Central America: Tax amendments and opportunities
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Central America: Tax amendments and opportunities

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Consortium Legal

Reform is in the air for Central America’s tax systems. Alfredo Rodríguez, Diego Martín-Menjívar, Armando Manzanares, Carlos Taboada and Diego Salto Van der Laat of Consortium Legal take a look.

Central America's tax systems have certainly evolved over the past few years. Looking ahead, the need to increase fiscal revenues and the lack of modernised systems will trigger further reforms in most of the countries.

According to the United Nations Conference on Trade and Development (UNCTAD), foreign direct investment (FDI) into Central America exceeded $43 billion in 2018. For this reason, the region's tax systems are adapting to international tax trends – led by the BEPS initiative – and intensive tax reforms are likely to materialise in both Costa Rica and Nicaragua. Recent elections in El Salvador and Guatemala will also open windows of opportunity to push tax reform in those countries.

At the same time, Central America's tax authorities are working hard to strengthen their technology platforms to conduct more efficient audits and collection processes.

Costa Rica

Costa Rica's Legislative Assembly approved a comprehensive tax reform in 2018, which entered into effect on July 1 2019. The Law on Strengthening Public Finances introduced a completely new VAT regime and important amendments to income tax law.

The implementation process has been complicated, as there has been a lot of uncertainty regarding the application of the new rules. The regulations for the new VAT and income tax regimes were not published with enough time before the laws entered into effect to allow taxpayers to prepare accordingly. In addition, several issues are still pending clarity and further definition, which has caused a delay in the implementation process.

Since 1982, Costa Rica had a general sales tax that taxed the transfer of goods and only certain services expressly stated within the law. As of July 1 2019, this tax was repealed and a new VAT Law was enacted, which taxes all transfer of goods as well as all services. Although the VAT Law maintains the ordinary 13% tax rate, special rates have been introduced: a 1% tax on the basket of goods (list of goods considered necessities); a 2% levy on non-regulated education and personal insurance; and a 4% tax on airfares and health services, among others.

In addition, transitory regimes were introduced for construction services, tourism and recycling services. The regimes exempt participants in those sectors from tax during their first year of operation, then taxes them at a 4% rate in the second year, an 8% rate in the third year and a 13% rate starting in year four. In addition, on exactly the same date, a new version of the electronic invoice was also introduced.

Regarding income tax law, the tax reform introduced a comprehensive amendment which brought in a new simplified regime applicable to passive income, real estate income and capital gains received by corporations and individuals. Such income is subject to a 15% fixed rate and only allows a one-time deduction of 15% of gross income. Several special regimes were also introduced. On the other hand, the ordinary income tax regime has been kept at a 30% rate on taxpayers' net income.

In addition, the tax reform introduced: thin capitalisation rules; anti-tax haven regulations; a broader concept of 'permanent establishment'; a new fiscal year-end (January-December); a new regulation for exchange rate differences; an extended concept of loss-carry forward; a regulation on hybrid instruments; and several other modifications.

It has been the most important tax reform in the country of the past 50 years.


The Nicaraguan tax system is a modified territorial system focused on transactions occurring within the territory, as well as those linked to Nicaraguan taxpayers, assets or labour. The main taxes include direct taxes, such as income tax and real property tax, and indirect taxes, such as VAT and excise taxes. The corporate income tax (CIT) rate is 30% on net income and VAT is 15%. A specific provision establishes that the minimum corporate tax will be the higher of 1-3% of gross sales, depending on the company sales level, and the application of the 30% CIT rate. In addition to these taxes, there are municipal taxes and social security obligations.

The latest tax reforms in Nicaragua were introduced between February and March 2019 via amendments to the Tax Concertation Law and changes to the regulations implementing the law. The changes included an increase in applicable tax rates mainly on income tax withholdings, as well as the elimination of certain tax exemptions.

On capital income and capital gains, the general tax rate was increased from 10% to 15%, while other rates were also increased. For example, the withholding on real property capital gains, which is established by means of a progressive rate with a previous limit of 4%, was increased to 7% according to the value of the transaction. Another rate that was increased was the withholding rate applicable to services rendered by non-residents, which was increased from 15% to 20%. Regarding exemptions, VAT was extended to several goods that had previously been exempt.

Other changes introduced by the Tax Concertation Law and its regulations, included an increase in excise tax rates for tobacco, beverages and other goods. In addition, modifications were conducted to reduce the terms to submit tax returns, as well as the requirements necessary to allow cost deductions. Other important changes include modifications to the requirements for obtaining tax credits and benefits.

Overall, the reforms limited taxpayers' chances of attaining benefits that had been attainable before the changes.


The Honduran tax system will likely be modified in the near future. The Income Tax Law and the Sales Tax Law have been in force since 1963. For this reason, the Honduran Council of Private Enterprise (COHEP) has entrusted a group of private consultants with the preparation of new drafts for both laws. The goal is to improve the country's tax collection structure by modernising its system with new rules and moving to a source-based income system.

Within this process, it is expected that the proposed Bills will consider new rules for permanent establishment, capital gains and the territoriality principle. In addition, an amendment to the simplified regime of the sales tax will also likely, and eventually, be analysed, as well as better rules to govern the credits and debits system and applicable VAT on exports. There is a strong possibility that in August 2019 a Bill will be discussed with different social and political groups before the being submitted to the National Congress.

As part of this modernisation effort, a new Tax Code entered into effect on January 2017 (Decree-170-2016), which replaced the one in force since 1997.

On July 10 2019, the National Congress also approved a Decree that interprets the scope of the tax and customs regularisation benefit established in Article 213 of the Tax Code, which established the rules of a tax amnesty by conducting a payment on the 1.5% of gross income during the fiscal years 2013 to 2017. It was initially interpreted that the tax credits belonging to the taxpayers, which were granted with the benefits of the tax amnesty, were lost. For this reason, the Decree has been very relevant, as it confirmed that the existing credits accrued before the tax amnesty are valid.

El Salvador

In February 2019, El Salvador held presidential elections, which former Mayor of San Salvador Nayib Bukele won. Bukele took office on June 1 2019. During his campaign, he promised to review the fiscal legal framework and to eliminate taxes that were considered damaging to most of the population, such as the special contribution to telecommunication services. Notwithstanding this pledge, President Bukele has not announced any tax amendments. It is worth mentioning that before leaving office, former President Salvador Sanchez Cerén approved four important amendments to the tax laws.

In November 2018, the Legislative Assembly issued a Bill in which Article 30 of the Income Tax Law was authentically interpreted, resulting in a modification to Section 1 of the aforesaid article. This benefitted the coffee and sugar sectors in terms of the modified calculation of its equipment depreciation rule, which will no longer apply only to the effective time of use in a calendar year but for the full fiscal year. The aforementioned will result in a larger deduction for the coffee and sugar sectors, which will lower their tax burden.

In April 2019, the Assembly amended subsection b) of Article 131 of the Tax Code, which stipulates the requirements for appointing a fiscal auditor. In this regard, the Assembly increased the required income amount from $571,429 to $1.46 million. By doing this, many companies were no longer obliged to appoint a fiscal auditor, which resulted in savings for small companies.

In May, the Special Contribution to Large Taxpayers for the Citizen Security Plan Law was amended to remove the obligation to pay this special contribution. The tax was equivalent to 5% of the net gains by companies categorised as large taxpayers and supported those companies that have been granted any type of tax benefit and/or exemption. These latter entities include companies established in free trade zones; companies dedicated to tourism, renewal energy generation and international services; and to entities structured as cooperative associations.

Finally, in July 2019, the Legislative Assembly also issued a Bill in which Article 28 of the Income Tax Law was authentically re-interpreted to include the waste or loss of merchandise and/or production as a deductible cost. Before this amendment, the Salvadoran tax authority did not accept waste or loss of merchandise and/or production as a deductible cost, which resulted in an important loss of capital for contributors.


Guatemala has a territorial tax system. The two main taxes applicable to business activities are income tax and VAT. Although certain aspects of the tax system require modification, no comprehensive tax bill is being discussed. Notwithstanding this, it is expected that tax reform may be discussed after the second round of the presidential elections has been conducted in August 2019.

It is worth mentioning that Guatemalan income tax law levies taxes on different income categories. The categories subject to this tax are business income, labour income and capital gains. The regulations applicable to income tax for business income establish two systems that a taxpayer may subscribe to: the system of profits from lucrative activities (subject to a 25% tax rate); and the simplified optional system on income from lucrative activities (a 5% rate on monthly income up to CLP30,000 ($3,900) and 7% for anything over the threshold).

The sale of goods and services are subject to a 12% VAT. The tax base is the price of the transaction minus any discount granted.

Guatemala's income tax law stipulates that all income derived from business activities is subject to taxation and provides some examples of which activities trigger the imposition of tax. This has generated some doubts about the imposition of taxes regarding services rendered by foreign companies outside Guatemala, especially services rendered by digital companies. The country's tax authority (Superintendencia de Administración Tributaria – SAT)'s interpretation is that if a foreign company renders its services outside Guatemala, there is no withholding tax to be paid. This interpretation is also applicable to indirect taxes, since VAT is only triggered by the rendering of services in Guatemala.

No Bill proposals are being discussed in Congress regarding taxation of the digital economy.

Alfredo Rodríguez



Consortium Legal – Guatemala


Alfredo Rodríguez has 38 years of experience in food and beverages; financial services; real estate; agro-industry; pharmaceutical and life sciences; aviation; manufacturing; professional services; and start-ups.

Alfredo has experience advising companies in tax and corporate matters related to M&A, private equity investments, financial transactions, project financing, foreign investments in Guatemala and Guatemalan investments abroad. He is also an advisor to natural persons and family groups on tax and inheritance planning and has an extensive practice in corporate law. Alfredo leads the real estate and entrepreneurship practice.

Diego Martín-Menjívar



Consortium Legal – El Salvador


Diego Martín-Menjívar has experience in M&A; banking and finance; insurance law; foreign investment and international trade; customs law; tax; and corporate law. He also has extensive experience as a legal advisor to recognised companies, both local and international and has been a local consultant for national and international public organisations, including the World Bank.

He has advised clients in tax and customs litigation at administrative and judicial levels. Recently, he led the defence of an administrative process of verification of origin under CAFTA, against the granza rice import industry, and achieved the recognition of origin by the General Customs Office and the closure of the case.

Armando Manzanares



Consortium Legal – Honduras


With more than 26 years of experience, Armando Manzanares specialises in commercial and tax law. He has an extensive experience in administrative law, intellectual property, arbitration, foreign investment and the regulated sector.

He is an advisor to important national and international companies and has been featured in national and international publications for his knowledge and capacity in tax matters, corporate, civil and procedural law, but above all for his comprehensive management of the right in large financing projects, concessions, mergers and acquisitions of mercantile companies.

Carlos Taboada



Consortium Legal – Nicaragua


Carlos Taboada has more than 19 years of experience in agroindustry, real estate, financial and retail sectors in Nicaragua. He provides strategic counsel on tax, real estate and corporate aspects in important transactions and agreements to foreign investors and large- and medium-sized companies established in the country.

Carlos has participated in different projects and acquisitions in recent years that include corporate and financial restructurings in the agro-industrial and energy sectors, involving assets of more than $250 million. He has also advised on regional financings, due diligence processes for the acquisition of a Nicaraguan bank, acquisitions of real estate assets for foreign investors and residential real estate projects, among others.

Diego Salto Van der Laat



Consortium Legal – Costa Rica


Diego Salto Van der Laat is a specialist in the financial and tax sectors. He has extensive experience in tax consulting, litigation, mergers, acquisitions and tax planning, mainly for multinational companies but also for local entities.

Diego leads the tax consulting practice for analysis and business consulting. He is considered one of the five most highly recommended tax advisers in Central America by Latin Lawyer Magazine, Law Business Research Institute of Great Britain. He has worked as an external consultant for the Inter-American Development Bank in the development and implementation of training programmes for public officials and is a columnist for the economic weekly El Financiero.

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