Tax advantages of obtaining credits for companies:

Regional Tax Law team

Deductibility of interest in Central America

Financing for a business is one of the most important pillars for its growth. Entities can be financed through capital from their shareholders, which generates returns through dividends, or by requesting loans from banking and financial institutions or third parties, such as Fintech entities. In the case of loans, the returns generated are interest, which is a cost for the companies.

In the case of the capital contributed by the shareholders, this is not returned except by a capital reduction or dissolution of the entity. Dividends paid to the entity are not tax deductible. In the case of interest, these generally do generate a tax advantage as they are deductible and the investor is guaranteed the return of the capital delivered as credit in accordance with the agreed term. However, it is relevant to consider the requirements and limitations that may be generated for the deductibility of interest in the jurisdictions in which they operate. The tax treatment of interest in Central American jurisdictions is set out below.


In the case of Guatemala, unlike dividends which generate a 5% withholding tax, interest in general has a withholding tax rate of 10%, since it is considered capital income, whose line of business is not to grant loans.

The law that regulates income tax establishes that interest derived from financial instruments, credit openings, issuance of debt securities, financial leasing, among others, will be deductible. In order for this interest to be deductible, it must be related to the production of income or conservation of the producing source.

However, the same regulation establishes limits with respect to the amount that can be deducted. Likewise, the tax treatment is different if the loan comes from abroad than if it is a loan granted in Guatemala.

In the case of loans granted in Guatemala, the amount of interest cannot exceed the following formula:

Maximum interest rate of the YM X 3 (Average total net assets of the taxpayer).

The interest rate on credits or loans in quetzales (local currency) cannot exceed the maximum annual simple rate determined by the Monetary Board for tax purposes, which is published twice a year.

In the case of loans from abroad, interest will not be deductible unless the credit contract is made with banking or financial entities, registered for the intermediation activity in their jurisdiction.

In this case, the interest rate on loans in foreign currency may not exceed the following formula:

For both formulas, the average total net assets will be the division of the net assets at the end of the previous year with the total net assets at the end of the current year, both values presented in the annual income tax return of each definitive liquidation period.

Finally, pursuant to interest payments under loans granted by non-residents, the legislation establishes the obligation to withhold 10% on the amount of interest paid. However, this is not applicable to interest on loans granted by banking and financial institutions to entities duly authorized and regulated in the countries of origin. Therefore, in the case of loans granted by non-residents, interest is subject to withholding and is not deductible unless it is granted by banking or financial institutions.

El Salvador

In El Salvador the treatment and deductibility of interest will depend on the type of financing, such as financing granted by a local financial system operator or a non-regulated third party, which will be established in section 2.1.4.

General rules

The rules that we can generally apply to any type of financing are as follows:

Taxable and Salvadoran source income, non-subject income and non-taxable income.

Interest is considered as income obtained in El Salvador and, consequently, taxed because it is of Salvadoran source.1 The law excludes certain taxpayers, which are not subject to payment of Income Tax, such as the State of El Salvador, municipalities and public law and public utility corporations and foundations previously qualified by the General Tax Directorate (DGII).2

As for interests, these will not be taxed3 if they come from credits granted abroad by international organizations; agencies or development institutions of foreign governments; foreign governments; and corporations or foundations of public utility domiciled abroad qualified by the BCR.

Deductibility of interest

In general, interest paid or incurred, as the case may be, is deductible from the income obtained by companies, as long as the loan has been invested in a source that generates taxable income.4 For the deductibility of such expense to be possible, it is important to consider that the cost or cat related to an income subject to withholding is not deductible, when the payment has been made and the obligation to withhold and pay the withheld tax has not been complied with.5

Cases of nondeductibility of interest

The law also provides that interest computed on capital or profits invested in the business is not deductible.6 Interest is also not deductible to the extent that the asset to which it relates does not produce taxable income. When the term “interest” is applied to allocations or payments made to holders of preferred stock and they actually constitute dividends, or represent distribution of profits, such interest is not deductible.

Likewise, it is ruled that interest will not be deductible from income tax in the following cases7: 

The withholding of ISR or the Tax on the Transfer of Movable Goods and the Rendering of Services (called VAT) has not been made.
The lender or provider is a domiciled related party, and the latter has not declared them as taxable income in the fiscal year or tax period of their accrual.
It exceeds the result of applying to the loans or credits, the average lending interest rate8 on credits plus four additional points and the lender is a related party or is domiciled in a tax haven.
Thin capitalization rule. The lender is a related party or is domiciled in a tax haven and the indebtedness exceeds the result of multiplying by three times the value of the average equity or stockholders’ equity of the borrowing taxpayer9. This rule is not applicable to entities supervised by the SSF, nor to savings and loan cooperative societies and their federations.
Income tax withholding and VAT self-rebatement rates

In the case of Value Added Tax, it must be considered that, if the payment is made to persons who are not taxpayers of this tax, the entity must issue an invoice of excluded taxpayer, charging the corresponding VAT to itself. Likewise, when the borrower taxpayer is also classified as a large taxpayer by the DGII, one percent of the interest paid must be withheld from the creditors domiciled in El Salvador as an advance payment of VAT. This does not apply when the creditor is also a large taxpayer.16

Specific rule: double taxation agreement between El Salvador and Spain

In addition to what is indicated in section 2.1, the provisions of the “Agreement between the Republic of El Salvador and the Kingdom of Spain for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion in Income and Wealth Tax Matters” (CDI), which is the only one El Salvador has signed to date, must be considered. Article 11, paragraph 2 of the Convention, regulates that, when the interest is also taxed in the Contracting State, but, if the beneficial owner of the interest is a resident of the other Contracting State, the tax thus levied may not exceed 10% of the gross amount of the interest.



Interest paid or accrued on amounts owed by the taxpayer, provided that the debts on which the interest is paid have been contracted to obtain income, will be deductible from its gross income.17 Additionally, the law establishes that for an expense to be recognized as deductible, the other general requirements must be met, such as: i. That it is necessary for the generation of income; ii. It must have been paid or incurred in the period; iii. It must be accounted for; and iv. That it is proven. Therefore, it is important to ensure that the interest expense complies with the above requirements.

Among the limitations for the deductibility of interest, it should be considered that the law establishes that interest on capital invested or loaned in commercial companies by the owners or their relatives, partners or shareholders will not be deductible.18 In this case, there is no distinction between whether the shareholders or owners of the companies are residents or non-residents. Additionally, it could be understood that when the Income Tax Law refers to the owners or their relatives, partners or shareholders of the taxpayer it is referring to “related parties”.

In the case of interest on commercial operations, bonds, securities, or any other type of obligation paid to related entities that are not resident or domiciled in Honduras are not deductible.19

Interest on commercial operations, bonds, securities or other types of obligations, obtained from Honduran source by non-residents or non-domiciled persons in the country will be subject to a withholding tax of 10%, the tax caused will be paid to the Treasury within 10 days of the month following the month in which the withholding was made.


In Nicaragua, financial expenses are deductible from the Annual Income Tax provided that they are incurred, general, necessary and normal expenses to produce the taxable income and to maintain its existence and maintenance, and must be registered and supported by the corresponding receipts.20 Additionally, the legislation states that the following tax requirements must be met for the deductibility of expenses: a. Accounting records must be made within the fiscal period. However, when expenses incurred and not paid have been recorded, the withholding must be made at the time of payment: b. The supporting vouchers must incorporate the name of the taxpayer and its Unique Taxpayer Registration Number or identification; c. Payment and disbursement supports; d. Apply the withholdings of law and issue the withholding certificate, declare them and deliver them in accordance with the law.

It is important to mention that, in practice, the Tax Administration usually rejects the costs/expenses as long as the linkage of the loan with the generation of taxable income is not demonstrated, therefore, it is important to mention in the loan contract the purpose for which the funds will be used.

Similar to other legislations in the region, Nicaraguan legislation establishes a maximum interest deduction limit:

“Interest caused or paid in the fiscal period for debts contracted to generate taxable income from economic activities, will be deductible up to the amount resulting from applying the average active interest rate of the bank, as of the date of obtaining the loan, if fixed, and as of the date of each payment if variable. This limitation does not include loans made by financial institutions regulated or not by the competent authorities. Financial institutions subject or not to the supervision and oversight of the competent authority are exempted from this provision”.

Finally, for withholding purposes, it is important to mention that interest on loans granted by non-regulated entities will be subject to a 15% withholding of capital income. In the case of regulated and supervised Nicaraguan financial institutions, capital income generated by loans is not subject to withholding.

In the case of foreign financial institutions, they are subject to a 15% withholding on capital income received. Foreign Banks with Investment Grade have a special regulation, since they are subject to a 10% withholding; it should be noted that the Ministry of Finance and Public Credit publishes a list of financial institutions that are exempt from this 10% withholding.

Withholdings must be applied, declared and paid by the company at the time of making the interest payment, this is an indispensable requirement for the deductibility of the financial expense. Any withholding omitted implies that the company will be jointly and severally liable before the Tax Administration.

Costa Rica

In accordance with the Income Tax Law, the financial expense is deductible as long as it is linked to the generation of taxable income. However, through Law No. 9635 of December 03, 2018, called “Law for the Strengthening of Public Finances” (hereinafter “the Law”) an anti-abuse rule known as thin capitalization rule was introduced in Costa Rica, which aims to limit the deductions of non-bank interest that taxpayers include as an expense when making the calculation to cancel the income tax. From this, it is clear that the intention of the legislator with the inclusion of such rule is to prevent taxpayers from incurring in over-indebtedness and thus reduce their taxable income.

Accordingly, Article 9 bis of the Income Tax Law establishes a maximum deductibility for net interest expenses of 20% of the income before interest, taxes, depreciation and amortization (Uaiida) for each tax period. For this purpose, net interest expense is defined as the excess of interest expense over financial income. It is important to note that the Law established a transitional provision with a gradual process of the limit, as follows:















In this regard, the rule states that:

“Article 9 bis- Limitation on deduction of non-bank interest (…).

Net interest expenses in excess of the twenty percent (20%) allowed in the tax period, according to this provision, may be deducted in successive tax periods and until such difference is exhausted, provided that the limit indicated in the first paragraph of this article is complied with in each tax period. In these cases, the taxpayer is obliged to prove the veracity and atinence of these net interest expenses, both accounting and documentary, whatever the fiscal year in which they originated and independently of the ordinary statute of limitations of said period. (…)”.

As can be seen, the rule does NOT limit the period of time to deduct the financial expense. That is to say, the taxpayer may always use such financial expense in the future, without any time limitation, unlike what happens in the case of the deductibility of losses of past periods, which is limited to a term of 3 periods. In other words, in the case of limited interest, the taxpayer may use it until the balance is exhausted, which is why the tax reconciliation at the end of each period is essential.

Thus, at the time of preparing the tax reconciliation, the Company must record each year the financial expense that cannot be deducted, fully identified, in order to be able to deduct it in a subsequent period.

However, when the financing comes from abroad, the Law establishes the duty of withholding tax on remittances abroad, with a general rate of 15% and reduced rates in case of agreements to avoid double taxation or particular situation of the creditor.