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How to potentiate the foreign and domestic capital investment in Nicaragua

One of the topics where countries compete the most, particularly the ones that are in development or looking to overcome poverty, is in how to promote and channel the investment of foreign companies and countries, or companies already established locally in the economic environment and of opportunities that the country presents. Nicaragua is not left behind when trying to potentiate the foreign and domestic capital investment in the country.

Nicaragua has been competing with the rest of the countries of Central America and presenting different opportunities for investors in sectors like agribusiness, infrastructure, services, real estate, energy, transportation, etc. There have been significant achievements, which is evident in the country. The advantages of the country have been sold for its macroeconomic stability, geographic position, security, low costs, progress in basic road infrastructure, non-complex tax regime (yet), good record in public debt management and growth of gross domestic product (GDP); points that have put us on the radar of investors. Could we be better? Of course. Is there much to do? Undoubtedly.

If we check our reality we can see that we have learned some lessons; we have sold us again in the economic environment where we compete. However, that selling is still incipient; we’re still on the basic. If we do domestic tourism is easy to realize that we are not doing what we should. There is still a lot to do to sell our country.

That sale as a country has to be done in all the sceneries and with the tools that allow us to succeed. In law matters, Nicaragua has made important progress with laws and reforms to potentiate the investment and to ease the mobilization of capital that allows to finance major investments (capital market law, investment funds, trusts, public-private associations, investment societies, etc.). However, for projects where substantial financial resources are required (millions), our legislation doesn’t have a legal vehicle that allows the interaction of capital flow and tax regime.

For example, in the case that an investor would like to participate in big projects like the Granada-Managua Railroad, the Tumarín project, the coastal highway, energy projects that require funds to be developed; this investor has two options: a) Grants a loan and charges the interests. In such case the investor will only pay taxes for the interests that receives from the loan; where the loan is a liability and the interests a charge to the cash flow and to the profitability, which may not result attractive to the project managers; and b) That the investor puts capital in the project, in such way that their inputs are not debt.

In the case that the capital holder wants to be an investor, our tax legislation and regulation do not present clear and viable options for the investors.

To make the potential investors to “bring capital” in projects that the country wants to promote, it would be interesting to count with a clear regulation for the entities (societies) that will only be investors, in other words a “Entity Holder of Shares or Contributions” or “Holdings”, and that their dividend incomes (incomes that already paid taxes) have a “fixed and definitive” taxation without any major tax complication, since this kind of entities would put their capital in projects already established or to be established; or second, to create a figure like the “Private Capital Funds” that facilitates companies or people to provide their capital to the project managers without too many formalities or complex corporate structures.

Of the aforementioned options, there are examples and models already tested in other countries that has allowed them to manage capital for the development of their big projects (Private Capital Funds in Chile, the FIBRAS in Mexico, the ETVE of Spain), allowing to improve the technical and economic capacity of the same, since it’s not the same a creditor than an investor that assumes proportionally the risks and/or the success of the projects.

Carlos Téllez Páramo
Managing Partner
García & Bodán