SECTION 1: Market outlook
1.1 What is the outlook for US investment into your jurisdiction over the next 12 months, given the new US administration's protectionist focus?
From a foreign policy perspective, as the US has withdrawn from the Trans-Pacific Partnership (TPP) and is hoping to renegotiate Nafta, CAFTA-DR has gained more relevance for Guatemala. This could draw investment to Guatemala, not only from the US but from other countries as well. However, the protectionist focus of the US is not a determinant factor driving US investors away from our jurisdiction.
1.2 Are there any industries in particular that you think are more likely to be affected by the US's new economic stance?
No, since CAFTA-DR has been left out of the 're-negotiation or withdrawal' agenda of the US Trade Representative and Department of Commerce.
SECTION 2: Approving foreign investments
2.1 Explain the foreign investment approval process and approval timetable.
In Guatemala, there is no foreign investment approval per se. Depending on the sector, it may be a requirement to have a branch or a legal entity incorporated within the jurisdiction. This takes approximately two months. After being incorporated, and depending on the sector and nature of the business, the investment may require certain permits. The timetable will vary, depending on the complexity of the permits. As a general reference, it takes approximately between five to six months to have a company fully operating within the Guatemalan jurisdiction.
2.2 Are there any investment restrictions in specially regulated sectors and is the government entitled to any special rights in these sectors?
From a general perspective, for an enterprise organised under foreign law to be established in Guatemala, in any form, it must designate a determined amount of capital for its operations in Guatemala and execute a guarantee in favour of third parties to an amount not less than $50,000. When establishing a subsidiary, 90% of the company's employees must be Guatemalan workers and these workers must receive at least 85% of total wages paid. These percentages can be modified in case there is a need to protect the national economy or there is a lack of technical Guatemalan personnel.
For the financial sector, only foreign financial institutions legally authorised in Guatemala can provide banking services. Financial institutions, organised outside the Guatemalan jurisdiction, can provide investment advice and portfolio management services but not custodial services, trustee services or execution services unrelated to managing a collective investment scheme located in its territory (Annex I, Schedule of Guatemala, CAFTA-DR).
For infrastructure, only Guatemalans by birth and companies owned 100% by Guatemalans can acquire the ownership of land within 15 kilometres of the border. Moreover, foreign nationals require an authorisation from the government to acquire ownership of state-owned real estate located in urban zones and for which rights were registered in the General Property Registry before March 1 1956 in the following locations:
- a three-kilometre-long strip of land along the ocean;
- 200 meters around the lakeshores;
- 100 meters on either side of the navigable rivers; or
- 50 meters around any spring that serves as a source of water for the population.
In the natural resource sector, only Guatemalans by birth and companies owned 100% by Guatemalans can be granted title to rent or use state-owned lands in the Department of El Petén, which is an environmentally protected area. Only Guatemalans by birth or enterprises organised under Guatemalan law may exploit and renew forestry resources. The subsoil is property of the State of Guatemala, so certain rights are reserved to the State to exploit it. Moreover, Guatemala is part of the 169 Convention of the International Labour Organization; hence, whenever a project is intended to have an impact on the indigenous community, consultations shall be held.
Apart from the rights mentioned above, the State does not have any additional rights other taxes.
2.3 Which authority oversees competition clearance and give a brief overview of the merger clearance process?
Currently, there is no Competition Authority. Guatemala is in the process of approving its first Competition Law.
2.4 Are there further approval requirements that foreign investors should be aware of?
None, apart from the ones mentioned in sections 2.1 and 2.2 above.
SECTION 3: Investment techniques
3.1 What are the most common legal entities used for US investment in your jurisdiction?
A branch is one of the most common legal entities, and whenever a Guatemalan entity is created the forms most often used are the sociedad anónima or sociedad de responsabilidad limitada.
3.2 What are the key requirements for establishment and operation of these legal entities?
The minimum paid capital requirement is of approximately $660. The entity must register a legal representative with TAX ID in Guatemala.
SECTION 4: Dispute resolution
4.1 How effective are local courts' enforcement and dispute resolution proceedings, and what should US investors be particularly aware of?
The extremely extended period of time it takes to reach a definitive outcome impacts the effectiveness of our judicial system's proceedings and enforcement. This length of time depends on the type of process. After receiving a definitive sentencing, there is an executive procedure that should be followed in order to enforce the content of the resolution. The average period ranges between five and 10 years after going through all the instances, ordinary and constitutional.
Aside from the local particularities mentioned above, investors should be particularly aware that Guatemala has a free trade agreement with the US (CAFTA-DR), which includes an investment chapter. For the investment to be covered by CAFTA-DR it should be considered as originating from the US. Moreover, Guatemala is part of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention), which facilitates and secures the enforcement of foreign awards.
4.2 Does your jurisdiction have a bilateral investment protection treaty with the US and is that commonly used by investors?
Yes, as mentioned in section 4.1, the CAFTA-DR contains an investment chapter protecting investors from the state parties.
4.3 Do local courts respect foreign judgments and are international arbitration awards enforceable?
Yes, as mentioned in question 4.1., Guatemala is part to the New York Convention.
SECTION 5: Forex controls and local operations
5.1 What foreign currency or exchange restrictions should foreign investors be aware of?
None, Guatemala's regulations stipulate a free circulation and exchange of currency. Moreover, Guatemala has a very stable inflation rate and policy.
SECTION 6: Tax implications
6.1 Are there tax structures and/or favourable intermediary tax jurisdictions that are particularly useful for US investors into the country?
Having a territorial tax regime in place within our jurisdiction and given the lack of reciprocal tax arrangements between Guatemala and other countries, there is no particular tax structure or favourable intermediary tax. Nevertheless, there is always a possibility to generate tax efficiencies by using alternative jurisdictions to create an efficient tax operating plan. Since transparency and information sharing is becoming a global standard, tax structures and intermediary tax jurisdictions will tend to disappear.
6.2 Has your jurisdiction benefitted from the recent trend of US companies pursuing inversion structures? If yes, do you believe this will be threatened under the new administration?
Yes, our jurisdiction has benefited since US companies have invested in our country given our lower manufacturing costs and certain tax benefits. We believe this will not be threatened by the new administration since, from a competitive perspective and investment perspective, Guatemala manufacturing costs will remain lower than US costs and taxes below the 35% US corporate tax rate.
6.3 What are the applicable rates of corporate tax and withholding tax on dividends?
Corporate tax options:
- 25% corporate tax, having the possibility to deduct cost and expenses that are specifically included in the law; before the application of said rate; or
- 7% corporate tax, not having the possibility of deducting cost and expenses but paid on a monthly basis and directly applied over invoiced amount.
Either option is available for the first time when the company or corporation is incorporated. Changes from one regime to another can be done every year at the end of the fiscal year.
Withholding tax on dividends:
- 5%, after the payment of corporate tax.
6.4 Does the government have any tax incentive schemes in place?
Yes, the Guatemalan government has tax incentive schemes in specific areas of investment. The tax incentives include the exemption of income tax and VAT for a certain period of time. Tax incentives schemes are usually granted to companies incorporated in free trade zones and/or active in specific investment sectors, such as energy, oil, gas and natural resources.
6.5 Are there any reciprocal tax arrangements between your jurisdiction and the US? If so, how can they aid investors?
At the present time, there are no reciprocal tax arrangements between Guatemala and the US.
6.6 Do you think that the introduction of new rules and regulations in the US, such as the Bring Jobs Home Act, is likely to have an impact on investment into your country?
In our opinion, apart from the flaws in the current Bring Jobs Homes Act, the introduction of similar regulation could only have an impact on our jurisdiction if it is designed in such a way as to reduce US manufacturing costs and taxes to a level below those in our country.
|About the author|
Ruby Asturias is the managing partner of Pacheco Coto's Guatemalan office. She has more than 20 years of experience advising clients on tax efficiencies and investment.
|About the author|
Martin Barillas is a senior associate in Pacheco Coto's Guatemalan office. He is in charge of the international trade division, advising clients on their import/export performance as well as investment matters.