From an accounting and fiscal perspective, starting a business in Latin America can be complicated as a foreign investor interested in doing business in the region. The language, procedures and ambiguity in the concepts can make the incorporation and operation of your company a real challenge.
But during the last decade the governments of Latin America (one of the fastest-growing regions in the world) have begun to work on improving and providing better options in fiscal and accounting matters as part of their policies.
Business opportunities in the region are constantly growing, and are surfacing in sectors that were not considered before. Renewable energy, startups, e-commerce, among others, have begun to open new fields that should definitely be taken advantage of.
All these industries have a bright future in Latin America. For the region’s current governments, emerging industries mean new or increased sources of income and foreign direct investment (FDI). These governments are therefore becoming more flexible and willing to provide fiscal incentives to those who wish to invest in their countries.
Key Steps in Accounting to Start a Business in Latin America
Below we will provide a guide on how to establish and start commercial operations in Latin America.
Before mentioning the accounting requirements, there are several essential legal steps to incorporate in LatAm and that will help you identify your tax obligations.
1) Define the type of company that you want to form: In general, the differences between legal entities in Latin America are characterized by the responsibility each partner/shareholder owns.
Among the most important types of legal entities, there are:
●Limited Liability Company (Sociedad de Responsabilidad Limitada, or SRL)
●Foreign Branch Office (Sucursal de Sociedad Extranjera)
●Corporation (Sociedad Anónima, or SA)
●Simplified Shares Company (Sociedad por Acciones Simplificadas, or SAS).
2) Company bylaws: Once the type of company is defined, the company bylaws must be drafted and registered with several government agencies (depending on the country). This deed must include:
a.Statutes of the company
b.Names of partners and/or shareholders
c.Name of the sole administrator or manager
d.Name of the legal representative/power of attorney
3) Corporate Bank Account: All companies must open and have an active corporate bank account in the name of the company. Customer deposits, bill payments, tax payments, contributions, as well as employee payroll payment.
After completing the above requirements and incorporating your company, a series of additional procedures must be carried out to comply with the tax and fiscal requirements of each country. In Latin America, these requirements are generally quite similar between countries. However, keep in mind that the order in which they should be carried out may vary depending on the country.
Getting a Tax ID:
Throughout Latin America, as a business owner, you must obtain a Fiscal Registry to operate. For example, in Mexico it is called the Federal Taxpayers Registry (Registro Federal de Contribuyentes), in Brazil National Register of Legal Entities (Cadastro Nacional da Pessoa Jurídica), while in Colombia and Chile it is called the Single Tax Registry (Registro Único Tributario).
In some Latin American countries, your company tax ID can be obtained through the web platforms of the national tax entities. In others, it must be carried out personally. The initial procedure can be done online, although later you must go to the corresponding office to deliver the original documents necessary to be validated. This procedure has no cost in most countries.
In general, to get a fiscal registration it is necessary to comply with:
●Presentation of the company bylaws
●Power of Attorney of the legal representative
●Official Identification of the legal representative
●Proof of legal/fiscal address of the company.
Once you obtain a tax ID, the company can begin to operate and carry out its intended actions. It is very important to keep your tax record up to date. This is to ensure the government and tax authorities can monitor the company’s actions and make requests for information regarding accounting and tax as needed.
All companies must issue and register their sales or operations through invoices or records that have certain requirements depending on the country where they operate. For example:
🇲🇽 Mexico: Currently use electronic invoicing CFDI (Digital Tax Proof by Internet). These are computer files and to be valid they must be registered through the SAT portal (Tax Administration Services). It is important to mention that all invoices issued or received will be available on the SAT portal for internal consultation of the company or the tax authority.
🇨🇴 Colombia: Currently, Colombia is in the process of implementing electronic invoicing, which entered into force in 2019. With this new system, it will be possible to reduce tax evasion rates, modernize tax compliance and increase savings. Companies must also comply with the usual requirements such as company name, date, tax identification number and address.
🇨🇱 Chile: Chile’s electronic invoice is a digital tax document. Chilean law mandates its use at the national level. One must be made for each sale of goods or services that are carried out, and must also meet the following requirements: Customer data, date, description, discounts, payment method, among others.
The fiscal obligations that companies in Latin America must fulfill, in general, are very similar between countries. One of the most common taxes in the region is the Value Added Tax (VAT), known as impuesto al valor agregado. VAT is an indirect tax that is generated each time a company purchases goods or services. The tax is added to the value of the merchandise. In the case of companies, the tax is transferred so that the person who ends up paying this tax is the final consumer.
There is also a tax on profits or profits obtained by the company, known as Income Tax. This tax must be paid in accordance with the rates applied in each country. Income Tax percentages can vary between 30% to 34%, depending on the country.
In addition to these taxes, there are other contributions that must be taken into account when incorporating a company in Latin America. As these requirements may vary depending on the country, it is better to consult with a team of local professionals who can clarify your doubts and take you through the process of tax requirements and payment in a simple and smooth way.
Exceptions and Tax Benefits:
It is important to bear in mind that each country provides its investors with tax benefits when setting up a company. These benefits vary depending on the sector in which the company operates, as well as the company’s size and political and economic agenda.
In countries such as Colombia and Mexico, it is not necessary to pay Income Tax during the first year of operations. Both Colombia and Mexico offer this incentive to encourage startups. An incentive like this is very appealing as it is usually predetermined that first-year companies will incur a loss. By not paying income tax, this loss is significantly reduced allowing the company to recover and grow faster in the second year. You’ll find that other countries, such as Ecuador, also offered staggered subsidies on paying taxes for new companies in the country.
In general, it is important to investigate these tax benefits as it can be a deciding factor when looking to incorporate a company inexpensively in Latin America.
Seek Accounting Guidance:
To start a business in Latin America, one must always consider the different accounting and fiscal opportunities, whilst also keeping one eye on varying Latin American political situations.
Businesses must be alert for external or environmental signals that may affect the company as well as individual changes that present themselves. Fortunately, as a result of many shared cultural aspects, most countries have similar fiscal accounting policies which make the process a little easier.
The best advice we can offer is to ensure your company is well-advised by a group of professionals dedicated to country-specific accounting, fiscal and legal services.