In this article, we will review the general provisions regarding the technique for the determination of Income Tax (IR) on capital gains and losses in accordance with the Tax Agreement Law (“LCT“) and its Regulations (“RLCT“), applicable to taxpayers not exempted by Art. 77 LCT, with respect to non-exempt income established in Art. 79 LCT or special legal provisions.
Art. 3 LCT establishes that IR is levied on Nicaraguan source income from capital gains. Art. 15 LCT defines capital gains and losses as “the variations in the value of the taxpayer’s assets and liabilities, as a consequence of the alienation of assets, or assignment or transfer of rights. Likewise, capital gains are those coming from games, bets, donations, inheritances and legacies, and any other similar income”. For its part, Art. 16 LCT regulates the economic ties of income from capital gains and losses from Nicaraguan sources, establishing a list of this type of income comprising two assumptions:
- Those obtained in Nicaragua, by residents and non-residents.
- Those accrued or received outside the national territory by residents, provided they come from assets and capital of Nicaraguan origin.
On the other hand, Art. 75 LCT provides the rules to be considered to determine the moment in which the taxable event for capital gains and losses tax takes place, establishing, as a rule, that it occurs when the transfer or disposal of assets or assignment of rights takes place.
When the alienation occurs when the incorporation of an entity or increase of its capital, it is provided that the moment in which the generating event occurs will be when the contribution is made.
The taxable amount will be, in accordance with Art. 82 LCT for the case of transfers or disposals for valuable consideration or free of charge, the difference between the transfer value and its acquisition cost. To determine the acquisition cost, Art. 83 LCT establishes that it includes the amount paid, the cost of investments and improvements, as well as the expenses inherent to the acquisition, deducting the amortization or depreciation installments applied. The determined cost will be updated according to the variations of the exchange rate with respect to the US dollar. The transfer value will be the amount received by the transferor or disposer if it is not less than the market value or the cadastral value in the case of property subject to registration before a public office. When the transfer is free of charge, Art. 84 LCT provides that the capital gain will correspond to the total value of the transfer at the market price, deducting only the transfer expenses.
In the event of capital losses, resident taxpayers or taxpayers with a permanent establishment may request the Tax Administration to offset them against profits received up to the following three tax periods, subject to the rules of articles 85 and 86 LCT.
As a general rule, the tax rate, i.e., the tax rate, will be 15% in accordance with Art. 87 LCT.
The income tax to be paid will be the amount resulting from applying the tax rate to the taxable base (Art. 88 LCT) by means of definitive withholdings (Art. 89 LCT) with the withholding agent filing a declaration and payment within the fifth day of the following calendar month (Art. 67 RLCT).
Considering the legal provisions, adequate management of the capital gains tax comprises the following 7 steps:
- Determine whether the alienation, transfer, conveyance, or contribution has generated a capital gain income.
- In case there is a capital gain income, determine whether the income generated can be considered as a Nicaraguan source.
- In case the capital gain income is determined to be of Nicaraguan source, confirm that there are no subjective, objective exemptions or special rules to be considered according to the nature of the transaction that generated the gain.
- Confirm the date on which the generating event has taken place.
- Determine the taxable base according to the rules indicated, based on the supporting documentation of the transaction.
- Calculate the tax payable by applying the tax rate to the taxable base.
- Proceed with the declaration and payment of the tax according to the calculation made.
In this way, taxpayers can implement the tax technique by complying with their formal obligations. In the case of transactions between related parties, it should be considered that it may be necessary to also have a transfer pricing study. Otherwise, it may be convenient to have independent appraisals to support the operation.