Treatment of capital gains in Central America

Regional Tax Team

Concept and background:

Capital gains are those that are generated by activities outside the taxpayers’ line of business. That is to say, they do not come from their line of business or usual activity. Capital gains occur when as a result of a monetary operation, there is a difference between the amount paid for an asset or right and the amount at which that asset or right is sold; or when the taxpayer receives for any reason any good or right that increases its equity without coming from its productive activity.

This usually occurs with objects subject to capital gains, whose value increases as time goes by; and as a consequence when sold or transferred onerously, these are transferred at a higher price than the one at which they were acquired. The principle behind this is that the taxpayer obtained an increase to the amount initially invested, thus producing taxable income.

This tax has a functional equivalent in several jurisdictions, taking a similar denomination, but fulfilling the same objective. In jurisdictions with an Anglo-Saxon tradition it is called “Capital gains tax”, in other Latin American jurisdictions it is called “Income tax”, etc.

Some jurisdictions treat capital gains tax and capital income tax differently. As will be discussed throughout this article, which seeks to provide a basis for understanding the treatment of capital gains in the region.

Capital gains in the region

Guatemala

It is important to differentiate capital gains from capital income, as these are different in nature. Capital gains consist of capital gains from the disposition or transfer of assets, while capital income is derived from the economic exploitation of real or personal property.

Capital gains tax is generated when a gain is obtained from the transfer of assets or rights, regardless of the concept of such transfer. This is provided that the taxpayer’s line of business is not trading with such goods or rights.  The law also regulates the possibility of obtaining a capital loss derived from such transfers, which may be offset in the future for up to two years.

The tax rate on all capital gains generated either by real or personal property is 10%.

The taxable base for the calculation of the gain is the sale price of the assets or rights less the cost of the asset recorded in the accounting books.

Finally, the management of this tax in Guatemala has the particularity that it is paid directly by the taxpayer who receives the capital gain. It is not subject to withholding. Based on the principle that the buyer has no notion of what the capital gain is, the information is only available to the person who is receiving it. 

El Salvador

In El Salvador there is no capital gain tax specifically, but within the Income Tax there is a differentiated rate for capital gain, which is similar, and which is applied in the following cases:

Real estate and furniture: The gain obtained by a natural or juridical person who is not habitually engaged in the purchase and sale, swap or other form of negotiations on goods, movable or immovable, constitutes capital gain and shall be taxed according to the following rules:

    1. The capital gain or loss for the case of the aforementioned transactions shall be determined by deducting from the value of the transaction, the basic cost of the property, the amount of the improvements made to preserve its value and that of the expenses necessary to carry out the transaction. When the value of the transaction is greater than the deductions, there will be a capital gain. If the deductions are greater than the value of the transaction, there will be a capital loss.
    2. Pursuant to Article 42 of the Income Tax Law, the tax payable on the net capital gain will be the equivalent of ten percent (10%) of such gains, except when the acquisition of the asset subject to capital gain was acquired within the following twelve months, in which case the net capital gain must be calculated as ordinary income, being attached to the Income Tax return of the respective tax year, and submitting the form for calculating the capital gain.
    3. In case the loss exceeds the gain, the balance may be used within the following five years against future capital gains, provided that it is declared in the form provided by the Tax Administration for such purpose.
    4. The liquidation of extraordinary assets referred to in the Banking Law must be taxed as ordinary income in the same tax year of its realization. The same treatment will have the assets realized by Insurance Companies, Official Credit Institutions and Non-Banking Financial Intermediaries.
    5. The basic cost of movable and immovable property will be determined in the event that it is acquired for valuable consideration by deducting from the acquisition cost the depreciations that have been made and admitted in accordance with the law.
    6. The basic cost of goods acquired by donation or inheritance shall be the basic cost of the donor or testator.

Honduras

Capital gains obtained by individuals or legal entities and domiciled in Honduras, shall pay the single rate of ten percent (10%), reason why they are not subject to the progressive rate established in Article 22 of the Income Tax Law.

Capital Gains are those resulting from the transfer, assignment, purchase-sale or other form of negotiation of goods or rights carried out by individuals or legal entities, whose usual line of business is not to trade with such goods or rights.

Capital gains obtained by non-residents will be taxed with a 4% withholding calculated on the value of the transaction. Article 14 of Decree 113-2011 designates purchasers as withholding agents. The tax must be declared and paid within the first 10 working days of the following month in which the withholding was made.

Capital Gains obtained by a resident will be subject to a 10% rate. The resident taxpayer must file an annual Capital Gain return no later than April 30 of the following year in which the gain was obtained.

The tax must be paid within the first 10 days of the following month in which the gain was obtained by means of an Official Payment Receipt.

Nicaragua

In accordance with Law No. 822 “Ley de Concertación Tributaria”, capital gains and losses are the variations in the value of the taxpayers’ assets, as a consequence of the alienation of goods, assignment or transfer of rights. Likewise, capital gains are those coming from games, bets, donations, inheritances and legacies, and any other similar income.

In this sense, the current Nicaraguan legislation regulates three scenarios in which the generating event of the Income Tax on Capital Gains and Losses occurs:

    1. At the moment in which the transfer or alienation of the assets, goods or assignment of rights of the taxpayer takes place, as well as at the moment in which the contributions for incorporation or capital increase take place.
    2. In the case of capital gains with economic links to Nicaraguan source income, the generating event shall be when the income is recorded, when it enters Nicaraguan territory or when it is deposited in resident financial entities (whichever occurs first).
    3. In the case of capital gains to be integrated as income from economic activities, the generating event shall be when the income is originated or received.

In order to determine whether a legal act generated a taxable capital gain, it is necessary to observe the rules for the determination of the taxable base. The law makes a distinction between the taxable income applicable to gratuitous transfers and onerous disposals:

    • At the time of the transfer or disposal of the assets, property or assignment of rights of the taxpayer, as well as at the time of the contributions due to incorporation or capital increase.
    • In the case of capital gains with economic links to Nicaraguan source income, the generating event shall be when the income is recorded, when it enters Nicaraguan territory or when it is deposited in resident financial entities (whichever occurs first).
    • In the case of capital gains to be integrated as income from economic activities, the generating event shall be when the income is originated or received.

In order to determine whether a legal act generated a taxable capital gain, it is necessary to observe the rules for the determination of the taxable base. The law makes a distinction between the taxable income applicable to gratuitous transfers and onerous disposals:

    • Transfers free of charge: In those cases where the transfer is free of charge, the capital gain will correspond to the total value of the transfer at the market price, deducting only the expenses inherent to the transfer.
    • Transfers or disposals for valuable consideration: The taxable amount will be the difference between the transfer value and the acquisition cost.

For such purposes, the acquisition value must be understood as the total amount paid for the acquisition, including the cost of investments and improvements made in the acquired assets and the expenses inherent to the acquisition. On the other hand, the transfer value will be the amount received by the transferor or disposer, provided that it is not lower than the market value, in which case the latter prevails. However, in the case of property subject to registration before a public office, the valuation will be made taking the sale price stipulated in the public deed or the value of the cadastral appraisal, always giving priority to the higher value.

    • It is important to clarify that Nicaraguan legislation establishes that all transactions of goods, transfers of goods and rights, and the rendering of services, are presumed to be made at their normal market value. However, the Ley de Concertación Tributaria does not determine a precise procedure to calculate the market value in the different transactions.

Finally, Article 87 of Law No. 822 “Ley de Concertación Tributaria” regulates the rate applicable to the Income Tax on Capital Gains and Losses:

    1. 15% for residents and non-residents, including trusts.
    2. 30% for transactions with tax havens; and
    3. In the case of transfers of property subject to registration before a public office, the following definitive withholding rates apply, depending on the value of the property disposed of from 1% to 7%.

In the case of Income Tax on Capital Gains and Losses, the legislation determines that this is paid through definitive withholdings before the Tax Administration; therefore, those taxpayers appointed as withholding agents will have the obligation to apply the withholdings, declare them and pay them before the Tax Administration.

Costa Rica

In accordance with the Income Tax Law, capital gains from Costa Rican sources are subject to profit tax or capital gains tax.  Profits tax applies in the following cases:

    1. If the capital gain is obtained as part of the taxpayer’s usual activity.
    2. If the asset is subject to the taxpayer’s lucrative activity.
    3. The depreciation of the asset was considered a deductible expense for income tax purposes. Habituality is to be understood as the activity to which a person or company is dedicated with a commercial purpose, in a public and continuous or frequent manner.

On the other hand, the capital gain will be taxed with the capital gains tax when net profits are obtained from the sale or disposal of a capital asset, and its sale price is higher than its acquisition value. Capital assets are those that are not intended for sale in the taxpayer’s ordinary course of business.

The capital gain will be subject to a 15% capital gains tax rate. The general rule is that the taxable amount is the difference between the transfer value and the acquisition value, the definition of which may vary according to the nature of the asset.  The same regulation provides for a reduced rate of 2.25% on the price, provided that the following conditions are met:

    • That the good or right has been acquired prior to July 1, 2019;
    • That the income is obtained for being the first sale of that right or good.

In case the good or right located in Costa Rica is sold by a non-domiciled person, the capital gain will be taxed at a rate of 2.5% of the agreed consideration.

 

Art. 84, Ley de Actualización Tributaria.

Art. 92, Ley de Actualización Tributaria.

Art. 89, Ley de Actualización Tributaria.

Art. 96, Ley de Actualización Tributaria (Tax Update Law).

Art. 14 Income Tax Law (Ley de Impuesto sobre la Renta, LISR)