Forfaiting is a valuable tool for exporters seeking to eliminate risks and guarantee cash flow in international transactions, especially in emerging markets or those with high credit risks.
What is a Forfaiting Contract?
Forfaiting is an international financing mechanism primarily used in foreign trade. It involves the purchase, by a bank or financial institution (the forfaiter), of medium or long-term payment instruments, such as bills of exchange, promissory notes, or commercial invoices, issued by a buyer in an export transaction. This operation is conducted on a non-recourse basis, meaning the forfaiter assumes the full risk of non-payment.
Main Characteristics of Forfaiting
- Non-recourse: The forfaiter cannot claim payment from the exporter in case of default by the importer or buyer.
- Credit guarantee: Payment instruments are usually backed by a guarantee, such as a letter of credit, bank guarantee, or sovereign guarantee.
- Currency: Transactions are generally conducted in hard currencies such as the US dollar (USD) or Euro (EUR).
- Duration: Used for medium to long-term operations, typically from 180 days to 7 years.
- Immediate liquidity: The exporter receives payment upfront, minus interest and commissions.
- Risk transfer: The risks of non-payment, exchange rate fluctuations, and interest rates are transferred to the forfaiter.
How Forfaiting Works
- Export: An exporting company sells goods or services to a foreign customer.
- Payment instruments: The importer issues financial instruments (bills of exchange, promissory notes) as a means of deferred payment.
- Forfaiting: The exporter sells these instruments to the forfaiter, receiving payment upfront.
- Deferred payment: The importer makes payments to the forfaiter according to the terms of the financial instrument.
Tax and Exchange Rate Analysis
The Subdirectorate of Regulations and Doctrine of the UAE, the National Tax and Customs Directorate – DIAN, through its latest opinion 100208192 – 1113 with reference 000S2024009989 dated December 3, 2024, determined that forfaiting contracts are perfectly viable as long as they comply with the provisions of the civil and commercial code. It is inherent in the forfaiting contract that the responsibility for the eventual non-payment of credits, among other risks (exchange rate fluctuations, political risk, etc.), is transferred to the forfaiter. In compensation, the forfaiter discounts a sum of money (lower value) from the nominal value of the credit instruments transferred to it by the exporter for sale or assignment, which it can claim directly from the importer or negotiate on the market, in accordance with its law of circulation.
Forfaiting has some similarities to Factoring, with the following highlights:
- They constitute a financial operation and financing mechanism that provides liquidity. In the case of forfaiting, to the exporter.
- They involve the transfer (sale or assignment) of credit instruments, generally securities: promissory notes, bills of exchange, invoices, among others.
- As a general rule, forfaiting is agreed upon “without recourse,” that is, without responsibility. Factoring can be agreed upon with or without recourse.
- In both operations, a discount is applied in exchange for the liquidity granted to the exporter and/or assignor by the forfaiter and factor, respectively. Such discount does not constitute income for the exporter or assignor under the terms of Article 26 of the Tax Code, but rather a financial expense.
For withholding tax, the provisions indicated in Office No. 900919 – int 0151 of February 5, 2021 of the Subdirectorate of Regulations and Doctrine should be reviewed, which indicates that in contracts for the purchase and sale of portfolios or factoring, withholding tax must be applied as income tax, for the concept of other taxable income, when the operation does not correspond to a capital repayment and/or when the factor does not acquire securities with certain exceptions.
Regarding the tax on movements, it will be necessary to review how the forfaiting operation and the payments made are structured, in light of the provisions of Articles 871 and 879 of the Tax Statute, mainly.
From a foreign exchange perspective, the Banco de la República has established the operations that must be channeled obligatorily through the foreign exchange market, among which are expressly indicated: ” (…) 1.- Import and export of goods (…)”
