DOING BUSINESS IN NICARAGUA

Investement Framework

Business Climate
Financial and Fiscal System
Commercial entities
Investors Rights and Investment Laws
Trade Agreements

Investors Rights and Investment Laws

A. Direct foreign investment and the rights of private property

The Constitution of Nicaragua guarantees the same rights to foreign investors as they are guaranteed to national investors. Article n.º 44 of the Constitution,  states that the right to private property and goods is guaranteed.

According to the constitution, the government must protect, promote and foster investment in properties, cooperatives, collectively, and social investment to try to guarantee a social and economic democracy. The State guarantees business freedom. Businesses organized under the structure established by the Constitution, have equal rights under the law and the Government's economical policies.

Investors not wishing to buy a property, have the option to rent the space needed to open a business; for example, an industrial park or a complex of corporative offices. According to international real estate agencies, buying property in Nicaragua is a good investment.

B. Investment incentives in Nicaragua

During the last few years, open market policies such as large scale privatizations, ratification of free trade agreements, protection for personal and intellectual property and free repatriation of earnings and capital by foreign investors have been implemented in order to stimulate investments by the private sector and improve competitiveness in Nicaragua.

Investment Incentives

• Fiscal concessions
• Special exemptions in sector laws such as foreign trade zones, forestry, tourism and temporary admissions
• Accelerated depreciation of assets

Guarantees for Foreign Investment

Foreign investors enjoy free access, purchase and sale of available foreign currency, as well as a free currency conversion. Among others, foreign investors can freely carry out any of the following, without being affected by other obligations required in the country:

• Transfer of capital investments abroad by dissolution, liquidation or voluntary sale of foreign investments.

• Remittal of any profit, dividends, or earnings generated in the national territory after payment of the corresponding taxes.

• Payment and remittal of payments originated by debts contracted abroad and the interests earned by these, as well as royalties.

• Revenues and technical assistance.

• Payments derived from compensation for expropriations.

Foreign Investment Promotion Law and Regulations – Law 344

The Foreign Investment Promotion Law guarantees free access to the purchase and sale of foreign currency by investors, such as free convertible currency, capital transactions abroad, and remittal of profits for investors. Investors can be protected with an insurance against non-commercial risks backed by bilateral treaties or conventions signed by Nicaragua.
Disputes or claims with investors can be settled by international arbitration.

The Foreign Investment Law is intended to promote investment; contributing to job creation, as well as to the country's economic and social development.
Foreign investment in particular, is a great source of employment, the transfer of know-how, and technology. Investment increases exports and will allow Nicaragua to become more competitive in the global market.

Resident Pensioners or Individuals Living on Investments - Law 628

This law is for residents pensioned or retired by government entities and official organizations, private companies in their respective countries, as well as any other person who enjoys any type of permanent and stable income generated abroad. They should be over forty-five years old and enjoy a monthly income of not less than four hundred dollars (US$400) or its equivalent in any other foreign currency, plus one hundred dollars per month (US$100) for each dependent family member in the country.

Among the incentives granted by this Law, are:

• One-time duty free permits to import household furnishings and equipment, and other tax exemptions for the net amount of ten thousand dollars (US$10,000).

• Income tax exemption on any of the assets introduced from abroad and declared under this law.

• Exemption on duties and sales taxes as well as the import of one automobile vehicle for personal or general use. Once the vehicle has been introduced in the country, it can only be sold, handed over or transferred to third parties without having to pay taxes, only after five years from the date it was imported.

For further information, visit the website: www.intur.gob.ni

Law for Fiscal Equity and its Regulations - Law 453

The Law for Fiscal Equity allows for a 1.5% tax return on FOB (Free on Board) exports that are accredited to income taxes (IR), among other incentives.

Exporters who make use of Law 382, the Law of Temporary Admission for Active Improvement and Expedite Exports, can credit 25% excise taxes (ISC for its acronym in Spanish), paid for fuel purchases used for input. This credit is not transferable to third parties and only applies for the fiscal period during which the purchases were made.

For commercial fishing activities, including industrial, artisan and aquaculture activities, the excise tax (ISC) will apply in the following manner:

The excise tax (ISC) that is not subject to direct credit against income taxes can be deducted as or expense for such tax.

A 1.5% tax credit on FOB exports was established to promote goods exported from Nicaragua, as well as for farmers or manufacturers who produce these goods. This benefit will be credited to the exporters’ annual income tax, prior presentation before the International Revenue Service stating that he/she transferred the corresponding portion to the producer or manufacturer whichever the case may be.

The following exports are exempted from this benefit:

• Exports by companies protected under the foreign trade zones, mines and quartiers;
• Re-exporting without active upgrading or improvements;
• Scrap exports.

This benefit will be effective for a seven-year period as of the date that the law takes effect.

Law on industrial Export Free Trade Zones

The foreign trade zone is an ideal industrial sector for foreign investors. Once approved by the National Commission for Free Trade Zones, companies administrating or operating free trade zones, can enjoy fiscal incentives, and benefits set forth in the Law on Industrial Free Trade Zones for Exports including among others, the Privileges of the World Trade Organization (WTO).

The special designation, offered by the World Trade Organization, allows Nicaragua to keep tax free zone benefits after the year 2008.

Companies using free trade (or tax free) zones classify under the following categories:

• First category companies. In order to classify in this first category, a company should use 50% national supplies to produce its goods and generate more than 100 jobs; or use a minimum 40% national supplies for production and generate more than 150 jobs; or use a minimum 30% national supplies for production and generate more than 200 jobs.
• Second category companies. To classify in the second category, a company should use, a minimum 30% national supplies for the production of such products and generate more than 40 jobs; or use a minimum of 20% national supplies for production, and generate 100 jobs; or use less than 20% national supplies for production and generate more than 200 jobs.
• Third category companies. To classify in this third category, companies should use more than 30% national supplies for production and generate more than 40 jobs; or use 20% national supplies for production and generate more than 100 jobs.

• Fourth category companies. To classify in this category, a company must use more than 10% national supplies for production and generate more than 10 jobs. Companies belonging to this category will not enjoy fiscal exemptions for automotive vehicles.

Law on Export Processing Zones, Decree 46-91, offers incentives such as:

• 100% tax free (income taxes)
• Full exemption from municipal and property taxes
• Exemption from all import taxes, tax collections, and sales taxes on imports of raw materials, supplies, machinery, equipment and spare parts
• Allows for operation of individual foreign trade zones so they can operate anywhere. in the national territory

Other advantages in the Export Processing Zones/ EPZ

• Competitive labor costs
• Exemption from foreign-exchanger regulations

Law on Incentives for the Tourism Industry in the Republic of Nicaragua and its Regulations - law 306

Several tourism activities enjoy benefits in the "Tourism Incentives Law." Natural persons or juridical entities investing directly in the development of tourism activities, or that indirectly participate by funding such activities; as well as if these activities are part of the Special Tourism Planning and Development Zones (ZEPDT) for its acronym in Spanish, defined and determined as such by the Nicaraguan Tourism Institute (lNTUR), can also benefit from exemptions and fiscal credits under the present law.

Companies willing to invest and operate in areas and facilities belonging to the State, where the Executive Branch through INTUR is interested in developing high-quality tourism activities can also benefit from concessions the terms, and conditions set forth in a long-term contract.

This law grants:

• 80% to 100% income-tax exemption, depending on the type of activity performed by the company
• Full property tax exemption term
• Tax exemption during the designing period, and the supervision of construction projects in tourism
• Full tax exemption on all construction material and equipment used in the first ten-year period

Law for the Conservation, Promotion and Sustainable Development of the Forestry Sector - Law 462

Forestry development will be carried out in coordination with other related public sector entities and with the private sector participation. It will have the following objectives:

• Natural forest management
• Extended forestry coverage
• Forestry protection and conservation
• Increased aggregate value
• Better technology
• Promote research
• Strengthen the forestry sector

Natural persons or juridical persons investing in natural forests and forestry plantations, on their own or as third-party initiatives, shall benefit from incentives created by the present law, if they comply with the registration requirements set forth in the regulations.

This law grants:

• Fifty percent (50%) exoneration on Municipal Sales Tax payments and fifty percent (50%) on Income Taxes, for those earnings derived from management of registered planting during the first ten years of enforcement of the present law.

• Exoneration in Property Tax payments, or the minimum payment on the Income Taxes, contemplated in the Fiscal Equity Law for properties with natural forests or in areas designated for reforestation, and where forestry management is carried out through a Forestry Management Plan during the first ten years of enforcement of the present law.

• Companies with any type of business activities, investing in forestry plantations could deduct for income tax purposes as much expenses as 50% of the amount invested.

• Exoneration on payment of import duties for second and third transformation companies that import machinery, equipment and accessories improving their technological level in lumber processing, excluding sawmills.

• One hundred percent (100%) deduction on income taxes, for natural persons, or juridical entities, allocated to promote reforestation, or the creation of forestry plantations. For purposes of this deduction, the taxpayer must first present their forestation proposal to INAFOR.

• Natural persons or juridical entities investing in natural forests or forestry plantations, on their own, or through third parties in their own or someone else's property, can receive the benefits of the incentives created by the present law; however, they must comply with registration requirements set forth in these regulations.

Temporary Admission for Active Improvement and Export Facilitation - Law 382

This law establishes that direct or indirect imports, under the Temporary Entry Regime for Active Perfectionism, are not subject to payment of fiscal duties or taxes.

The privilege of the Customs Regime is to allow entry of certain goods without payment of duties, import taxes or any other taxes under that condition that these goods will be subject to some type of subsequent operational activity.

The objective of this law is to regulate required simplification of formalities for temporary entry of goods for the purpose of going thru a process of improvement as well as those materials required for the assembly and re-exporting of textile products. This includes sales to the different Industrial Free Trade Zones for Exports.

Duties and taxes are either exempted or, reimbursed under this law, including tariffs and any other tax of fiscal nature encumbered on imports, local sales or gross income, that increase the price of raw materials, intermediate or capital goods acquired by the exporter, either through a direct import or local purchase, and has been directly or indirectly incorporated into exported goods, or used to produce such goods.

Optional exemptions for companies that directly or indirectly export at least twenty-five percent (25%) of their total sales with an export value not less than fifty thousand U.S. dollars (US$ 50,000.00) can claim exemptions to duties and taxes, according to procedures set forth in this law and its regulations.

The national commission for promotion of exports is the entity that administers this law. The commission’s secretariat is located in the ministry for development, industry and trade ministry (MIFIC for its acronym in spanish).

Law for the electricity industry law 272

This law provides the juridical framework that regulates the electricity sector in Nicaragua. Published in La Gaceta, official bulletin n. 74 dated April 23, 1998 and its regulations (decree n.42-98) published in La Gaceta, official bulletin n. 116 dated June 23 of that same year, as well as its subsequent amendments, granting the following benefits:

• a three-year exoneration of all import levies for machinery, equipment, materials and input destined for the generation, transmission, distribution and commercialization of the offer and supply of electric energy for public use.
• Fuel oils for electricity generation are indefinitely exempt form any levies.

Domestic consumption of electricity increases by 7% annually in Nicaragua, creating the need to increase the current generation capacity by 1.176 MW in the next 20 years. The volcanic range on the pacific coast and diverse water resources in the country offer a great opportunity for generating geothermal and hydraulic energy.

The Nicaraguan energy institute (INE for its acronym in Spanish), administers the energy sector, which in turn is divided into three sub sectors:

• Fuel
• Hydrocarbons
• Electricity

There are some estimates that Nicaragua could be receiving in the next five years US$ 500 million from exporting fuel oil. This income could alleviate the deficit in the balance of payments.

Hydrocarbon sub sector
Hydro-carbon supplies (downstream)

Imports, exports, refinement, transportation, storage, marketing and any other service related to hydrocarbon supplies, it can be performed by any natural person or juridical entity , national or foreign, within the public license or authorization to build the corresponding fuel oils facilities, in compliance with all the requirements in our legislation.

Consumer prices for different fuel oil by products (except liquid power gas LPG) are free of state control. Therefore, prices are set by participants in the supply chain, taking into account variations in international  prices.

Law for promotion of electricity generation with renewable sources- law 532

The purpose of this law is to promote the development of new power-generation projects using renewable resources. This laws sets forth the economic and financial incentives to support the framework of sustainable exploitation of renewable energy sources such as: projects that expand the installed generation capacity of power plants which are currently in operation, with renewable resources; and electric energy generation projects that use biomass or biogas sources produced in sustainable manner.

The law was created with purpose of coping with international prices increases- allowing for the production of Aeolic, hydraulic, geothermal and biogas energy, so we are not solely dependent on petroleum.

This law offers an additional advantage in energy production with this type of renewable resource by reducing generation and consumer costs.

According to this law, new projects and expansions that classify as electricity generation projects with renewable resources (PGEFR for its acronym in Spanish), can be owned by any natural or juridical entity either private, public or mixed under following incentive model:

• Exoneration from payment of all import tariff rights (DAI for its acronym in Spanish) for machinery, equipment, materials, and any input used in the pre-investment and construction period of the subs-transmission line needed to transport energy from the generation station to the grid – interconnected national system (SYM for its acronym ins Spanish).
•  In the case of projects denominated “isolated systems” with their own generation, the exonerations cover the pre-investment tasks, construction work and materials used to generate with renewable resources, and construction of sub-transmission lines, as well as all investments for distribution associated with the project, panel and solar batteries for generating solar energy
• Exemption from the payment of the aggregate value tax (IVA for its acronym in Spanish) for machinery, equipment, materials and input exclusively used for pre investments tasks and material including construction of the sub-transmission  line needed to transport energy form the generation station to the grid- interconnected national system (SYM for its acronym ins Spanish).
• Exemption form payment of income taxes (IR DAI for its acronym in Spanish) and minimum defined IR payment, set forth in law N 453, law fiscal on equity, for maximum term of seven years from date of the projects initials commercial or mercantile operation. Likewise, during this same period, income derived from sale of carbon dioxide bonds shall be exonerated from IR payments.
• Exemption from all enforced municipal taxes on real estate, sales and registration fees during the project construction, for ten years period beginning the date when the project begin its commercial operations. It will apply in the following manner: 75% exemption during the first three years; 50% during the following five years; and 25% during the last two years.
• Fixed investments in machinery, equipment and hydroelectric dams will be exempted from all types of taxes, tariffs and municipal taxes for a ten-year period as the initial date of commercial operations.
• Exemption from all taxes that could exist for the exploitation of natural resources for a maximum term of five years after initial operations
• Exemption from revenue stamps taxes (ITF for its abbreviation in Spanish) incurred during the construction and the operation of the project, or from expansion, for a ten-year term.

Article 8: investors will have a ten-year term to claim the benefits set forth in this law, starting the date the law goes into effect.

General Law on telecommunications and postal services, and its regulations – Law 200

This law regulates all matters relating to communications. The regulations for this law set forth the regulatory framework to obtain concessions and licenses.

Telecommunications services are divided into the following categories:

• Public
• Of general interest
• Of special interest
• Of particular interest
• Non-regulated services

Anyone interested in providing telecommunications services must request authorization from telecommunications regulating agency. Authorization will be issued according to the requested service.

• If a request is made for providing a public service, TELCOR will grant the concession.
• If the request is made to provide services of general interest, TELCOR grants a general interest license.
• If the request is for providing a service of special interest, TELCOR grants a special interest license.
• If the request is made to provide a service of particular interest, the only necessary requirement is to register in TELCOR. Nonetheless, TELCOR may require procedures to obtain special permits in order to operate.

In the case of non-regulated services, the only requirement is to register in TELCOR. If the request made for experimental purposes or to cover an emergency, TELCOR can give a temporary authorization as long as they are in compliance with certain requirements. In addition to the above described authorizations, a permit is required in order to allocate a frequency.

Note: concessions, licenses, permits or authorizations granted by TELCOR cannot be mortgaged, sold, transferred or willingly used in whatever manner and they are not transferable.

Laws for the protection of intellectual property rights

It is becoming increasingly more important for businessmen to have good understanding of the intellectual property rights systems in order to manage intellectual assets in a more effective manner for their companies.

Regardless of the products, either manufactured goods or services provided, your company probably uses and creates a great deal of assets with intellectual property rights. Therefore, you should systematically consider the necessary measures to protect, manage and observe your rights with the purpose of obtaining the best possible commercial results thanks to your copyright ownership.

Trademarks and other distinctive signs

• law 380 on trademarks and other distinctive signs
• regulations to law 380, decree N 83-2001
• general inter-American convention for trademark and commercial protection
• Paris convention for the protection of industrial property

Gives an owner of a brand name the exclusive right to commercially use the registered trademark or sign  related to a product or service, to a group of products or services, or with respect to a commercial establishment, meaning that, without the specific authorization of whoever inscription, no other person can use the registered trademark or sign in relation to:

• The same products or services for which the sign registration was requested
• The products or services that are similar to those for which the brand name were registered, if it could cause confusion or error among the consumers.
• The same activities that constitute the line of business of the commercial establishment identified by brand name or sign.

Patents

• Laws 354 “law a on patents for inventions utility models and industrials designs”, and its regulations
• Decree 1244 , approval of adherence by Nicaragua to the Paris convention for protection of industrial property
• Nicaragua is a member of the patent cooperation treaty (PCT).

The patent is the exclusive right granted by the republic for a determined period of time.

Copyright

• Law 32 on copyright in Nicaragua
• Regulations law on copyright and related rights
• Nicaragua is a member of the Bern, Rome, Geneva, WIPO, WIPO Performance  and phonograms treaty, and the Brussels Conventions.

The laws protects copyrights for all original intellectual creations that take place in the arts and letters and science, recognizing that the title-holder has a set of rights that guarantee respect for the author as such (moral rights), and other that impede utilizing or exploiting of the work by third parties without due authorization (economic or patrimonial rights).

Law on the development of vegetable varieties

• Law 318 on the development of vegetable varieties in Nicaragua and its regulations.
• Nicaragua is a member of the international convention for the plant variety protection act (UPOV), 1978 act.

The administration for obtaining vegetable varieties of intellectual property registry (RPI for its acronym in Spanish) avails plants breeder, producers of new plants varieties, farmers, researchers, universities and the public in general, information referring  to the protection of a vegetable variety, basic concepts procedures to follow for obtaining a plant breeder title, protection conditions, the rights and duties of a producer of new plants varieties, legislation that regulates the protection for development of vegetables varieties, and adhesion to an international agreement.

Law on the protection of layout designs of integrated circuits and its regulations – Law 324.
Decree N 38-2001

The purpose of this law is to establish the rules that regulate the protection of layout designs and integrated circuits, that is, all three-dimensional disposition of elements, expressing at least one active element, in some or all of the interconnections of an integrated circuit, as well three-dimensional disposition prepared for integrated circuit to be manufactured.

Law on the distribution of programming carrying signals transmitted by satellite and its regulation – Law 322
Decree N44-2001

The purpose of this law is to protect entities or transmitting organizations that distribute program-carrying signals by means of wires, cable or other similar communications channels sent to a satellite or passing through a satellite, with the purpose of guaranteeing the adequate resources to prevent its non-authorized utilization (article 1 of the law).

In addition to the above mentioned laws and international treaties, it is necessary to mention that Nicaragua signed an agreement with the United States of America in 1998 on intellectual property rights in which parties committed themselves to modernize and ensure effective respect for their respective legislations in all matters relating to intellectuals property.

In Nicaragua, the agreement on all aspects relating to intellectual property rights related to trade, better known as ADPIC for its abbreviation in Spanish, was implemented in the year 2000, which came into being in the Uruguay summit, and is one of twenty-eight multilateral agreements ratified by each of the members countries, when they ratified the WTO agreements.

ADIPC, like the agreement between the United States of American and Nicaragua, enforces in general the modernization and respect for the intellectual property of each of the signatory countries, with the difference that in case of incompliance with the ADIPC agreements, the beginning country will be excluded from the World Trade Organization, WTO.

If you wish to learn more about the intellectual property in the Ministry for Development, Industry and Trade, or visit the webpage:

For further information, visit the website: www.rpi.gob.ni

Mediation and Arbitration Law – Law 540

In contractual relations, all natural or juridical entities, including the state, have the right to mediation or and arbitration process, to solve their economic (patrimonial) and no economic (non-patrimonial) disputes.

This new law applies to alternative methods of conflict resolution, mediation and arbitration, both of national international nature, without prejudice of any pact, convention, treaty or any other instrument of international law to which Nicaragua is a party.

The following are most important aspects of the law as it relates to investors:

• Confidentiality of decisions made in this process.
• Prompt decisions on controversies.
• Pre eminence of the will of the parties. It removes the jurisdictional act in the controversy and turns it into a friendly arrange.
• The laws allows for the possibility of opening an arbitration process even if a legal proceeding has begun in ordinary courts. In this case the intention of the legislator is to leave the conflict resolution to the will of the parties.
• Reduction of work load for the juridical system.

International Arbitration

Nicaragua is signatory of the International Centre for Settlement of Investment Differences (ICSID) since 1995 and the New York convention, since June 10, 2003. there are alternative mechanism for the solution of disputes in the free trade agreements, the United Nations Commission for International Merchant Law (UNCIML), MIGA and OPIC.

MIGA: Multilateral Investment Guarantee Agency, World Bank (1990) www.miga.org
ICSID: International Centre for Settlement of Investment Differences (1995) www.worldbank.org/icsid/
PIC: Overseas Private Investment Corporation (1990) www.opic.gov

Labor laws

Labor relations are detailed in the Nicaraguan labor code. Law 185, defines rights and obligations for employers and workers. Likewise, foreign companies shall be ruled by the labor laws set forth in the labor code, always reaffirming international treaties with the International Labor Organization (ILO).

• Collective bargaining agreements can be negotiated with workers to improve work conditions
• Works shifts include day, night, mixed and special shifts. Alternative shifts can be made by mutual agreement between the employer and the employee.

Labor contracts

• An individual labor contract establishes labor relations to carry out task or provide an individual service.
• The name of type of contract does not determine the type of contract or labor relation: rather it is the content that determines whether it is labor contract or a contract of another nature, such as professional service.
• The contract should specify the conditions that make up the work relation, including salary, shift, work hours, date and form of payment of the salary, job title and description of functions.

For further information, visit the website www.mitrab.gob.ni

Employer Obligations

Contribution for Training
Employers should pay 2% of the employees’ salary to the national technological institute (INATEC for its acronym in Spanish) for training purposes.

Social Security
Employers must register in the Nicaraguan Institute for Social Security (INSS for its acronym in Spanish) when opening a new business. They must register the new employees  within the first three days after being hired.

For the rest of the regional departments in Nicaragua, and especially in rural areas, 9% rate applies for employers and 4.25% for employees. Free-lance or self employed workers have access to social security with a quota of 18.25% over salary. Late payments will be penalized with  3% fine over the total contribution.´

For further information, visit the website: www.inss.org.ni