Typical due diligence issues

In Colombia, regulatory noncompliance is not uncommon, particularly when the target is a family-owned business. Examples of noncompliance include breaches of statutory corporate obligations, underpayment of social insurance or violation of overtime policies for employees, breaches of tax law, data privacy law, intellectual property and environmental law. Often such noncompliance means additional costs for rectification and operations post-closing.

As these issues may erode deal value, a thorough due diligence process is recommended to define a plan for both the negotiation of the acquisition agreement and a post-closing plan. A deep understanding of the local practice and practical risks involved is required to create an appropriate solution. It may be advisable to seek protection through a reduction in the purchase price, or post-closing security mechanisms such as escrows or holdbacks (where escrow arrangements are increasingly common in Colombia).

Pricing and payment

There are no special considerations regarding pricing and payment in Colombia. Parties may freely negotiate the terms considering foreign exchange controls (see below).

Foreign exchange control

Colombia has a floating exchange regime that operates as part of a wider economic policy targeting inflation. The Colombian Central Bank monitors currency flows and purchases and sells foreign currency to ensure stability, but, in general, does not restrict the free-flowing exchange market. While businesses are not restricted from moving foreign currency into or out of the country in principle, they must comply with the related reporting and regulatory requirements.

The rule is that payments for goods or services between Colombian companies or individual residents must be made in Colombian pesos. This means that foreign investors will frequently need to exchange foreign currency into Colombian pesos to enable their subsidiaries to make payments and conduct business in the country. Exceptions to this rule include payments made by Colombian companies or residents from offshore accounts registered with the Colombian Central Bank (compensation accounts) and payments between certain companies in the oil, gas and mining sectors.

Most business transactions that require an exchange of foreign currency into pesos (or vice versa) are regulated and the exchange must be made through an authorized channel, such as a foreign exchange market intermediary (i.e., banks or other chartered financial entities).

Signing/closing

Whether signing and closing is simultaneous, or there is a gap between signing and closing, will depend on the conditions of each transaction. Both mechanisms are common. When a merger control or regulatory approval is required for closing the transaction, the parties typically agree on a deferred closing, subject to obtaining the applicable authorization.

Foreign investment restrictions

Colombia does not have a foreign investment screening procedure, but there are some narrow sector-specific rules that should be considered on a case-by-case basis. For further information, see the more detailed section on "Foreign investment restrictions".

Antitrust/merger control

Colombia has a mandatory and pre-closing merger control regime, which means that any transaction affecting the Colombian market, whether through vertical links or horizontal overlaps, must be reported and authorized before closing if the transaction amounts to a concentration or has the potential of creating vertical links and the legal thresholds are met. For further information, see the more detailed section on "Antitrust/merger control".

Other regulatory or government approvals

For acquisitions in certain sectors, such as the financial industry, private surveillance and security services and healthcare, approval from the relevant industry regulator is required.

For formal mergers, administrative authorization may be required if any of the merging companies are subject to government oversight (i.e., by the Financial Superintendence or the Superintendence of Health) or meet certain conditions, such as having pension liabilities on their balance sheet or having registered goodwill — pending amortization.

Upon authorization from the relevant authority, if required, the companies must incorporate the agreed-upon merger into a public deed (or into a private document, if the absorbing entity is a simplified stock corporation and there is no transfer of real estate), together with the financial statements and other documents related to the merger, and amend the surviving company's bylaws. This must be registered with the Chamber of Commerce (commercial registry), and all pertinent notifications to other government entities must be made.

Share sales: When a business is transferred through a stock purchase, the transaction will not involve a change of employer. Therefore, employee conditions, benefits and entitlements are unaffected. Consent from employees or labor unions is not required for the transfer, unless otherwise defined in the collective bargaining agreement (which, in any case, is not common).

Asset sales: If the transaction is structured as an asset purchase that entails the automatic transfer of personnel that are directly linked to the assets subject to the purchase, it would generally be considered an “employer substitution”. The transfer of personnel by means of an employer substitution operates automatically, by virtue of law, upon completion of an asset purchase.

The transferred employees will not be legally entitled to refuse the change of employer or to demand payment of any social benefits or redundancy or severance pay due as a result of the employer substitution, as the employment agreement is not terminated, suspended or modified. If they do not wish to work for the new employer, they can resign, as any employee is legally entitled to do.

Filing Requirements

Foreign investors that have transferred shares located in Colombia are required to file an income tax return with the Colombian Tax Office ("CTO") within one month following the closing of the transaction (Form 150). For this purpose, the foreign entity or individual must be registered with the Colombian Tax Registry ("RUT") and have an electronic signature registered with the CTO. In such cases, stamp tax does not apply. Note that the indirect transfer of Colombian assets through the transfer of shares in foreign companies is subject to income tax in Colombia and the seller must file Form 150 during the following month after the indirect transfer.

OECD's Two Pillar Solution

The OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting has introduced a Two‑Pillar Solution to address the tax challenges arising from the digitalization of the economy. Pillar Two establishes a global minimum effective tax rate of 15% for multinational enterprise groups with consolidated revenues exceeding EUR 750 million, calculated on a jurisdiction‑by‑jurisdiction basis.

While Colombia has not yet enacted Pillar Two legislation, multinational groups with Colombian operations may be affected through income inclusion or undertaxed profits rules implemented in other jurisdictions. Accordingly, Pillar Two considerations may impact M&A transactions across the entire deal lifecycle, including transaction structuring, due diligence, contractual risk allocation, and post‑acquisition integration. In addition, please consider that although Colombia has not implemented a Qualified Domestic Minimum Top‑up Tax ("QDMTT") under OECD proposal, it does have a domestic 15% minimum effective tax rule, that applies to Colombian-resident corporations. 

For information on post-acquisition integration matters, please see our Post-acquisition Integration Handbook.