Law No. 1,012, published on 12-19-2019, reforms the articles of Law No. 286 Special Law on Exploration and Exploitation of Hydrocarbons. Law No. 286 is the norm that regulates the exploration, drilling and other activities related to the search and potential extraction of oil, gas and other hydrocarbons in Nicaraguan territory.
The main objective of this reform is to establish tax incentives for investors in the oil exploration phase.
Within the reform’s context, the term “contractor” is interchangeable with that of “concessionaire” or “owner of the exploration and/or exploitation concession, while a key and novel figure within the reform is the “subcontractor” who is a third party hired by the owner of the concession to perform various functions or provide certain services, and who may interchangeably be a national, foreigner, resident or non-resident.
Among other incentives, the newly included fourth paragraph of Article 62 exempts the non-resident subcontractor from any tax (including withholdings) on the services it may provide to the concessionaire related to the hydrocarbon exploration stage. Taking into account that the reform of the Tax Agreement Law at the beginning of 2019 increased the withholding rates for residents and non-residents, this becomes an important incentive for the oil industry.
Furthermore, the new Article 62a, paragraph b, creates a total exemption from income tax on the payment of dividends or profits to members of the contractors and subcontractors, whether they are residents or not.
Although the spirit of this reform is to create tax incentives, it is important to note that Article 59 of the Law continues in force, which means that exploitation and exploration activities will be subject to an Income Tax of no more than 30% on net income from its activities. In order to determine net income, the royalties to be paid and the reasonable costs and expenses attributable to the development of exploration and exploitation activities are deductible.
Article 62 of Law No. 286 (the sections in italics correspond to the amended text) states:
Article 62.- The contractors shall be exempt from the payment of any tax imposed at the national or municipal level on their patrimonial assets, their income from sales, the goods, services and use or enjoyment of goods that they acquire internally and that are necessary for the exploration activities and exploitation of hydrocarbons.
In the same way, contractors will be exempt from municipal taxes on the construction and expansion of works during the exploration period.
In addition to the exemptions set forth in the preceding paragraph, the contractor shall be exempt from the payment of taxes and fees at the national and municipal levels on their income or capital invested during the exploration phase, without prejudice to the obligations that as a tax-retaining company it must make for purchases and payments for local services.
Services provided during the exploration period by non-resident subcontractors or any other non-resident third parties that carry out activities associated with hydrocarbon exploration will be exempt from any national or municipal tax, including any applicable withholding.
Article 62a. Without prejudice to the provisions of the preceding article, the following additional tax incentives are established:
a. Transfer of contracts: During the exploration period, the assignment or direct or indirect transfer of all or part of the rights derived from the contracts under any modality for the hydrocarbon exploration activity will be exempt from any capital gain tax, transfer or related tax or municipal tax, stamp duty, fees or other charges.
b. Payment of profits for non-residents: Dividends, participation in profits and interests paid by contractors and subcontractors to their shareholders or partners, resident or not resident in the country, will be exempt from capital income tax.
c. Transfer of losses to subsequent periods: contractors will be allowed to deduct losses incurred in previous fiscal periods until such losses are amortized for tax purposes.
Article 62b. In order for subcontractors to apply the tax incentives established in this law, the contractor must include the subcontractors in its investment plans before the Ministry of Finance and Public Credit and the Ministry of Energy and Mines for local purchases of goods and services as well as imports and contracting services of non-residents in the period of exploration.
As with Law No. 1,011, the intention of this reform is to promote activities that reduce dependence on imported oil and incentivize further development of the national energy sector.