I. Kind of Tax

Before the enactment and entry into force of Law No. 822, Law on Tax agreement (LCT for its acronym in Spanish), its Regulations and subsequent amendments, there was a unique way in which the income tax levied the revenue generated by a taxable person. However, with the LCT, new concepts were introduced like Capital Income and Capital Gains, which are different and have a different tax treatment than Labor Income Tax (perceived by workers or employees) and Income from Economic Activities Tax.

Article 15 of the LCT states that revenues or income generated by the sale of shares should be considered a Capital Gain.

“Art. 15 capital income and capital gains and losses.

II.Changes in the value of the assets of taxpayers, as a result of the transfer in any way of goods, or assignment or transfer of rights are considered capital gains and losses….”

This is moreover ratified by the provisions of Article 16, subsection B, paragraph 4 which states that the following are also considered as gains and losses from Nicaraguan source:

"4. Gains and capital losses from the sale, transfer or generally any way to dispose, transfer or acquire shares under any legal figure, where the percentage or direction or ownership of a corporation is changed on any legal entity, whether its corporations, trusts, investment funds, institutions and collectivities, or a permanent establishment of non-residents, when the transfer or acquisition occurs outside Nicaraguan territory;"

That is, that regardless of whether the purchase is not made in Nicaragua, it will continue to be considered Income from a Nicaraguan source, so the seller will be subject to capital gain.

In short, according to the LCT (Article 15), the sale of shares is considered to be a Capital Gain for the seller of the shares, as it represents a change in the assets (e.g. shares) as a result of the sale or transfer of rights contained in those shares.

II. Tax payment / Tax Technique

In conformity to Article 82 LCT, the taxable amount of capital gains derived from a sale of shares of Nicaraguan entities must be determined on onerous transfers by the difference between the transfer value and acquisition cost.

Article 87 paragraph 3 of the LCT establishes the applicable rate on capital gains made by residents and non-residents to be a fixed at 10% and in accordance with Article 89 these capital gains are payable through definitive withholdings made by the buyer and then paid to the Tax Administration, within 5 days of the subsequent month in which the gain was caused.

In the event that the taxpayer who receives Income from Capital Gains and capital losses whom was not withheld of the WHT tax Rate, must submit his statement to the tax authorities and simultaneously pay the tax debt self-assessed on a monthly basis, within the first five days business the following month. Such self-liquidation is definitive (Art. 69 Regulation LCT).

The above mentioned takes is particular importance in the event that the purchaser is a non-resident person or entity, in which case there is no legal mechanism for the Non-resident to withhold and pay the Tax to the Tax Administration. In this case, the Seller must pay the Tax Gain as indicated in the paragraph above.

The responsibility of creating the support documentation related to the transactions, prices, payments, taxes and withholdings as well as the custody of such documentation lies with the withholding agent as the applicable withholding should be paid to the tax authorities by it. The support documents may include any of the evidence admitted in tax matters. It is advisable to include contracts for acquisition of shares, share purchase agreements, appraisals, financial statements, tax returns, among others.