Doing Business In: Honduras

Changes in 2022 versus 2021

During the years 2021 and 2022 significant changes have been carried out in the national legislation that depends on the perspective of each businessmen. Changes can mean a benefit or appear to be something “good” for the country, or on the other hand, something that has a negative impact on national politics and economics. The most significant changes are the following:

1. Through an Agreement, the Income Tax for natural persons was adjusted by 4.01% according to the interannual variation of the Consumer Price Index (CPI) published by the Central Bank of Honduras. This means that withholding agents, companies, must apply said adjustment to calculate the amount of monthly withholding for employees as of January 1st, 2021. This implies a reduction in tax payments for employees.
2. By means of an Agreement, the General Regulation of Seeds was created to regulate the production, import, export, processing and commercialization of seeds or vegetative material at national level, whose provisions must be complied by all the agents involved in the process, including the producers, processors, seed traders, civil servants and public employees. This interests the agro-industrial union, which is very strong in the country.
3. The Electronic Signatures Law was created in 2013, but it was not sufficiently used or informed by public officials. Due to the health emergency caused by the Covid-19 Pandemic, and the lack or little circulation due to the state of emergency (curfew), the
   State improvised its online portals and with it, the use and application of the Electronic Signature. Therefore, by means of an Agreement, the Electronic Signatures Law of 2013 was amended, in the sense of requiring and allowing the use of electronic signatures in general to prove the existence of obligations, as well as homologating electronic signatures created or used outside the Republic of Honduras so that they produce the same legal effects as a signature created or used in Honduras. Very important is the updating and ratification of Decree 33-2020 regarding the fact that all kinds of acts, contracts and any other type of legal business can be held by electronic means whenever it is possible to reliably show the will of the parties to carry out the legal business by that means. This has been a provision that has benefited investment and industry in Honduras.
4. After thirteen years, the Government created the Regulation of the Consumer Protection Law since it was imperative to complement said legal body.
5. The Law for the Promotion and Strengthening of the Electricity Industry Market was created through a Legislative Agreement, whose purpose is to create the conditions so that the agents of the National Electricity Market can compete under free market rules in the generation, distribution and commercialization of Electric Power in the national territory.
6. A high percentage of our economy is generated by the industry, industry that is in “Special Regimes” granted and authorized by the State. With these special regimes granted to the industry and other entrepreneurs, obligations are generated that each beneficiary of said regime must comply with, such as notifying, when competent, the change of legal representative or significant changes suffered by the beneficiary or user company of said regime. Therefore, and with the purpose of simplifying the way to carry out these notifications, is that the procedure for the change of legal representative and change of company name in beneficiary commercial companies or users of special regimes was created by Agreement by the Secretary of State in the Offices of Economic Development.
7. The Tripartite Agreement was approved within the framework of the Negotiation for the fixing of the minimum wage for the years 2022 and 2023, which will govern the entire country according to economic activities, company size and amounts.
8. To grant tax benefits and incentives that promote the creation, development, strengthening and formalization of Micro and Small Enterprises (MYPE), and to contribute to the improvement of the economy and the capacity for entrepreneurship and innovation, as well as the generation of new employment opportunities for the population, through Legislative Decree, the “Law for the Economic Recovery and Reactivation of Micro and Small Enterprises” was created.
9. The Tax Administration approved and agreed to classify the taxpayers according to the categories of small, medium and large taxpayers. This is influential since depending on the classification granted to a taxpayer, call it a commercial company, this will be its tax obligations such as declared jurisdictions, informative statements and reports through the applications, platforms, sites or other electronic mechanisms that the Tax Administration makes available for this purpose, otherwise they will be subject to sanctions already established in the Tax Code.
10. An incentive for employers in certain areas and categories was the Hourly Employment Law that was created in 2014, but with the change of Government from 2021 to 2022, and by Legislative Decree said Law was repealed, therefore that, once the repeal came into force, the employees who had been hired under the hourly employment modality were under the protection of the ordinary provisions related to Labor Law. This resulted in the loss of thousands of jobs.

Advantages of business in Honduras

One of the greatest advantages of Honduras as a source of business has been and will continue to be its geographical location, located in the heart of America with coasts on the Pacific and Atlantic Oceans, as it provides direct access to key markets, facilitating the transportation of people and goods both nationally and internationally. According to the investigations carried out by the National Investment Council (CNI) (https://www.cni.hn/), leadership in the region is being achieved with the air, land and maritime communication channels that facilitate the operation of cargo movements and logistics centers, making the country an attractive territory for the development of commercial and industrial infrastructure megaprojects.

The main advantage would be to have legal certainty as the guarantee of the equality of all before the law, so that the rights of all people and their assets are respected and guaranteed. The person, as the primary purpose of the State, must be certain of the right that citizens have so that their legal situation is not modified other than through regular procedures and legal channels established, previously and duly approved. The Constitution of the Republic ensures that no one can be judged except by the competent judge or court, with the formalities, rights and guarantees established by law; Likewise, the State has signed and ratified international instruments committing itself to real compliance with the guarantees of due process, for which the actions of all the institutions that protect legal security in Honduras are essential and effective, not only for nationals but also for the foreigners. However, it is not a mystery that the change of government has generated some uncertainty for national businessmen and foreign investors, due to the repeal of laws that were considered to bring benefits not only for investors but also for small national entrepreneurs. Similarly, public institutions have been created aimed at fostering and promoting investment, always in strict adherence to generating greater legal security in the country.

In general, foreigners or investors have the following guarantees established in the Constitution of the Republic and the laws:

• The principle of national treatment.
• The non-application of market access limitations to natural or legal persons establishing their investments in Honduras.
• The right to make transfers abroad in currency or in securities, at your choice, the product of your profits, capital gains, dividends, royalties and considerations for the use and transfer of technology owned by you, or the total of your investments.
• The right to access credit in the National Financial System on equal terms with national natural or legal persons.
• The free participation of foreign investment in the shareholding structure of companies.
• The right to establish without restrictions, subsidiaries, branches, representative offices or joint investments.Another advantage is the digitization of legal acts. The registry entities already have their digital platforms to proceed with the registration of distinctive signs, sanitary registries, Sanitary Licenses, Registration in the Registry of State Suppliers, among others. In this way, less time is invested in management and the results are delivered more expeditiously to the client, not to mention that follow-ups are done through digital channels such as emails and virtual platforms.And, last but not least, the application of conflict prevention mechanisms and alternative methods of conflict resolution such as conciliation and arbitration before the centers that take place in the Chambers of Commerce and Industries, collegiate centers and outside the country. Since investors are guaranteed full recognition of international arbitration awards and those issued in accordance with the provisions of the Convention on the Recognition and Enforcement of Arbitral Awards, the Inter-American Convention on International Commercial Arbitration and the Agreement on the Settlement of Investment Disputes between States and Nationals of other States (CIADI Constitutive Agreement). And of course, there are ordinary justice bodies that do not distinguish between a national or a foreigner, as long as the legal transaction was carried out in Honduras.

The Free Trade Zones enjoy exemption from fiscal taxes (ISV, DAI, ISR and related, ACPV, Tradition Tax) and municipal taxes (ICS, Operations Permit, Real Estate), all for an indefinite period except the ISR whose exoneration is for a period of 15 years, being able to extend 10 more years.

Other Benefits and Tax Incentives in Honduras when joining Special Regimes to promote exports are:

• Exemption from Tariff Taxes (DAI).
• Exemption from Income and Related Taxes that are levied on the company’s profits.
• Net Asset Exemption.
• Exemption from the Solidarity Contribution.
• Sales Tax Exemption.
• Exemption from Municipal Taxes and Contributions.
• Exemption from Tradition Tax.
• Fuel Tax Exemption (ACPV) Diesel, LPG Gas, Bunker.

Business Structure

A natural or legal person can carry out commercial acts that impact the national economy, whether on a small or large scale. And according to the national commercial legislation, these natural or legal persons can exercise said commercial acts in the following ways:

1. As Individual Merchants, which is any natural person who, having the capacity to engage in commerce, declares himself as such, making this his main occupation, being the owner of that commercial company and implicitly carries the unlimited responsibilities of the company that is constituted and he as its owner; and,
2. As Social Merchants, also called Societies, which are a group of people who associate for a specific purpose and who contribute money, industries, goods and other assets, for the exploitation of a business that pursues a profit or utility.

In Honduras we have companies regardless of their purpose:

1. Company in collective name.
2. Corporation.
3. Limited Liability Company.
4. Simple Limited Partnership.
5. Limited Partnership by shares.
6. Cooperative Society.

Being the most used and recommended both to carry out small-scale commerce and for large industries, Corporation and Limited Liability Company. Each one with its corresponding characteristics, advantages and disadvantages, but always aimed at the sole purpose of carrying out trade directly in Honduras. Some differences between the two are:

1. Capital: With a Corporation, the initial capital may not be less than twenty-five thousand Lempiras (L 25,000), which is divided into shares, these may have different nominal values or have different privileges attached and may be freely transferred; while the Limited Liability Company, which is a commercial company with legal personality and whose capital may be five thousand Lempiras (L 5,000.00), and be divided into social or equal parts, cumulative and divisible as long as the number of partners does not reach to be greater than twenty-five (25).
2. Partners: A Corporation can be established with a single shareholder, this by virtue of the reform to the Commercial Code through Decree No. 284-2013 that contains the Law for the generation of employment, promotion of business initiative, formalization of business and investor rights protection; and has no shareholder limit. While the Limited Liability Company is constituted with a single partner, but no more than twenty-five (25) partners can join it.
3. Responsibility: In a Corporation, shareholders are not liable with their personal assets for the company’s debts, only up to the amount of capital they have contributed. While, in the Limited Liability Company, the partners are not personally responsible for the debts contracted by the company, but only with the capital contributed.
4. Transmission: In a Limited Liability Company, the transmission is restricted, and must be done in accordance with the statutes of the same, or additionally, in accordance with the Law in the event that the statutes do not regulate the system of transmission of shares. You must communicate the intention to sell them, the number of shares you want to sell and their price; The rest of the partners will have a preferential right of acquisition and in case of not making use of their preferential right, they must give their consent so that the partner who wishes to transfer his social part to a third party can do so. In addition, this transmission will be made in a public document. While, in a Corporation, because it consists of securities, in the form of shares, the transfer thereof is simpler and freer, since only the securities must be endorsed to the third party after negotiation between the shareholder and the third party, as long as, in the deed of incorporation and bylaws there is no prohibition or restriction regarding the transfer of shares.
5. Type of activity: Although it is true, a Limited Liability Company can carry out practically any activity, except those that are reserved by Law for Public Limited Companies, such as banking companies, pension fund managers, insurance companies, etc., Limited Liability Companies are designed for small and medium-sized companies with few partners, family businesses or professional societies that do not require a large outlay of capital, while Corporations are better suited to activities that require a larger number of partners to achieve a greater capital and a greater mobility of the same is foreseen.

How to invest in Honduras

An investment by a national or foreigner in Honduras can take the following forms according to the “Law for the Promotion and Protection of Investments” contemplated in Decree No. 51-2011:

1. a company, shares, capital and other forms of participation in the assets of a company or commercial company;
2. turnkey, construction, management, production, concession, revenue-sharing, and other similar contracts;
3. as well as other tangible or intangible, movable or immovable property rights; and,
4. property rights such as leases, mortgages, encumbrances and pledges.

All these forms in order to obtain a profit through lawful means, the expectation of obtaining profits or assuming risk for its owner or owners.

The most common form of investment is through a company. Whether the foreigner establishes a commercial company in Honduras, as a shareholder or partner; or “incorporate” your business and/or foreign company in Honduras.

Incorporating a Honduran commercial company entails information and documentation requirements and procedures in different government entities, depending on the purpose of the commercial company. As a first step, it is the declaration and/or constitution of the commercial company before a Public Notary duly authorized by the Supreme Court of Justice. In this declaration, the partner(s) will indicate their form of government, company name, foundation capital, purpose of the company, registered office and its form of administration. The second step is the publication, that is, the registration of the Deed of Constitution granted before a Public Notary, before the Public Registry of Commerce of the domicile established in the deed. This registration entails the payment of registration fees to the Mercantile Registry, which are calculated based on the share capital or the maximum share capital established in the Deed of Constitution. Once the registration has been made before the Mercantile Registry, the new company must be registered with the tax authority, this being the Revenue Administration Service (SAR), this with the purpose of obtaining the National Tax Registry (RTN) or tax identification of the company. Until this stage, the company can open its bank accounts with national banks and can protect its Intellectual Property, if it has any distinctive sign. For which, the registration of the brand, trade name, logo, emblem, advertising sign, among others, is managed before the General Directorate of Intellectual Property of Honduras. This registration process takes up to eight months before the registration authority.

For a company to be in a ready to operate state, it will need its adherence to the billing regime before the Revenue Administration Service, and the request for authorization to open the commercial establishment to the public, through the Operations Permit that granted by the Municipal Mayor’s Office of the registered office. There are permits that simultaneously can be applied for.

There are authorizations or permits that must be requested and obtained, but they depend on the purpose of a company or whether or not they have staff or employees, for example: For a company whose line of business will be the sale of ready-to-eat foods, the Sanitary License of the establishment must be requested before the Sanitary Regulation Agency (ARSA) and the registration of the company before the Honduran Institute of Social Security (IHSS) to which they will have to send the payment or contribution quota of the employee payroll monthly .

In the event that a foreigner wishes to incorporate his/her foreign company in Honduras, he/she must proceed as follows:

1. Make the decision or agreement to incorporate the company in Honduras, in an Assembly of Shareholders or Partners, depending on the type of company.
2. Authorize before a Public Notary the Shareholders Meeting Minutes with the corresponding agreement, or comply with the equivalent legality in the country of origin.
3. Apostille both the authorization of the Shareholders Meeting Minutes and the Deed of Constitution of the company, so that it takes effect in Honduras.
4. Bring said original apostilled documents, and register them in the Public Registry of Commerce of the address that is required. Once registered, the foreign company incorporated in Honduras already exists for all kinds of legal purposes, but in order for it to operate, it must follow the same processes mentioned above.

Legal System in Honduras

Honduras is a country that regulates all kinds of businesses, from the small grocery store found in a community, to large industries that export all their products. This to generate a more orderly economy and to collect the greatest amount of applicable taxes and/or tributes.

In order to do business in Honduras, in any of its forms and denominations, it is necessary to fulfill requirements before a bureaucratic system that depends on the knowledge and agility of a public official.

However, and based on what is established in the “Law for the Promotion and Protection of Investments”, the attraction, promotion and protection of both foreign and national investment in Honduras is of primary interest of the State. This means that there is protection for investors. Guaranteeing the investments, whatever their form, with the guarantees established in the
Constitution of the Republic of Honduras and in the Law for the Promotion and Protection of Investments. Counting on obligations and benefits such as hiring inside and outside the country and without restrictions, insurance that covers your investments against commercial and noncommercial risks. Likewise, they may request the signing of stability contracts as long as they make investments greater than the sum of two million United States dollars (USD 2,000,000.) in any of the following circumstances:

1. That they make capital contributions in a company established or to be formally established in Honduras.
2. That they acquire shares directly or indirectly owned by the State greater than 50% of the total shares.
3. Through Public Private Partnerships. These stability contracts guarantee the investor no increase or new taxes in the National and Municipal Tax Regime at the time of their subscription and for the term of their validity.

Foreigner Investment Restrictions

In the following legal bodies there are laws that apply to both a national and a foreigner investor, since they do not distinguish between the two and others that are aimed at investor protection:

• Constitution of the Republic.
• Commercial Code Decree No. 73.
• Tenancy Law Decree No. 50.
• Legislative Decree No. 51-2011 Law for the Promotion and Protection of Investments.
• Legislative Decree No. 284-2013 Law for the generation of employment, promotion of entrepreneurship, business formalization and protection of investor rights.
• Executive Agreement No. 22-DGTC-2014 Regulation of the Law for the Promotion and Protection of Investments.
• Executive Agreement 679-2014 Regulation of the Law for the generation of employment, promotion of entrepreneurship, business formalization and protection of investor rights.
• Legislative Decree No. 008-2020 Regulation of the Law of Free Zones.
• Law for Residents, pensioners and rentiers.
• Decree Number 104-93 General Environmental Law.

There are no restrictions for a foreigner to invest in the country. However, the following sectors are not covered by the Law for the Promotion and Protection of Investments and, therefore, are not subject to constitutional and legal guarantees as investors:

1. Disposals and waste of toxic, dangerous or radioactive garbage;
2. Activities that affect public health;
3. Small-scale industry and commerce, since they are covered by another law; and
4. Manufacture, import, distribution and sale of weapons, ammunition and similar items.

Investors have constitutional and legal guarantees.

Foreign Exchange Control

According to the provisions of the Central Bank of Honduras, the objective of the exchange policy is to ensure the maintenance of the external value of the national currency and consequently, stimulate the competitiveness of Honduran exports, especially in relation to those of its main commercial partners, seeking a sustainable current account external deficit in the medium term.

The parameters and operating mechanisms of the exchange policy: In the current exchange regime and under the operating mechanism of the Foreign Exchange Market, the Central Bank of Honduras uses an exchange band of one percent (1%) above and below the center of the exchange band, which will be made up of the average of seven (7) days prior to the Base Price weighted by 80% + Average of seven (7) days prior to the Weighted Average Exchange Rate of the Foreign Exchange Market weighted by 20%; ergo, bids will not be accepted in the Foreign Exchange Market whose prices are higher or lower than the exchange band.

The Monetary Authority reviews the established level of the Base Price every five (5) events, trying to maintain the level of external competitiveness of the national currency. In that review, the Internal and External Inflation Differential with the main commercial partners of Honduras, the Nominal Effective Exchange Rate index and the Coverage of International Reserves are considered; meanwhile, the average of the weighted price of the Foreign Exchange Market seeks to incorporate the behavior of the local foreign exchange market in the Reference Exchange Rate (weighted average by amounts of the prices that result from the event in the Foreign Exchange Market).

In this context, the Central Bank of Honduras maintains a policy of evaluating the foreign currency holding limits assigned to foreign exchange agents, with the goal that they guarantee the operation required for foreign exchange trading.