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Nicaragua's new tax law, the Law of Fiscal Equality, went into
force in May of 2003, aimed at simplifying the tax code, while
reducing and harmonizing tariffs.
Although the new tax law did streamline the tax code, it is
important to get a good lawyer who can explain the intricacies,
obligations, exemptions and deductions in this 142-article law.
KINDS OF TAXES
1. Income Taxes
2. Value Added Tax (IVA)
3. Selective Consumer Tax (Luxury Tax, or ISE)
4. Fiscal Stamp Tax (ITF)
CLASSES OF TAX PAYERS
1. Persons or associations of persons.
2. Incorporated associations of persons.
a. Corporations (sociedades anonimas (S.A.), societies,
associations and foundations.
b. Mixed corporations (i.e. government with private
capital)
c
State entities and state-owned enterprises.


Each of these is subject to income taxes and the sales tax
regardless of nationality as long as the source of that income is
based in Nicaragua.
July 1 - June 30 and special periods for seasonal activities.
INCOME TAX
For national individuals, or individuals receiving income in
Nicaragua, income taxes are calculated through a progressive tax
rate as income increases.
People making less than 50,000 córdobas a year ($3,086) are not
subject to income tax. After that, it is a progressive tax scale:
Income Level
Tax Rate
Over 50,000 córdobas
10%
Over 100,000 córdobas ($6,172)
15%
Over 200,000 córdobas ($12,345)
20%
Over 300,000 córdobas ($18,518)
25%
Over 500,000 córdobas ($30.864)
30%
Nicaragua's top corporate tax rate is 30%, up from 25% in 2003.
Declarations of income must be filed by everyone making over
50,000 córdobas. Declarations must be made the General
Department of Income (DGI) no later than three months after
the end of the fiscal year, June 30.
Natural persons who only receive income from one employer are
exempt from declaring.
VALUE-ADDED TAX (IVA)
The Law of Fiscal Equality establishes a blanket 15% value-
added tax on most services, goods and imports. There are
exceptions for each category.


Imports of primary materials have a 0-5% tax, for some primary
goods imported from outside Central America.
SPECIAL CONSUMER TAX (LUXURY TAX)
A Special Consumer Tax, or Luxury Tax (ISE) is tacked onto
some imports, such as certain vehicles. The tax ranges from 10-
30%, depending on engine size.
FISCAL STAMP TAX (ITF)
A Fiscal Stamp Tax (ITF) is paid for some legal documents
whenever they are issued in Nicaragua or given abroad and
enforced here. The ITF ranges from 5 córdobas ($.30), to 5,000
córdobas ($308). But for most documents and paperwork, the
ITF only comes out to several dollars.
ITF is paid for :
1) Certificates
2) Certifications
3) Bonds, bills of exchange
4) Contracts
5) Legal papers
6) Import policy
DEDUCTIONS:
Ordinary Deductions are all costs and expenses incurred while
doing the habitual activities or in the scope of business
producing income. Costs of goods, services, general
administration expenses, financial expenses, loss for bad debts,
donations, labor reserve, etc.
Extraordinary Deductions include losses in money exchanges,
loss for exploitation, and various incentives (tourism).
* costs associated with the production process such as rent,
insurance, advertising, etc.


* losses due to bad debts
* interest paid on a debt as long as it was used for investment
or production.
* losses due to destruction or loss of assets used in the
production process if they are not insured
* the amount needed to replace depreciating capital
* donations to certain specified groups
* benefits for employees directed towards their well-being
such as medical services
* insurance for employees up to 10% of their salaries
For deductions, the income tax payer must document and
register with Ministry of Finance all costs being claimed. Income
tax is not to be paid on capital gains or interest earned from the
local stock exchange or from dividends.
SOCIAL SECURITY
Nicaragua's social security system is in a state of flux, following
the government's announcement in July 2004 that plans to
implement social security reforms that would have created
individual accounts (based on the Chilean model) have been
postponed indefinitely. Thus far, the failed structural-reform
measures have cost the social security system $74 million in
deficit, and climbing. The government calculates the deficit will
reach $250 million by 2015, if the system is not fixed.
The 137-Article law to reform the social security system is still
stuck in Congress, where it has been since it was introduced in
2000. Until that law is passed, the old system is still in place:
INTEGRAL - This is the type of social security provided to
urban employees. In this case, the employer contributes the
equivalent of 12.5 percent of the employees' salary to cover social
security costs while the employee pays the social security system
4 percent.


The IVM is required typically for laborers in rural areas. In this
case, the employer is responsible for 5 percent to cover social
security costs while the employee is responsible for 2 percent.
SELF-EMPLOYED - In this case the individual contributes
13.5 percent of his or her salary.
FREE TRADE ZONES
The 14 free-trade zones operating in Nicaragua employee some
70,000 Nicaraguans, and export around $500 million a year in
textiles and tobacco. The Bolaños administration has aggressively
sought free-trade zone investment, and hopes to have the
number of employees reach 200,000 by the end of 2007.
In 2004, Nicaragua exported to the United States 150 million
meters2 of textiles, generating $484 million in revenue. This
translated into a 17% increase in production, and a 22.5%
increase in the value of textile exports. Nicaragua's production
growth in the textile sector last year ranks 3rd in the world
(behind China and Cambodia), and value growth was 2nd in the
world (behind China). This at a time when textile plants have
been closing in other countries in Central America, namely
Honduras, El Salvador and Guatemala.
The government projects that free-trade zone exports in 2005
will reach $830 million.
There are three classifications of companies that operate in a free-
trade zone:
1) Operating or Management Companies (the companies in
charge of administration of the zone)
2) Tenants of Users (the companies authorized to produce and
export goods and services within the perimeter of the
management companies)


3) Administered Zones (companies authorized to produce and
export goods and services outside the perimeter of the
management companies)
The benefits extended to free-trade zones are:
1) 100% exemption on Income Tax during the first 10 years of
operation and 60% after that.
2) Exemption on sales tax and capital gains tax
3) Exemption on import taxes, custom's fees and consumer
taxes on imports of raw materials, equipment, machinery,
parts and replacement parts, samples, molds, etc.
4) Exemption on import tax on transportation equipment,
commercial or passenger
5) Exemption on Luxury tax
6) Total exemption on export taxes on goods produced inside
the zone
TAX AUDITS
The DGI has the right to conduct tax audits whenever it deems
it necessary. If there is suspicion of tax evasion, it has the right to
temporarily or permanently close the plant, business, etc.
APPEALS
Appeals can be directed to the DGI or a commission created by
the Ministry of Finance.
STATUTE OF LIMITATIONS
When an individual or company fails to pay taxes that were
withheld (i.e. 15% IGV on sales), then there is no statute of
limitations. If however, an individual or company fails to pay
their income tax, then the limit is 7 years.


As proof of that commitment, in 1999 the National Assembly
passed an amendment to the "Ley de Justicia Tributaria" (Tax
Justice Law), which will provide additional tax reductions.
*Courtesy of the U.S.Embassy in Managua