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Taxation in Nicaragua
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Taxation in Nicaragua
 
 
 

General

In May of 2003 the Nicaraguan legislature overhauled the national tax system, replacing among other laws the old income tax law (1974) and the old value added tax law (1984) with a comprehensive Tax Equity Law, and added Regulations in June 2003. Currently a new Tax Code has been approved by the Nicaraguan Congress (2005) and nowadays there is a reform pending. The creation of this new Tax Code has been due to the signing of the Central American Free Trade Agreement (CAFTA), in order to improve the dispositions provided.

Income Tax

The Tax Equity Law and its regulations only taxes income that is generated by activity within the national territorial boundaries (domestic source or “source income”), regardless of its nature, including profits, employment income, and including remittances to foreign persons. It does not tax based on residency or citizenship. Unless exempt under one or more provisions, such as Free Trade Zone status, all entities with a "permanent establishment" in Nicaragua are subject to the income tax. Individuals are taxed at 30% for income over C$500,000. Corporations and SRLs are currently taxed at 30% on all net income, with 1% of gross receipts due on a monthly basis as a proxy until final year-end calculations. A net assets tax of 1% functions as an alternate minimum tax.

A Nicaraguan subsidiary of a foreign company may deduct as expenses certain documented payments to its foreign parent company. Specifically, the subsidiary may deduct from gross income payments to its foreign parent for technical, financial (up to national market interest rate) or other assistance, or for patents, formulae, trademarks and similar items. The deduction is available only if the Nicaraguan company has duly withheld any corresponding withholding tax due.

Dividends and other profit distributions received by the owners of taxpaying Nicaraguan companies are excluded from gross income, regardless of the nationality of the owners. In general, other capital gains are taxed as ordinary income. Dividends and other distributions received by owners of tax exempt entities (such as those operating in Free Trade Zones) are considered gross income for the owners and may therefore be subject to a withholding tax (see sub-section on Withholding Tax in this section).

By law, the fiscal year of Nicaraguan taxpayers ends on June 30. However, companies, individuals and other taxable entities may request a special fiscal year if they reasonably justify their need for it. Nicaraguan tax law does not allow for consolidation of tax reporting. Nicaraguan corporate taxpaying entities may carry forward up to three years operating losses for most activities. Carrybacks are not allowed. Although Nicaraguan legislation generally requires accrual method accounting, companies may use cash-flow accounting upon prior approval of the tax authorities. Nicaragua does not currently have any asset or equity tax, apart from the alternate minimum tax and local real property taxes. Nicaragua does not have any tax treaties currently in effect, except for a tax information exchange agreement with the United States.


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