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Colombia: Hedging Against Changing Laws with Legal Stability Contracts

    Client Alerts
  • May 17, 2011

In an era where image is everything, certain countries are designing innovative investment promotion tactics to stand out from the crowd. Case in point—Colombia. After decades of civil turmoil, Colombia is quickly emerging as South America's new "it" spot for tourism investment. As the pressure to succeed sits squarely on Brazil’s “BRIC” shoulders, Colombia continues to charge on with the optimism of being the new kid on the block and the determination of having nothing to lose and everything to gain. Through progressive investment tactics and targeted marketing campaigns, Colombia is on a mission to rewrite its legacy. One such tactic is the use of Legal Stability Contracts, which allow investors to “stabilize” laws to prevent significant adverse effects of subsequent modifications to existing laws and administrative changes.

In 2005, the Colombian Government enacted the Investment Stability Law (Law 963 of 2005) for the purpose of improving the stability of rules governing investment, with a goal of promoting and expanding investment. This law, together with Decree 2950, 2005, authorizes the Government to enter into a Legal Stability Contract (“LSC”) with an investor to ensure that the investment will not be adversely affected by subsequent changes to certain existing laws, regulations, or rulings identified in the LSC. If a law or regulation is changed in a detrimental way for the investor, the law or regulation that was “stabilized”  in the LSC will apply during the term of the agreement (3-20 years). This provides investors with the benefit of knowing that their investment is protected in the event of a subsequent change to the laws.

LSCs can be used in several industries, including, but not limited to, tourism, telecommunications, and port and railroad projects. Currently, in order to qualify for an LSC, the investor must make new investments or increase existing ones so that the total minimum investment is US$2.14mm. Additionally, the investor must pay the Government a premium equivalent to 1% of the amount of the investment made each year, such premium being paid on the total investment in the first year or deferred over the course of the investment. To obtain an LSC, an investor must go through an approval process with the Government and specifically identify the laws and regulations considered to be determinants of the investment. Certain laws are not within the scope of an LSC, including, for example, indirect taxes (e.g., VAT) and utility rates. 

The ability to stabilize laws to protect investment through contracts is not a novel concept. Parker Poe has done this for clients through the use of development agreements in other jurisdictions. However, the standardization, purpose, and use of these contracts as specific marketing tools indicates a new trend in investment promotion. As its recent tourism slogan—“The Only Risk is Wanting to Stay”—suggests, the unique challenge Colombia faces as a country centers around one thing—risk, and the Government’s ability to minimize the perception of it. There is hope that the use of LSCs and other investment incentives will help re-characterize Colombia as a safe and lucrative place to do business. 

Over the years, we have seen countries in the region standardize concessions and various other investment details in an effort to create certainty for investors. It remains to be seen whether the standardization and use of LSCs is a passing trend or whether it will become more prevalent for countries to incorporate LSCs into their legal infrastructure to promote investment. It is clear, however, that Colombia is on a mission to make up for lost time and to cement its future as one of South America’s best places to do business and one of the world’s best tourism destinations. 

For additional information on Legal Stability Contracts or doing business in Colombia, please contact Matt Norton at 843.727.2645 or


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