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Doing Business I. Main Economic Variables 1

II. Doing Business in Honduras 4

III. Legal System 15

IV. Tax Aspects 19

References 27

Contact 28 I. Main Economic Variables Doing Business Honduras I. Main economic variables

GDP growth GDP 2019: 25.1 mmdd (Annual percentage change, in real terms)

Position 2018 2019 2020e 2021e 106/ 189 in the :

3.7 2.7 -5.8 4.1

Macroeconomic Context (figures at the end of 2019)

Reference Unemployment GDP per capita Inflation Exchange Population FDI rate rate rate

2,556.12 15.74 4.08 4.11 24.63 9.8 0.84

Millions of Annual percentage Millions Billion Percent Percent USD/HNL dollars change of dollars people

Macroeconomic Context (figures at the end of 2019)

Fiscal balance, Primary Public debt, Current Trade balance, International International percentage of balance, percentage of account, percentage of reserves, reserves, millions GDP percentage of GDP percentage of GDP percentage of GDP of dollars GDP GDP

-2.5 -1.9 49.8 -0.65 -15.29 23.0 5,744

Balance, % Balance, % SHRFSP, % Balance, % Balance, % Balance, % Balance, USD Millions

2 Doing Business Honduras

The Ease of Doing Corruption Perception Competitivenes Business Index

(Doing Position Position Position 101/ 141 (WEF, 2019) 133 / 190 Bussiness, 146 / 180 (TI, 2019) in the world: in the world: 2020) in the world:

Foreign Trade (main sectors) Foreign Trade (main trading partners)

Exports Exports

Value Value Sector Participation Country Participation (Thousands of dollars) (Thousands of dollars)

Textiles 3.64 40.0% U.S 4.86 54.0%

Vegetable products 1.92 21.0% 0.58 6.4%

Machinery and equipment 0.71 7.9% 0.50 5.6%

Food and tobacco 0.57 6.3% Germany 0.46 5.1%

Animal and vegetable oils 0.46 5.2% 0.33 3.7%

Imports Imports

Machinery and equipment 1. 58 16.0% U.S 3.76 38.0%

Textiles 1.52 15.0% China 1.26 13.0%

Mineral products 1.22 12.0% El Salvador 0.78 7.9%

Chemical products 1.13 11.0% 0.73 7.4%

Food and tobacco 0.96 9.7% Mexico 0.72 7.3%

Source : World , International Monetary Fund (IMF), World Economic Forum (WEF), Transparency International (TI), International Intellectual Property Organization (WIPO), Intelligence Unit of (EIU), D.Econosignal and Atlas of Economic Complexity (MIT))

3 II. Doing Business in Honduras Doing Business Honduras

II. Doing Business in Honduras a) General profile Honduras, in the current commercial context, is a territory that presents several competitive advantages, but also certain challenges.

Economically, Honduras had the second highest GDP growth rate in in recent years, second only to . In the last three years, it grew by an average of 3.7%. However, at the per capita level, it ranks as the second to last country in the region, only after Nicaragua, with a GDP of USD 2,556 per inhabitant1.

Honduras has advantages for rapid growth and greater prosperity, as it has a strategic location, a growing industrial base, continuous efforts to diversify its exports, and a young population (65% of the population) and growing.

Honduras has the Sea to the north, El Salvador and the to the south, Nicaragua to the east, and Guatemala to the west , which represents a comparative advantage.

In 2019, the financial and manufacturing sectors contributed the most to Honduras' GDP with 18.2% and 18%, respectively, followed by agriculture, which contributed with 13% 2, demonstrating a greater diversification of its economic activities.

The most exported products are T-shirts, , and sweaters; The main destinations of its exports are the , Central America, and Germany3. Honduras has 11 trade agreements in force with countries such as the U.S, , South Korea and regions such as Central America and the , which gives it access to a market of approximately 1,139 million people4.

On the other hand, Honduras registers high levels of violence with more than 41 homicides per 100,000 inhabitants (2017); among the highest rates in the world.

1. Based on the . 2. of Honduras 3. Economic Complexity Observatory (2017) 4. Secretary of Economic Development, 2020. 5 Doing Business Honduras

b) Political Regime

Constitution

The Honduran Political Constitution of 1982 is the supreme law in Honduras and defines this country as a sovereign, rule of law, constituted as a free, democratic, and independent . The Constitution establishes that the republican, democratic, and representative form of government is exercised by three powers: the Legislative, the , and the Judicial.

Human rights, provided for both in the Constitution and in international treaties, should guide the actions of the government and individuals, while constituting a limit to their activity.

The Political Constitution was last updated in May 2005.

Powers of the Republic

The Executive Power has the general administration of State headed by the President, who lasts four years, and is elected by direct and universal vote. In addition to the president, the Executive Power is made up of the Secretaries of State.

The Legislative Power is made up of a of Deputies, and is in charge, among other things, of presenting and approving the bills.

Finally, the Judicial Branch is made up of the Supreme Court of Justice (the highest court of said branch), made up of fifteen magistrates, by other courts and tribunals.

Rule of Law

As there is a separation of powers, the recognition of human rights by the Honduran State and the system of checks and balances that balance and restrict the powers among themselves, all of the above, fundamentally contained in the Constitution, derives then that the rule of law is intimately intertwined with it.

All electoral acts and procedures are supervised by the Supreme Electoral Tribunal, which is autonomous and independent of the three branches of the Republic. The Supreme Court is made up of three Proprietary Magistrates and a , elected by the National Congress for a period of 5 years.

To guarantee the rights and freedoms recognized in the Constitution, there is the Institution of the National Commissioner for Human Rights. The Constitution guarantees and foreigners residing in the country the right to life inviolability , individual security, liberty, equality before the law, and property.

The reforms to the Constitution can be decreed by the National Congress, with two thirds of the votes of all its members.

6 Doing Business Honduras

c) Economic structure

GDP is the sum of all the goods and services that a country produces and the most important way of estimating the productive capacity of an economy. The three main economic sectors that make up Honduras's GDP are:

• Primary sector: agricultural activity, livestock, forestry, hunting, and fishing.

• Secondary sector: manufacturing industry, construction and production of energy, and water distribution.

• Tertiary sector: services, wholesale and consumption.

In Honduras, the tertiary sector is the largest component of GDP (63.6%), followed by the industrial sector (23.2%) and the primary (13.2%). Of the labor force, it is estimated that 30.5% is employed in agriculture, 19% in commerce and 13.5% in manufacturing, as a percentage of the Economically Active Population5.

Table 1 Sectoral Composition of GDP (Percentage contribution, at 2000 ) GDP 2019 Share of GDP,%

Total 100.0

Primary 13.2

Secondary 23.2

Manufacturing 18.0

Building 2.8

Electricity and water distribution 2.4

Tertiary 63.6

Financial intermediation 18.2

Communications 9.4

Wholesale and retail trade 8.9

Home ownership, real estate, and business activities 7.5

Public administration and defense, social security plans 4.6

Teaching services 4.3

Transportation and storage services 3.6

Hotels and restaurants 2.1

Other services 5.0

Source: BCH.

5. BCH, external sector accounts, 2019.

7 Doing Business Honduras

Manufacturing Industry Manufacturing is an important component of Honduras' GDP, which represented approximately 18% of total GDP during 2019.

In the manufacturing sector, the industries that generate the most added value are: • Food products, beverages, and tobacco: it is the most relevant part, contributing approximately 46% of the added value of the manufacturing industry. • The activities that continue in importance are the manufacture of textiles, leather, and footwear with 31%, and the manufacture of metal products, machinery and equipment with 7%.

One of the competitive advantages of Honduras is its proximity to the largest economy in the world: the United States, its main destination for exports with 36% of the total in 20196. In addition, it has a good geographical position for trade, since to the north it has access to the and to the south to the .

Graph 1 Manufacturing Industries (Value added by industry, percentage, 2019)

1% 1% ProductosFood Products, Alimenticios, Beverages, Bebidas y 1% Tabacoand Tobacco

7% ProductosTextile, Leather, Textiles, and Cuero Footwear y Calzado Products

3% Madera,Wood, Paper Papel and y sus its Productosproducts 6% ProductosChemicals, Químicos,Plastics, Plásticos y 3% Derivadosand Petroleum del Petróleo Products 46% MineralesNon-metallic no MineralsMetálicos

IndustriasBasic Metallic Metálicas Industries Básicas

FabricaciónManufacture de of Productos Metal Products, Metálicos, MaquinariaMachinery, andy Equipo Equipment

31% MueblesFurniture

OtrasOther IndustriasManufacturing Manufactureras Industries

Source : BCH.

8 Doing Business Honduras

Foreign currency entering the country Historically, exports of general merchandise for transformation and other goods, are the main source of foreign currency income to the country; however, have become the second source of foreign exchange for the country.

During 2019, remittances increased 13% over the previous year, maintaining a double-digit growth rate since 2017. This source of foreign exchange represents approximately 20% of GDP.

A little further behind are Foreign Direct Investment (FDI) and Tourism, which continue to show a constant growth trend after the 2009 crisis. It should be noted that FDI in 2019 fell sharply by 48%, compared to 2018, derived mainly from the net outflow of capital, decrease in reinvestments, and cancellation of loans in the manufacturing sector.

Graph 2 Main Sources of Dollars in Honduras (Millions of dollars) 10,000 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019p

ExportacionesExports TurismoTourism RemesasRemittance IEDFDI

Source : BCH.

9 Doing Business Honduras

Investment and Foreign Trade

Most of the income from Foreign Direct Investment (FDI) in the period 2015-2019 comes from :

• US - contributes 14.8% of the total

• Mexico - contributes 13.5%

• Panama - participates with 13.3%

The services sector was the one that captured the most FDI, mainly due to reinvestment of profits in the financial intermediation and insurance activity (31% of the total). Transportation, warehousing, and telecommunications companies rank second to receive 21% of total FDI, and thirdly to maquiladoras with 17% of FDI, in the period 2015-2019.

Table 2 Main Countries of Origin of FDI (Millions of dollars, accumulated 2015 - 2019)

Total U.S Mexico Panama

$12,966 $1,918 $1,745 $1,719 $1336

% of the total 14.8% 13.5% 13.3% 10.3%

Source : BCH

Table 3 Main Investment Sectors (Millions of dollars, accumulated 2015 - 2019)

Financial services Transport Maquila Manufacturing industry

$4,042 $2,733 $2,219 $1,638

31% 21% 17% 13%

* Retailer and wholesaler, as well as restaurants and hotels. Source: BCH

10 Doing Business Honduras

Monetary and Fscal Policy Fiscal policy is tied to the Fiscal Responsibility Law approved during 2016, which established a limit for the non-financial public sector deficit (SPNF), with a target of 1% of GDP for 2019. The legislation limits recurrent growth of spending at the nominal growth rate of GDP. The government has made great strides to contain the deficits of the Central Government and the SPNF, in line with the Fiscal Responsibility Law.

The exchange rate regime in the country is rigid; the legal currency in Honduras is Lempira, which has accumulated a 30% depreciation against the US dollar from 2010 to December 2019. During 2019, the exchange rate was, on average , at 24.7 Lempiras per US dollar6 .

Ease of Doing Business The Doing Business Report prepared by the World Bank measures the ease with which business can be done in Honduras, through various variables. Currently, Honduras is in position 133 out of 190 countries evaluated in the 2020 Edition, having a rating of 56.3 points (graph 3). In Central America, the country is only above and Nicaragua.

Graph 3 Honduras, the Sixth Best Business Environment in Central America (Position of various economies in the World Bank Doing Business report)

142 150 133 135 115 96 86 91 67 68 74 59 60 Belize Mexico Panama Colombia Honduras Nicaragua Guatemala El Salvador El Dominican Rep.

• The ranking classifies where each of these countries is located with respect to 190 economies (the closer to 1 the better and vice versa). Source: Doing Business, World Bank, 2020.

6. BCH, Monetary Sector Accounts, Monthly Exchange Rate Series, 2020.

11 Doing Business Honduras

As can be seen in the following graph, the category in which the country is best qualified is that of obtaining credits; followed by the opening of a business, which includes the number of steps new entrepreneurs need to complete, the average time it takes, and the minimum cost and capital required. On the contrary, the item in which it is worst evaluated is insolvency resolution.

Graph 4 Doing Business in Honduras (Ranking of Honduras in the world -general and variable index- and points qualification)

Ranking 133 170 158 138 101 25 120 167 130 154 143 Honduras

Qualification

80.0 71.4 62.3 64.3 59.5 56.3 56.2 49.9 42.0 44.2 32.6 Total Taxpayment Start a business a Start Obtainingcredit Buildingpermits Investor protection Investor Cross-border trade Accessto electricity Contractsexecution Property registration Property Insolvencyresolution

* The ranking classifies where Honduras is located compared to 190 other countries (the closer to 1 the better and vice versa). The score is a score between 1 and 100 points, where the ease of each of the variables is measured (the closer to 100 the better and vice versa).

Source: Doing Business, World Bank, 2020.

12 Doing Business Honduras

Current Economy

Graph 5 GDP Growth and Contribution of the Components of Aggregate Demand (Percentage of GDP)

8% 8%

6% 6%

4% 4%

2% 2%

0% 0%

-2% -2%

-4% -4%

PrivateConsumo consumption Pirvado PublicConsumo consumption Público InvestmentInversión ExportacionesNet exports netas PIBGDP

Source : BCH

At the end of 2019, consumption (public and private) represented around 88% of GDP. For its part, investment contributed 19% of GDP, while the net balance of foreign trade relations (exports minus imports) is -7% of GDP.

GDP growth shows a clear downward trend since 2018, after four years of continuous growth. The estimated forecast for 2020 is a 5.8% drop in the economy, derived from the pandemic caused by the SARS-CoV-2 virus (Covid-19).

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Graph 6 Graph 7 BCH Begins Cycle of Rate Cuts Due to Lower Inflation Honduran Currency Maintains Constant Devaluation (Inflation and inflation target) (USD/HNL)

26 15.00 InflationInflación ((interanualinterannual %)%) 13.00 24 TPM 11.00 22

9.00 20 7.00 18 5.00 16 3.00

1.00 14 2005 2007 2009 2011 2013 2015 2017 2019 2005 2007 2009 2011 2013 2015 2017 2019

Source: : BCH. Source: : BCH.

The BCH maintained an unchanged stance since The exchange rate regime has been modified twice since 2004. At 2016; however, in January 2017 the rate increased by 0.25p.p. before that time the BCH opted for a fixed exchange rate regime, with the a possible rise in inflationary expectations. objective of promoting stability.

In 2011, the decision was reversed and it returned to a controlled In December 2019, the BCH decided to decrease the monetary policy floating regime. In 2018, the exchange rate registered interannual rate to 5.50 as a result of lower inflationary pressures, a historical depreciation of 3.18%, which is within the BCH target range, which balance of international reserves, and less dynamism in the 7 points to a nominal depreciation of around 3-4% per year, in performance of economic activity . support of the country's competitiveness 8 .

7. BCH, Monetary Program 2020-2021 8. (BCH).

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III. Legal System

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III. Legal system

a) Legal Persons

The current Commercial Code establishes the different modalities of constitution of a commercial entity in Honduras; The types of companies that are generally incorporated in Honduras are the Limited Liability Company and the Public Limited Company. The Limited Liability Company has a minimum of two partners and a maximum of twenty-five, with a minimum share capital of HNL 5,000.00 (Approx. USD 200.91); The Corporation has at least two partners and a minimum share capital of HNL 25,000.00 (Approx. USD 1,004.57).

The partners must appear before a Notary Public to authorize the deed of incorporation, which must be registered with the Public Registry of Commerce of the domicile of the company.

Main Commercial Companies

According to Article 384 of the Commercial Code, the registration of all merchants in the Chamber of Commerce and Industry (CCI) corresponding to the in which the new company will operate is mandatory, since without this registration, the Municipal Mayors will not authorize operation permits.

• Person who carries out the procedure: Businessman.

• Average Time: One business day.

• Procedures to perform

Present at the public service window: • Original deed of incorporation and copy. • Complete the registration form • Original ICC payment receipt and copy. • Copy of bank deposit of capital.

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Financial sector

National Commission of and Insurance (CNBS) It is in charge of authorizing, supervising, monitoring, and inspecting the constitution and operation of all banks, branches, and banking agencies that operate in the country, whether they are state or private entities, national or foreign, which usually dedicate themselves directly or indirectly, to the intermediation of activities between the supply and demand of financial resources or the provision of other banking services. It also supervises securities, insurance, and financial warehouse institutions.

Agreements and Treaties

Among the agreements and treaties in force in Honduras that establish the elimination of customs duties, are:

. Free Trade Agreement between Mexico and Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua.

. Free Trade Agreement between Central America and the ; which establishes total elimination of customs duties.

. Free Trade Agreement between the United States (CAFTA-DR).

. Free Trade Agreement between Honduras and Taiwan.

. Free Trade Agreement between Central America and Panama.

. Free Trade Agreement between Chile and Costa Rica, Nicaragua, El Salvador, Guatemala, Honduras.

. Free Trade Agreement between Central America and the European Union.

. Free Trade Agreement between Korea and Central America.

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Foreign Investment Incentives

The Law for the Promotion and Protection of Investments was approved by Decree 51-2011. The objective of this law is to facilitate and guarantee the promotion of growth and development of national and foreign investment; Some tax benefits of this law may be enjoyed by natural or legal persons who execute new projects in activities where they carry out their business or in the region where they carry out their activity and who are declared of priority interest. Benefits:

• They will be able to amortize the preoperative expenses for a period of 5 years.

• Accelerated depreciation benefits, being able to use the method of decreasing balances or double decreasing balances, with prior authorization from the Tax Administration.

• When new projects or expansions for more than 2 million dollars are carried out, there may be a partial exemption from income tax in accordance with the following terms:

• 50% of the amount invested in the case of projects declared priority without considering activities or regions.

• 60% in the case of projects that develop activities of priority interest or in regions of priority interest.

• 70% in the case of projects that meet all three requirements.

These benefits must be formally requested before the Secretary of Finance and will be granted only if the applicant does not have to pay taxes in other countries on the income obtained from a Honduran source.

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IV. Fiscal Aspects

22 IV. Fiscal Aspects

1. General 2.4 Solidarity Contribution: In accordance with Decree 278- 2013 Chapter V, legal entities, except those included in the The Honduran tax system is based on the principle of territorial Special Export and Tourism Regimes, without prejudice to the income; The tax doctrine establishes two types of tax obligations provisions of Article 22 of the Income Tax Law, will pay a a) formal tax obligation and b) material tax obligation. The formal solidarity contribution of 5% to be applied to the excess of the tax obligation is intended to present those documents that give net taxable income greater than one million Lempiras (L. validity to the tax act, among them, the presentation of 1,000,000 Approx. USD 40182.62), from the 2014 fiscal period declarations, reports, etc., and the material tax obligation is onwards. nothing other than the payment of the declarations that by law taxpayers are required to file. 2.5 Anti-Evasion Measures Law: Natural or legal persons who during two non-prescribed fiscal periods have had consecutive 2. Direct Taxes or alternate operation losses and who in the last period have had gross income equal to or greater than one hundred million Lempiras (Approx. USD $ 401.8262.00) annually, will be subject 2.1 Income Tax (ISR): Taxes any income from capital, labor, or a to payment of an advance of 1% for Income Tax, which will be combination of both, within the principle of territorial income. calculated on gross income. The rate for a legal person is 25%, which is calculated on the taxable base; the taxable base constitutes the gross income minus the deductions allowed by the Law. The tax is paid in advance in 3 equal quarterly installments, which due dates are June 30, 30 and December 31, the last payment is made with the presentation of the declaration on April 30 of each year.

2.2 Minimum Income Tax : Natural or legal persons who have obtained gross income of more than one billion Lempiras in the previous fiscal period must pay 1% of said income when the application of the rates indicated in paragraphs a) or b) of Article 22 of the Law of the Income Tax results less than 1% of the declared gross income. The rate will be reduced to 0.5% for some sectors.

2.3 Tax on Net Assets: or Annual ID Tax, applicable on the total net assets of legal entities domiciled in Honduras, applying a rate of 1% on the taxable base, which is the difference that results from the value of the assets that appear in the taxpayer's balance sheet minus deductions allowed by law.

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3. Withholding Tax to Suppliers 4.2 Withholding on Dividends or Profit Sharing. In accordance with article 25 of the Income Tax Law, legal entities must proceed to retain 10% on dividends decreed, paid, or made available to 3.1 Withholding of 1% Income Tax (Agreement 217-2010) shareholders. applies to all taxpayers with sales greater than L. 15,000,000.00 (Approx. USD 602,739.30), the withholding and payment of this Accounts receivable from shareholders older than 100 days are advance to the ISR must be made by natural and legal persons considered advance dividends. who are not subject to the payment on accounts regime, for the sale of goods or provision of services provided to them. The tax base must be gross sales minus returns or services determined by the Tax Administration.

3.2 Withholding of Professional Fees and Services (Article 50 ISR) Tax levied on income from professional fees, allowances, commissions, perks, bonuses, and remuneration for technical services paid to companies or resident natural persons. The tax rate is 12.5% applied on the amounts paid for the aforementioned concepts, it does not apply if the person or company that receives these values are subject to the account payment system.

3.3 Withholding to Non-residents (Article 5 ISR). The gross income obtained from a Honduran source by non-resident or non-domiciled natural and legal persons must pay the tax through the withholding system. The applicable withholdings are 10% and 25% depending on the type of service being contracted.

The person responsible for making these withholdings is the natural or legal person resident in Honduras who makes the payments, without the right to any kind of deduction.

3.4 Withholding Sales Tax (Agreement 215-2010) The withholding of the sales tax in the commercial companies that according to the resolution of the Tax Administration have classified as large taxpayers must withhold and pay the Sales Tax withheld to the natural or legal persons that provide any or all of the following services: a) Freight transportation by any means b) Cleaning, and fumigation service c) Printing or screen printing service d) Investigation and security services. e) Rental of commercial premises, machinery, or equipment.

4. Withholding Taxes to Employees and Partners

4.1 Withholding at Source (Article 22 ISR) Tax levied on the income of employees and individuals. This withholding applies if these people received income during the year greater than L. 165,482.06 (Approx. USD 6651.01). The tax rate ranges from 15% to 25%. For this calculation, L. 40,000.00 (Approx. USD 1,634) must be considered as deductibles for medical expenses, without the need to present supporting documentation.

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5. Indirect Taxes 6.2 Personal Tax: It is a tax that falls on the annual income that natural persons receive within each municipality, whether or not 5.1 Sales Tax (ISV) they have a domicile therein. This tax is paid in favor of the . Of Lempiras Until Lempiras Fee per thousand The general tax rate is 15% on the value of the tax base of imports or of the sale of goods and services subject to it. 1.00 5,000.00 1.50 Additionally, 18% will be applied in the case of beer, carbonated 5,001.00 10,000.00 2.00 waters, and soft drinks. This tax will be applied to the sale price at the distributor stage, including the value of the production 10,001.00 20,000.00 2.50 and consumption tax at the import stage, and at the national production level. 20,001.00 30,000.00 3.00 30,001.00 50,000.00 3.50 Taxable base for the calculation of sales tax will be : 50,001.00 75,000.00 3.75 • In the sale of goods and provision of services: it will be the 75,001.00 100,000.00 4.00 value of the good or service, whether in cash or credit, excluding direct costs of ordinary or extraordinary financing. 100,001.00 150,000.00 5.00 • The tax base to settle the tax in the case of imported goods 150,001.00 or more 5.25 will be the CIF value of said good, increased with the value of the customs duties, selective consumption taxes, specific taxes, and other import charges. Declaration and Payment • In the use or consumption for own benefit, self-provision of The filing of the declaration and the respective tax payment will services and gifts, the tax base will be the commercial value be simultaneous; it will be made during the first three months of of the good or service. The payment date is at the time of the year and will be calculated according to the income of the nationalization of the good, or liquidation and payment of immediate previous year. the corresponding policy. 7. Employer Contributions For the national producer, the payment will be made within the first ten (10) calendar days of the month following that in which 7.1 Private Contribution Regime (RAP) The employer the sales were made. contribution is 1.5% applied to total wages and 1.5% paid by employees via retention of monthly wages. 6. Municipal Taxes

6.1 Tax on Industry and Commerce : All taxpayers who start a 7.2 Honduran Social Security Institute. Registration is business must declare an income estimate corresponding to mandatory from the first employee hired. Monthly, the employer the first quarter of operations, which will serve as the basis for and the worker contribute social security equivalent to 8.5% on calculating the tax to be paid monthly during the start year. the part of the employer and 5% on the part of the employee. Said declaration will be made at the time of requesting the business operation permit. They will be taxed according to their 7.3 National Institute for Professional Training (INFOP) annual production volumes, income, or sales as follows: Companies employing five or more workers will contribute From Lempiras To Lempiras Fee per thousand monthly to the Institute 1% of the amount of wages and salaries 0 500,000.00 0.30 earned. The monthly fee for this Institute is 1% paid by the employer, on the total return. It must be paid up to the 30th of 500,001.00 10,000,000.00 0.40 each month plus 10 business days as grace period. When not 10,000,001.00 20,000,000.00 0.30 paid in that period, you will be charged with 10% of the total to be 20,000,001.00 30,000,000.00 0.20 paid. 30,000,001.00 onwards 0.15

Declaration and Payment: Taxpayers subject to said tax must submit in January of each year a Sworn Declaration of their income obtained from their economic activities from the previous calendar year.

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8. Other Provisions 9. Special Regimes

8.1 Population Security Law: Special contribution for In Honduras there are different tax benefit regimes, among financial transactions pro-population security. the most important are the Free Zones Regime (ZOLI) and the Temporary Import Regime (RIT). The rate applied to the Special Tax for Financial Transactions will be as follows: Two Lempiras (L. 2.00) per thousand or per The Free Zones Regime (Decree 356-1976) grants exemption thousand fraction. from almost all taxes, except the capital gains tax and the obligation to act as a withholding agent. 8.2 Transfer Pricing Regulation Law Commercial and financial operations that are carried out The Temporary Import Regime (Decree 37-1984) grants between linked or related parties are regulated, valued in exemption from net asset tax, solidarity contribution, sales tax accordance with the principle of free or arm's length at the time of importation and payment of customs duties. competition. To enjoy these benefits, a series of procedures must be The scope of application covers any operation that is carried carried out and certain obligations must be fulfilled. out between domiciled natural or legal persons or residents Additionally, these exemptions have a term of twelve years. related or linked to non-resident or non-domiciled natural or legal persons and those covered by special regimes that enjoy 10. Other Laws with Tax Incentives tax benefits. In addition to those recognized as Special Export Regimes, in Taxpayers of Income Tax who are related parties and who Honduras there are other laws that bring tax benefits for carry out commercial and financial operations with each other companies from other sectors or industries: are obliged to determine, for tax purposes, their income, costs, and deductions, applying for said operations and • Tourism Promotion Law. operating results, prices and margins of profit that would have • Law for the Promotion of Electric Power Generation with been used in comparable commercial and financial operations Renewable Resources. between independent parties. • Investment Promotion and Protection Law.

8.3 Billing Regime Regulations, other Tax Documents and 11. Income Management System (SAR) Tax Registry of Printers With the closure of the Executive Directorate of Income (DEI) The purpose of this regulation is to lay down the rules to according to Executive Decree PCM-083-2015, the Income which taxpayers are subject and to facilitate the procedure of Administration Service (SAR) is created according to Executive issuing Fiscal Documents and other activities related to the Decree PCM-084-2015 as a decentralized entity attached to control of said documents, incorporating all sectors of the the Presidency of the Republic, with functional, technical, country's economy. administrative, and national security autonomy, with its own legal personality, responsible for the tax administration, with The documents authorized by this regulation are: authority and competence at the national level and domiciled • Invoices in . • Pro Forma Invoice • Ticket • Receipt for Professional Fees • Purchase Ticket • Proof of Donation • Other Tax Receipts that the Tax Administration authorizes

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Doing Business Honduras

First Steps - (Soft Landing in Honduras)

There is a more in-depth brochure on these activities produced by Deloitte Honduras. However, for those companies looking to invest in Honduras, the most relevant steps to consider are the following:

Legal Fiscal

• Legal and corporate analysis of the characteristics of the • Determine the formal and material tax obligations that investment, to prepare a strategy. derive from the activities that will be carried out.

• Determine the type of company to be constituted or • Verify the operating structure of the company in order to incorporated. determine efficient operating alternatives from a fiscal point of view. • Review the documentation and requirements to proceed to the constitution of the companies. • Determine the feasibility of joining or enjoying the tax benefits established in Honduran law. • Preparation of the powers that will be granted to resident foreigners or local people for the constitution of the • The implementation of cross-border tax strategies for company, or to open the branch or other. investments, mergers, and business acquisitions; as well as local investments. • Elaboration of the bylaws.

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Accounting, Payroll, and Tax Compliance Expat Employees

• Prepare accounting records and financial statements at the • Address the tax implications that foreigners working in end of each fiscal period, in Spanish, that comply with local Honduras and Hondurans who have migrated to another regulations and in the functional currency. country could face.

• Prepare the reconciliation of income tax. • Analysis of the possible investments that the expatriate has in Honduras in order to visualize the treatment of the income • Prepare monthly tax returns and pay them on the dates obtained. stipulated by law.

• Preparation, presentation, and payment of annual tax returns and informative returns that apply to the company.

• Prepare the official payrolls respecting the local rules and submit monthly withholding declarations to employees, as well as the payment of the employer's fee.

• Declaration and payment of any license fee, rate, or contribution granted.

26 Doing Business Honduras

References

• Central Bank of Honduras (BCH), Annual Report 2018 https://www.bch.hn/download/memoria/memoria_anual_2018.pdf

• Central Bank of Honduras (BCH), External Sector Accounts, 2019.

• Central Bank of Honduras (BCH), Monetary Program 2020-2021 https://www.bch.hn/download/programa_monetario/programa_monetario_2020_2021.pdf

• Economic and Commercial Office of in Tegucigalpa, Economic and Commercial Report 2018, http://www.comercio.gob.es/tmpDocsCanalPais/FAA286803FC35EE27BB81801F3A23083.pdf

• International Monetary Fund, World Economic Outlook https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020

• National Statistics Institute, ENDESA 2011-2012 https://www.ine.gob.hn/publicaciones/endesa/Honduras-ENDESA-2011-2012.pdff

• Secretary of Economic Development https://sde.gob.hn/

• The Economist Intelligence Unit, Country Report 2019 http://www.eiu.com/FileHandler.ashx?issue_id=687639052&mode=pdf

• The Observatory of Economic Complexity https://oec.world/en/profile/country/hnd

• World Bank, Country Profile https://datos.bancomundial.org/pais/honduras

• World Bank, Total Population https://datos.bancomundial.org/indicador/SP.POP.TOTL?locations=HN

27 Doing Business Honduras

Contact

Carla Coghi Tel.: +(504) 2276 9500 Managing Partner Email: [email protected] Central America, Panama, and Dominican Republic

Rita María Silva Tax and Legal Partner

Ninoska Rivera Tax and Legal Partner

Carlos Valverde Legal Services Partner

Tomás Guardia Legal Services Partner

Rosa Morales Business Process Solutions Partner

28

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