Legal framework for Direct Foreign Investment in Guatemala

For Guatemala, Foreign Direct Investment (FDI) constitutes one of the main engines of its economy, allowing to carry out projects whose implementation would be less likely if it were not for this method of investment. Everyone is aware that the world is going through an economic crisis that has started to take its toll and according to predictions, the worst is yet to come. In the case of Guatemala, FDI increased by almost 20% in 2021. One of the reasons for this increase was a transaction made that year in which a foreign company invested around 2.2 billion dollars to acquire full control of a company in the telecommunications sector. Likewise, according to some figures gathered, by October of this year the FDI goal for 2022 had already been reached, which had been set at US$1.5 billion, which according to the Ministry of Economy, would suggest that the year could end with US$2 billion in FDI.

In this respect, Guatemala has a favorable legal framework to attract Foreign Direct Investment since the State has entered into a large number of Bilateral Investment Treaties (BIT) and Multilateral Investment Treaties (MIT) with several states and

Luis Pedro del Valle Partner

regional international organizations. According to information published by the Ministry of Economy, Guatemala has 19 BITs in force with other countries and 9 MITs in force with provisions on the protection of Foreign Direct Investment. These treaties contemplate reciprocal commitments acquired by the signatory States in matters of investment received from nationals of other States and incorporate international standards regarding protection for Foreign Direct Investment that result in security and certainty for investors.

Likewise, Guatemala has local legislation in matters of Foreign Direct Investment, specifically the Foreign Investment Law, Decree 9-98 and other laws that although they do not regulate only in this matter, they have the aim of fostering it, such as the Organic Law of the Free Zone of Industry and Commerce

“Santo Tomás de Castilla” (ZOLIC), Decree 22-73; Law for the Promotion and Development of the export and nearshoring activity, Decree 29-89; Law of Free Zones, Decree 65-89; Law of free currency trading, Decree 94-2000; Law of incentives for the development of renewable energy projects, Decree 52-2003; and Law of Alliances for the development of economic infrastructure, Decree 162010, the latter being the one that promotes the so called Public-Private Alliances. Likewise, there is the Law for the promotion of Foreign Capital Investment that recently came into force. This Law aims to “(…) promoting foreign capital investment projects carried out by investors through the establishment of a special treatment for the investment of foreign capital in Guatemala.” It also states that the Law will be applied to investors who are individual or legal entities. Similarly, among other things, it stipulates that investors will be able to reinvest capital under the special treatment to invest foreign capital established by the law, when the investment is made in new projects that correspond to an economic activity different from the one that originated the resources to be reinvested.

The aforementioned regulations, together with the BITs and MITs position Guatemala as a favorable jurisdiction for Foreign Direct Investment, offering protection guarantees to foreign investors who decide to bet on Guatemala. Nevertheless, there is great room for improvement so that the country can attract even more investors. Such areas for improvement include: Unification of registry criteria, an independent and integrated justice system in accordance with the law which is also efficient, fast and effective. The fight against corruption, organized crime and urban delinquency. Respect for property rights and protection of property owners and the solution to social conflict, especially in multiethnic and multilingual sectors.

Based on the above, Guatemala’s legal framework offers foreign investors a favorable environment to make investments in the national territory. Proof of this is that, despite the disadvantages that problems of political, social or compliance nature and those derived from the application of the law by government authorities might represent, Guatemala has remained as one of the main and most attractive destinations in the isthmus to capture Foreign Direct Investment.

Planning on starting a business in Guatemala?

Aspects to take into consideration

Starting a business can be an undoubted challenge if the legal, economic and social conditions of the place where the investment is made or the business started up are not known. In order to improve the chances of success when doing business, these conditions must be analyzed and the related legal aspects learned. Some elements that must be paid attention to are listed below:

First, it is important to know the commercial regulations to define the most suitable legal vehicle for the operation of the business. In Guatemala, mercantile societies are the most commonly used vehicles to conduct business. Nonetheless, commercial regulations contemplate diverse ways to start businesses, from the registration as individual merchants, to the signing of contracts of distributorship or representation and / or the entering of participation agreements.

Jorge Luis Rodas Partner

In the case of commercial entities, there are several types, some of which are stockholders and others are not. All commercial companies have their own legal personality different from that of their partners. The partnership agreement must be executed in a public document before a Notary Public and they are created with the participation of at least 2 persons. The entity most commonly used for business development is the limited company (corporation), which has its capital divided and represented by shares.

Second, every business is subject to tax obligations. Once the legal vehicle has been defined, careful attention must be paid to tax obligations. The success of the business will depend on the tax planning that includes transfer pricing analysis, double taxation agreements and the compliance with obligations, mainly in the payment of income taxes (ISR, acronym in Spanish), Value Added Tax (IVA, acronym in Spanish) and Solidarity Tax (ISO, acronym in Spanish).

Third, it must be defined whether or not a labor force will be needed. An appropriate human resources strategy starts by considering the number of personnel to be had, the form of hiring and the work regulations. This is important for regulatory compliance issues related to the registration of employment contracts, employer obligations, registration of work regulations (+10 employees) and social security affiliation (+3 employees).

Fourth, considering the market or industry of the business in order to define the regulatory aspects derived from the possible application for permits, licenses and / or registrations. The main economic activities with the highest growth in Guatemala are manufacturing, transportation and communication, international trade, power generation and / or agriculture industries, which can be heavily regulated by different authorities.

Lastly, it is worth considering that there are favorable conditions to invest and open businesses in Guatemala. It is the country that contributes the most in economic performance in the Central American region. In addition, the strategic geography offers logistical access by both oceans and proximity to major logistics centers. Furthermore, its proximity to some of the world’s largest economies, the United States and Mexico, plays a fundamental role. Guatemala stands out for its macroeconomic stability and solid financial system and it also must be recognized that the State continually seeks to stimulate and promote local and foreign investment by strengthening the rule of law and the regulations related to commercial activity.

A new dispatch model in air logistics

Air transport of goods has had its share of complexities such as tariffs, route changes and shortages of planes in recent years, worrying aspects mainly for entrepreneurs who have been affected by not being able to dispatch their export goods to their destinations due to the itinerary and flight routes changes that the main cargo agencies have carried out.

These behaviors from airlines are explained by their executives. It is because there is a chain phenomenon that begins with a demand increase due to the new order that logistics has had: Nearshoring, plane shortages, emerging markets, mainly through e-commerce and the service of transport of products with a higher added value.

According to The International Air Transport Association (IATA)

Jorge Gómez Chief Executive Officer

global air cargo markets are once again showing “healthy and sustained” figures and air cargo demand during the first half of 2022 was 2.2% above levels prior to the first half of 2019. IATA recognizes this as a good performance considering the “continuous supply chain constraints” that in our view we are facing due to an inflationary economic crisis and threats of recession in the world’s major economies.

Nonetheless, there are actions that may begin to be considered, one of them being the attention that the different public and private economic players should identify in order to capture the interest of airlines in Guatemala, as a result providing competitiveness.

As part of the stakeholders, we have maintained the integral modernization current through continuous improvement projects for the infrastructure, equipment and processes with the aim of providing appropriate facilities, streamlining cargo and safety operations, as well as keeping costs down so that importers / exporters perform their activities competitively. In addition to the interest and participation to support projects in accordance to the Trade Facilitation agreement, among others.

We are pleased to be the pioneers of the new air dispatch model, established by the Customs System in their Institutional Strategic Plan 2021-2025. It is expected to comprehensively modernize aspects related to the interoperability with different actors, thus simplifying the air cargo process. This transformation of the customs IT system will allow to operate cargo manifests, risk analyses, declarations, dispatches, among others, in a modern way. Likewise, part of the efforts of the Customs Administration is to establish various agreements that allow the execution of differentiated and valueadded actions, such as the implementation of the e–AWB or electronic air way-bill. The above reference is made as a token of the achievements that Guatemala can achieve when leadership is oriented with a country vision.

For our part, we will continue contributing as a facilitating entity and assume as our own the modernization actions that air logistics require in the face of such a dynamic environment.

Werner Ovalle Ramírez

Intendant of Guatemalan Customs

Agreement between the Government of the United States of America and the Republic of Guatemala in relation to the Mutual Assistance between their Customs Administrations

In recent years, globalization, digital transformation and other global trends have caused an increase in international trade that has coincided with the need to strengthen customs or create new customs controls in order to increase security in cases of illegal trafficking of goods, compliance with regulations, fraud and customs contraband, as well as other non-tariff control challenges. On the other hand and simultaneously with the effective control on goods, Customs Administrations are also urged to give importance to the speed of procedures and customs correspondence in order not to hinder trade.

In accordance with the above, a strategy of transformation, strengthening and positioning has been conducted for

SAT in customs matters at an institutional level through our comprehensive customs modernization. This modernization process promotes the adoption and adaptation of international best practices, the use of guidelines and compendiums of the World Customs Organization such as the SAFE Framework of Standards, that contains three pillars, one of which is called “Pillar 1: Customs-to-Customs Relationship” which promotes cooperation, assistance and coordination between Customs Administrations and on the other hand the World Trade Organization’s Agreement on Trade Facilitation (TFA) which in its Article 12 states what refers to “customs cooperation,” mainly in matters of information exchange, assistance for capacity strengthening and other forms of cooperation.

According to statistics and foreign trade indicators, Guatemala’s main trading partner is the US, representing 35% of total imports and 53% of exports in 2021. Current communications and coordination between the Competent Authorities of commercially linked countries is a common practice and not alien to the Republic of Guatemala, since it is a necessity derived from the trade, migratory and socioeconomic relationships of the countries that are intrinsically linked.

Therefore, the recently signed Customs Agreement between Guatemala and the US mark a milestone in the bilateral trade and customs relationships between both countries. This instrument will allow to strengthen coordination, information exchange, trade facilitation, collaboration to mitigate risks and to work for secure trade as well as mutual assistance between both Customs Administrations. It also considers that the parties are able give each other advice and technical assistance to reduce risks, simplify and streamline customs procedures, strengthen personnel training and increase the use of technologies. Some of the main issues contained in the Agreement are the following:

• Exchange of information derived from the operations of foreign trade that will allow both Administrations the proper follow-up of cases and strengthening action.

• Transference of international best practices, development of coordinated projects, including the interchange of experts in certain matters of customs interest in order to create or strengthen capacities.

• Provide the legal framework for Customs to be able to implement projects such as the Container Security Initiative (CSI) which will elevate and position Guatemala’s ports as a logistics HUB due to the safety standards to be adopted. redeem a series of measures to simplify Guatemalan exports. Signing the Agreement after 6 years of processing, positions Guatemala within a more competitive scenario in the commercial environment and a stronger SAT through its customs modernization and frontal fight against customs fraud and contraband. The extensive background of cooperation and collaboration between the Customs Administrations of Guatemala and the US has been reaffirmed and consolidated.

The Ministry of Foreign Affairs of the Republic of Guatemala has implemented a strategy of economic and commercial diplomacy in order to promote the country through diplomatic missions of Guatemala abroad.

Carrying out a transformation and renewal of the foreign policy of the country, the diplomatic representations have been used to promote foreign trade, the attraction of direct foreign investment and position Guatemala as a major tourist destination.

To this effect, through the

Shirley Dennise Aguilar Barrera

Vice Minister of Foreign Affairs of the Republic of Guatemala

signing of an Inter-Institutional Cooperation Agreement between the Ministry of Foreign Affairs, the Ministry of Economy (MINECO, acronym in Spanish) and the Guatemalan Tourism Commission (INGUAT, acronym in Spanish) in September 2020, the Network of Commercial Counsellors was institutionalized, comprised of 21 commercial departments in 17 countries, located at the national diplomatic and consular representations in the following regions: North America (6), Latin America (5), Europe (5) and Asia (5). This is how the initiatives and actions that have been implemented in the Network of Commercial Counsellors meet the requirements of pillar number five of the General Government Policy, contained in the 2032 Katun’ Plan, referring to Guatemala’s international relations with the world and its proper leverage. In addition to good diplomatic relations, it is also sought to improve the order of international trade, tourism, foreign investment and the decent treatment of migrants.

In this sense, the Network of Commercial Counsellors is a tool that allows public and private institutions the rapprochement to the world, focusing on promoting the three pillars, trade, investment and tourism, with specific functions which are implemented in:

• Promoting the diversification of exports

• Pursuing and attracting foreign direct investment

• Fostering the development and promotion of multidestination itineraries

• Managing and attending to applications from interested sectors or companies for economiccommercial, investment and tourism aspects

• Aligning with national plans and export strategies, defining priority markets

• Managing and attending to applications for the admissibility of products and developing advisory guides to facilitate their entry into foreign markets, including local commercial legislation in force

• Identifying buyers and distributors of Guatemalan products

• Supporting market visit programs and / or trade missions, investment agendas and missions, familiarization and press travel, participation in fairs and promotional activities and other events related to the country’s foreign trade

• Organizing webinars to promote economiccommercial, investment attraction and tourism opportunities in the country.

All these actions are monitored through a board of measurable and quantifiable indicators that allows accounting for the effective functioning of the Network, in which the vocation of each country has been defined for the achievement of specific monthly and annual goals to be met by each Commercial Counsellor in order to measure its performance in the promotion of the three established pillars. In this way, the Ministry of Foreign Affairs, through the diplomatic representations and the Network of Commercial Counsellors, actively promote Guatemala’s international relations by carrying out multiple economic and commercial diplomacy actions which include the promotion of Guatemala with the new country brand. PROMOTING GUATEMALA