Transactions between related companies and transfer pricing regulation in Nicaragua

By: Jean Paul Aguirre

Transfer pricing is an extremely important regulation for any company, especially for those companies that are part of a corporate group with presence in different countries.

Transfer prices refer to those amounts fixed between related parties for the transfer of tangible and intangible goods or services. The guiding principle is the “Free Competition Principle”, which means that the prices agreed between related parties cannot differ from those agreed by independent companies in similar operations and circumstances.

The Nicaraguan legal system regulates transfer prices in the Tax Agreement Law, being applicable in those operations carried out between resident and non-resident related parties, including companies operating under the special free zone regime. There are several criteria by means of which it is determined whether they are related companies, such as common shareholding; voting rights; decision-making capacity over the companies; kinship relationships; and business association.

In the current Nicaraguan market, transfers and rendering of services between related companies are very common, especially those transactions carried out between regional business groups, therefore, transfer pricing regulations are applicable to this type of operations. It is important that all taxpayers that fall within the scope of application described above have an updated transfer pricing study with the related parties with which they have recurring operations.

It is important to highlight that the General Revenue Directorate (DGI) may request at any time to the taxpayers their updated transfer pricing study and all the supporting documents related to the transactions with their related companies; in case of not complying with the requirement, the taxpayer will be exposed to penalties and tax assessments.