This content is from: Local Insights

The boom of rep offices in Colombia

Carlos Fradique MéndezAdriana Ospina-Jiménez
Leading global financial institutions, asset managers and multi-product investment advisers are among the foreign entities that are increasingly showing their interest in promoting their cross-border, financial and securities-related services to Colombian investors. These foreign entities are especially targeting Colombian pension funds, the most important institutional investors in the Colombian financial sector, as they have approximately $65 billion AUM and growing at a 25% rate per year.

The growing interest of these foreign entities is mainly due to (i) Colombia's sound economic growth (preliminary figures indicate that real GDP grew by approximately 4.8% during the first quarter, 4.9% during the second quarter and 2.1% during the third quarter of 2012); (ii) Colombia's high level of foreign direct investment; (iii) its reliable legal framework (as indicated in the World Banks's Doing Business 2013: "Colombia is a regional leader in narrowing the gap with the world's most efficient regulatory practice"); and, (iv) the upgrade to investment-grade status in 2011 by Moody's Investor Service and Fitch Ratings.

This growing interest is evidenced by the number of representative offices (rep offices) established in Colombia by foreign financial entities, which have amounted to approximately 62 as of March 2013.

The legal regime of rep offices is mainly set forth in Decree 2555 of 2010 and in regulations issued by the Colombian superintendent of finance, which were modified in 2011 to include certain requirements applicable to rep offices, with the purpose of reflecting the market practice regarding the promotion of foreign financial products in Colombia. In addition, the recently enacted Law 1607 of 2012 (the Tax Reform) includes new tax rules, which need to be reviewed for their direct and indirect applicability to rep offices.

According to applicable regulations, any foreign financial institution which core business is to provide financial, reinsurance or securities-related services and that is seeking to market its products or services in Colombia, is regularly required to either establish a rep office in Colombia, or enter into a referral agreement with a local broker-dealer or a financial corporation (unless the foreign entity is acting under an exempted activity, or a safe harbour applies, as defined or constructed under applicable law).

A rep office is deemed to be a commercial establishment or going concern of the relevant foreign financial institution, having only the authority to carry out promotional activities, (that is, a rep office is expressly barred from directly rendering financial, securities-related or reinsurance services).

In general, the establishment of a rep office in Colombia involves an inexpensive process that requires the filing of certain information with the Colombian superintendent of finance in order to obtain its approval for the incorporation of the rep office. Once the rep office has been established, it is required to comply with certain ongoing formal reporting obligations.

The establishment of a rep office in Colombia usually does not require substantial efforts from the foreign entity, and gives the foreign entity the opportunity to market, directly or indirectly, or undertake advertisement activities in respect of the foreign entity's securities products or services within Colombia, for Colombian residents. It also allows the foreign entity to send employees, contractors, representatives, agents or travelling salesmen into Colombia, or to hire or contract Colombian residents to advertise or market the foreign entity's products or services. In any case, it represents a number of advantages, not only in terms of reputational risk but also from a compliance standpoint.

Carlos Fradique-Méndez and Adriana Ospina-Jiménez

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