Written by: María Lizeth Prado
General information on the purpose and scope of the Law
On November 15, 2022, it has been published in The Gazette Official Daily No. 214, Law No. 1137, Special Law for the Change of Legal Regime of Non-Profit Organizations, which has the following objectives: 1. To establish special conditions and procedures for the change of the mercantile legal regime of 29 Non-Profit Organizations (hereinafter “NPOs”) to recipient 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 allow this type of operation, since NPOs may not allocate their assets to objectives and purposes other than those for which they were created, and on the other hand, they may not distribute among their members dividends, profits, financial or material remainder from donations, contributions or surpluses of any nature obtained in accordance with their objectives and purposes (Law No. 1115, General Law for Regulation and Control of Non-Profit Organizations, Article 35, Prohibitions on Non-Profit Organizations, paragraphs 6 and 3, respectively).
A change of legal regime implies a change in the regulatory framework that has been applicable to the entity, since it not only changes its nature from “not-for-profit” 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 Legal Regime
To make the change of regime and formalize the transfer of its assets, it is important to consider 3 stages that will allow to achieve the purpose of the law and give continuity to the operation of the entity, among them:
- Planning stage
The planning stage should have the following objectives: a. Identify the legal and financial status of the assets, liabilities, and equity to be transferred; b. Determine an action plan with progress milestones to identify 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 to follow up on the plan, in the case of the first one, and to resolve and/or authorize the issues that require a critical definition, in the case of the second one.
- Execution of the Transfer
After the planning stage comes the execution stage, where the change of legal regime will be made effective through the formalization of the legal documents and the corresponding accounting record. At this stage, it is important to consider 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.
To prepare the supporting documentation, it must be clear about the type of assets and liabilities that the NPO has on and off the balance sheet, the administrative or judicial processes that it has and the commitments or reporting or notification obligations agreed in favor of third parties, due to their contracts or alliances with suppliers, funders, donors, or allies.
At this stage, the review and validation by 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 Closing and Post-Transfer
The last stage will be the closing of the NPO and the cancellation of its registration with the different 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 liability is 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 the litigation rights in the case of judicial processes that are pending of 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, it must start the process of closing and cancellation of the registration of the NPO before the Department of Registration and Control in MIGOB, DGI, MITRAB, INSS, Mayor’s Office and other entities where the NPO is registered.
Parallel to this, in the post-transfer stage, the recipient 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 overlooked that each entity, due to the nature of its operations, business lines and corporate group, will have its own particularities that should be estimated when defining 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 aforementioned Law. To this end, a multidisciplinary team that guides and advises each part of the process will be a crucial element for the success of the operation.