Important Capital Gains Tax Considerations for Nicaragua

It has been almost 8 years since the Ley de Concertación Tributaria, or LCT for its acronym in Spanish was approved by the Nicaraguan legislative body.

Since then there have been changes that have modified the various articles of the national tax law. The most substantial changes made to the law were put in approved just last year, 2019.

Today we want to discuss the treatment that the LCT stipulates should be given to capital gains.

Definition – What are Capital Gains?

The updated national tax law modified from the previous tax legislation how income tax was classified. Now the law stipulates that there are 3 classifications of income that is taxable, we refer to:

1. 1. 1. Work income;
      2. Business income;
      3. Capital income and Capital Gains and Losses.

The third classification of Capital income and Capital Gains and Losses is what interests us today for the purposes of this article but mind you it is a very extensive and somewhat confusing part of Nicaraguan tax law. This is due to the fact that, we are discussing income that is the result of very specific uncommon situations.

What do I mean? Well I mean for example income that is generated from:

1. 1. 1. Sale of real property;
      2. Sale of moveable property;
      3. Rental income;
      4. Licensing fees;
      5. Royalties;
      6. Dividend income; and
      7. Etc.

Even though all of these types of situations technically fall under the category of Capital income and Capital Gains and Losses, there are certain rules that need to be observed and special considerations that need to be taken into account when accounting for any tax liabilities for these types of income.

Additionally, with the tax reforms that were passed during 2019 significant changes were implemented that greatly changed last year’s tax declaration in comparison to years prior.

We don’t want to do anything too complicated toady, so we are going to focus on the Sale of Moveable Property.

Tax Considerations for when Selling Moveable Property

When selling of moveable property, such as an equipment, tools, etc., there will either be a Capital Gain or a Capital Loss, what is the difference?

The difference is that if accounting wise you were to sell a piece of equipment at a sales price that was more than its current value on your accounting then there is a taxable gain, but if the sales value was less this would then constitute a loss.

I know that may not make much sense, but remember if you buy office equipment for $10,000 that amount is registered on your accounting books, but as time passes depreciation begins to reduce value of the equipment based on a set of generally accepted accounting principles, so after a year the office equipment that you bought on your books has had about 20% of its value already depreciated, or about -$2,000.

Now, if someone wanted to buy the equipment and was willing to pay $9,000 for it, well that would mean that you now have a taxable gain of $1,000, because he paid more for the equipment than what its “perceived” value was.

So, the question now is if there is a gain, what tax liabilities will I have?

Now this last question is not so simple, because the Ley de Concertación Tributaria presents various ways to answer that question and we can only limit ourselves to saying… it depends.

For example, one of the possible tax liabilities can be calculated by simply withholding 15% capital gains tax on a taxable base of $1,000 – which is the difference between the value of the office equipment on the accounting books verses the amount it was sold for.

On the other hand, the Ley de Concertación Tributaria also mentions another method for calculating the tax with the supposition that if the taxpayer selling the item cannot support the costs and expenses related to the office equipment, then the 15% capital gains tax can be levied on 60% of the sales amount for the office equipment.

How does both situations work out? Well they would look something like this:

The difference between one and the other is significant. Therefore, prior to arranging any transactions related to:

1. 1. 1. Sale of real property;
      2. Sale of moveable property;
      3. Rental income;
      4. Licensing fees;
      5. Royalties;
      6. Dividend income; and
      7. Etc.

It is recommendable to discuss this with a tax advisor, in this manner you can either save money or better manage your budget and cashflow in accordance to your businesses’ needs.