The Colombian private equity industry is expanding its boundaries to attract new investors. Local pension funds are increasingly cautious about committing additional capital to new funds given that they are reaching the limits stated in the local investment regime, and they are waiting to review the performance of funds that are reaching their full term.
With this in mind, in October 2018, the Ministry of Finance (MoF) enacted a new set of regulations to take private equity funds to new levels. The priority of the regulator is to bolster the development of the industry through the adoption of international standards and to resolve some of the challenges that have arisen in the industry over the last 10 years.
One of the most relevant components included in the new set of regulations is the possibility for private equity funds to publicly issue bonds. Even where private equity funds are registered instruments in Colombia, it was not previously clear in the regulations whether it was possible to issue bonds. Under the new decree, a private equity fund will be able to increase its leverage by issuing debt instruments.
Additionally, it was not clear whether the funds structure was permitted, meaning that a private equity fund was not free to invest in another private equity fund. The MoF has finally permitted this structure, which will open the door to a whole new segment of potential investors.
This new set of regulations, combined with the tax outlook for these vehicles, will make Colombia an even more interesting jurisdiction for private equity investments.
From a tax perspective, private equity funds are pass-through entities with relative tax transparency in that they are not liable to tax, and income is only taxed at investor level, which provides for legitimate tax deferral. However, withholding taxes will apply upon the distribution of profits according to the type of income that produces the profit. An important feature for tax purposes is that private equity funds can redeem capital before distributing profits, which allows for a second level of deferral. Distributed profits can be from any source (capital gains, leases and so on). There are no distribution requirements, and in fact 100% of funds can be reinvested.
|Carlos Fradique-Méndez||Lyana |