Transfer Pricing Regulations in Nicaragua
On December 17, 2012, the General Transfer Pricing Rules were introduced through Law 822, the Tax Coordination Law (LCT), published in the Official Gazette No. 241.
The general rule establishes the taxpayer’s obligation to have available, at the time of filing the Annual Income Tax Return, sufficient information, documents, and analysis to assess their transactions with related parties, either individually or as a business group. In other words, they must submit the Transfer Pricing Study.
However, according to Article 95 of the Tax Coordination Act, this obligation applies to any transaction carried out between related parties, between a resident and a nonresident, and between a resident and those operating under a free trade zone regime, and that have an impact on the determination of taxable income for the tax period in which the transaction takes place or for subsequent periods.
On December 17, 2015, the National Assembly approved an amendment to extend this measure, setting June 30, 2017, as the new effective date.
To date, this new requirement lacks a regulation that defines—as in other countries—minimum thresholds for application, compliance procedures, and, most importantly, the requirement to file a transfer pricing affidavit along with the income tax return.
Related-Party Rules in Nicaragua
According to Article 94 of Law 822 in Nicaragua, two parties are considered related parties under the following circumstances:
- When one of them directs or controls the other, or holds, directly or indirectly, at least 40% of its capital stock or voting rights;
- When five or fewer persons direct or control these two entities, or collectively hold, directly or indirectly, at least 40% of the capital stock or voting rights in both entities; and
- When they are companies belonging to the same decision-making unit. Two companies are considered part of the same decision-making unit if one of them is a partner or shareholder of the other and is related to it in any of the following situations:
- It holds the majority of voting rights;
- Has the power to appoint or remove the majority of the members of the board of directors;
- It can exercise the majority of the voting rights;
- Has appointed, solely through its own votes, the majority of the members of the board of directors; and
- The majority of the members of the governing body of the controlled company are members of the governing body or senior executives of the controlling company or a company controlled by the controlling company.
Likewise, a natural person is also considered to hold a stake in the share capital or voting rights when ownership of the stake, directly or indirectly, belongs to the spouse or a person related by blood in a direct or collateral line, up to the fourth degree of consanguinity or up to the second degree of affinity.
The following are also considered related parties:
- In a business collaboration agreement or a joint venture agreement, where any of the contracting parties or partners has a direct or indirect interest of more than forty percent (40%) in the proceeds or profits of the agreement or the activities arising from the joint venture;
- A person resident in the country and an exclusive distributor or agent of that person resident abroad;
- An exclusive distributor or agent residing in the country for an entity residing abroad, and the latter entity;
- A person resident in the country and its permanent establishments abroad; and
- A permanent establishment located in the country and its parent company resident abroad, or another permanent establishment of the same company or a person related to it.
Formal Obligations: Informative Affidavits
Pursuant to Article 95 of the Tax Coordination Law, this obligation applies to any transaction conducted between related parties, between a resident and a nonresident, and between a resident and those operating under a free trade zone regime, and that have an impact on the determination of taxable income for the tax period in which the transaction occurs or for subsequent periods.
There are no regulations regarding the return that a taxpayer must file regarding its intercompany transactions.
Deadline for Filing Annual Tax Returns.
As for the documentation, it must be filed no later than March 31 for tax years ending in December; for special periods, three months after the end of the tax year.
Penalties for Noncompliance
In the case of transfer pricing, there are no specific penalties; however, the Tax Code establishes, in Article 137, a fine of 25% of the tax due for a tax violation when it is proven that the taxpayer or withholding agent has failed to pay or remit the taxes that are required by law to be paid or passed on.
