Foreign Investment Double Taxation – A pending issue in Nicaragua

Foreign Direct Investment in Nicaragua over the past 10 years has been growing steadily at an average rate of approximately 16% per year according to official sources. This growth has been made possible by a combination of factors including the existence of investment opportunities, geographical advantages, some tax incentives, conditions of macroeconomic stability, public safety, among others. The main recipients of this investment sectors include energy, mining, infrastructure and construction, financial, agribusiness and tourism.

On taxation, generally the Nicaraguan legal framework does not establish tax preferential tax regime to promote foreign investment which is subject to the same rules and that the national tax obligations. Despite the above, if there are some tax benefits, which are particularly limited for certain sectors, for example, the tourism industry, free zone, among others, that they can be used by foreign investors.

Recent tax reforms have come to incorporate and standardize certain international tax provisions recommended by the Organization for Economic Cooperation and Development, known by its acronym in English as OECD. These additions are for example the tax treatment of permanent establishments, the tax residence and transfer pricing regulations. No clutch, despite these advances in line with international trends, the Government of Nicaragua has not signed international agreements to avoid double taxation that would primarily benefit foreign investors who are taxed based on worldwide income.

Foreign investment is usually realized through capital contributions to the establishment of branches or the establishment of new affiliated commercial companies through which economic activities take place in Nicaragua. If economic activity taking place in Nicaragua does not have tax incentives, local authorities are obliged to pay taxes created under the general tax regime for the payment of income tax, being subject to compliance with the following general rules:

    Application of internal rules:

        The Nicaraguan commercial company or branch is subject to 30% of income tax based on taxable income or payment of a minimum of 1% of the gross revenue in economic activity;

        The dividend is subject to final retention of 15% for non-resident shareholders and 10% for resident shareholders.

    Application of foreign standards:

        Dividend income may be taxed for foreign investors according to the rules that apply.
From the foregoing, it is evident that originated in Nicaragua income could be taxed both in Nicaragua and abroad, resulting in double taxation. Double taxation reduces the returns on capital by reducing net cash flows for foreign investors. This creates comparative disadvantages, which although not seem to be a determining factor discouraging foreign investment in Nicaragua in the short term, it is an issue that the country less competitive in attracting investment. Aware of this, the local tax authorities are paying greater attention to developments in international taxation, particularly those driven by the OECD issues including double taxation, and therefore, medium term is expected to start Nicaragua sign international agreements to avoid double taxation. In this effort, we estimate that the adoption of tax treaties governing double taxation begin with those countries which have been its main source of foreign investment. In a context of reciprocity, chances are that agreements that include mechanisms that allow investors from countries with which such agreements are signed will be promoted, deduct the taxes paid on the receiving investment income and source country.

For now, the absence of international agreements governing double taxation, foreign investors can only avoid double taxation to the extent that their countries unilateral mechanisms that allow the exemption of income earned abroad or established on which tax payments are demonstrated abroad, or to authorize the deduction or credit of taxes paid in Nicaragua.

Carlos Taboada, Partner
Consortium Legal – Nicaragua