We are going to address a very interesting topic that has been the object of discussion—and also of administrative remedies filed by non-profit organizations—in Nicaragua; which is, the tax exemption that by nature the nonprofit organizations have, commonly called “NPO”. We will focus our attention on the Income Tax, which is the core of the discussion.

The current “Ley de Concertacion Tributaria” (Law of Tax Concertation, hereinafter the “LTC”) applies in a separate manner the following sources of income of Nicaraguan source obtained by the taxpayer: 1. Income from work; 2. Income from economic activities; and 3. Capital income and income from capital gains and capital losses. Additionally, this law applies to any not justified increment of patrimony and to incomes that are not expressly exempt by the law.

Regarding the NPO, the LTC stipulates in its article 32, that the following subjects are exempt from the payment of income tax from economic activities, but subject to the conditions provided by the article 33 of such law, and only for those activities meeting those specified in their articles of incorporation:

1. Universities and Higher Technical Education Centers, according to the article 125 of the Political Constitution of Nicaragua, as well as the vocational technical education centers;

2. Powers of the State, ministries, municipalities, councils and regional and autonomous governments, autonomous and decentralized entities and other state agencies regarding their income from their activities or public law authority;

3. Churches, denominations, associations and religious foundations that have legal personality, in terms of their income from activities and assets exclusively for religious purposes;

4. Non-profit organizations focused on nature or other related activities: sporting, artistic, scientific, educational, cultural, business associations, labor unions, political parties, Nicaraguan Red Cross, fire departments, charities and social welfare, indigenous communities organized as: civil associations, unions, foundations, federations, confederations and chambers; having legal personality;

5. Legally constituted cooperatives up to or equal to an annual amount of forty million cordobas (C $ 40,000,000.00) as gross annual amount.

6. Missions, international bodies and international cooperation agencies and their representatives; programs and projects funded by international cooperation implemented by non-profit organizations registered in the appropriate bodies; and public programs and projects financed by international cooperation in accordance with conventions and agreements signed by the government of the Republic of Nicaragua, with the exception of those nationals serving in such representations and organizations.

However, the LTC establishes in its article 33, numeral 2, as an exception for the application of the subjective exemptions mentioned above that when the exempt subjects habitually perform lucrative economic activities with third parties in the market of goods and services, the income from such activities will not be exempt from this tax.

Additionally, it is important to note that in relation to the capital income and income from capital gains and capital losses, the LTC stipulates in its article 77 a list of exempted entities from these income; however, such list does not mention all the types of non-profit organizations that were listed as exempt for the income from economic activities, such as the churches, non-profit organizations of nature: sporting, artistic, scientific, educational, cultural, business associations, etc. causing with this omission the application of income tax to these types of organizations when they receive donations or do sell a real estate, for example, which constitute capital gain, or when they rent a real estate, for example, which is the case of a capital income.

Although the LTC contains this exception for the application of the exemptions to the income tax for NPO, it is important to mention what the Supreme Court of Justice of Nicaragua has resolved through judgements about similar regulations contained in former tax laws that in that moment tried to establish this same exception for the application of such exemptions; however, before mentioning such judgements, we deem necessary to understand why the non-profit organizations shall be exempt from income tax, even if they obtain income from economic activities performed habitually with third parties in the market of good and services, and when they obtain capital income and capital gains.

The State of Nicaragua, as part of its functions proper of a Social State of Law, has the responsibility to develop works of public utility for the common benefit of all its habitants—and justifies the taxation of its citizens as a measure taken in order to afford the building of highways, schools, hospital, etc. Based on the interest to develop work of public utility, there are some citizens who decide to associate to form non-profit organizations, which become allies of the State in order to develop activities of social interest that beneficiate the people in general or a determined number of habitants of a specific geographic zone.

Considering that these non-profit organizations act as allies of the State to comply with its social function, the tax exemption is justified because, at the end, the NPOs come to perform activities or projects for which the same State collects the taxes.

Based on the above mentioned justification and under the understanding that the legislator must create laws that regulate the situations of interest for the State and its habitants according with the objective sought—and not to create laws to establish different situations than those situations that justified the necessity of the creation of the laws—in Nicaragua, any law to be issued to regulate the tax matter should stipulate the exemption to the income tax of non-profit organizations due to that such incomes are obtained to carry out the activities of social interest or public utility for which these entities were formed.

Since the enactment of the already abolished “Ley de Ampliación de la Base Tributaria” (Law of Addition to the Tax Base) it was established that the non-profit organizations (including here all the types of non-profit organizations allowed by the law) have income tax exemption; however, this law intended to except from this exemption to such organizations when they perform activities of commercial, industrial agricultural, agro-industrial or service nature, stating that income from such activities would not be exempt from income tax; it also sought to except non-profit organizations that provide financial services of any kind from this exemption. This exception was object of a plea for unconstitutionality that was resolved by the Supreme Court of Justice of Nicaragua through the Judgment 141 at 10AM of October 24th, 2003 in which the Supreme Court of Justice declared the unconstitutionality of the abovementioned exception based on the principle of equality under which all the non-profit organizations must receive the same treatment because all of them were incorporated as non-profit organizations to pursue a public cause and not a lucrative goal, and the fact of obtaining incomes from commercial activities or others that the exception tried to establish was not against the nature of the association because such incomes were used to implement or fund their activities of public cause and not to be distributed between the associates (lucrative character characteristic of the commercial companies).

The Judgement 141 has been used as base for other judgements that have been issued by the Supreme Court of Justice of Nicaragua to resolve remedies that have been filed by other non-profit organizations to which the tax authority has tried to apply income tax alleging exceptions to the income tax exemption, and it is based on this judgement and criteria of the maximum court that we consider that the exception established in the numeral 2 of the article 33 of the LTC is inapplicable because it has been already resolved that the non-profit organizations can obtain incomes from economic activities without being subject to the payment of income tax for such incomes, provided that these incomes be used to perform the social activities for which the organizations exist and not distributed between the associates. In this same sense, we consider that non-profit organizations can also obtain incomes from capital incomes and capital gains and be exempt of taxes for these sources because not recognizing this exemption violates the constitutional principle of equality and the spirit of the judgement 141 issued by the Supreme Court of Justice.

As a final comment, we believe that the exception contained in the numeral 2 of the article 33 of the current LTC possibly was established by the legislator to try to avoid that some persons opt to incorporate non-profit organizations instead of commercial companies to take advantage of the income tax exemption, but performing in an habitual and exclusive manner lucrative economic activities where the utilities be distributed between the associates, which would be in detriment of the nature of the non-profit organizations, in which case, the exception to the tax exemption should apply, also causing the risk of a cancellation of the legal personality of the organization by the National Assembly of Nicaragua in accordance with the article 24 of the Law 147 “Ley de Personas Jurídicas Sin Fines de Lucro” (Law of Non-Profit Organizations).