Within the last decade, there has been a Nicaraguan sector that has stood out among all others: the Free Trade Zones.
These are territorial boundaries under the supervision of the General Customs Administration, which purpose is to promote investment and exports through the establishment and operation of different companies within the zone. These companies are dedicated to the production and exports of goods or services regulated by a tax and customs exemption system. For tax purposes, Free Trade Zones are considered to be outside national borders.
Economic Importance of Free Trade Zones
Free Trade Zones in Nicaragua are of national interest mainly due to the ample employment opportunities they provide, foreign investments, exports of both traditional and non-traditional products, maximization of our domestic trade, among other reasons. It is noteworthy that Free Trade Zones are leading employers in Nicaragua, both for formal or informal jobs.
At the same time, the following make Nicaragua an appealing destination for foreign investors looking to incorporate a company under the Free Zone system:
• Favorable business climate.
• Solid legal framework.
• Growing economy.
• One of the safest countries in the region.
• Preferential access to the most important markets in the world.
• Availability of a productive and qualified workforce at competitive prices.
The statements above confirm why Free Trade Zone exports totaled US$2,510 million in 2014, exceeding by 7.1% the US$ 2,342 million contribution to the country in 2013, according to official statistics from the Central Bank of Nicaragua. These numbers turn Free Trade Zones into the first exports sector in the country.
It should also be noted that Nicaragua has signed and ratified several international instruments with other States, thus fostering and diversifying trade among various nations with diverse tax and customs incentives. Some of these international agreements include:
*Source: National Free Trade Zone Commission of Nicaragua
Free Trade Zones Law in Nicaragua is regulated by Decree No. 46-91 issued on November 13, 1981. The current Decree has regulations: Rules of Industrial Exports Free Trade Zone Decree Number 50-2005, approved on August 8, 2005.
The process of forming and registering a Free Trade Zone is described in the aforesaid normative documents. At the same time, the National Free Trade Zone Commission was thereby created as a leading regulatory entity for Free Trade Zones in Nicaragua. This Commission oversees registration, operational permit issuance, project supervision, among others.
Legal Benefits and Incentives
Thanks to Decree 46-91 for Industrial Export Free Trade Zones, we have several tax incentives to attract companies interested in establishing operations for textile and garment industry exports, as well as manufacture and agro-industrial industries. Those who operate under such system enjoy the following benefits:
1) Exemption on payment of 100% of income taxes during the first ten years of operation.
2) Exemption on payment of taxes on transfers of real property, including taxes on capital gains.
3) Exemption on payment for incorporation, transformation, mergers, reform of a company, as well as on stamp duty.
4) Exemption on all consumption and customs taxes and duties related to imports of raw materials, materials, equipment, machinery, scaffold, parts or spare parts, molds, and accessories to enable the company to operate, as well as applicable taxes to the equipment needed for the installation and operation of the canteens, medical care, day care, recreation and any other type of goods that meet the needs of the personnel of the company.
5) Exemption of customs taxes on transportation equipment such as freight cars, passenger or service vehicles, or those used daily by the company.
6) Added Value Tax Exemption.
7) Full municipal tax exemption.
8) Full exemption of exports duty on manufactured products.
9) Tax exemption on local purchases.
Free Trade Zone Categories
There are over 160 companies currently operating throughout the country under the Free Trade Zone system. Based on the nature of their operations, Free Trade Zones may be classified as follows:
1) Operator Free Trade Zone: Private companies devoted to the administration of the industrial park where the Free Trade Zones are installed. These entities lease the industrial premises from the User Free Trade Zones. They may be private or public, but they are mostly private. The only industrial park owned by the government is “Las Mercedes” park, managed by the Free Trade Zone Corporation.
2) User Free Trade Zone: Companies performing any activities related to the production, storage, and exports of goods or services, as per the operation permit granted.
3) Administered Free Trade Zone: User companies that, by the nature of the production process, the origin of raw materials, or characteristics of the company, are authorized by the Free Trade Zone Commission to settle outside an industrial complex, such as: Client Call Centers of foreign companies, data processing and text/image digitalization, those for export purposes, administrative processes for third parties (outsourcing), as long as the service is exclusively an export product, and software development.
In order to apply to the Free Zone System, the interested party must send a letter to the Technical Department of the National Free Trade Zone Commission, requesting an Operation Permit. The following documents must be included with said letter:
1) Application Form.
2) Public Limited Company duly formed and registered, with a special single purpose, which will be devoted to operations under the Free Trade Zone system.
3) Project Feasibility Study (Executive Summary as detailed as possible).
4) Title Deed of the Property or Lease Contract with the Operator Free Trade Zone, as applicable.
5) General Administration Power of the Legal Representative, held by a lawyer, by the president of the company or the general manager, as well as their identification.
6) Polygonal and location drawings.
7) Environmental Management Permit or Administrative Authorization, as applicable, issued by the Environmental Quality Department of the Ministry of Environment and Natural Resources (MARENA).
8) Two (2) bank reference letters and two (2) commercial reference letters for the company partners.
9) Submit location drawing and facility and/or building layout drawings where the industry will be established.
10) Project support letter issued by the Office of the Mayor of the Municipality where the company will be established.
11) Proof of availability of basic services.
12) Certification and/or proof of request in process for the Opening License regarding health and occupational safety, issued by the Department of Health and Occupational Safety of the Ministry of Labor (MITRAB).
13) Proof of right of way issued by the Ministry of Transport.
14) Favorable opinion from the General Customs Office.
Once the complete documentation package has been received, the Technical Department must respond in no later than thirty (30) calendar days.
A five-hundred dollar-fee (US$500.00) must be paid to the National Free Trade Zone Commission for processing the application, as well as a security deposit of ten thousand dollars (US$ 10,000.00) for the operation permit.
XIX Free Trade Zone Conference of the Americas
On November 4 – 6, 2015, the XIX Free Trade Zone Conference of the Americas will be held in Managua with the purpose of promoting Free Trade Zone investment opportunities in Latin America.
The conference will consist of two days of lectures and exchanges covering a wide variety of topics, from business and industry innovation to opportunities offered by the Free Trade Zone sector for company and employment growth.
(XIX Free Zone Conference of the Americas).
At CENTRAL LAW we have a group of attorneys specialized in Foreign Investment and Free Trade Law. They advise our clients about the permits that are required for projects and the necessary information to provide optimal access to the markets in Central America, Panama, and the Dominican Republic, as well as others
Avil Ramírez Mayorga
CENTRAL LAW Nicaragua