What should my organization take into account for the regime change of an NPO in Nicaragua?

By: María Lizeth Prado

General information on the purpose and scope of the Law

On November 15, 2022, Law No. 1137, Special Law for the Change of Legal Regime of Non-Profit Organizations was published in La Gaceta – Official Gazette No. 214, which has the following objectives: 1. To establish special conditions and procedures for the change of the mercantile legal regime of 29 Non-Profit Associations (hereinafter “NPOs”) to receiving mercantile entities; 2. To authorize the transfer of the patrimony, assets and obligations of the NPOs to the mercantile entities created under the laws of the Republic of Nicaragua, entities that will be successors without solution of continuity of the NPOs, and; 3. To cancel the legal personalities or the registration of the referred NPOs within a fatal term of 90 days, counted as of the entry into force of the law.

The Law in reference has a “special” character as it is applicable to the listed NPOs that operate in the microfinance sector and that in one way or another, their operations are included within the supervisory framework of the National Microfinance Commission. In other words, only these NPOs may proceed with the change of regime within the framework of this Law.

The Law establishes special conditions considering that the ordinary regulatory framework applicable to NPOs does not permit this type of operation, inasmuch as NPOs may not use their assets for objectives and purposes other than those for which they were constituted, and on the other hand, they may not distribute dividends, profits, financial or material remainder from donations, contributions or surpluses of any nature obtained in accordance with their objectives and purposes among their members (Law No. 1115, General Regulation Law of Microfinance). 1115, General Law for the Regulation and Control of Non-Profit Organizations, Article 35 Nonprofit Organizations Prohibitions, paragraphs 6 and 3, respectively).

A change of legal regime implies a change of the regulatory framework that has been applicable to the entity since it not only modifies its nature from “nonprofit” to “for profit”, but also the authority in charge of its regulation and supervision, and the tax regime that will be applicable to it due to its economic activity and the profits generated within the framework of that activity.

Change of regime

In order to carry out the change of regime and formalize the transfer of its assets, it is important to consider 3 stages that will allow to achieve the object of the law and give continuity to the operation of the entity, among them:

  • Planning stage

The planning stage must have the following objectives: a. Identify the legal and financial status of the assets, liabilities and equity subject to the transfer; b. Determine an action plan with progress milestones to identify the critical activities that must be completed prior to the transfer, considering the operation, its assets, liabilities and stakeholders: regulators, funders, donors, suppliers, personnel, strategic allies, among others. In addition to the action plan, it will be important to establish an execution instance and a resolution instance, which will make it possible to follow up on the plan, in the case of the former, and to resolve and/or authorize the issues that require some critical definition, in the case of the latter.

  • Execution of the Handover

After the planning stage comes the execution stage, where the change of regime will be made effective through the formalization of the legal documents and the corresponding accounting record. At this stage, it is important to take into account the figure that will be established for the formalization: donation, transfer of assets and liabilities, assignment. Some similar figures are called “transformation” or “merger by absorption”, however, transformation is not a figure adopted by the Nicaraguan regime and a merger is not applicable due to the legal nature of the NPO, since the provisions that the Code of Commerce establishes for mergers proceed only when 2 or more companies of a mercantile nature merge.

In order to prepare the supporting documentation, the type of assets and liabilities that the NPO has on and off the balance sheet, the administrative or judicial processes it has and the reporting or notification commitments or obligations agreed upon in favor of third parties, due to its contracts or alliances with suppliers, funders, donors or allies, must be clearly stated.

At this stage, the review and validation of a duly authorized auditor or public accountant based on international accounting standards is of vital importance for the certification of the NPO’s closing balance sheet and the proper accounting recording of the transfer of assets, liabilities and equity in the receiving entity, taking into account the accounting regulations applicable to the receiving entity, in the case of a microfinance institution regulated by CONAMI or financial companies regulated by the SIBOIF.

  • NPO Closure and Post-Transfer

The last stage will be the closing of the NPO and the deregistration of the NPO with the various State institutions where the NPO is registered. To initiate this stage, it will be important to have completed the procedures related to the substitution of the employer, in the event that the labor liabilities are the object of the transfer, to have processed and obtained updated certificates of compliance, legal representation, among others, issued by MIGOB, to have closed bank accounts and assigned litigation rights in the case of legal proceedings pending resolution, and to have processed all the corresponding requirements for the transfer of real estate (cadastral certificates, municipal solvency), vehicles, licenses, among others.

Once the above points have been confirmed and validated, the process of closing and deregistering the NPO must be initiated before the Department of Registration and Control in MIGOB, DGI, MITRAB, INSS, the Mayor’s Office and other entities where the NPO is registered.

Parallel to this, in the post-transfer stage, the receiving entity must initiate the corresponding registration processes to register the change of ownership of the real estate before the competent Public Registry, change of ownership of the vehicle fleets before the National Transit, movement due to change of Employer before the INSS, among others, depending on the assets and liabilities that were the object of the transfer.

It should not be lost of sight that each entity, due to the nature of its operations, business lines, corporate group in which it is, will have its particularities that should be taken into account for the definition of its plan, considering that the objective will be the continuity of the business and the change of regime within the framework of the provisions of the referred Law. For this purpose, a multidisciplinary team that guides and advises each part of the process will be a crucial element for the success of the operation.

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