With coastlines on both sides of the American continent, and the second-biggest country in South America by population, Colombia is one of the most picturesque and vibrant countries in the world. Known for strong coffee crops and for precious stones like emeralds, it is an interesting choice for many prospective incoming businesses from overseas, hoping to take advantage of the country’s long-term ambitions for growth.
However, Colombia is not exactly the most stable country in the world, either economically or politically, leading to some turbulent times for its population of around 50 million people. Furthermore, its unique cultural and historical practices can make its business, employment and payroll requirements confusing and difficult for new entrants to the Colombian market. Undoubtedly a payroll partner can help you make sense of all things payroll in Colombia, but this guide sets out the key basics.
Most companies in Colombia set up as simplified joint-stock companies (S.A.S.); there is no minimum start-up capital requirement as long as at least some capital is present. All companies, however, should recruit the services of a lawyer and an accountant to help ensure the set-up of the company is fully legal and compliant, and to navigate through a significant amount of local bureaucracy.
The first step of setting up a business in Colombia is to register at the Chamber of Commerce to receive a business ID number. Then an in-country bank account must be set up, before several other registrations can be completed for:
- Family Compensation Fund
- Employee public health coverage and pension plans
- The Labor Risks Administrator and the severance fund
The whole process should take around 2-3 weeks, and an increasing number of these steps can now be completed online.
Collective bargaining is allowed in Colombia, though the practice is likely to vary considerably from industry to industry. Recently there has been a real push within certain parts of the country to encourage more open dialogue between workers and employers in an effort to strengthen the economy. Employee contracts must be in writing, and probation periods are allowed for up to two months for standard full-time jobs.
Working weeks in Colombia are a maximum of 48 hours, spread across either five or six days depending on whether an employer requires staff to work on Saturdays. Any work conducted between 9pm and 6am must be paid at 135% of normal daytime rate. Overtime can be worked up to a maximum of two hours per day or 12 hours per week, and is paid at 125% during daytime hours and 175% during night-time hours (9pm to 6am). Employees in managerial positions are exempt from these working time limitations.
Compensation and Severance
As of 2020, the national minimum wage in Colombia is 980,657 pesos per month (approx. £200; $270; €230), and generally consists of a basic salary and an allowance for transport. Allowances for transport, and for clothing and footwear required for work, must be provided to all employees who earn less than double the minimum wage.
Colombian employees also receive the “13th-month bonus” of an extra month’s salary, although this is split over two payments in June and December. Other bonuses may be awarded and vary depending on industries and employment contracts.
Unusually, employment contracts can be terminated by either party for any reason at any time. However, severance pay is one month per year of service, and is paid proportionally for incomplete years served.
Tax and Social Security
Like many other countries, income tax in Colombia is levied at progressively higher rates and is withheld by employers at source. The first 37,354,300 pesos per year (approx. £7700; $10,300; €8700) is exempt, above which the first of six rates kicks in at 19%. The highest rate of 39% is applied to all earnings over and above 1,062,370,000 pesos per year (approx. £220,000; $290,000; €245,000). The corporate tax rate is 33% and the VAT rate is 19%.
There are a variety of different social security schemes and payroll taxes to which both employers and employees must contribute. These include:
- Pension: 12% employer, 4% employee
- Health: 8.5% employer (if employee earns more than ten times minimum wage), 4% employee
- Solidarity pension fund: 1-2% employee (if employee earns more than four times minimum wage)
- Professional risks: 0.35-8.7% employer
- Payroll taxes: 4-9% employer
Certain tax rates will vary based on the nature of the job, for example, in consideration of occupational hazards or potential health risks. Colombia's local tax systems also vary based on location, so employers are highly encouraged to research the levies and rates of specific areas before choosing their location.
Holidays and Leave
Employees are entitled to 15 days of paid leave a year, normally taken in one block. Employees are also entitled to take time off on the 18 national holidays each year, and anyone required to work on these days receives 175% of their normal rate.
Maternity leave entitlement is 18 weeks at full pay, and although employers are responsible for making these payments, they can then claim the money back from social security. Paternity leave is eight days, also on full pay. Sick leave is paid at two-thirds of salary: employers cover the first two days of sick pay, and social security picks up the payments from the third day onwards. Medical authorization is required for these payments to be enabled.
Any company looking at trading in Colombia should proceed with caution. High levels of bureaucracy, a complex tax structure and the country’s relative instability can all make doing business there difficult, and without local knowledge, it can be very easy to fall foul of the rules and regulations there. A lawyer and an accountant are vital assets in the set-up process, but just as important is a global payroll partner who can provide specific expertise and solutions that take the stress out of payroll in Colombia. That way, you can focus on the core tasks of building a successful Colombian operation.
This article is for informational purposes only and not intended to convey or constitute legal or any other advice. It is not a substitute for advice from a qualified professional.