts.
2. FOREIGN TRADE
2.1 Free Trade Agreements
Currently, Ecuador is not a signatory to any bilateral free trade agreements.
2.2 Andean Community
Since 1969, Ecuador has been part of an international trade integration organization called the Andean
Community or Andean Pact (Comunidad Andina or CAN).
The CAN was founded in 1969 with five members: Ecuador, Bolivia, Chile, Colombia, and Peru. In 1973,
Venezuela joined the CAN, and in 1976, Chile withdrew. In 2006, Venezuela withdrew from the CAN.
The primary goal of the CAN is to help member states attain a balanced and harmonious development
through a process of increased economic integration and social cooperation.
91
In addition to trade and investments, the CAN also regulates issues such as customs, social development,
intellectual property, and many others. The institutional framework consists of bodies and institutions such as
the Commission, the Andean Court of Justice, and the Andean Parliament. Of particular importance is the
CAN supranational legislation that controls all intellectual property rights, obligations, and procedures in all
CAN member countries.
2.3 Montevideo Treaty
Ecuador is also a signatory to the multilateral 1980 Montevideo Treaty, which established the Latin American
Integration Association (Asociación Latinoamericana de Integración or ALADI) with Argentina, Bolivia, Brazil,
Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay, and Venezuela.
ALADI’s main objectives are to encourage trade, economic complementation, and agricultural development
through granting reciprocal regional tariff preferences and regional and partial scope agreements.
Even though Ecuador signed on to the ALADI, Ecuador has not benefited from this treaty because it has
not signed any specific implementation agreements.
2.4 Special Economic Development Zones
The Organic Code for Production, Trade and Investment (Código Orgánico de la Producción, Comercio e Inversiones
or COPCI), enacted in late 2010, allowed the Ecuadorian government to authorize the establishment of
Special Economic Development Zones (Zonas Especiales de Desarrollo Económico or ZEDE). ZEDEs are
delimited areas used to establish new investments. These zones benefit from special customs treatment. They
require express authorization and are regulated by the Sectorial Production Council, an entity subject to the
Coordinator of the Ministry of Production, Employment and Productivity.
ZEDEs may be created for the following purposes:
•
To execute activities of transfer and disaggregation of technology and innovation. These include
technological development projects, electronic innovation, biodiversity, environmental improvement,
and sustainable energy to run industrial diversification operations mainly for the export of goods that
include perfecting activities such as manufacturing, processing, and repairing goods.
92
•
To develop logistic services such as cargo storage, classification, labeling, packaging, inventory, and
others. These zones are preferably established within or adjacent to ports and airports or in border
areas.
2.5 World Trade Organization
Since 1996, Ecuador has been a Member State of the WTO. As a Member, it is bound by the organization’s
principles of trade negotiations, is subject to implementation and monitoring measures, and is protected by
special provisions for implementing agreements and commitments with developing countries. Ecuador is
obligated to follow the WTO guidelines and rules in the liberalization and the applicable exceptions for
goods, services, and intellectual property.
3. CORPORATE MATTERS
3.1 Common Vehicles to Conduct Foreign Investment
3.1.1 Corporate Structures
Ecuadorian law allows the establishment of business associations to perform commercial acts. Civil
corporations may be created to execute all other types of activities, other than commercial. The law
establishes the following corporate structures:
•
Corporations
•
Limited liability companies
•
Branch of a foreign corporation
•
General partnerships
•
Limited partnerships
•
Mixed economy companies
•
Holding or shareholder companies
•
Incidental companies.
Corporations, limited liability companies, branches of a foreign corporation, and civil corporations are
common business entities in Ecuador.
93
3.1.2 Corporations
A corporation (Sociedad Anónima or S.A.) is a legal entity created by or under the authority of the
Superintendence of Companies. Its capital is divided into shares that may be freely transferred by the
shareholders without the need for authorization. A corporation has the following characteristics:
•
Initial shared capital must be divided among at least two shareholders.
•
Minimum subscribed capital for a corporation is US$800, from which at least 25% must be paid
upon its constitution. The remaining 75% must be paid within 24 months of its incorporation.
•
Shares can be freely transferred. The Superintendence of Companies is not required to authorize
transfers, but must be provided notification of such. Payment must be made in full prior to issuing
the corresponding certificates.
•
Liability of individual shareholders is limited to the amount of their holdings in the corporation.
•
Only 50% of shares may be preferred. Preferential rights apply only to dividend and liquidation
payments. Cumulative dividend payments in favor of preferential shareholders are allowed.
•
A corporation may have foreign ownership. The only restriction is that foreign owners must hold
registered shares.
•
Corporate profits may be capitalized by issuing stock dividends. Discount shares are not allowed. A
corporation may purchase its own shares only from accumulated profits.
•
A corporation must set aside at least 10% of its annual profits into a legal contingency reserve fund
until this fund equals 50% of the corporation’s total capital.
•
The administration of a corporation must include two managing officers: a president and a general
manager. These officers will enforce the obligations set by law and the statutes of the corporation.
•
The legal representative must be domiciled in Ecuador and must be a citizen or permanent resident
of Ecuador.
•
Shareholders must hold at least one shareholder meeting per year, between January and April.
3.1.3 Limited Liability Companies
A limited liability company (Compañía de Responsabilidad Limitada or LLC) is constituted upon approval of the
articles of incorporation by the Superintendence of Companies. An LLC has the following characteristics:
•
At the time of incorporation, an LLC must have at least two, but no more than 15 partners. If the
number of partners surpasses 15, the company must be transformed into another type of corporate
structure, or it must be dissolved.
•
An LLC requires a minimum subscribed capital of US$400, of which at least 50% must be paid at the
incorporation and the remaining 50% within 12 months.
•
Shares must be issued in the amount of US$1.00 or in multiples thereof.
94
•
The liability of LLC partners is limited to the amount of their capital contribution.
•
LLC shares cannot be transferred without unanimous approval of all the partners. Furthermore, the
transfer of shares must be through a public deed, which must be registered at the Register Ministry.
•
Although foreign individuals may be partners in an LLC, foreign corporations, banks, insurance
companies, and capitalization and saving companies are prohibited from participating in this type of
organization.
•
An LLC must set aside at least 5% of its annual profits into a legal reserve until the funds equal 20%
of the company’s capital. If the company’s accumulated losses amount to 50% of the capital, either
the entity must be liquidated or the partners must invest additional capital.
•
An LLC cannot be created to conduct banking, insurance, or financial activities.
•
The General Assembly is the governing body, and a meeting must be held at least once a year
between January and April. To obtain approval of a resolution, the majority of the capital must be
represented at the meeting.
•
The administrative tasks of an LLC must be performed by the president and by the general manager.
•
The legal representative must be domiciled in Ecuador and must be a citizen or permanent resident
of Ecuador.
3.1.4 Branch of a Foreign Corporation
To establish a branch operation in Ecuador, a foreign company must first comply with the following
requirements:
•
The foreign company must provide proof that the company is legally constituted in its country of
origin and that its statutes allow the company to perform operations abroad (i.e., through a certificate
of legal existence).
•
The board of directors or the corresponding authority at the company must decide on the
establishment of the branch in Ecuador.
•
The company must appoint a permanent legal representative, with complete authority to represent
the company in Ecuador. The representative must be domiciled in Ecuador and must be a citizen or
permanent resident of Ecuador.
•
The company must establish the branch with minimum operating capital of US$2,000.
•
Branches are subject to the same legal regulations and obligations as any other Ecuadorian company.
However, these companies are not required to provide information about their structure to the
Superintendence of Companies (shareholders).
•
Liquidation of a branch of foreign corporation may be initiated whenever a loss of 50% of the capital
is evidenced, unless the parent company supplies additional capital.
95
3.1.5 Civil Corporation
Corporate law regulates a civil corporation as a business corporation. Therefore, the characteristics of a
corporation as described in section 3.1.2 generally apply to a civil corporation. However, there is no specific
provision regarding the incorporation process of a civil corporation. In practice, a civil judge will review and
approve the existence of a civil corporation. It is also important to note that a civil corporation is not subject
to the control of the Superintendence of Companies.
3.2 Corporate Obligations to the Superintendence of Companies
•
Each year by April 30, the company must submit General Balance Statements, Profit and Loss
Statement, General Manager’s Report, Comptroller’s Report, and Shareholders’ Statement. If the
company has more than US$1 million in total assets, it must also file an External Auditor’s Report.
•
The company must update information on the website of the Superintendence of Companies.
•
The company must submit a foreign shareholders declaration form between January 31 and February
5.
•
If a domestic company has a foreign company as a shareholder, the general manager of the
Ecuadorian company needs to provide the Superintendence of Companies with an updated list of
foreign company shareholders each year. It must also submit, on an annual basis, a certificate of legal
existence/good standing for each foreign company that is a shareholder in the domestic entity.
4. EMPLOYMENT
Ecuador has very protective laws regarding labor and employment.
4.1 Labor Relationships and Provision of Services
The Ecuadorian Constitution generally provides that all core activities of a company are to be rendered by
people with direct and bilateral labor relationships with the company.
According to Ecuadorian Law, the provision of services through a civil agreement is an exception, applicable
only when the service provided is not part of the core business of the user company.
96
Outsourcing of services is prohibited. Nevertheless, under the name of complementary activities, the
provision of security, cleaning services, catering, and delivery is allowed to be rendered by a third-party
provider. However, special regulations apply to those employees, including joint responsibility for the
fulfillment of labor obligations, as well as the potential right of those employees to participate in profit
sharing of the user company.
4.2 Salary and Monetary Benefits
The basic or minimum salary is an amount set by the government for employees in general. For 2013, this
amount is US$318.00 per month. Each year, special minimum salaries apply to certain jobs as defined by
regulations approved by the Ministry of Labor. In addition to the basic salary, labor laws state that employees
are entitled to receive the following monetary benefits:
•
13th Salary: Equivalent to the 12th part of the total income received by the employee between
December 1 and November 30 of the year of payment.
•
14th Salary: Equivalent to one month’s minimum salary.
•
Profit Sharing: The employer must distribute 15% of the profits among its employees.
•
Reserve Funds: The employer must pay 8.33% of the employee’s salary to the employee after the
13th month of employment.
•
Worthy Salary (Salario Digno): The company can choose to declare and distribute profits in
reference to the previous fiscal year, after reviewing that its employees have earned a minimum total
average. The amount is calculated using statistical parameters and a special formula provided by law.
4.3 Social Security
Enrolment of employees in the National Public System of Social Security is mandatory. The total monthly
contribution must equal 21.5% of the employee’s monthly salary; 9.35% may be deducted from the
employee’s salary, and the employer must contribute the remaining amount.
4.4 Work Schedule and Overtime
A normal work schedule is eight hours per day and forty hours per week (Monday through Friday). An
employee may work overtime for up to four hours per day and twelve hours per week.
97
Overtime hours must be paid with an increment of 50% if they are from 0600 to 2400, Monday through
Friday, and with an increment of 100% if the hours are worked from 2400 to 0600, Monday through Friday
or Saturday and Sunday. There is a surcharge of 25% for night shifts (between 1900 and 0600).
If the company demonstrates special needs related to the normal course of business, it may obtain special
permits for overtime and shifts from the Ministry of Labor.
4.5 Vacation, Holidays, and Leave
Employees are entitled to fifteen non-interrupted calendar days of annual vacations, and one additional day
for each year exceeding five years of seniority (up to a maximum of fifteen additional calendar days).
According to the law, there is no work during National Holidays (except by special permit from the Ministry
of Labor). National Holidays are January 1, Good Friday, May 1, May 24, August 10, October 9, November
2, November 3, and December 25. Additional local holidays may apply depending on the city where the
services are being performed.
Ecuadorian labor laws recognize both maternity and paternity leave. The term of such leave depends on the
type of birth.
5. TAX MATTERS
5.1 Income Tax
Income tax in Ecuador is 22%.
5.1.1 Advance Payment of Income Tax
Companies must provide an advance payment of income tax, which results from the mathematical sum of
0.2% of the net worth, or 0.2% of total deductible costs and expenses, 0.4% of assets, and 0.4% of taxable
incomes. The advance payment becomes final if the income tax generated is less than the advance payment.
5.1.2 Withholding of Income Tax
Companies or individuals who are required to keep accounts become income tax withholding agents when
they make payments, or when payments are accounted for those who receive them. The withholding amounts
98
equal 1% on the purchase of goods, transportation, and interest, 2% on payments for services, 5% on oil
contracts, 8% on leases, 10% on professional fees, and 22% on payments drawn abroad.
5.2 Value Added Tax (VAT)
VAT is generally 12% or 0% for goods and services.
5.2.1 VAT Tax Credit
Taxpayers may be eligible for a tax credit for VAT paid on the purchase of goods and on the use of taxable
services, provided that such goods and services used in the production and distribution of other goods and
services are subject to 12% VAT.
5.2.2 VAT Withholding
Public sector entities, corporations, and individuals considered to be “special taxpayers” by the Ecuadorian
Revenue Service shall act as VAT withholding agents when paying for purchases to suppliers of goods (30%),
services (70%), and professional services (100%), when such transfer or provision of services is subject to
VAT.
5.3 Special Consumption Tax
A special consumption tax is generated in the first stage of the transfer of domestic and imported goods and
services considered luxuries. Manufacturers and importers are required to pay this tax.
The tax rate shall be imposed over the suggested retail price of the manufacturer or importer, minus VAT
and the special consumption tax. The special consumption tax base cannot be less than the result of the price
increase ex factory or ex customs, and 25% of marketing presumptive minimum margin.
Goods and services considered “special consumption” include cigarettes and snuff products, soft drinks,
video games, guns, incandescent bulbs, ground transport vehicles up to 3.5 tons load, pay TV, casinos and
gambling, dues, memberships, affiliations, and similar charges for members and users of social clubs and
alcoholic beverages.
99
5.4 Remittance Tax
A remittance tax applies to funds transferred out of the Ecuador. Transfers may be in cash, checks, wire
transfers, or any other means. It is presumed that currency transfers also include all payments made from
outside Ecuador, including the following:
•
Funds held outside of Ecuador by the taxpayer.
•
Payments made abroad on behalf of a natural or legal person domiciled in Ecuador with financial
resources that are outside of Ecuador, owned by others.
•
With regard to exports of goods and services, when payment has not returned to Ecuador within 180
days.
Tax Credit on Remittance Tax: Any payment used for imports generates the remittance tax, whether
payment was made by transferring funds from Ecuador or because they have paid with funds located abroad,
through money of their own or from a third party. The remittance tax paid on imports may be used as a tax
credit for payment of income tax, if the following occur:
•
The tax is paid on imports of raw materials, inputs, and capital goods, contained in list issued by the
Tax Policy Committee and valid at such time.
•
Raw materials, inputs, and capital goods are incorporated into the production processes.
The tax credit can be applied to income tax for five years, after which the unused balance cannot be used
even as a deductible expense. Those unable to apply the remittance tax paid as a tax credit for income tax
may consider it as deductible, but only in the year it was paid.
5.5 Dividends Paid Abroad
Payments of dividends to individuals who are not residents of Ecuador, and to domestic and foreign
companies, are exempt from income tax, unless they are located in tax havens or low tax jurisdictions. If they
are located in tax havens or low tax jurisdictions, the payment is subject to an income tax withholding. The
withholding rate is the difference between the maximum rate of income tax for individuals (35%) and the
overall rate for corporations (22%).
Remittance Tax Applicable to Dividends: Remittance tax does not apply to dividends paid by domestic or
foreign companies domiciled in Ecuador to foreign companies that are not domiciled in tax havens or low tax
100
jurisdictions, provided that the company distributing dividends has already paid income tax in Ecuador and
that the shareholders of the foreign corporations are not individuals residing in Ecuador.
5.6 Municipal Tax on Economic Activities
Individuals and companies that exercise economic activities are required to obtain a municipal license and pay
the corresponding tax. The tax rate is calculated over the net worth of the corporation ranging from
US$10.00 to US$25,000.00.
Companies that exercise economic activities in Ecuador are also subject to a municipal tax on economic
activities. This tax is 1.5 per thousand and calculated over the total assets minus the current debts of the
taxpayer.
5.7 Tax Incentives
The Organic Code for Production, Trade, and Investment (COPCI) provides three types of tax incentives:
•
General tax incentives
•
Regional tax incentives
•
Tax incentives for less developed areas.
5.7.1 General Tax Incentives
•
Progressive reduction of the income tax rate for corporations.
•
Incentives established for special economic zone development (ZEDE).
•
Additional deductions of income tax, established to encourage the improvement of productivity,
innovation, and eco-efficient production.
•
Benefits for selling shares of corporations to employees.
•
Payment facilities in foreign trade taxes.
•
The additional employees’ benefit called living wage is considered deductible for income tax
purposes.
•
Financing operations abroad are exempt from remittance tax.
•
Any new investment is exempted from paying anticipated income tax until the fifth year.
•
Reform of the advance payment of income tax.
101
5.7.2 Regional Tax Incentives
Any new investment is exempt from paying income tax until its fifth year if the investment promotes
alternative energy systems, the substitution of imports, or the development of exports, or contributes to rural
development or urban development.
5.7.3 Tax Incentives for Less Developed Areas
In addition to general and regional tax incentives, the cost of hiring new workers in less developed areas is
deductible for income tax purposes up until the fifth year.
5.8 Double Taxation Treaties
Ecuador has agreements in place to avoid double taxation with Germany, Argentina (air transportation),
Belgium, Brazil, Canada, Chile, Spain, France, Italy, Mexico, Romania, Switzerland, and Uruguay. Ecuador
and the Andean Community also maintain a system to avoid double taxation between member countries.
5.9 Transfer Pricing Regime
Taxpayers conducting transactions with related parties, local or foreign, are subject to transfer pricing rules
and must submit reports to the Tax Authorities depending on the value of transactions with such related
parties.
102
QUICK FACTS
The Republic of Ecuador borders Colombia to the north, Peru to the east and south, and the Pacific Ocean
to the west. The Ecuadorian territory also includes the Galápagos Islands in the Pacific Ocean. Ecuador, a
representative democratic republic, gained independence from Spain in 1830.
Area: 258, 238 km2
Population: 14,666,055
Largest Cities: Quito is the capital of Ecuador. UNESCO declared it a World Heritage Site in 1970.
Guayaquil is Ecuador’s largest city. Located on the coast, it is the country’s main port city. The city of Cuenca
was declared a World Heritage Site in 1999 and is a popular destination for foreign retirees.
Language: Spanish
Currency: U.S. Dollar
Economy: Ecuador’s economy is the eighth largest in Latin America with a GDP of 8% in 2011. Main
exports are petroleum products, bananas, shrimp, flowers, and fish. Ecuador produces one of the finest
aroma cocoa in the world, as well as high-quality coffee, exports that are gaining importance in international
markets. Inflation is 1.14%. The oil sector accounts for 40% of exports. Exploitation and production of oil
has increased since the 1960s, and proven reserves are estimated at 6.51 billion barrels as of 2011. Ecuador
also boasts large natural mineral reserves that have contributed to the development of projects to explore and
extract copper, gold, and iron. U.S. direct investment in Ecuador is led by the mining and manufacturing
sectors.
Government Type: Presidential Republic
Legal System: The current state of Ecuador consists of five state functions: Executive, Judicial, Electoral,
Transparency, and Social Control.
Constitution: The current constitution has been in place since 2008. It is the first in the world to recognize
legally enforceable Rights of Nature, or ecosystem rights prohibiting the extraction of non-renewable
resources in protected areas. The state protects the intellectual property of collective work based on national
biodiversity and recognizes the Rights of Nature.
103
This page intentionally left blank
104
PANAMA
Ivette E. Martínez S., Partner, and Khatiya Asvat Patel, Associate
1. CHOOSING A CORPORATE STRUCTURE
The main corporate structures covered under Panama law are:
•
Corporations (sociedades anónimas)
•
Limited liability companies (sociedades de responsabilidad limitada)
•
Limited partnerships (simple or by shares) (sociedades en comandita)
•
Branch of a foreign corporation.
For estate planning purposes, other structures such as private interest foundations (fundación de interés privado)
and trusts (fideicomisos) are also available.
There are also several special benefits laws and special economic areas for which the company may apply,
which are:
•
Establishment in a Zona Franca, regulated by Law 32 of 2011, formerly known as an Export
Processing Zone, regulated by Law 25 of 1992.
•
Establishment in the Colon Free Zone, regulated by Decree Law No. 18 of 1984.
•
Establishment in the Panama–Pacifico Area, regulated by Law 41 of 2004.
•
Establishment as a Multinational Company Headquarters, regulated by Law 41 of 2007, in Spanish,
Sede de Empresa Multinacional or SEM.
•
Establishment in the Tecnoparque of the City of Knowledge, in Spanish, Ciudad del Saber, regulated by
Decree Law 6 of 1992.
•
Law 76 of 2009, the Certificate for Industrial Promotion (CERFIN), created to encourage the
development of industry, based on the effective integration of technology with high added value.
The following sections describe the most relevant corporate structures and special benefits laws and regimes.
105
1.1 Corporations
Regulated by Law 32 of 1927, as amended, Panamanian Corporate Law is inspired in Delaware’s Corporate
Law.
Advantages
•
Expedite incorporation procedures
•
Limited liability of shareholders, directors, and officers
•
Favorable tax treatment of foreign earned income.
Quick Facts
•
A corporation can be constituted by two or more persons or corporate entities, even if they are not
domiciled in Panama.
•
It begins its existence after its articles of incorporation are registered in the Public Registry.
•
The article of incorporation must include:
o
Name and domicile of the parties who execute the articles
o
Name of the corporation with an indication that it is a corporation
o
The purposes and objectives of the corporation
o
The capital stock and the number and classes of shares into which it is divided, which as of
April 1, 2013 can be:
•
Bearer (a pending project of law will immobilize bearer shares in the near future, granting
their custody to specially designated agents) and/or registered
•
Of various classes with designations, rights, privileges, and limitations
•
With or without a stated par value.
o
The number of shares underwritten by each party to the articles of incorporation
o
The corporate domicile and the name and address of its resident agent in Panama, which must
be a law firm or lawyer
o
The corporation’s duration, which may be perpetual
o
The initial board of directors, which should have at least three members and may be natural
persons or legal entities
o
•
Other legal clauses agreed upon.
Directors may be represented and cast their votes in the meetings of the board of directors by
proxies.
106
•
Any corporation, regardless of where it undertakes its business, must keep a record book for minutes
and another for shares.
•
Accounting and other records may be kept using ledgers, electronic media, and other means as
approved by law.
Management of the Corporation
There are two main corporate bodies in charge of the management of the corporation:
•
Board of Directors: The board is responsible for the management or supervision of the
corporation. The board has absolute control and full supervisory powers, and may exercise all powers
granted to the corporation, except for limitations in the law, the articles of incorporation, and the
bylaws, or those set aside for the shareholders. The board of directors appoints corporate officers.
•
General Shareholders Meeting: The shareholders hold paramount power in the corporation. Their
engagement is unavoidable when amending the articles of incorporation; appointing directors;
enacting, amending, or repealing bylaws; and when the articles of incorporation so require,
transferring into trust or encumbering property with liens or mortgages to secure the corporation’s
debts with third parties, and any agreement to merge or dissolve the corporation.
In addition to the aforementioned, corporations may also have any agents and representatives that the board
of directors, the bylaws, or the articles of incorporation may establish and designate.
Taxes
A Panamanian corporation not undertaking business within the Republic is not under any obligation to
submit tax declarations or its financial statements to any local authority, and its accounting ledgers, as well as
any other information about its business, may be kept and stored in any part of the world.
On the other hand, corporations with business taxable within Panama are under obligation to file an income
tax declaration, as well as discharge any other lawful requirement related to the type of business they
undertake.
1.2 Limited Liability Companies
Law 4 of January 9, 2009, regulates limited liability companies and provides a new vehicle through which
foreigners and nationals can structure their investments and make use of tax advantages that laws of their
country of origin provide for limited liability companies.
107
Advantages
•
More flexibility and privacy in the creation and use of the LLC structure, although an LLC requires
more disclosure for its constitution than a Panamanian corporation (sociedad anonima).
•
Possibility to convert into any other type of legal entity.
•
Possible tax advantages of its taxation; income tax of an LLC falls on the partners in accordance to
their share of participation in the LLC.
Quick Facts
•
An LLC can be formed by at least of two or more partners, which may be individuals or legal
entities, whose names and domiciles are noted in the publicly available articles of organization.
•
There is currently no legal limit on the number of partners than an LLC may have.
•
The articles of organization must be entered to the Public Registry and may be documented either by
an officially recorded private document or by a public deed and must include the following
information:
o
The identity of the granters and the partners and an indication of their domicile
o
The LLC’s domicile
o
The duration of the LLC, which may be perpetual or for a definite period of time
o
An indication of the corporate purpose, which may be broad or limited
o
The amount of authorized corporate capital, which may be in any currency, the shares or
interests in which it is divided and the value of each one
o
The designation of one or several individuals who will be in charge of the administration and
representation of the LLC and who may or may not be partners
o
The designation of one or more officers or general power of attorney holders, special power of
attorney holders, and the powers granted to them
o
The designation of a resident agent, which must be a lawyer or a law firm
o
Any other legal agreements that the granters wish to include.
•
The LLC can exist for a term, which can be renewed, or it can exist in perpetuity.
•
Capital may be completely or partially paid at the time of incorporation, and only the contributions in
kind must be completely made at the time of incorporation.
•
Modifications to the corporate capital can be made by amending the articles of organization;
however, a reduction of the corporate capital is not allowed if such a decrease could cause the
company’s assets to be less than its liabilities.
108
•
Transfers of corporate quotas that change the identity of the partners and the dissolution of the LLC
must be registered to be valid.
•
Transfers may now be made through a private document and must be entered into the Public
Registry, but to become a partner, the transferee must be approved by the other partners.
•
Panamanian LLCs to transform into any type of company or merge with any other type of company,
if such a conversion or merger is approved, and any other type of company can transform into an
LLC.
Management of the LLC
Panamanian LLCs are governed by two corporate bodies:
•
General Assembly of Partners: The General Assembly of Partners is the meeting of all the partners
of an LLC. This assembly can be notified through electronic means, and written agreements between
partners are valid, without the need for a meeting, and whether the partners are present or absent.
•
Administrator: Administrators are individuals designated to carry out the LLC’s operations. If there
are several administrators, agreements are to be made by a majority of votes, unless the articles of
organization state otherwise.
Taxes
Panamanian LLCs not undertaking business within the Republic of Panama are not under any obligation to
submit annual tax declarations or financial statements to any local authority. Its accounting ledgers, as well as
any other information about its business, may be kept in any part of the world.
On the other hand, Panamanian LLCs with taxable income in Panama are under the obligation to file an
annual income tax declaration, as well as discharge any other lawful requirement related to the type of
business they undertake.
1.3 Registration as a Branch of a Foreign Corporation
Corporate structures organized in other countries or jurisdictions may register as a branch of a foreign
corporation in the Republic of Panama.
Advantages
•
Expedite incorporation procedures.
109
Quick Facts
•
The registration of the foreign corporation to do business in Panama encompasses its registration:
o
Before the Public Registry Office (our corporate registry)
o
The Ministry of Commerce and Industry’s Panama Emprende system, which will issue a Notice
of Operation
o
•
Registration before the Ministry of Finance and Treasury as a taxpayer.
To register the foreign entity before the Public Registry Office, the corporation needs to file the
following documents:
o
A certified copy of the company’s articles of incorporation and amendments to date, duly
authenticated
•
o
A copy of the company’s balance sheet
o
A declaration of the amount of its capital engaged or to be engaged in business in Panama
o
A Certificate of Good Standing issued by the registrar of the state of incorporation.
The branch must appoint one or more natural persons who will act as legal representatives of the
corporation in the Republic of Panama, with power to act in the name and on behalf of the company
in all its local activities.
•
Usually, a general power of attorney is registered on behalf of the firm handling the branch’s matters.
Taxes
The branch will be required to file taxes on the taxable income it generates within Panama. It will be under
the obligation to file an income tax declaration, as well as discharge any other lawful requirement related to
the type of business it undertakes.
1.4 Multinational Headquarters Regime
Law 41 of August 24, 2007, creates a special regime for the establishment and operation of Multinational
Companies Headquarters and creates the Licenses Commission of Multinational Companies Headquarters.
Advantages
•
Favorable tax treatment for the company
•
Special migratory visas for its workforce
•
Flexible labor regulations for their employment contracts.
110
Quick Facts
•
•
To qualify for the benefits of Law 41, the company or its business group has to fit specific criteria:
o
It has to have headquarters in a foreign country.
o
It has to carry out activities in several countries or different regions of the same country.
o
Its assets should be of at least US$200 million.
A Multinational Company Headquarters is intended to be a part of the multinational company that
provides services to the company’s headquarters, subsidiaries, affiliated companies, or associated
companies outside of Panama.
•
A Multinational Company Headquarters can carry out the following type of services for the
multinational company or companies that are part of the same business group:
o
Management and/or administration of operations of any of the companies of an economic or
corporate group in a specific geographic area or globally, including strategic planning, business
development, managing and/or training personnel, operation control and/or logistics
o
Logistics and/or warehousing of components or parts required for the manufacturing or
assembling of any product manufactured by the company
o
Technical assistance to companies of an economic or corporate group or to customers having
acquired products or services from any such companies, for which the latter shall be under the
obligation to provide support services
o
The financial management, including treasury services, of an economic or corporate group
o
The accounting of an economic or corporate group
o
Preparation of plans being part of the designs and/or constructions, or any thereof, in the
normal course of business of the headquarters or any subsidiaries thereof
o
Consulting, coordination, and monitoring of marketing and advertising strategy for goods or
services produced by any economic or corporate group
o
The electronic processing of any activity, including the consolidation of operations of an
economic or corporate group, which may include network operations
o
Support of operations and research and development of products and services of an economic
or corporate group
o
•
Any other analogous service previously approved by the Cabinet Council.
To obtain a license, a written request must be submitted to the Technical Secretariat of the
Commission by way of the application form, along with a series of documents.
111
Management
A Multinational Company Headquarters can operate as a foreign company registered in Panama or as a
Panamanian corporation that is owned by the multinational company, its subsidiaries, or affiliates. Although
the company may also engage in local activities, it must do so through a separate legal entity. The separate
entity must keep its personnel separate from the Multinational Company Headquarters personnel and not
partake in the benefits that Law 41 grants to the Multinational Company Headquarters.
Confidentiality
After obtaining a license, Multinational Companies Headquarters are under the obligation to present an
annual report to the Technical Secretariat regarding their activities in the isthmus and have a duty to report
any changes in the status of their operations in the country and their personnel.
Taxes
Law 41 establishes tax benefits for the Multinational Companies Headquarters and for its management
personnel. The hallmark of the tax system of Panama is linked to strict adherence to the principle of
territoriality. Only taxable income generated from any source within the Republic of Panama, regardless of
where it is paid from or received, is subject to tax liability. Because Multinational Companies Headquarters
essentially generate their income from providing services abroad, there is little if no taxable income.
Law 41 establishes the following tax benefits for the corporation:
•
It is exempt from payment of income taxes on the services it provides to entities abroad.
•
It is exempt from paying the tax on the transfer of goods and services to export services provided to
people residing abroad, with the following limitations:
o
Multinational Companies Headquarters with local operations in Panama must provide those
services through a separate legal entity and will be liable for the tax on the transfer of goods and
services.
o
Multinational Companies Headquarters must pay this tax for goods and services purchased
within the country and for their imported products.
•
Multinational Companies Headquarters are permitted to reach tax-related agreements with the
Ministry of Economy and Finances in order to consolidate their earnings and the payment of taxes
for income obtained in several countries.
112
The foreign management personnel of Multinational Companies Headquarters are granted the following tax
benefits:
•
They are exempt from payment of income tax, social security, and education contributions so long as
their salaries are paid from abroad.
•
They are allowed to import household items without the payment of custom duties on their first
arrival to the country.
1.5 Immigration
There is a special and efficient procedure for obtaining visas for the personnel of Multinational Companies
Headquarters. Law 41 instructs the Ministry of Commerce and Industry to procure the paperwork for the
foreign personnel and their dependents, which they do through a Single Window Service.
The Visa for Permanent Personnel of Multinational Companies Headquarters is issued for a renewable period
of five years, during which they have the benefit of multiple entries and exits, with the option of obtaining
permanent residency at five years counted from the visa approval date. Holders of this type of visa do not
require a work permit. For temporary personnel, there is a Special Visa for Temporary Personnel of
Multinational Companies Headquarters, which can be obtained by personnel from countries that require a
visa to enter Panama. This visa has a maximum duration of three months, and the holder does not require a
work permit. Special visas are also available for special events, obtainable by personnel of countries who
require a visa to enter the country and will only enter for a specific event.
It must be noted that the ordinary visa application requirements and costs still apply, and their personnel need
to be covered by private medical insurance plan.
Labor Law Benefits
Among the benefits conferred upon personnel by Law 41 are the following:
• Their personnel do not require work permits.
Labor Code mandated quotas do not apply to the management personnel of Multinational Companies
Headquarters.
113
1.6 The Panama–Pacific Special Economic Area
The Special Panama–Pacific Economic Area Agency is a Government entity created by Law No. 41 of 2004
(amended by Law 31 of 2009, Law 8 of 2010, and Law 11 of 2013) that is in charge of managing, directing,
operating, and developing the Panama–Pacific Area.
This is an area made up of 2,005 hectares (approximately 4,952.35 acres) of land located on the west bank of
the Panama Canal, near the Pacific Ocean, where the U.S. Howard Air Force Base operated. This base was
under the command of the United States of America, until it reverted back to Panama in 1999, by virtue of
the Panama Canal Treaties. The Panama–Pacific Agency facilitates the paperwork procedures that the
companies operating there need to carry out, as well as helps them in any need they may have.
The Panama–Pacific Agency operates as a system known as the Integrated Processing System (in Spanish,
SIT). It makes it easier for all companies that operate there to process their paperwork procedures, which
must be processed before Government entities, thus avoiding the need to go to different places or locations
for services to be rendered. Therefore, the institutions stationed at SIT take care of and resolve at the site all
processing of paperwork procedures required for by the companies operating within the Panama–Pacific
Area, pursuant the new and accelerated procedures. At present, government entities that have established an
office at SIT are as follows: the National Immigration Service (in Spanish, SNM), the Ministry of Labor and
Labor Development (in Spanish, Mitradel), the National Environmental Authority (in Spanish, ANAM), the
Municipal Government, Social Security Office (in Spanish, CSS), the National Customs Authority (in Spanish,
ANA), just to name a few.
Individuals and corporations established in the Panama–Pacific Area may engage in all types of activities not
expressly prohibited the laws, rules, and regulations currently in force in the Republic of Panama, on health,
security, and public order issues. Regarding activities that in the opinion of the Agency may affect equilibrium
of contract agreements entered into with the state, individuals and corporations that engage in these activities
can register at the Registry of the Panama–Pacific Area, but shall not benefit from the tax and labor
incentives provided by the law currently in force.
There shall be no showrooms within the Panama–Pacific Area of products that are internationally marketed
in other free zones or that receive special tax treatment.
114
Tax Incentives
The Panama–Pacific Area is an area or zone free from all taxes for the companies of the Panama–Pacific
Area, except for the provisions of Articles 60, 72, and 77 of Law 41 of 2004. Therefore, all activities,
businesses, services, operations, or transactions within the Panama–Pacific Area shall be 100% free from
direct and indirect taxes, levies, rates, duties, and national encumbrances, including but not limited to the
following exonerations:
•
Exemption from any tax, levy, rate, encumbrance, or import duty on any kind or class of
merchandise, products, equipment, services, and other goods in general that are entered into the
Panama–Pacific Area, including but not limited to machinery, material, containers, construction,
pre-fabricated material or merchandise, raw material, fuel and lubricants, production input material,
final products, cranes, vehicles, automobiles, artifacts, supplies, and spares entered into the Panama–
Pacific Area.
•
Exemption from the Tax on the Transfer of Movable Property and the Rendering of Services (a kind
of sales tax) on all kinds or types of merchandise, products, equipment, goods, services, and other
goods in general entered into the Panama–Pacific Area, as well as any tax, rate, or duty on the
rendering of services. This exemption includes the financial lease of any equipment or other movable
good, as well as equipment, raw material, and production input material.
•
Exemption from any tax, duty, rate, levy, or fee with regard to the movement or storage of fuel or
other hydrocarbons and their derivative.
•
Exemption on the payment of any fee for the Notice of Operation.
•
Exemption from Stamp Tax.
•
Exemption, on commercial and industrial improvements, from real estate taxes on land and
improvements, as well as from the Tax on the Transfer of Immovable Goods. For the purposes of
the Tax on the Transfer of Immovable Goods, it must be evidenced in the respective public deed
only that the immovable good that is being transferred is located within the Panama–Pacific Area,
and it shall not be necessary to have the exemption from the payment of tax and the data of the
respective affidavit evidenced, the notaries public being able to bear witness of the respective
agreement.
•
Exemption from any tax on the export or re-exports of any type or class on merchandise, products,
equipment, goods, or services.
•
Exemption from any tax, rate, duty, encumbrance, withholding, or other fees of similar nature
applied to payments to foreign creditors, for the interest, commissions, royalties, and other financial
fees generated by the financing or refinancing granted to the companies of the Panama–Pacific Area,
to the operator and to the developer as referred to in this law, and for the financial lease of the
115
equipment required for the development of the activities, business, or operations carried out within
the Panama–Pacific Area.
•
Exemption from the payment of the tax levied on international telephone calls.
The developer, the operator, or the companies of the Panama–Pacific Area shall submit the following
statements, documents, and reports to the Ministry of Economy and Finance, through the intermediary of the
Agency:
•
Affidavit in respect of Income Tax
•
Statement regarding the Tax on the Transfer of Movable Property and the Rendering of Services
•
Return on the Tax on the Transfer of Immovable Property
•
Any other returns, reports, or documents provided for in the law and/or its regulations.
The workers of the developer, the operator, or of the companies of the Panama–Pacific Area, the residents,
and the visitors of the Panama–Pacific Area shall not enjoy the tax benefits.
All of the following activities that are listed in Article 60 of Law No. 41 of 2004 are exempt from paying the
following taxes:
•
Income tax for net taxable income received from the activities, business, and operations carried out
within the APP.
•
Taxes on dividends retained from profits or dividends paid to its shareholders or partners, and the
Complementary Tax.
•
Taxes on Monies Transfers sent Overseas, retained as payments for commissions, bonuses, and
payments for technical assistance services or for any other item.
•
Import taxes and Personal Property Sales and Rendering of Services Tax, specifically for companies
that render professional services regulated under special current legislation and rules and regulations.
Activities listed in Article 60 that are tax-exempt are the following:
a.
The rendering of services to natural or corporate persons located outside the territory of the
Republic of Panama.
b. The disposition or transfer of shares of Companies of the Panama–Pacific Area, of the Operator or
of the Developer, whether such transfer is evidenced in a direct or indirect manner, through the sale
of shares of companies that are in turn the owners of the shares of Companies of the Panama–
Pacific Area, of the Operator or the Developer.
116
c. The disposition or transfer of all kinds or classes of merchandise, products, equipment and goods, as
well as the rendering of services, between Companies of the Panama–Pacific Area, the Operator and
the Developer, or to companies established in other petroleum free zones or port premises of the
Republic of Panama; the latter being subject to the provisions of Articles 50 and 51.
d. The activities carried out by the Developer pursuant to the Developer Agreement of the Panama–
Pacific Area and to sub-section 5 of Article 42 of Law 41.
e. The sale of any kind or class of merchandise, products, equipment and goods, as well as the
rendering of services, to visitors, passengers or crew members in transit or whose destination is
foreign countries, except in cases where the sale is made by the own manufacturer of the
merchandise, products, equipment or goods, or by a Company of the Panama–Pacific Area that
belongs to the same economic group as the manufacturer.
f.
The sale of any kind or class of merchandise, products, equipment and goods, as well as the
rendering of services, to vessels that cross the Panama Canal bound for foreign ports or that navigate
between any operational port of the Republic and foreign ports, except in cases where the sale is
made by the own manufacturer of the merchandise, products, equipment and goods, or by a
Company of the Panama–Pacific Area that belongs to the same economic group as the manufacturer.
g. The sale of any kind or class of merchandise, products, equipment and goods, as well as the
rendering of services, to aircraft that use the operational airports of the Republic, bound for foreign
airports, except in cases where the sale is made by the own manufacturer of the merchandise,
products, equipment and goods, or by a Company of the Panama–Pacific Area that belongs to the
same economic group as the manufacturer.
h. The rendering of services relating to aviation and airports, including the transportation, handling and
warehousing of cargo in general; the repair, maintenance, conversion and reconversion of aircraft;
the distribution, maintenance, conversion, reconversion and manufacture of parts and/or spares for
aircraft, whether for their import into the Fiscal Territory, their export or disposition or transfer
between the Companies of the Panama–Pacific Area, the Operator and the Developer, or to
companies established in other free zones of the Republic of Panama, whether of petroleum or
which have a special tax treatment.
i.
The manufacture of high technology products, components and parts, whether for their import into
the National Fiscal Territory, their export or disposition or transfer between companies of the
Panama–Pacific Area, the Operator and the Developer, or to companies established in other free
zones of the Republic of Panama, whether of petroleum or that have a special tax treatment.
j.
Multimodal and logistic services, as well as transactions of sale of merchandise not manufactured in
the Area, destined abroad, provided such sale is made by a multinational company or any of its
branches, affiliates, subsidiaries or companies of the same economic group.
117
k. The rendering of services from call centers for commercial use; the gathering, processing, storage,
commutation, transmission and re-transmission of data and digital information; the connection of
radio, television, audio, video and/or data signals; the administration of offices for users within the
Panama–Pacific Area, the Developer or the Operator, or that are established outside the territory of
the Republic of Panama; the investigation and the development of resources and the digital
applications for use in Intranet and Internet networks.
Labor Regime
Law 41 of 2004 contains special labor provisions for the Special Panama–Pacific Economic Area.
Nevertheless, matters not regulated by this law shall be regulated by the Labor Code in a supplementary
manner; that is, it applies to those issues not regulated by Law 41 of 2004.
Labor regulations include the following:
•
25% fixed overtime pay for overtime hours.
•
Mixed and night work shifts, paid per tour actually worked.
•
Possibility to agree on rotating shifts.
•
Possibility to agree on weekly day off different from Sunday.
•
Fixed overtime pay of 50% for working on a weekly day off.
•
Possibility to negotiate the manner of making use of vacation time.
•
The following are considered to be grounds for dismissal: reduction in sales, and/or request of
services because of market fluctuations. In the event of economic grounds for dismissal, labor
authorities shall have fifteen days to render a decision thereupon. In the event that no decision has
been made, the dismissal shall be considered to be justified.
•
Day, night, and mixed shifts shall be paid on an hourly basis having been worked.
•
Maximum duration, without exceeding that established by law.
•
Right to compulsory day off is governed by the Labor Code.
•
Overtime hours can be agreed upon, with the limitations set forth under the Labor Code, with an
only overtime pay of 25%.
•
Unless otherwise agreed upon, overtime work shall be compulsory if relief has not arrived.
•
Freedom to negotiate the compulsory weekly day off, same which can be any day of the week.
•
This includes all companies located within the Special Economic Area, which are part of the list of
companies that, pursuant the Labor Code, can open on Sundays and on national or mourning
holidays.
118
•
By way of negotiation of a Collective Work Agreement, on vacation issues.
•
The Labor Code applies temporarily, until a Collective Work Agreement is approved.
•
Justified grounds for dismissal are listed in the Labor Code of the Republic of Panama, as well as
economic grounds or reasons for dismissal as regulated under Law 41 of 2004.
•
Market fluctuations that cause the loss or considerable reduction on the demand for services or sales
are grounds for dismissal or layoff.
•
Ministry of Labor must render a decision for request for dismissal or layoff within fifteen days;
otherwise the company will understand that it is authorized to proceed with a reduction of personnel.
•
In lieu of Labor Conciliation Boards, the Office of Conciliation has been created at the agency,
which shall handle all out of court, unofficial labor claims.
•
There is an obligation to enter into labor contract agreements in writing, subject to the formalities
and provisions as set forth in the Labor Code.
•
There are special visas for area employees and investors that are processed directly at the agency.
1.7 Promotion and Industry Development (CERFIN)
With Law 76 of 2009, the Certificate for Industrial Promotion (CERFIN) is created, with the aim of
encouraging the development of industry, based on the effective integration of technology with high added
value. This benefit is applicable to industrial manufacturing companies, agro-processing and marine resources
companies, as well as to all the integrated operations of industrial firms engaged in the acquisition and
processing of agricultural and forestry raw materials, including micro, small, medium, and other companies
established or being established in the Republic of Panama.
The CERFIN is a nontransferable nominative document approved by the authorities that is exempt from any
kind of tax, does not cause any interests, and is valid for eight years from its issuance. The same may be used
by the beneficiary for the payment of all taxes and national contributions. The certificate may not be used for
payment of taxes, fees, or contributions of the company that were generated in fiscal years prior to its
issuance, to cover the minimum payment of dividends or complementary taxes, for payment of excise tax on
fuel or oil products, or for payment of taxes subject to withholding.
The CERFIN will be granted to agricultural/industrial businesses that invest in privileged activities, which
may receive the benefit of 35% reimbursement of disbursements incurred in such activities and 25% for
other industrial activities they perform. The activities encouraged by the law are:
•
Research and development
119
•
Management and quality assurance and environmental management
•
Investment or reinvestment of profits in the establishment or expansion of productive facilities or
the capacity to produce
•
Preparation and training of human resources
•
Increase in employment associated with production.
Companies that for whatever reason are enjoying any other benefit or tax incentives—construction
companies, communication or power generation, transmission and distribution of electricity, or companies
engaged in the packaging and distribution of products without the intervention of industrial processing—are
not allowed to request a CERFIN. On the other hand, companies that are established after the entry into
force of Law 76 may apply for the CERFIN two years after starting its operations.
Companies that adopt the provisions of Act 76 of 2009 may import raw materials, semi-finished or
intermediate products, machinery, equipment, packaging, and other inputs used in the composition or the
process of developing their products, paying in addition to the value added tax, only the import tax equivalent
to 3% of CIF value of foreign inputs.
All companies benefiting from the incentives provided under Law 76 must inform the Ministry of Trade and
Industry through a sworn affidavit of the name of beneficiaries who have directly or indirectly more than 5%
of the shares of that company.
This is effective as of January 23, 2010, and is valid for 20 years.
2. NOTICE OF OPERATION
Once the branch or company is registered at the Public Registry, the next step is to obtain the Notice of
Operation, which is the equivalent of a business license.
Law 5 of January 11, 2007, by which the opening process of enterprises is sped up and other norms are
established, provides the legal groundwork for the Notice of Operation, which has replaced the commercial
licenses that were once issued by the Ministry of Commerce and Industry. It is the only process required to
start a new activity in Panama and includes the Taxpayer’s Unique Registration Number, known as the RUC,
Registro Único de Contribuyentes.
120
Quick Facts
•
The Notice of Operation is obtained online through a website called Panama Emprende
(www.panamaemprende.gob.pa) through which information on the corporation, its directors,
employees, activities, operation, starting date of business, and a sworn statement is introduced.
•
The number issued by the Panama Emprende system is the only number that will identify a taxpayer
at all levels of government, including the Ministry of Economy and Finance, the Ministry of
Commerce, the Social Security System and municipalities.
Regulated Activities and Exempt Activities
Certain regulated activities need to comply with previous requirements before starting the operation notice
process.
3. REGISTERING WITH THE AUTHORITIES
Ministry of Economy and Finance
Registration as a taxpayer before the Ministry of Economy and Finance assigns the company a taxpayer
number known as the RUC and is generally completed with the obtainment of the Notice of Operation. It is
prudent, however, to verify registration is in effect directly at the Ministry of Economy and Finance.
Municipalities
Registration as a taxpayer before the municipalities in which it operates assigns the company a taxpayer
number in the municipalities. While this is generally also completed with the obtainment of the Notice of
Operation, it is prudent to verify that registration is in effect directly as the municipalities.
Regulated Industries
Companies engaged in any of the following regulated industries may require registration at any of the
following entities:
•
Banks and financial institutions at the Superintendency of Banks of Panama (Superintendencia de Bancos
de Panamá)
•
Insurance and reinsurance companies at the Superintendency of Insurance and Reinsurance of
Panama (Superintendencia de Seguros y Reaseguros de Panamá)
•
Securities activities at the Superitendence of the Securities Market (Superintendencia del Mercado de
Valores)
121
•
Companies engaged in activities involving public services such as water, energy, electricity, and
telecommunications at the National Authority of Public Service (Autoridad Nacional de los Servicios
Públicos)
•
Companies engaged in private or commercial air travel at the Civil Aeronautic Authority (Autoridad
Aeronáutica Civil)
•
Companies engaged in the tourism industry at the Tourism Authority of Panama (Autoridad de
Turismo de Panamá).
4. EMPLOYEES
Panamanian labor conditions are governed by the Labor Code (Cabinet Decree No. 252 of December 30,
1971, as modified). Legal subservience and economic dependence hallmark the existence of a job relationship
under the Code. The existence of said relationship gives rise to the obligation for payment of wages.
Workers’ rights are considered a minimum and cannot be relinquished or diminished. Any act, contract, or
statement suggesting waiver or impairment of worker’s rights is held to be null and void. Furthermore,
employer or business division into different legal entities does not impinge on workers’ rights.
The two entities to engage with regarding employees are the:
•
Ministry of Labor and Labor Development
•
Caja de Seguro Social (Social Security).
Employment Contracts
Employment contracts must be executed in writing in three copies (one each for the worker, employer, and
Ministry of Labor and Labor Development). In absence of such contract, worker allegations of facts and
circumstances, which should have been contained thereon, shall be deemed proven, barring contrary proof
from the employer.
Contracts can be entered into for specific or indefinite periods and for specific works. The maximum term
for a specific contract is one year. It will nonetheless be held as effectively covering an indefinite period
should the employee:
• Continue working beyond the contract’s expiration
• Continue working beyond conclusion of works agreed
• When successive contracts are entered into for definite terms or for specific works.
122
Contracting under a probation period of up to three months is viable, provided the service sought requires
certain ability or dexterity and is explicitly spelled out in the contract.
Termination of Employees
Under Panamanian law, an employer cannot terminate without cause a permanent job relationship, barring
justification provided by law and under legal formalities. Exceptions to this general rule include:
•
Workers with service of less than two continuous years
•
Household staff
•
Ratings on vessels trading internationally
•
Apprentices, and others.
The law prescribes a specific set of causes justifying dismissals, categorizing them as disciplinary, not
attributable, and economic.
Major grounds for dismissals include the following:
•
Acts of violence or threats against an employer or relatives, senior staff, or co-workers
•
Grievous lack of probity or integrity or in the commission of property crimes to the detriment of the
employer
•
Sabotage of job-related machines, tools, products, buildings, and appurtenances
•
Negligently imperiling the security of the workplace and of persons present there
•
Willfully and repeatedly refusing measures preventing occupational hazards
•
Unjustifiable disobedience of management-related orders to the employer’s detriment
•
Repeated lack of attendance without employer authorization
•
Sexual harassment or lewd or criminal conduct by worker during working hours
•
Repeated and unauthorized consumption of alcohol or drugs
•
Evident deficiency in productivity against specific standards measured under technical and evaluation
systems previously approved by the Ministry of Labor and Labor Development or agreed to in
collective bargaining
•
Self-evident lack of talent or inefficiency by the worker or the loss of legal qualifications for the
specialty that preclude discharge of contractual obligations
•
Force majeure or happenstance implying unavoidable, direct, definitive cessation of the employer’s
activities
123
•
Employer’s bankruptcy proceedings
•
Contractually defined job interruptions or a decrease in employer activity, due to serious market
downturns, partial profitability due to production losses, or innovations in production procedures
and equipment or analogous causes, all subject to corroboration.
To legalize dismissal, an employer must deliver a letter formally notifying the worker of the decision, as well
as a date and specific cause for termination of the job relationship.
Foreign Workers
As a general rule, Panamanian law allows contracting foreign workers in a proportion of not more than 10%
of the workforce, except for foreign technicians, whose percentage may increase up to 15%.
Foreigners require a work permit issued by the Ministry of Labor and Labor Development. A work permit is
valid for one year, renewable for similar periods up to a maximum of five years.
Exempted from said percentages are foreign staff members of businesses established solely to supervise from
Panama transactions executed, carried out, and consummated abroad, prior official approval.
Employers with Ministry of Labor and Labor Development authorization to recruit foreign technicians are
under the obligation to substitute them by Panamanians after five years.
Salary
Salaries may be set by unit of time (month, fortnight, week, day, or hour) and by piecework. It encompasses,
in addition to money or payment in kind, gratuities, receipts, bonuses, performance premiums, commissions,
profit sharing, and any income or benefit accruing to the worker by virtue of his or her job or as consequence
thereof. In any event, it may not be less than the legal minimum (decreed by government according to service
and geographical location) or by agreement.
Thirteenth Month Bonus (Décimo Tercer Mes)
Under Panamanian law, employers must pay workers a special bonus styled Thirteenth Month, consisting of a
day’s salary for each eleven days of work, to be disbursed in three equal installments on April 15, August 15,
and December 15 of each year.
This worker bonus is not attachable, but is subject to income tax and social security assessment. It is tax
deductible for the employer as an expense in the production of income.
124
Work Shifts and Overtime
Three work shifts exist under the Labor Code:
•
Day shift (from 6:00 a.m. to 6:00 p.m.)
•
Night shift (from 6:00 p.m. to 6:00 a.m.)
•
Swing shift (encompassing periods other than the above, but limited to three hours within the night
shift).
Day shift involves a maximum 8 hours, and its workweek is defined as up to 48 hours.
Maximum night shift is 7 hours, and its workweek covers up to 42 hours.
The swing shift is allowed a maximum 7.5 hours of work, and its week is up to 45 hours.
The same wages accruing to a full day shift of 8 hours are to be paid for each 7-hour night shift and 7.5-hour
swing shift.
Overtime entitles surcharges on regular wages as follows:
•
25% during the day shift
•
50% during the night shift or as an extension of a swing shift begun during a day shift
•
75% for extensions of a night shift or of a swing shift begun during a night shift.
No more than three hours of overtime per day or nine hours per week are lawful. Should overtime materialize
in excess of these limits, the surplus itself shall bear a surcharge of an additional 75%.
Shifts during national holidays or days of mourning carry a surcharge of 150% (which includes payment for
the day’s rest), without prejudicing the worker’s right to another weekday’s rest as compensation
Shifts on a Sunday or another mandatory day of rest entitles the worker to a 50% surcharge, without
prejudice to his or her right to enjoy another day’s rest.
In calculating these surcharges, the surcharge for work on a Sunday, holiday, or national day of mourning is
initially applied to regular wages, and this amount subsequently serves as the basis for determination of any
overtime owed.
125
National Holidays and Days of Mourning
The following are mandatory rest days in Panama:
•
January 1 and 9
•
Carnival Tuesday
•
Good Friday
•
May 1
•
November 3, 4, and 5
•
November 10 and 28
•
December 8 and 25
•
Inaugural Day for a new President of the Republic.
Vacations
Workers are entitled to annual paid vacations determined at the rate of 30 days for every 11 months of
continuous work (or 1 day for every 11 days of service). Payment will involve 1 month’s salary when the latter
had been agreed on a monthly basis and 4 1/3 weeks when weekly wages had been agreed.
Vacation time may not be waived or exchanged for neither money nor any other compensation. Time off for
vacation can be divided only in two equal portions. Up to two vacations terms may be accumulated, in which
event the worker must take at least fifteen days of rest from the first term and the balance should accumulate
for the subsequent term.
Seniority Payments and Discharge Provision Fund
Upon termination of any job contract for an indefinite period, for whatever reason, every worker is entitled to
receive from his or her employer a “Seniority Payment” to be fixed at the rate of one week’s wages per each
year of service from the commencement date of the work relationship. In the event of an incomplete year of
service, the worker is entitled to proportionate payment.
For Seniority Payment calculations, the average amount of any and all compensation received by a worker
during the final five years of employment is deemed to constitute his or her salary for every year throughout
the working relationship. The official Social Security Administration, as well banks, life-insurance companies,
and savings and loans associations, are authorized to manage Seniority Payment sinking fund contributions.
126
Employers are under the obligation to set up a discharge provision fund to cover Seniority Payments and
indemnity for unjustified dismissals or warranted resignations.
Every three months an employer must contribute into this fund a quota for the worker’s Seniority Payment,
plus 5% of the monthly amount toward an indemnity to which the worker might be entitled should the
relationship end in unjustified dismissal or warranted resignation. These quarterly contributions will be held in
trust by banks (with General License), insurance companies (with license to operate in Panama), businesses
holding fiduciary licenses, and cooperatives and companies managing investment funds or mutual funds.
Such contributions are deductible expenses to the employer’s income tax calculations.
Indemnity for Unjustifiable Dismissal
The Labor Code provides for an indemnity to be disbursed solely in cash in event of termination of an
indefinite job contract without a justifiable cause, as per a schedule established in the code. For job
relationships initiated after August 12, 1995, indemnity is 3.4 weeks for every year served during the first ten
years, while every subsequent year thereafter carries one week’s salary each. This indemnity cannot be
combined with the other scales. An appropriate proportional amount is payable, should a full year not be
completed.
Collective Job Relationships
Formation of unions by company or by industrial is viable under Panamanian law. Workers’ right to strike in
order to protect their rights and working conditions is also recognized. Similarly, collective bargaining
between employers and unions is also lawful. Collective job conflicts are submitted to arbitration. Employer
strikes (lockouts) do not exist in Panama.
Social Security
Both employers as well as workers or employees must pay mandatory contributions into the Social Security
Administration (Caja de Seguro Social or CSS), in order to cover benefits for disability (temporary or
permanent), death, old age, maternity leave, dental and medical services, pensions, and retirement.
As a general rule, under Panama law every employee (including foreigners) employed by a natural or juridical
person operating within Panama must be insured against occupational hazards with the CSS. Premiums for
this coverage are set by the aforementioned entity via a schedule covering types and degrees, and payments
are from employers’ sole account. Classifications and ratings of firms or employers are set by the Social
Security Administration. Premiums are quantified by multiplying total salary amounts by the degree of risk
associated with the business and by a constant factor of seven balboas cents (US$0.07).
127
Education Tax
This contribution styled as Educational Insurance is a mandatory subsidy for educational activities within the
country. It is made up by contributions from workers (salaried or self-employed) and from employers.
Contributions into the Educational Insurance fund are deductible from the taxpayer’s income tax
calculations.
5. MANAGING THE BUSINESS
5.1 Contracting with Third Parties
Contracts without special legislation are generally covered under the general rules for contracts. The general
rule of contracts encompasses the notion of contractual freedom, in which parties may accord into any
clauses, pacts, terms, and conditions deemed convenient as long as they do not contradict the law, public
morals, and public policy.
A note must be made on adhesion contracts. Contracts between providers of goods and services and
consumers are also regulated by Law No. 45 of October 31, 2007, which dictates norms on consumer
protection and defense of competition. This law creates the Consumer Protection and Competition Defense
Authority (Autoridad de Protección al Consumidor y Defensa de la Competencia). In adhesion contracts, the law deems
such clauses as might imply a waiver of consumer rights recognized in law to be null and void.
5.2 Contracting with the Government
Law No. 22 of June 27, 2006, regulates public contracting, or contracting with the government, as modified
to date.
Contracts with the government are now managed through an online portal system called PanamaCompra,
which details the products and services required by the public sector. All government entities are required to
publish all the information pertaining to minor contracting, contractor selection proceedings, direct
contracting, and the contractual stages.
PanamaCompra is managed by the General Directorate of Public Contracting (Dirección General de
Contrataciones Pública), an autonomous entity with legal personality that regulates, interprets, controls, and
advises state and public entities on contractor selection proceedings. The directorate is subject to the control
128
exercised by the General Comptroller of the Republic (Contraloría General de la República) and the Executive’s
policies as outlined by the Ministry of Economy and Finance.
5.3 Intellectual Property Rights
Law 35 of May 10, 1996, regulates industrial property and was recently modified by Law 61 of August 2,
2012.
This statute intends to protect inventions, utility patents, models and industrial drawings, industrial and
commercial secrets, trade and service marks, collective marks, warranty marks, declarations of origin, source
denominations, commercial names, and advertising slogans and signs. Among the changes implemented in
2012 is the possibility of multiclass registrations, allowing the registration of power of attorneys within the
Panamanian trademark office and provisions with respect to the electronic processing of trademark
registrations.
Protection is applied for at the General Directorate of Industrial Property Registration (DIGERPI) of the
Ministry of Commerce and Industries.
6. PAYING TAXES
Tax legality is among the fundamental rights enshrined in the Political Constitution of the Republic of
Panama, which is to say all tax and revenue schemes must be enacted into law. The Fiscal Code (Law No. 8
of 1956 and its successive reforms) is the principal body of law governing the country’s taxation system.
Among the major national tributes levied under the Panamanian tax system are taxes on:
•
Income
•
Import
•
Exports
•
Real estate
•
Ships
•
Execution of documents (stamp tax)
•
Commercial and industrial licenses
•
Banks, finance companies, and exchange houses
•
Fuel and petroleum by-products
129
•
Transfer of chattel and services (ITBMS)
•
Selective consumption (ISC)
•
Real estate transfer
•
Insurance.
6.1 Income Tax
The hallmark of Panamanian taxation is strict adherence to the principle of tax territoriality. Thus Article 694
of the Fiscal Code specifies that only “taxable income generated from any source within the territory of the
Republic of Panama regardless of where it is received” is subject to income tax.
As of 2011, the general corporate tax rate is 25%.
Legal entities in the mining sector, as well as those in electric generation, telecommunications, insurance,
reinsurance, cement production, gaming, and financing and banking, shall pay their income tax rate according
to the following rates:
Fiscal Periods Rate: January 1, 2012: 27.5%; January 1, 2014: 25%
These tariffs are also applicable to subsidiaries or affiliates of legal entities which main activity is mining,
electric generation, telecommunications, insurance, reinsurance, cement production, gaming, financing, or
banking or that render services related to these activities in an exclusive or principal manner.
Entities in which the Government owns more than 40% of their shares shall pay income tax at the rate of
30%.
According to Article 694 of the Tax Code, certain activities as not taxable within Panamanian territory, since
they are not considered to be income:
•
Invoicing from a business within Panama for the sale of merchandise or products for an amount
greater than that for which such items had been invoiced to said business within Panama, whenever
said merchandise or products do not physically enter Panama.
•
Supervising from an office within Panama business transactions performed, completed, or having
effect abroad (offshore operations).
130
•
Except as described in the following paragraphs, distributing dividends or shares of juridical persons,
when these originate from income not produced within the territory of the Republic of Panama,
including that generated by activities listed in the previous two bullets.
If a natural or juridical person perceives income from both Panamanian and non-Panamanian sources, tax is
liable only against that portion obtained from a Panamanian source, except for dividends if the company has
a Notice of Operation.
For natural persons, the following items are considered gross revenue of the taxpayer’s overall income,
without any deductions:
•
Salaries, wages, bonuses, representation expenses, day wages, travel allowances, incentives,
commissions, pensions, retirements, honoraria, use of vehicles or housing, leisure travel, family
education expenses, considerations, shares plus other payments for personal services, except medical
insurance expenses
•
Proceeds or profits from business, industries, commerce, or agricultural activities
•
Leasing activities of any kind, interest plus shares from copyrights, royalties, lease premiums, factory
marks, patents, etc.
•
Dividends or share distributions
•
Profits taken on the sale of real or personal property, shares, bonds, plus other securities
•
Proceeds or profits from the rendering utilities such as electricity, telephone, or gas
•
50% of income that local movie distributors receive from theatres when films are shown within
Panama
•
Business activities of parties operating established within free zones
•
Any increase in personal wealth not justified within the relevant year.
Under applicable provisions, those expenses incurred in the generation of income and the protection of its
source are deductible. Also, the following are deemed deductible expenses or distributions:
•
Donations to officially designated local educational or nonprofit charities up to US$50,000 (for
natural persons) or 1% of the donor’s taxable income (for legal persons)
•
Dues paid to local nonprofit bodies or associations or guilds
•
The difference between interest paid and interest taken on deposits securing loans (back to backs)
•
Employer’s distribution on earnings to its workers.
The following expenses or distributions are not deductible:
131
•
Personal living expenses for the taxpayer and his or her family
•
Disbursements for construction or improvements to augment the value of any chattel or real estate
that are liable to depreciation or amortization
•
Travel, fees, or entertainment expenses or donations that are not advertisements
•
Expenses of local distributors with bearing on film producing companies
•
Remittances on account of royalties by companies in the Colon Free Zone and the Tocumen Airport
Free Zone to persons abroad
•
Any other deductible expense that may not be satisfactorily verified by the tax authorities.
Legal entities with taxable annual income of more than $1,500,000.00 have to calculate their income tax under
an alternative formula, that is, (i) a rate of 25% from the year 2011 of their net income or (ii) 4.67% of their
gross taxable income; these entities have to use the formula that gives the highest amount. Legal entities with
taxable annual income under $1,500,000.00 may only apply the first alternative.
Natural persons pay against net taxable income for a fiscal year on a progressive schedule:
•
Up to US$11,000.00: 0
•
US$11,000.01 to US$50,000.00: 15% of the excess from US$11,000 to US$50,000.00.
•
More than US$50,000.00: US$5,850.00 for the initial US$50,000.00, plus 25% of the excess over
US$50,000.00.
Income tax in Panama is levied only on net income derived from operations within the territory of the
Republic of Panama. Income obtained from corporations consummated abroad is not income obtained from
sources within Panama and, therefore, is not taxable under it laws.
Even if a Panamanian corporation has an office in Panama, employees in Panama, and a license to engage in
business in Panama, it still does not pay Panama income tax, if the transactions out of which the income
arose were consummated outside of the Republic of Panama. No tax liabilities arise even though payment of
the merchandise is made from the Republic of Panama, or payment therefore is received in the Republic of
Panama, or if the sale or purchase corporations are directed from an office situated in the Republic of
Panama.
Remittances to nonresident entities are subject to an income tax withholding rate of 12.5% as of January 1,
2011, provided that the remittances are deducted as an expense by the Panamanian taxpayer for income tax
132
purposes, and that the services rendered by the foreign entity have an incidence on the generation or
preservation of the income of Panamanian source.
6.2 Annual Franchise Tax
Panamanian corporations pay an annual franchise tax of US$300.00, payable as follows:
•
Until July 15 of each year for corporations incorporated during the months of January to June
inclusive.
•
Until January 15 of each year for corporations incorporated during the months of July to December
inclusive.
Failure to pay the aforementioned tax will result in a penalty of US$50.00 for each year, or fraction thereof,
for which payment is overdue and the nonregistration of documents or issuance of certification by the Public
Registry other than those ordered by authorities or requested by third parties seeking protection of their
rights. Failure to pay franchise tax for more than one period will cause an additional penalty of US$300.00
and an annotation of being in arrears.
If the tax is not paid for a non-interrupted period of ten years as of February 3, 2005, the company shall be
deemed to be dissolved if not restated within three years.
6.3 Dividends and Complimentary Tax
Except for companies that require a Notice of Operation for doing business in Panama, stockholders or
partners pay a 10% income tax on dividends to be withheld at source by the relevant juridical persons
(income from offshore business is excluded).
Any legal entity that requires a Notice of Operation regulated by Law 5 of 2007 (equivalent to a license for
doing business in Panama) is obligated to withhold the dividend or participation quota tax of 10% of the
sums distributed to its shareholders or partners when these sums are from a Panamanian source and of 5%
when the income originates from:
•
Foreign source
•
Exterior or export operations
•
Local income exempt from income tax as per sections e, f, l, and n of Article 708 of the Tax Code.
133
The legal person that distributes the dividends or participation quotas must always distribute first the
Panamanian source income before distributing dividends from foreign source income, export or exterior
operations and local income.
In case of companies established or to be established in any free zone in the Republic of Panama, they shall
pay the dividend or participation quota tax at a fixed rate of 5% of the sums distributed to shareholders or
partners, regardless of the source of the income.
The companies that do not distribute dividends, or if the total amount distributed as dividends or
participation quota is less than 40% of the total net income for the corresponding fiscal period, after
deducting the taxes, the company must cover 10% of the difference—or in other words, at a 4% rate of the
total net income after taxes. This 4% rate is the complimentary dividend tax. The other 6% will be paid when
the dividends are actually paid or distributed.
Companies established or to be established in any free zone of the Republic that to do not distribute
dividends, or if the total amount distributed as dividends or participation quota is less than 20% of the total
net income for the corresponding fiscal period, after deducting the taxes, the company must cover 10% of
the difference. Withheld sums shall be sent to the tax authorities within ten days following the date of
withholding. Such deductions and withholdings are definitive.
Legal entities shall not be obligated to make the withholding referred to in this article on the part of their
income derived from dividends, provided that the legal entities that distributed such dividends have paid the
applicable tax and have made the withholding required in this article. Legal entities shall neither be obligated
to make the withholding referred to in this article on the part of their income derived from dividends,
provided that the legal entities that distributed such dividends were also exempt from the obligation of
making such withholding.
Any natural or legal entity that must remit to a natural or legal entity not residing in Panama sums derived
from income of any kind produced in Panamanian territory, except for dividends or participations, must
deduct and withhold, at the time of remittance, the amount established in Articles 699 or 700 of the Tax
Code and shall pay the withheld sums to the tax authorities within ten calendar days from the date of
withholding.
To calculate the withholding amount, the sums paid, drawn, credited, or advanced to the taxpayer during the
year must be added to the amount paid, drawn, credited, or advanced and to 50% of this sum the rate of
134
Article 699 (for individuals) or 700 (for companies) shall be applied. From the amount so established, the
withholdings already made in the taxable year shall be deducted. Notwithstanding the above provisions,
holders of bearer shares shall pay this tax at a rate of 20%.
The company that distributes the dividends shall do the withholding, which shall be of a definitive nature. In
case the company distributing dividends has different classes of shares, the tax shall be paid pursuant to the
rated established herein and according to the class of shares.
When the distribution is less than 40% of net earnings, or if no distribution is made, the provisions on
complimentary tax shall apply, regardless of the classes of shares issued by the company.
6.4 Real Estate Taxes
All land located within Panamanian territory, as well as improvements to them, is subject to this tax, except
the following realty intended for:
•
The state, municipalities, or association of municipalities
•
Autonomous or semi-autonomous entities, subject to their own regulations
•
State-sanctioned worship or churches
•
Public or social welfare programs
•
Family homesteads
•
Treaty exemptions or state contracts
•
Labor unions, provided the real estate is not used for profitable activities
•
Those with taxable base (including improvements) not exceeding US$30,000.00
•
Agriculture or cattle farming, if the registered value (valor catastral) does not exceed US$150,000.00.
Private educational institutions undertaking to offer scholarships to needy students and private hospitals
undertaking to assist needy patients may deduct these sums from the tax amount to be paid.
The progressive combined tax rate and base for calculation is the following (applicable to noncondominiums):
•
1.75% of the excess of US$20,000 of taxable base, up to US$50,000.00
•
1.95% of the excess of US$50,000 of taxable base, up to US$75,000.00
•
2.10% of the excess of US$75,000 of taxable base.
135
The progressive combined tax rate and base for calculation is the following (applicable to condominiums):
•
1.40% of up to US$20,000 of taxable base
•
1.75% of the excess of US$20,000 of taxable base, up to US$50,000.00
•
1.95% of the excess of US$50,000 of taxable base, up to US$75,000.00
•
2.10% of the excess of US$75,000 of taxable base.
The alternative tax rate and base for calculation of this tax is the following:
•
Up to US$100,000.00 in land and improvement: 0.75%
•
Over US$100,000.00: 1.0%.
The real estate tax must be paid according to the official assessment value, which is usually the declared value
on the sale document. The maximum annual percentage of assessment is 2.10%, which is based on the value
of the land and plus the declared value of the improvements built on it. The taxable base will depend on the
total value of the land plus all improvements. Real estate transactions at prices of more than the appraisal
value will automatically increase the value of these properties for tax purposes. Certain properties and
improvements thereon are exempt or can obtain exemptions from real estate taxes according to special
incentive tax laws. Those properties with assessed registered values of less than US$30,000.00 are exempt
from payment of real estate taxes, as well as those properties that fall under the 20-year exemption.
6.5 Real Estate Transfer Tax
Transfer tax must be paid by the seller at the moment of transfer of the property. This tax is approximately
2% of either the sale price stated in the Purchase and Sale Contract or the registered property value,
whichever is higher. New residential properties bought as a personal residence are exempt from the payment
of the real estate transfer tax.
6.6 Capital Gains Tax
By means of Law No.18 of June 19, 2006, certain provisions of the Tax Code were amended, including
Article 701, which establishes new rules for the application of capital gains tax derived from the sale of bonds,
shares, participation quotas, and other securities issued by legal persons, as well as capital gains arising from
the transfer of other movable properties.
136
Except for shares registered with the National Securities Commission and if transfer (i) is made through a
stock exchange or other organized market or (ii) results from a merger or corporate reorganization or
consolidation and shareholder only receives other shares in surviving entity or its affiliate, which are exempt
from capital gains tax, the following events are now subject to income tax, at a fixed rate of 10%:
•
Capital gains resulting from the transfer of bonds, shares, participation quotas, and other securities
issued by Panamanian companies
•
Capital gains derived from the transfer or sale of other movable assets
•
Capital gains derived from the transfer of securities resulting from the acceptance of a public offer
for the purchase of shares, pursuant to the Securities Law.
Income produced by capitals or securities that are economically invested in the territory of Panama, regardless
of whether the sale is executed in or outside of Panama, is considered Panamanian source income and, thus,
taxable.
The buyer of the shares has the obligation to withhold from payment to the seller 5% of the total amount of
the transfer, on account of income tax payable on the seller’s capital gains. The buyer has the obligation to
send payment to the Tax Authorities the sum withheld within ten days following the date the obligation to
pay arose. If there is a breach of this obligation, the issuer company is jointly liable for the payment of the
unpaid tax. The seller has the option to consider the sum withheld by the buyer (5%) as the definitive income
tax to pay for the capital gains. If the sum withheld exceeds the amount resulting from the application of the
10% rate to the gain obtained from the sale, the seller may file a special tax return to credit the sum retained
and claim the excess resulting as a credit in his or her favor applicable to the income tax levied in the same
fiscal period in which the transaction was completed. The sums obtained from the transfer are not cumulated
to the taxpayer’s taxable income.
6.7 Movable Assets and Services Transfer Tax (ITBMS)
Panama’s fiscal laws (in this case, Decree 84 of 2005) establish that a specific tax for transfer of mobile assets
and services (ITBMS) will be applied to those assets transferred or provision of services effected in the
territory of Panama. This is to be irrespective of the place where the contract has been celebrated or where
payment is made; therefore, a 5% value added tax is levied on the transfer of movable assets in the Republic
of Panama and the rendering of services by merchants, manufacturers, professionals, lessors, and other
service providers.
137
6.8 Stamp Tax
Stamp tax is collected via stamped tickets (franqueo) or sworn statements or by any other means authorized by
the Revenue Directorate General of the Ministry of Economy and Finance. The person obligated to pay this
tax should affix them to the relevant document at the time of its execution, either on original or on his or her
file copy. Alternatively, the person should submit to the Revenue Directorate General sworn statements
attesting to the number of executed documents liable for tax, the total amount of the face value on them, and
the amount of corresponding tax payable.
The face value of revenue stamps ranges from US$0.01 to US$20.00. Documents such as checks, promissory
notes, letters of exchange, receipts, and invoices, among others, must bear revenue stamps in an amount that
will vary with the face value of the document. Contracts and acts valued at more than US$100.00 must be
stamped at the rate of US$0.10 for each US$100.00 of face value. Sealed paper has a cost of US$8.00 per
page. Any applications to the Administration (except before the Tax Authorities) and official certifications
and documents for notarization bear affixed the appropriate revenue stamps.
6.9 Notice of Operation Tax
As per Article 1004 of the Fiscal Code, the tax rate applicable to licenses (commercial or industrial) under
Law No. 25 of 1994 is 2% per annum on the company’s capital, with a minimum of US$100.00 to a
maximum of US$60,000.00. The first year’s tax must be paid to the Ministry of Commerce and Industries
upon application for license. Subsequent payments must be effected together with a sworn statement within
the first three months following the closing of the relevant fiscal period.
6.10 Municipal Taxation
The municipalities of the Republic of Panama are legally empowered for the collection of taxes and rates set
at the district level. Pursuant to Law No. 106 of 1973, an extensive range of profitable activities are taxable by
municipalities.
6.11 Accounting and Auditing Standards
Panama has adopted as accounting standards the International Financial Information Standards (NIIFs, in
Spanish) issued by the International Accounting Standards Board. The International Auditing Norms and
138
Guidelines issued by the International Federation of Auditors are also adopted as applicable norms in
Panama.
6.12 Depreciation Rules
General Rules: Annual depreciation permitted by reason of wear and tear or exhaustion is that effected on
fixed assets employed by the taxpayer in his business, industry, or profession and in activities linked with the
production of taxable income. In the case of fixed assets devoted indeterminately to the production of taxable
income, exempt income, and foreign source income, the deductions for depreciation shall be made in the
respective proportion, taking into consideration criteria such as the amount of time that the assets are
engaged in the production of each income, the units produced, or the taxable income, exempt income, and
the foreign source income.
6.13 Double Taxation and Information Exchange Agreements
To date, the Republic of Panama has signed fifteen double-taxation treaties with the following countries:
Mexico, Italy, Barbados, Qatar, Portugal, the Netherlands, Luxembourg, Spain, South Korea, Singapore,
France, Ireland, the Czech Republic, the United Arab Emirates, and Israel.
Panama has also signed seven exchange-of-information agreements with the United States, Denmark,
Finland, Greenland, Faroe Islands, Norway, and Sweden.
The Republic of Panama is an independent country since 1903, joining Central America and South America,
between Costa Rica and Colombia. It borders the Caribbean Sea and the Pacific Ocean. It is subdivided
politically into nine provinces and five special indigenous regions. The Panama Canal crosses the Republic
from north to south, at the Isthmus’ narrowest point.
Quick Facts
•
Area: 75,517 square kilometers.
•
Population: 3,405,813.
•
Government type: Constitutional democracy, centralized Republic.
•
Capital: Panama City.
•
Language: Spanish is the official language; English is widely spoken.
•
Time Zone: GMT-5.
139
•
Currency: Officially, known as the “balboa”; the U.S. dollar has been legal currency since 1904.
•
Weather: Tropical maritime; with a rainy season from May to January and a dry season from January
to May.
•
Government: Constitutional democracy structured in three branches: Executive, Legislative, and
Judiciary.
•
Legal System: Based on the civil law system; there is a judicial review of legislative acts in the
Supreme Court of Justice, and Panama accepts compulsory International Court of Justice jurisdiction
with reservations.
•
How to Get to Panama: The international airport is Tocumen International Airport, which is easily
accessible from the United States and Europe. It is serviced by Copa Airlines, Panama’s national
carrier, and many other international carriers.
Economy
The exercise of the economic activities depends mainly on the private sector. The most developing economic
sector is services, with special emphasis on international commerce carried out within and from Panama.
Outstanding in importance in the latter sector are the International Banking Center and the Colon Free Zone.
The official monetary unit is the balboa, which is at par value with the United States dollar (US$), as the
currency that circulates freely in the country. The constitutionally mandated absence of officially issued paper
currency accords the circulation of the U.S. dollar, which holds immense importance for both local, as well as
international transactions.
In the last four to five years, Panama has seen a boom in the maritime, logistics, construction, and
infrastructure industries related to the ongoing project for a third set of locks in the Panama Canal with
expected conclusion date by 2014.
Political System
Under its Constitution, the Republic of Panama is established as a sovereign and independent state with a
unitary, representative, democratic, and republican government. The government is structured basically in
three branches: Legislative, Executive, and Judiciary.
The Legislative consists of a unicameral National Assembly, currently consisting of 71 legislators, elected to
five-year terms by direct, universal, and popular suffrage, and allowed re-election.
140
The President of the Republic and the Cabinet constitute the Executive branch. The President is elected for
five years by direct popular suffrage. One Vice President who stands in for the President’s absences is elected
concurrently for the same period.
The Judiciary branch consists of a Supreme Court of Justice, Superior Courts, and tribunals such as
established by law. The nine Magistrates of the Supreme Court are nominated for ten years by the President
of the Republic and the Ministers assembled in Cabinet, and their designation is then ratified by the National
Assembly.
Entering Panama
Most foreigners initially enter the Republic of Panama with a tourist card, generally valid for 30 days and
renewable for an additional 90 days. Tourist cards are available from airlines travelling to Panama.
Some restricted nationalities, such as Chinese or Indian nationalities, will require an Authorized Tourist Visa
to enter the country, unless they have a valid U.S. visa or European visa that has been previously used. These
Authorized Tourist Visas can be obtained from Panamanian Consulates abroad or may need to be applied
locally.
In practice, foreign tourists of certain nationalities are currently allowed to stay up to six months, unless they
have been stamped at entry with a more restricted timeframe.
When staying longer than six months or when a restricted timeframe is stamped on the passport at entry,
foreigners remaining in Panama will be required to register with the National Immigration Service (Servicio
Nacional de Migración) of the Ministry of Public Security and will be required to apply for prior leave to exit the
country.
There are different types of visas available within Panama to attain legal residency, and a case-by-case review
must be conducted to verify the applicable visa status.
Foreigners Investing in Panama
The creation of legal vehicles and the enactment of business regulation within the country have been
consistent with the strategy of promoting services as offered by the Panamanian economy. There are few
existing limitations for foreign investments. Foreign and local investors are accorded equal status under the
law, which also holds among foreign investors themselves. With the exception of retail trade, which is limited
to local nationals and purchasing real estate within 10 kilometers of the Costa Rican and Colombian borders,
141
Panama has no general prohibitions for foreigners to hold equity in local businesses and/or in joint ventures.
Foreign investments in public services are allowed generally, except that law expressly prohibits direct or
indirect investment by foreign governments.
Under an open economic policy and with the explicit purpose of attracting foreign investments, the
government has set up various legal procedures and institutions. The Ministries of Economy and Finance and
the Ministry of Commerce and Industries are the main official institutions engaged in giving direction,
regulating and monitoring commercial activities within the country.
In particular, the Ministry of Commerce and Industries has established an office for promotion of
investment, known as Proinvex, Promoción de la inversion en Panamá (in English, Panama Trade & Investment
Agency). Its website can be found at http://proinvex.mici.gob.pa.
142
VENEZUELA
Guillermo de la Rosa S. and Adriana Bello R. 7
1. CONSTITUTION OF THE BOLIVARIAN REPUBLIC OF VENEZUELA
Title IV of the Venezuelan Constitution regulates matters pertaining to the National Socioeconomic System.
Article 301, under this Title, reads as follows:
Article 301. The State reserves the use of trade policy to defend the economic activities of national public and private
companies. No foreign persons, companies or organizations may be granted systems that are more beneficial than those
established for nationals. Foreign investment is subject to the same conditions as national investment.
This clearly shows that the Venezuelan Constitution provides for foreign investment under the same
conditions and benefits established for national investments.
Along these lines, it should be noted that international private companies may freely participate in any
economic activity in Venezuela, as a national company would, as long as not otherwise prohibited by the
Constitution or by law. This is the case of certain industries whose activities are exceptionally reserved to the
State, such as the oil industry, which is reserved to the State pursuant to Article 302, excluding the
involvement of domestic and international private companies. This Article provides in relevant part:
Article 302. The State reserves to itself, through the respective organic law, and for reasons of national convenience, the
petroleum industry and other industries, operations, services and goods that are of public interest and of a strategic
nature. The State shall promote the domestic manufacture of raw materials deriving from the exploitation of
nonrenewable natural resources, with a view to assimilating, creating and innovating technologies, generating employment
and economic growth and creating wealth and wellbeing for the people.
2. DECREE WITH THE RANK, STATUS AND FORCE OF LAW FOR PROMOTION AND PROTECTION OF
INVESTMENTS (EXTRAORDINARY OFFICIAL GAZETTE NO. 5.390 OF OCTOBER 22, 1999)
In 1999, the National Government issued the Decree with Rank, Status and Force of Law containing the
Investment Promotion and Protection Law. The purpose of the Decree, pursuant to its Article 1, is to
7
Guillermo de la Rosa is a Senior Partner and Adriana Bello R. is an Associate at Torres, Plaz & Araujo.
143
provide a stable and foreseeable legal framework for investments and investors, both national and foreign,
whereby they may interact within a safe environment, through the regulation of the actions of the State in
respect of such investments and investors, in an effort to increase, diversify, and harmoniously complement
investments, favoring the objectives of national development.
Along these lines, the referenced Decree defines as international investment that which is owned or is
effectively controlled by foreign individuals or legal entities. Foreign investment includes foreign direct
investment, sub-regional investment, neutral capital investment, and the investments of a Multinational
Andean Company. International investor is the owner of an international investment, or its effective
controller.
Articles 6 et seq. of the Decree establishes a series of provisions on the treatment of international
investment in Venezuela. Article 6 8 refers to the fair and equitable treatment of foreign investment; Article
7 9 establishes the norm regarding equality of treatment for foreign and national investments, developing a
principle that was already established in Article 301 of the National Constitution; Article 8 10 contains the
norm regarding nondiscrimination of foreign investment based on the country of origin of the capital;
Article 9 11 provides the norm regarding the right to the most favorable treatment; Article 11 12 offers
protection for foreign investment from confiscation; and Article 12 13 sets out the norm corresponding to the
right to transfer all payments relating to investments, such as initial capital, profits, interest, and dividends.
8 Article 6. International investments shall be entitled to a fair and equitable treatment, in accordance with international law standards and criteria, and shall not be subject to
arbitrary or discriminatory measures hindering their maintenance, management, use, enjoyment, enhancement, sale or liquidation.
9 Article 7. International investments and investors shall have the same rights and obligations as those applicable to national investments and investors in similar circumstances,
with the sole exception of the matters set out in special laws and the limitations contained in this Decree Law.
Paragraph One: Certain sectors of the economic activity may be reserved by Law to the State or to Venezuelan investors. The matters established in this Decree Law shall not
affect reserves existing at the effective date of this Decree Law.
Paragraph Two: International investments shall not require prior authorization to be made, except in the cases in which this is expressly so indicated by law.
10 Article 8. There shall be no discrimination in the treatment of investments or investors based on the country of origin of their capital. Sole Paragraph: That established in this
Article shall not be an obstacle to the establishment and maintenance of more favorable treatments to benefit investments and investors from countries with which Venezuela
maintains economic integration agreements, double taxation avoidance agreements or, in general, agreements relating entirely or partially to tax matters.
11 Article 9. International investments and investors shall receive the most favorable treatment in accordance with the provisions of Articles 7 and 8 of this Decree Law.
12 Article 11. No confiscations shall be decreed or enforced other than the exceptional cases established by the Constitution; and regarding international investors and investments,
by international law. Investments shall solely be expropriated, or be subject to measures of an equivalent effect to expropriation, for reasons of public use or social interest, following
the procedure legally established for such purposes, in a nondiscriminatory manner and through a prompt, fair and adequate indemnification.
The indemnification shall be equivalent to the fair price that the expropriated investment has immediately prior to the time at which the expropriation is announced by the legal
mechanisms or made publicly known, whichever comes first. The indemnification, to include the payment of interest up to the effective date of payment, calculated based on usual
common criteria, shall be credited without delay.
Sole Paragraph: The relevant indemnities based on expropriations of international investments shall be credited in convertible currency and shall be freely transferable abroad.
13 Article 12. International investments and, where applicable, international investors, shall be entitled, upon compliance with internal regulations and the payment of the
relevant taxes, to transfer all payments relating to the investments, such as the initial capital and additional amounts necessary to maintain, enhance and develop the investment;
the benefits, profits, income, interest and dividends; the funds necessary for the service and payment of the international credits relating to an investment; the royalties and other
payments relating to the value and compensation for the intellectual property rights; the indemnities referenced by Article 11; the proceeds of the sale or liquidation, complete or
partial, of an investment and the payments resulting from the dispute resolution.
The transfers shall be made without delay, in convertible currency, at the exchange rate effective on the date of the transfer, in accordance with the foreign exchange regulations
effective at that time.
The provisions of this Article shall be no obstacle to the application of measures established by law, administrative or judicial, for the protection of the rights of the creditors or in
the course of proceedings tried before the Courts of the Republic.
Paragraph One: Transfers may be limited temporarily, equitably and non-discriminatorily, in accordance with internationally-accepted criteria, when due to an extraordinary
economic or financial situation, the application of the provisions of this Article will result or could result in a serious disorder in the balance of payments or the international
144
It is therefore clear that there are legal conditions and benefits to encourage and protect foreign investment in
Venezuela.
3. REGULATIONS OF THE DECREE WITH THE STATUS AND FORCE OF A LAW FOR INVESTMENT
PROMOTION AND PROTECTION (OFFICIAL GAZETTE NO. 37.489 OF JULY 22, 2002)
The Regulations of the Investment Promotion and Protection Law were issued to develop the content of
Article 3 of the Decree for Investment Promotion and Protection, defining international investment,
international investor, foreign direct investment, and Venezuelan investment, among others.
Article 3 of the Regulations establishes that an investment is to be deemed owned by international investors
when their sharing in the company receiving the investment accounts for 100% of the capital stock,
shareholders’ equity or assets thereof, depending on the legal vehicle used by such company.
Article 4 provides that an investment is effectively controlled by international investors:
•
When their share in the company receiving the investment is equal to or greater than 51% of the capital
stock, shareholders’ equity or assets thereof, depending on the legal vehicle used by such company; or,
•
When, in the opinion of the relevant organization, in accordance with Article 6 of these Regulations,
regardless of the percentage of interest of the international investors in the company receiving the
investments, such investors have the ability to decide on its activities through:
o
The exercise of the ownership or usage rights to all or part of the assets of the company receiving the
investment; or,
o
Control over one-third or more of the votes of their director or administration boards; or,
o
Control of the decisions of their director or administration boards, through clauses in agreements,
the bylaws, or by any other means; or,
o
The exercise of decisive influence on the technical, commercial, administrative, and financial
direction of the company receiving the investment.
According to said Regulations, the agency in charge of verifying whether an investment is national or foreign
is the National Foreign Investment Superintendency. To determine the ownership or control of an
monetary reserves of the country, that cannot be properly resolved by any alternative measure. In such cases, the measure imposing the limitation must avoid any unnecessary
damages to the economic, commercial and financial interests of international investors and international investments; and must be released as the extraordinary situation leading to
it is corrected and, consequently, the serious disorders in the balance of payments or the monetary reserves of the country, or the threat of such disorders, as the case may be, are
reduced or eliminated.
Paragraph Two: In the cases of external debt for equity swaps, the remittances may be such to the terms and conditions established in the regulations governing such investment
modality.
145
investment, the company receiving the investment must present the relevant application, accompanied by the
following documents:
i.
Certified copy of the articles of incorporation/bylaws of the company receiving the investment,
where applicable, or of the agreement entered by the investors for the purposes of the incorporation
and running of the company receiving the investment.
ii.
Certified copies or publication of the minutes of the meetings evidencing the amendments to the
bylaws, if any; or of the instrument evidencing the resolutions by the company receiving the
investment, amending the agreement entered by the investors for the purposes of its incorporation
and operation, when it does not acquire its own legal status.
iii.
Copy of documentation identifying the shareholders or participants in the company receiving the
investment, if individuals. If the shareholders or participants in the company receiving the investment
are legal entities, a copy of its Articles of Incorporation/Bylaws; for foreign legal entities, an abstract
of the Articles of Incorporation/Bylaws evidencing its conformation and main characteristics,
translated into Spanish by a public translator and legalized and accompanied by the relevant apostille.
iv.
A copy of the documentation identifying the representative of the company receiving the investment,
and of the documents crediting their capacity to bind the company. An attorney in fact must present
a copy of the published power of attorney.
v.
Tax Information Registry number (RIF) and Taxpayer Identification Number (NIT) of the company
receiving the investment and of its investors.
4. COMPETENT AUTHORITY
The national agency of competent jurisdiction for all purposes established in such laws, regulations, and
decrees is the Foreign Investment Superintendency (SIEX). Investors shall appear before such authority to
(i) request the registration of a foreign or sub-regional investment made in Venezuela; (ii) request the
qualification of the company receiving the investment; and (iii) request the recording of the technological
import and patent and trademark usage agreements.
5. DECREE NO. 2.095 OF FEBRUARY 13, 1992: NATIONAL REGULATIONS FOR THE COMMON SYSTEM
REGULATING THE TREATMENT OF FOREIGN INVESTMENT AND TECHNOLOGICAL IMPORTS AND
TRADEMARK AND PATENT USE AND EXPLOITATION (OFFICIAL GAZETTE OF THE REPUBLIC OF
VENEZUELA NO. 34.930, DATED MARCH 25, 1992)
Article 2 of Decree No. 2.095, regulating the Common System for the Treatment of Foreign Investment and
Technological Imports and Trademark and Patent Use and Exploitation, establishes the following definitions:
146
1. Direct Foreign Investment:
a) Contributions made from abroad, owned by foreign individuals or legal entities, destined for the capital of a company,
in freely convertible currency or in physical or tangible goods, such as industrial plants, new or refurbished
machinery, new or refurbished equipment, spares, components and parts, raw materials and semi-finished products.
b) Investments and reinvestments made under this system, in local currency, owned by individuals of foreign nationality
or foreign companies, derived from profits, capital gain, interest, loan amortization, interest or other rights or of
any other resources that foreign investors are entitled to transfer abroad.
c) Those derived from External Debt for Investment swaps, owned by foreign individuals or legal entities.
d) Those derived from intangible technological contributions, such as trademarks, industrial models, technical assistance
and technical know-how, whether or not patented, that may be presented as physical goods, technical documents
and instructions.
2.
National Investment:
a) Those made by the State, individuals and legal entities, as defined in Decision 291 of the Cartagena Agreement
Commission.
b) Those made foreign individuals with uninterrupted resident visas in the country of no less than one (1) year, meeting
the other laws of the Republic and that, whether or not they have imported capital, have advised the Foreign
Investment Superintendency of their intention to waive the right to re-export them and send profits abroad, and
obtain a Credential as National Investor therefrom. In justified cases, the Foreign Investment Superintendency
may exonerate such people from the requirement of uninterrupted residence of no less than one (1) year.
c) Those made by Sub-regional Investors, upon the terms established in Decision 291 by the Cartagena Agreement
Commission and Articles 29 and 30 of these Regulations.
3. Sub-regional Investment: That made by a Sub-regional investor.
4. Neutral Capital: Neutral capital are investments by the Public International Financial Entities of which all countries
members of the Cartagena Agreement form part, as indicated in the Annex to Decision 291 of the Cartagena
Agreement. Such investments shall not be calculated as either national or foreign in the company in which they
participate.
5. Sub-regional Investor: The National Investor of any other member country of the Cartagena Agreement.
6. Foreign Investor: The Owner of a Foreign Direct Investment.
7. National Investor: The owner of a National Investment, the owner of a Sub-regional Investment and the bearer of a
National Investor Credential.
8. Subsidiaries: Subsidiaries are foreign companies that, for any reasons, are controlled in their capital or their
management by another company referred to as a parent company. Also considered subsidiaries are the companies that
are controlled separately, in terms of capital and management, by another that for such purposes is the parent company,
although they have no relation between each other. A subsidiary relation shall be deemed to exist between two companies
when the parent company has over fifty percent (50%) of the overall capital stock of the subsidiary.
147
Just as with the Decree for Investment Promotion and Protection, Article 13 of Decree 2.095 establishes that
foreign investors and investments shall have the same rights and obligations as those invested in national
investments, with the sole exception of the matters established in the special laws and the limitations
contained in this Decree.
Article 26 of Decree 2.095 establishes a reserve to national companies of the sectors of the economic activity
of television and broadcasting; newspapers in Spanish; and the professional services whose exercise is
regulated by national laws. Therefore, in addition to the oil industry, which is excluded for both nationals and
foreigners under Article 302 of the National Constitution, foreign investors cannot invest in economic
activities relating national television and broadcasting, or in Spanish-language newspapers.
6. REGULATION OF TAX MATTERS
The tax system of the Bolivarian Republic of Venezuela meets the principle of legality, attributed to the
Public Power: national, state, and municipal. The tax collection authority is the Integrated National Customs
and Tax Administration Service (SENIAT), which is ascribed to the Ministry of Finance. Article 317 of the
Constitution provides that “no tax, duty or contributions that are not previously established by law may be
charged.” The country has also subscribed to double-taxation avoidance conventions with several countries.
Such conventions limit the tax that may be applied by the country of origin of the investment on the
dividends, interest, and royalties that may be obtained by the investor. It should be noted that there are tax
incentives for private investments in some sectors of the economy.
According to these treaties, if a company performs activities in several countries, it shall be subject to the
payment of taxes in each, based solely on the activities performed in that country. To date, the Bolivarian
Republic of Venezuela has subscribed conventions with the following countries: Germany, Barbados,
Belgium, Bolivia, Canada, China, Colombia, Denmark, Ecuador, Spain, the United States, France, the
Netherlands, Indonesia, Italy, Mexico, Norway, Peru, Portugal, the United Kingdom, the Czech Republic,
Sweden, Switzerland, and Trinidad and Tobago.
Income Tax: The net annual income of individuals and legal entities shall be subject to the payment of taxes.
The taxes vary progressively from 15% to 22% and a maximum of 34% of net income.
148
Article 57 of the Income Tax Law 14 establishes a reduction in 10% for the amount of new investments made
during five years following the effect of this Law, to holders of income derived from industrial and
agroindustrial activities, construction, electricity, telecommunications, science and technological activities,
other than hydrocarbons and related activities, and in general, all activities that are defined as industrial
represent investments to acquire advanced technology or cutting-edge technology, represented by fixed
assets, other than land, used for the effective increase of productive capacity or for new companies, provided
that they have not been used by other companies.
Also, the same Article establishes that holders of income derived from rendering tourism services, duly
registered before the National Tourism Registry, shall receive a reduction of 75% of the amount of new
investment used for the construction of hotels, lodgings, and inns; for the expansion, improvement, or
refurbishing of existing buildings or services; to render any tourism service; or to the education and training
of their workers. Also for the case of agricultural, livestock, fishing, or pisciculture activities, the reduction
specified in this Article shall be 80% of the value of new investment made in the influence area of the
production unit with a purpose of mutual profit, both for the unit itself and for the community in which the
unit is located. For the purposes of the fiscal acknowledgment of communal investments, such investments
must be previously qualified and later verified by the competent entity of the National Executive. The same
reduction shall be granted to tourism activity for communal investments, when such investments are made by
small and medium industries of the area.
7. LABOR LAWS
Article 27 of the Organic Labor Law establishes that 90% or more of the workers at the service of an
employer employing at least ten workers must be Venezuelan. Likewise, the compensation of the foreign
personnel shall not exceed 20% of the overall remuneration paid to the remaining workers.
Only Venezuelan nationals may hold certain offices, such as chief of industrial affairs or of personnel, ship
and aircraft captains, foremen or those exercising analogous duties, without this being susceptible of being
deemed discrimination.
Article 28 of the aforesaid Law establishes certain temporary exceptions, as follows:
14
Published in Official Gazette of the Bolivarian Republic of Venezuela No. 38.628, dated February 16, 2007.
149
Article 28. The People’s Power Ministry with jurisdiction over labor and social security matters, upon studying the
general conditions of the labor and social security, upon study of the general conditions of the work and social security
posts in the country and the circumstances of the specific case, may authorize temporary exceptions to the provisions of
the above article, in the following cases and conditions:
1. When regarding activities requiring special technical knowledge and there is no Venezuelan personnel available. The
authorization would be conditioned to the employer preparing and training Venezuelan personnel within such term as is
indicated.
2. When there is a demand for work and the People’s Power ministry with authority in matters of labor and social
security ascertains that it cannot be satisfied with Venezuelan personnel.
3. When regarding immigrants entering the country contracted directly by the National Government, by labor entities
contracted thereby, or under the framework of International Conventions, the percentage authorized and the term of such
authorizations shall be established by resolution by the People’s Power ministry with authority over labor and social
security matters.
4. When dealing with people defined as refugees under the rules of International Law.
Additionally, Article 29 establishes a legal preference, whereby when contracting foreign personnel,
preference shall be afforded to those with children born in the national territory, or married to Venezuelans,
who have established their domicile in the country, or who have resided in the country for more than five
consecutive years.
In this sense, Article 527 establishes that infractions of these provisions shall be punishable with fines of
between thirty and sixty tax units.
8. FOREIGN EXCHANGE REGULATIONS
In Venezuela, a foreign exchange system has been in place since 2003. Therefore, under Articles 2, 29, and 33
of Foreign Exchange Agreement No. 1, subscribed between the Venezuelan Central Bank and the National
Executive through the Ministry of Finance, on February 5, 2003, published in Official Gazette of the
Bolivarian Republic of Venezuela No. 37.625, of that same date and reprinted in Official Gazette of the
Bolivarian Republic of Venezuela No. 37.653, dated March 19, 2003, in conformity with Articles 3, 7, and 10
of Decree No. 2.302, dated February 5, 2003, creating the Foreign Currency Administration Commission
(CADIVI), partially amended by Decree 2.330, dated March 6, 2003, an Order was issued establishing the
System for the Administration of Foreign Currency corresponding to International Investments and
Payments of Royalties, and the Use and Exploitation of Patents, Trademarks, Licenses and Franchises, and
Technological Import and Technical Assistance Agreements.
150
Such Order establishes the system applicable for the authorization of the acquisition of the foreign currency
required to honor commitments derived from the international investment activities in the Bolivarian
Republic of Venezuela, on behalf of companies duly incorporated or domiciled in the country that receive
such investments.
Along these lines, Article 2 provides that the foreign currency authorized by the CADIVI in accordance with
the provisions of this Order, may solely be affected for the following purposes:
•
Repatriation of initial capitals of international investment.
•
Amounts necessary for the maintenance, enhancement, development, and finalizing of the
international investment.
•
Remittance of profits, income, interest, and dividends from the international investment.
•
Indemnities to international investors for expropriation in cases of public and social use, in
accordance with the law governing the matter.
•
Proceeds from the sale or total or partial liquidation of an international investment.
•
Payments resulting from dispute settlement.
•
Payments for royalties; use and exploitation of trademarks, patents, licenses, and franchises; and the
payments of technological and technical assistance import agreements, provided the latter relate to a
company receiving international investments and not regulated in other orders issued by this
Commission.
•
Capital reductions in any modality.
9. ASSOCIATIVE FORMS OF THE VENEZUELAN STATE
The Venezuela State may form any type of associative forms, where its participation in the capital stock,
shareholders’ equity, or assets thereof may vary, depending on the legal vehicle used by such company.
In this regard, in accordance with the Decree with Rank, Status and Force Law that Protection and
Promotion of the New Joint Associative Forms between the State and the Community and Private Initiative
for the Development of the National Economy, published in the Official Gazette No. 39.945 on June 15,
2012, the Venezuelan Government, together with the Private and the Communitarian initiative, will promote
the creation of new associative forms, where at least Venezuela´s Government will own 40% of the capital
stock.
151
Such Decree with Rank, Status and Force Law defines a strategic alliance as the agreement between a Private
Company and the State with the purpose to share productive process. A joint venture is defined as the mixed
company where the State owns at least 40% of the capital stock; in this case, if the State does not count with
the majority of the capital stock, it will have the right to veto strategic decisions. Another associative form
established in the Decree is the conglomerate, which is defined as the group of companies, private or Stateowned, associated with a particular purpose.
152