Corporate Tax 2020 Comparisons

Last Updated January 15, 2020

Contributed By ACZALAW Nicaragua

Law and Practice

Authors



ACZALAW Nicaragua is located in Managua, with a team of seven attorneys, two of whom have extensive expertise in corporate tax. The firm was founded in 2002 and currently has a presence in three countries: Nicaragua, El Salvador and Honduras. ACZALAW’s experience focuses on solving and assisting foreign investors. Corporate tax is one of the main specialisations. In the last five years, taxes in Nicaragua have increased significantly due to modernisation and changes in the legal framework. The firm's tax advice is essentially preventative. It is aware of the economic and reputational importance for a company, which implies the timely fulfilment of its legal responsibilities, as well as the orderly management of its documentation and accounting records in accordance with the Tax Code, the Tax Conciliation Law and all the regulations issued by the Tax Administration. This allows clients to act efficiently with the correct and complete documents to keep their businesses and corporations in good standing.

In accordance with Article 118 of the Commercial Code of Nicaragua there are four types of corporate entities: collective partnership, closed limited partnership, limited joint stock partnership and corporation. In addition, foreign companies can operate as a branch in Nicaragua. It is also important to include joint ventures, which, although they are not recognised as juridical entities with capacity to sign agreements and acquire obligations, are used as a special vehicle for certain activities such as special public contracts. Joint ventures are also used as de facto associations.

There are other juridical organisations, including co-operatives and non-profit organisations such as associations and foundations.

The key difference between them is the legal framework that creates them, which distinguishes each figure in accordance with its own purposes and objectives.

In Nicaragua, each legal entity that develops activities for profit pays taxes in a separate and independent manner. There is no difference nor benefits due to the type or nature of each entity.

The tax benefits are granted to some economic sectors due to objective or subjective reasons; for example, free zones, tourism, promotion of export, investment in renewable projects. Other entities that enjoy tax benefits are those to which the law grants those rights, such as universities, Centres of Superior Technical Education, State Powers, State Secretaries, churches, religious foundations, non-profit institutions, the Red Cross and political parties. Co-operatives benefit from an income tax exemption over their gross income up to NIO60 million, the amount in excess pays tax income.

In accordance with the Tax Code, taxpayers are those that are directly bound to pay taxes in accordance with the rule of law. This includes natural or juridical persons, private or public persons, trusts and entities or associations that constitute one sole economic unit, notwithstanding if they have a patrimony or functional autonomy.

The business sector in Nicaragua basically uses only the corporation and sometimes the limited liability company. The limited liability company is mostly used by small groups or by families. They are also used due to tax reasons by companies subject to worldwide rent outside of Nicaragua.

Additionally, in accordance with the Ley de Concertatión Tributaria (the Coalition Tax Law, or LCT), natural and juridical persons, trusts, trustees and trust beneficiaries, fund investors and all entities notwithstanding the juridical entities, including associations and grantors of donations or donors, are also considered as income tax payers.

Private capital funds and coverage funds in accordance with Article 4, LCD Section D and investors in investment funds, savings products or instruments that unite many persons that invest their assets or goods consisting of currency, securities or titles of fixed rent in a common fund need to do it through a management entity in order to obtain benefits. In these cases, it is the management entity that is the passive subject to pay income taxes. Usually these entities are incorporated as corporations and need to pay taxes in accordance with their economic activity. The taxpayers are the investors in the funds, but the passive subject is the management entity who is jointly responsible for tax issues.

It is important to mention that the definite tax rate for economic activity for investment funds is 5% and the capital gain for residents and foreigners when selling any type of asset or fund is equivalent to 7%, which is the  same for transactions derived of participation certificates issued by an investment fund.

Nicaragua has not officially signed any double taxation treaties, nor treaties related to co-operation in the exchange of tax information with any states.

Pragmatically, banking institutions exchange different information, including related to tax issues.

Articles 3 and 4 of the LCT state that Nicaraguan Tax Law taxes Nicaraguan-source income obtained by its residents and non-residents. Income Tax is binding for all natural or juridical persons, trusts, income funds, entities or associations, notwithstanding the corporate structure or organisation form they adopt, with independence of its nationality and residence, or if they have or do not have a permanent establishment in Nicaragua.

Article 5, LCT and 8 of its regulations state the territorial nature of the Income Tax Regulations for income originated or received from Nicaraguan sources or that originate elsewhere within the limits of the law. The law defines precisely the circumstance by which a natural person is considered a resident and therefore bound to tax obligations, who are considered residents, and how are economic relationships related to income gain, gains and losses of capital originated from Nicaragua.

In general, all business entities independently from their corporate structure, except for those that benefit from tax benefits, are bound to pay as tax contributors a 30% annual income tax over their gross income, as a result of deducting their non-exempt gross income or taxable income from the authorised deductions stated in the LCT.

All registered or non-registered contributors are bound to pay income tax over capital and earnings and losses earned or perceived. These issues are taxed separately from the the rent originated from economic activities, except when the entities need to integrate them as rent originated from economic activities. The tax rate depends if rent originates from real estate and if the entity that receives income is resident or foreign. Additionally, the law establishes payment of a whithholding related to earnings and loss of capital when the transfer of assets needs to be registered before public office. Amounts vary from 1% to 7% and in accordance with the price of the assets from USD50,000 to USD500,000.

The LCT establishes two methods to calculate earnings for payment of income tax.

  • General method – net income is taxable. This means that you deduct from gross income tax all the deductions allowed by the LCT.
  • Net income tax of taxpayers related to gross income that is equal to or less than NIO12 million. This results from deducting earned income minus expenses or cash flow. In other words, the value of acquired assets is subject to a complete depreciation and immediate deduction from the moment they are acquired.

In all business transactions, tax payers are bound to pay a minimum definite tax that results from a taxpayer's gross taxable annual income. This payment is credited towards the Annual Income Tax, including other tax credits or withholdings in favour of taxpayers. The rate applicable for The Minimum Definite Tax (PMD) is 3% for Grand Contributors (except Caribbean Coast fishermen, who have a 2% rate), 2% for major contributors and 1% for other contributors

In accordance with General Administrative Disposition No 01 2018, principal contributors are those natural or juridical persons with gross income tax in excess of NIO60 million and less than NIO160 million declared in the latest previous tax period.

In accordance with modified Article 59 of the LCT, the exempt persons from PMD are the following.

  • Contributors that during the first three years of initiating business operations, as long as this activity is considered as new investment. Investment in used assets and pre-existing rights are excluded from exception, as well as joint ventures.
  • Investments subject to a longer consolidation period as authorised by the Consolidation Period Commission created by the Treasury and Public Credit Ministry.

In order to be able to obtain such exception, due process needs to be followed and final approval is required.

Legal co-operatives that obtain annual gross income in excess of NIO60 million liquidate the income tax in excess of this amount by deducting a proportion of their costs and expenses related to the gross taxable rent.

Organised co-operatives in federations or unions need to contribute individually.

Grants and administration funds received to finance social programmes in order to fight against poverty and for the development of the community are exempt and excluded as part of the gross taxable income of co-operatives, federations or unions.

In accordance with the law, special incentives, exemptions and exoneration for investments in technology in accordance with the Nicaraguan legal tax framework are not taken into account.

In accordance with Nicaraguan law, a diversity of legislation exists that confers special benefits to different economic sectors, such as exonerations and exemptions as stated in modified Article 287, LCT. This clause lists all exemptions and exonerations granted by the LCT, notwithstanding the legal dispositions stated in each law included in the benefited sector, such as the constitutional laws, executive decrees, law of municipalities and many others that are in force. Within the most relevant economic sectors that benefit from a special regime with tax incentives are Industrial Free Zones for exportation purposes, the Temporal Admission Regime in order to facilitate exports, the tourism, forestry and renewable energy sectors, among others. The exemptions and exonerations vary within each sector.

Article 280, LCT applies definite preferential rates in order to promote investment funds, such as:

  • income from a certain economic activity is taxable with a definite 5% withholding tax over gross taxable income; and
  • capital earnings for sale of any type of asset or fund equal to received income and derived from participation funds originated by an investment fund are subject to a definite withholding rate of 7.5%.

Regulations regarding tax losses are defined in accordance with the type of taxable rent.

Rent Related to Ordinary Activities (Articles 46 and 60, LCT)

  • Deduction of losses suffered during the fiscal year up to the three following periods of the period when they occurred. This deduction is allowed in order to define net income and to calculate the relevant Income Tax.
  • Losses occurred during an exemption period or during a fiscal benefit cannot be transferred to the period when this exemption or benefit disappears.
  • Losses suffered in a taxable year shall be separated from previous or future year losses, since they are independent from one another for tax purposes and must be calculated independently and not be accumulative.
  • In no other case may the losses of past periods affect the Minimum Definite Tax when it is in excess of the annual income tax.

Capital Earnings and Losses (Article 86, LCT)

When the resident contributor loses capital, it may request a compensation applicable to the immediate following fiscal period as previously authorised by the Tax Administration. If the result of the compensation were negative, the capital losses can be deferred to the following three fiscal years. Its transfer and compensation is not accumulative. It must be made separately and independently.

In accordance with the LCT, this does not apply to non-resident contributors that do not have a permanent establishment in Nicaragua.

In accordance with Article 48, LCT, caused or paid interests for acquired debt in order to generate taxable income related to economic activities shall be deducted by applying average bank active interest rate calculated at the moment of the loan if it is a fixed rate or calculated at the moment of each payment if it is variable. Loans granted by regulated or non-regulated financial entities are not included in this limitation. They are excluded from these dispositions.

In order to benefit from the above-stated, Article 29 numeral 12 of the LCT Regulations requires that in order to obtain deduction of interest expenses, the contributor must demonstrate to the Tax Administration the purpose of the loan and its investment in operations that generate its taxable income.

If the expenses related to interest are not related to taxable income or have a proportionate relationship, then the deduction shall be allowed in such proportion.

Consolidation is not considered in Nicaragua; each taxable entity must separately and independently file its statements.

Notwithstanding the above, modified Article 61 bis, LCT includes an anti-elusion Norm for Minimum Definite Tax and expressly states that separations of operations done by contributors independently of the juridical form they adopt that results in deliberate diminishing of gross income in order to pay less Minimum Definite Tax shall not be effective. For these cases, assumptions shall be made that all entities form a united decision.

Capital earnings are taxable at the moment of being received, at a 15% tax rate, which is normally calculated from the difference between the amount of transfer and the acquisition cost (amount paid minus depreciation). This is independent to the resident status of those that receive the capital earning. Article 87, LCT modified.

The following must be observed for capital earnings:

  • non-profit transfers – the capital gain shall be equal to the market cost, deducting expenses that are related to such transaction; and
  • profit transfer of real estate registered in public offices – definite withholding tax varies between 1 and 7% of the cost of the transaction.

Profitable transfers of shares are subject of a 15% tax rate after deducting the amount of the transference, price of sale, from the cost of acquisition. The entity that issues the shares is jointly responsible for the withholding, declaration and payment to the Tax Administration. Monthly filing of declarations, when relevant, must be made on the fifth day of the month following the transaction. This liquidation is definite.

Companies registered as resident contributors shall pay all taxes established in law.

  • Annual Income Tax for economic activities that is paid based on Advances or Minimum Taxes that are declared and paid on a monthly basis and that are an applicable deduction for the annual 30% Income Tax rate over net income once deductions of cost and expenses allowed by law are done.
  • Income Tax related to Capital and its Loss and Earnings based on rates is established by rate with a 15% maximum over the taxable amount.
  • Non-domiciled entities have a 15% rate over gross payments sent outside of Nicaragua.

Additionally, there are other taxes related to the purchase of assets and local or imported services, such as Value Added Tax, which equals 15% over the purchase price of the asset or service, and DAI (import duty). The Selective Consumers Tax is an indirect tax imposed over merchandise or goods that are listed in the LCT annexes in accordance with its customs classifications. Other taxes exist related to fuel, rum/alcohol and the tobacco industry as well as postage, revenue and similar stamps.

All are related to relevant transactions but in general, applicable taxes in addition to income tax may be Value Added Taxes (IVA), Selective Consumer Tax (ISC), Import Duties (DAI), Municipality Tax Payment over Income (IMI) and municipal taxes.

Incorporated businesses are subject to the payment of 15% value added tax over assets and services, local purchases and importation of goods.

The Import Duties and the Selective Consumer Tax also exist. For Value Added Tax on importation and local purchases, a tax credit exists.

The Selective Consumer Tax is imposed in Nicaraguan territory over the transfer of goods, importation and exportation. This tax is not considered as income for calculations on Income Tax payments or Municipal Tax payments but is part of the Value Added Tax.

Municipality Taxes

Payments on the opening of establishments and their registration are made initially on the incorporation of companies, but for opening an establishment, payment equivalent to 1% of its social capital with a minimum payment of NIO505 is required.

Annual Municipal Registry

This is renewed annually every January with a payment of a 2% tax over gross income obtained during the previous three months of the immediate year. For those companies that have declared 0 for this period, an average of the previous 12 months shall be made or a minimum payment amount of NIO505.00.

Municipality Tax Payment over Income

Declaration and monthly payment over gross income needs to be paid to the municipality based on a 1% rate. This payment is considered as a deductible expense for annual Income Tax.

Real Estate Tax (IBI)

This payment applies over real estate property and is paid annually. Payment is calculated based on cadastral value defined by municipality, which is notified annually. Payment must be made on June 30th of each year. If payment is made before March 30th, a 10% discount for prompt payment is received.

They operate in different forms, mainly as corporations, sociedades anonimas or limited liability companies. Professionals mostly do it autonomously or as individuals and not in a corporate format. Pragmatically, informal commerce pursue economic activities under their personal and individual titles and subject themselves to a tax fixed rate regime.

The LCT burdens economic activity with independence on the passive subject, disregarding if it is a natural or juridical person.

Modified Article 13, LCT establishes that accrued or received income of economic activities may originate from cash or payment in kind by either the supply of goods or services. For financial institutions (notwithstanding if they are regulated or not taxable), income includes income from earnings and loss of capital.

As previously stated, all income is taxable independently if generated by a natural or juridical person. The same annual tax rate of 30% applies since it disregards if it is a corporation or an individual.

Other income applies equally for the purchase of assets and services.

There are no variations in the tax rates. The triggering event that originates tax obligations is the same, disregarding if a corporation or an individual generates it.

Non-resident persons (natural or juridical) are also subject to definite withholding income tax rates from Nicaraguan-source rent. A general 15% tax rate is applicable over gross income.

For non-residents that receive income from labour, a definite withholding rate of 20% is applicable, 25% for attendance fees for non-residents, etc.

In order to refer to the different tax rates and withholdings, please review the Withholding Catalogue issued by the Tax Administration on 1 March 2019, which is currently in force.

From a legal, accounting and tax perspective there are no rules established for these issues. There are no limitations regarding fiscal benefits. It is important to review what the charter of incorporation and regulations establish in relation to that aspect.

Individuals are taxed on dividends from and on gain on the sale of shares in closely held corporations, through definitive withholdings of 15% on the taxable base determined by the law, regardless of whether they are residents or not.

  • Dividends – 15% on the value paid.
  • Shares – 15% on the difference between the transmission value and the acquisition cost. The issuer of the shares is jointly liable for retention.

In accordance with the tax legislation and regulations contained by technical dispositions that the Tax Administration issues, there is no specific rule for the sale of indirect shares, so the general rule applies, in the same way as non-listed companies, and a 15% aliquot is applied, as specified in 3.4 Sales of Shares by Individuals in Closely Held Corporations.

There is no special treatment or tax benefit; a definitive withholding for capital income for non-residents of 15% on gross income is applied, without the right to any deduction. Except for some specific cases that have an aliquot of less than 15% – such as capital gains for non-residents due to the financing granted by international banks with investment grade apply 10% on gross income that generates interest, that is, the value paid; and capital gains derived from certificates of participation issued by an investment fund and from disposal of any type of asset or investment fund – a definitive withholding of 7.5% on the amount paid is applied, which applies to residents or non-residents.

Also, the Economic Activity Income Tax payable by investment funds is 5%. See the Withholding Catalogue of the Tax Administration.

There is a definitive withholding of 15% for residents and non-residents on the value paid, excluding payments made to the local financial system.

There is no tax relief available to date.

In general terms, the current treaties that consider some benefits in tax matters and that benefit foreign investment would be DR-CAFTA, the recent treaty between the Republic of Korea and the countries of Central America, and the agreement by which a partnership between the United Kingdom of Great Britain and North Ireland and Central America is established, which generate or confer some benefits and incentives to import taxes and tariffs in member countries.

In any case, the local legislation, the LCT Tax Law, regulates in its reformed Article 288 that the exemptions and exonerations are subject to the rules that regulate the scope, requirements, deadlines and conditions of application of such agreements. Among them are the ones contained in the multilateral agreements of the World Trade Organization (WTO) and the Central American Economic Integration Standards. As applicable, these exemptions and exonerations are granted based on tax lists established between the Ministry of Finance and Public Credit and the public institutions that govern the economic sector that correspond to its supervision or regulation.

The authors are not aware of any specific cases.

The transfer pricing regulations of recent application were implemented as of the second semester of 2017, therefore it is still too early to identify any problem; this firm is still intending to define rules on the subject and continue in the process of training the personnel from the Tax Administration on its implementations for both technical and logistics training. However, derived from the LCT and its regulations, the authors can comment on some aspects referring to the ambiguity in the scope of related parties; ie, if it includes transactions between local related parties as well as their relationship with companies that operate under a free zone regimen.

The transfer pricing rules established in the LCT do not consider as a basis the principles established in the transfer pricing model of the OECD, therefore any regulation, guideline or provision related to Precios de Transferencia (transfer pricing, or PT) shall be incorporated, consigned and provided by express applicable law under local legislation, the Nicaraguan legal framework.

  • The rule is clear that you can make adjustments in the matter of customs and not just rent, which implies being able to check the values even before the Customs Administration; however, it does not establish or indicate that modifications can be made in VAT matters as this point is only considered in the LCT in the chapter that regulates Impuesto sobre la Renta (Income Tax, or IR).
  • The absence of a specialised division by the Tax Administration for due advice to taxpayers. It does not exist to date.
  • The absence of complementary provisions to the Law by the Tax Administration for its application.
  • The authors cannot cite a specific situation since the Tax Administration has not yet started asking for price studies.

There is no background on this subject at this time because a specialised transfer pricing division does not yet exist in the Tax Administration. However, and in accordance with this point, Article 101, LCT has legally provided that the services provided jointly in favour of several related persons, and whenever it is possible the individualisation of the service received or the quantification of the elements determining their remuneration, will be charged directly to the recipient.

If individualisation is not possible, the total consideration will be distributed among the beneficiaries in accordance with distribution rules that meet proportionality criteria. These criteria will be understood to be fulfilled when the distribution method is based on a variable that takes into account the nature of the service and the circumstances in which it is provided, as well as the benefits obtained or likely to be obtained by the recipients.

As a legal provision, the operations and transactions that are carried out between related parties may be subject to review by the Tax Administration with the purpose of verifying that they have been carried out under the principle of free competition, whether they are free of charge or onerous, and to challenge them if they are not found to be in accordance with what is regulated in the legislation and administrative dispositions.

Notwithstanding the foregoing at the theoretical level, the Tax Administration has not, to date, issued a provision in this regard.

The method of comparable uncontrolled price will be mandatory in the case of import and export of agricultural, mining and energy products and raw materials, with a known price on international stock exchanges, or whose price is directly linked to products or raw materials that are traded in said stocks; which deviates from the principle established in the OECD standards that the best is applied within the application of the principle of full competition.

Nicaraguan-source rents are paid through definitive withholdings, which are made by the resident. With this retention, the non-resident has no other material or formal obligation.

There is no regulation regarding compensating adjustments allowed/made when a transfer pricing claim is settled, although there are provisions at the theoretical level in the LCT. Mutual agreement procedures (MAPs) are not contemplated in Nicaragua's PT legislation, only advance pricing agreements (APAs).

The same rules apply for taxing local branches of non-local corporations and local subsidiaries of non-local corporations.

There are no special or different rules; as was indicated in 2.7 Capital Gains Taxation, a 15% aliquot of permanent, resident and non-resident retention applies.

Under Nicaraguan tax legislation, no provisions or specific rules are set forth on this subject. In accordance with the regulations of the LCT, the partners of the companies incorporated and registered under Nicaraguan law, residents and non-residents, are subject to the definitive withholdings for sales of shares, business transfers, participation sales and sales of goods, among others.

Foreign subsidiaries pay their taxes the same as local companies.

The standard rule that applies is that provided in, particularly, Articles 35 and 39, LCT. On one hand, the tax base of the annual IR of economic activities is the net income that results from deducting from the non-exempt gross income, or taxable income, the amount of the deductions authorised by the same LCT. The costs and expenses caused, general, necessary and normal to produce the taxable income and to preserve its existence and maintenance are deductible, provided that said costs and expenses are registered and supported by their corresponding receipts as required by law.

Included as part of the deductible expenses are the charges for management and general administration expenses of the parent company or related company that correspond proportionally to the permanent establishment, applying the valuation rules as provided by the LCT.

It is an important and indispensable requirement that for the deduction of some costs and expenses allowed by the LCT Law, the taxpayer has made the withholding and has informed the Tax Administration so that the expense will be deductible in the fiscal period in that payment of said withholding or contribution.

Likewise, the Tax Administration can make adjustments to said deductibility, since if the taxpayer has expenses that serve in turn to generate taxable income and therefore entitle him to the deduction, but he also has income not taxed or exempt or subject to definitive withholdings of income from economic activity and/or income from capital gains and gains and loss of capital that do not give that right by law, only the proportion of their total costs and expenses equivalent to the percentage resulting from dividing its taxable income over its total income can be deducted from its taxable income, unless the taxpayer can identify and demonstrate the costs and expenses attributable to taxable and untaxed income, in which case the respective accounting records would be kept separately.

Additionally, consider the response provided in 4.5 Related-Party Limited Risk Distribution Arrangements.

According to Article 48, LCT, on the maximum deduction of interest and without prejudice to the transfer pricing regulations and the deductibility requirements indicated in 5.6 Deductions for Payments by Local Affiliates, the interest caused or paid in the fiscal period for debts incurred to generate taxable income from economic activities will be deductible up to the amount that results from applying the average active interest rate of the bank, on the date of obtaining the loan, if it were fixed, and on the date of each payment if it were variable.

Loans made by financial institutions, regardless of whether they are regulated by the Superintendencia de Bancos y de otras Instituciones Financieras (the Superintendency of Banks and Other Financial Institutions, or SIBOIF), are not included in this limitation.

As a starting point, it should be borne in mind that Nicaragua operates the principle of reinforced territoriality so that income with economic links abroad, obtained by residents, may be taxed or exempt. Taxes paid by residents abroad on foreign income are not creditable in Nicaragua, generating double taxation.

Under local legislation and as additional information, all local corporations are subject to registration and compliance with the tax legislation that applies to any entity, even those that lack legal personality, but that carry out activities capable of generating tax obligations. If the income constitutes a generating event and is subject to taxable income for a service provided in Nicaragua and is considered income from a Nicaraguan source, they will not be exempt from corporate tax. If it is income from economic activity, they must declare and pay an annual IR of 30% on the net income except for the exceptions already established in the law; if it is capital income or capital gains and losses as applicable based on the law that have already been commented on in other consultations here. The company is obliged to make the self-liquidation, self-retention and declaration in accordance with the law and reflect it in its accounting records as appropriate and must simultaneously declare and pay the monthly self-liquidated tax debt no later than the fifth calendar day of the following month. For reference, see the Withholding Catalogue.

Even for entities that enjoy exemptions and exonerations by law, according to Article 69, LCT, every taxpayer has the obligation to present to the Tax Administration, at the latest on the last calendar day of the second month following the end of the fiscal period, the declaration of their earned or received income during the fiscal period and to simultaneously pay the self-assessed tax debt, in place, form established by legislation, rules and regulations on tax matters. This obligation is enforceable even if you are exempt from paying the tax or there is no tax to pay as a result of negative income.

As a starting point, keep in mind that all expenses associated with an exempt income will not be deductible.

As additional information, Article 43, LCT establishes what are non-deductible costs and expenses, among which the most relevant ones in relation to this section are taxes incurred abroad, the costs or expenses of which obliged the local taxpayer to make a withholding and he did not do it or if he did, but did not declare it, liquidated and paid to the Tax Administration, in which case that cost and expense will only be deductible in the fiscal period in which he makes the payment or informed of the respective retention or assumed it on behalf of third parties; all fines, customs, municipal and tax surcharges; and the amounts invested in the acquisition of goods and permanent improvements, and other expenses related to said operations, except for their depreciations or amortisations and any other expenses that are not linked to obtaining taxable income.

If, by law, the taxpayer is not obliged to make a definitive withholding on said foreign income because it has a special tax regime, and if it is considered a deductible cost and expense for the taxpayer's activities, it will be declared and settled according to its accounting records and in its corresponding tax returns.

Like the local corporations, a 15% aliquot applies to the total amount to be paid. The local taxpayer company is obliged to make the withholding, liquidation, declaration and full amount to the treasury and pay the tax debt no later than the fifth calendar day of the following month; said liquidation, withholding and payment is definitive. The local company has joint and several liability for this retention.

These transfers are taxed with the corporate tax considering the market value.

Any income received by a local corporation, or a natural or legal person, as royalties for the use of patents, trade marks and similar or other intangible rights is subject to a definitive withholding for capital income and capital loss of 15% on the tax base. The local taxpayer company is obliged to make the withholding, liquidation and declaration, and inform the treasury and pay the tax debt no later than the fifth calendar day of the following month; said liquidation, withholding and payment is definitive. The local company is jointly responsible for this retention.

This is not applicable because there is no legal configuration consulted under local law. Nicaragua has no controlled foreign corporation (CFC) rules.

There are no rules, except for what is related to transfer prices as they are related parties or withholdings if payments are made, transfers to a related party for any concept that constitutes a generating event.

There are no special or different rules regarding the taxation of local corporations on gain on the sale of shares in non-local affiliates. As has already been indicated in 2.7 Capital Gains Taxation and 5.3 Capital Gains of Non-residents, a 15% aliquot of definitive withholding on the taxable base to residents and non-residents applies. It is liquidated and paid by the local taxpayer company, which is obliged to make the withholding, liquidation and declaration, and inform the treasury and pay the tax debt no later than the fifth calendar day of the following month; said liquidation, retention or payment is of a definitive character. The local company is jointly responsible for the retention.

An anti-circumvention rule of the PMD was included under Article 61 bis reformed, LCT that expressly provides that for purposes of the definitive minimum payment, the segregations of operations carried out by taxpayers, regardless of the form or legal figure they adopt, give as a result a deliberate decrease in gross income to move towards a lower final minimum payment quota than would have been due if they had not made such segregation. In these cases, it will be understood that they integrate a decision unit and will pay taxes as such.

It is also important to note that Nicaragua's criminal code establishes several legal provisions about tax fraud.

There are no regulations of this type under Nicaraguan law. Audits can be randomised when the Tax Administration deems it to be the case. It usually does this for obvious situations or to regulate fiscal periods that are to be prescribed.

Only those changes related to transfer pricing, at least in the sense of legalising it, are set forth already in the legislation. Although their application is not fully implemented, they are in that process, but it is still incipient, there is not experience and record about such aspects.

There is no official pronouncement, but the authors believe that the government is in line with international tax standards, at least theoretically, in two of its recitals in the LCT: “That in order to modernise the tax system, it is necessary to incorporate new legal norms and tributary instruments adjusted to the best international practices” and "That it is necessary to have a tax system that favours progressivity, generality, neutrality and simplicity." Likewise, Article 2 of the law sets forth the tax principles of legality, generality, equity, sufficiency, neutrality and simplicity.

Also, the Tax Code, issued in 2005, left in its general provisions several articles that refer to the principal international conventions and the order of priority for the application of tax law and regulations that are to be taken into account. Accordingly, under Article 4: “The Tax Rules must be interpreted according to all the methods admitted in Common Law and those established in International Agreements based on the respective International Legislation. In any case, the interpretation has an eminently explanatory objective and does not imply in any way that by this means it is possible to create, alter, modify or delete existing legal provisions. Situations that cannot be resolved by means of the provisions of this Code or of the specific laws on each subject will be regulated additionally by the Common Law Norms.”

The BEPS recommendations have not been applied in Nicaragua, nor is their application projected in the short term. See 9.2 Government Attitudes.

The objectives are in accordance with the responses provided elsewhere in 9 BEPS.

The Tax Administration in Nicaragua in principle has the challenge of adapting local legislation to the requirements of global taxation in addition to implementing technologies, logistics and training in human resources to achieve a fiscal regime that works under the strict principles of legality, security and transparency, and strengthens the guarantees of taxpayers and above all harmonises or unifies the procedure for the process of exemptions and exemptions. First, it is required that the Tax Administration be competitive and internally prepared to then work on all issues and operate under the framework of global taxation.

No legal disposition has been applied in this respect.

Globally there are two ways to implement and apply the IR: world income and territorial income. Under the Nicaraguan legal framework on tax matters, LCT, although the principle of territoriality prevails, the country has a territorial tax regime essentially for indirect tax purposes. For direct taxes, a reinforced territoriality regime is applied by virtue of Nicaraguan-source income and its economic links obtained by residents and non-residents, applicable to the IR of economic activities, labour income, capital income and earnings and capital losses.

See 2.5 Imposed Limits on Deduction of Interest and 2.7 Capital Gains Taxation.

In Nicaragua this concept is unknown, so it does not apply. Additionally, in order to evolve to these rules, firstly, the Nicaraguan Tax Administration must review its internal legislation, sign collaboration agreements, exchange information, double taxation agreements among others, in order to move forward. The authors believe there is much to do to be able to implement these types of rules in Nicaragua.

In Nicaragua there are no rules about this subject, so the authors do not have an objective opinion on this matter.

There are no precedents or real facts about this matter to date, based on which an opinion or objective comment could be issued.

This firm agrees with the implementation of anything that contributes to transparency, controlling and eradicating tax evasion, and anti-circumvention. In Nicaragua, however, much remains to be done to advance to this point. See 9.8 CFC Proposals.

The taxation of digital economy businesses has not been implemented and the authors are not aware of any official proposal to regulate the taxation of such transactions.

No proposal has been incorporated or established or implemented under the legal framework in Nicaragua.

The income of personal or incorporeal movable capital or intangible rights with a definite withholding rate of 15% on the total amount paid or credited or that in any way is made available to the taxpayer is levied, in accordance with Article 81, LCT. In the case of operations with tax havens, an aliquot of 30% applies. The Tax Administration has not officially issued any list of countries considered tax havens so the rule in practice has no application to date.

So far, the evaluation of the amount is determined based on what is established in the contract that supports the relationship between the parties. Otherwise, there is a risk that in an audit the Tax Administration will ex officio establish a market price by applying the transfer pricing rules.

Article 61 bis of the LCT, reformed, includes an anti-elusion rule regarding the PMD, empowering the Tax Administration to identify the operations and apply the corresponding tax rate ex officio. For which, said administration may take into account the existence of linkage or affinity of interests based on carrying out activities of the business; common presence of shareholders, members of the board of directors, main officers or executives; power to appoint or dismiss the majority of the members; granting credits for significant amounts in relation to the borrower's assets or without adequate guarantees; possibility of exercising veto rights over business; frequent assumption of shared risks; marital or kinship relationship; participation in profits; and any other factor that allows the presumption of the existence of a common control between them.

However, in order to harmonise the legislation internationally, the authors do not see any concrete fact that indicates that the BEPS process is taken into account, since Nicaragua has not even started with the most basic measures, such as the signing of agreements on exchange of information or double taxation.

ACZALAW Nicaragua

Colonial Los Robles
V Etapa #26
Plaza El Sol 2c. al Sur y 1c. al este.
Managua
Nicaragua

+505 22705976, +505 22705186

+505 2782431 Ext. 107

Minerva.bellorin@aczalaw.com; nicaragua@aczalaw.com www.aczalaw.com
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Law and Practice in Nicaragua

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ACZALAW Nicaragua is located in Managua, with a team of seven attorneys, two of whom have extensive expertise in corporate tax. The firm was founded in 2002 and currently has a presence in three countries: Nicaragua, El Salvador and Honduras. ACZALAW’s experience focuses on solving and assisting foreign investors. Corporate tax is one of the main specialisations. In the last five years, taxes in Nicaragua have increased significantly due to modernisation and changes in the legal framework. The firm's tax advice is essentially preventative. It is aware of the economic and reputational importance for a company, which implies the timely fulfilment of its legal responsibilities, as well as the orderly management of its documentation and accounting records in accordance with the Tax Code, the Tax Conciliation Law and all the regulations issued by the Tax Administration. This allows clients to act efficiently with the correct and complete documents to keep their businesses and corporations in good standing.