invertir en Guatemala Strategic Tax and Legal Elections for Investing in Guatemala

Strategic Tax and Legal Elections for Investing in Guatemala

Byron Martínez

CEO and Lead Tax and Legal Partner, Deloitte Guatemala

As in any jurisdiction, strategic tax and legal elections in Guatemala should be made at the planning phase of the project in order to procure optimal results in the operational stage.

HoldCo Jurisdiction and Type of Local Entity

Guatemala taxation is based on territorial principle and the country has no tax treaty network at all. Furthermore, the jurisdiction(s) for shareholding the investment in Guatemala could be elected based solely on investor home jurisdiction considerations, since Guatemala treat all jurisdictions the same.

The significant local tax attributes and elections are the same for branches and subsidiaries as well as for the different types of domestic legal entities and then the vehicle used locally is normally elected based on investor home jurisdiction considerations.

Foreign investors looking for local per se corporations use the stock corporation (Sociedad Anónima –SA-), and those intending to have a local entity eligible to be treated as transparent in their home jurisdiction use the limited liability company (Sociedad de Responsabilidad Limitada –SRL-) or the Limited Partnership by Shares (Sociedad en Comandita por Acciones –SCA-).

Significant Income Tax Election

Evaluation and election for the more convenient between the net income based 25% Corporate Income Tax vs. the gross revenues based 7% simplified Income Tax is the backbone of the local tax profile of the Guatemala branch or subsidiary. Solidarity tax –ISO- of 1% annual on the higher of total assets or total revenues works as alternative minimum tax for taxpayers electing from the net basis that are allowed to credit ISO to Income Tax or vice-versa.

Value Added Tax –VAT-

Guatemala imposes VAT at a universal rate of 12% on imports, domestic transfers of goods, leases and services. Exports of goods and services are exempt. VAT credit refund is available for exporters only.

As a result, exporters of goods and services end up accumulating VAT credits because

they support input VAT with no output VAT. Then, cash flow projection and management becomes crucial for any exporting project that need to relay on the VAT credit refund regimes in place for exporters.

Those projects oriented to local market need to plan on their working capital needs considering the expected behavior of their input and output VAT.

Tax Incentives

Very few economic activities are provided with tax incentives: a) garment and textile exporters, both manufacturers and drawback, b) exporters of services related to information and communication technologies, offered by call centers or contact centers, software development, and digital content development, c) free zonebased manufacturing, trading and service companies and d) energy project related to renewable sources.

Main tax benefits granted include up to 10-year income tax exemption, and some exemptions

Cash Repatriation

Finally, some features in the local corporate and tax laws become relevant for cash repatriation.

The year-end balance of retained earnings in the statutory books is the ceiling to the ability of a local entity to pay out dividends that are subject to 5% dividend tax falling on both resident and nonresident shareholders.

Whereas the corporate law categorizes the loss of more than the 60% of the paid in capital as a corporate dissolution cause, the tax law includes a poorly worded anti-thin capitalization rule limiting the interest tax deduction to the interest rate prevailing in the local banking system applied to 3-times (sic) the average total assets of the tax payer in the respective fiscal year. These norms frame the debt / equity structure that can be defined for the local entity.