Investing in Central America: What You Should Know
2022-02-28
Central America comprises seven countries, Guatemala, Honduras, El Salvador, Nicaragua, Belize, Panama and Costa Rica, spanning an area of 422 614 km2. The region is known around the globe for its exuberant forests, impressive volcanoes, paradisiacal beaches, and Mayan ruins, but there are more than natural wonders to discover. Let’s look at the investment potential of this rapidly growing part of the world.
Investing in Central America: What You Should Know
In addition to these attractions, Central America has also become an excellent region for doing business because it has some specific characteristics that make the territory unique. These include:
- Strategic location in the middle of the hemisphere, which not only provides a convenient time zone and accessible latitudes but also airline service with frequent flights that connect the region with the world’s most popular airports.
- Great human talent. The workforce is well educated, with most candidates speaking excellent English and fluent in many other languages.
- Compared to other jurisdictions looking to attract foreign direct investment, Central America shares a low cost of establishing a business and operating in the region.
- World-class facilities for international trade, including transportation and freight forwarding logistics.
- The region has entered into trade agreements with leading economies such as the United States and the European Union, significantly facilitating international trade between Central America and the most active trade partners.
In addition to these common elements, each country has designed tax packages and/or incentives to attract foreign direct investment.
Why Set up in Costa Rica?
Costa Rica has one of Central America’s best free trade zone systems. The past thirty years have attracted operations by the world’s most significant t transnational companies. It provides incentives to manufacturing, services, and logistics projects ranging in investments from $100,000 (the minimum required for specific packages) to $10,000,000 and above for mega-projects.
In exchange, projects get favourable tax treatment for periods up to 12 years, including income tax exemption, exemption on import duties for facilities construction materials, subsequent operations, land tax exemption, and VAT exemption, among others. The country provides an excellent opportunity for nearshoring in the region: Costa Rica is ranked number one in the Greenfield Performance Index for 2021.
Furthermore, Costa Rica has also allowed commercialising products with CBD (100% free of THC), such as cosmetics, beverages, food, and natural medicine products. Congress approved a law that authorizes the cultivation of cannabis and hemp for medical purposes, including the possibility of applying for the Free Trade Zone Regime and obtaining tax incentives for such activities.
Governments invest in the infrastructure sector as a recovery response to the COVID-19 crisis. The Government has announced the execution of five key mega-projects, including four highways and a fast passenger train.
Finally, Costa Rica is the ultimate host country for remote workers looking to work from a beautiful and lively setting. Congress recently Recent immigration policies and tax incentives have been announced to help attract Investors, Renters, and Pensioners who are looking to relocate to Costa Rica.
Why Set up in Nicaragua?
Even though the country has faced political instability in past years, business opportunities continue to increase. The World Bank recently ranked Nicaragua as the third fastest-growing economy in Central America for 2021 and foresees a continued recovery for years.
Nicaragua offers varying opportunities for investors, including the major activities of gold and silver mining. Mining in Nicaragua has experienced significant growth in recent years thanks to the arrival of foreign direct investment. Mining represents 2.3% of Nicaragua’s GDP.
Nicaragua also offers excellent opportunities for the Agro-industry. Agricultural products have been a significant portion of Nicaragua’s exports for many years. The high regional demand for food makes its large-scale production, processing, and packaging beautiful to investors.
The country offers tax incentives in the Free Trade Zone field to attract projects for outsourcing services or export manufacturing operations.
Why Set up in Honduras?
Honduras offers excellent opportunities in the renewable energy sector through a law that promotes renewable energy generation and provides exemptions on customs duties for importing equipment and accessories during a project’s construction period.
In addition, certain types of projects qualify for a ten-year income tax exemption, or in the case of biofuel production, exemption from taxes and fees for twelve years, as well as special treatment during the construction process.
In the free trade zone sector, the country offers different tax incentives for call centres and manufacturing export companies, including exemptions on import duties for raw materials and equipment, VAT exemption for local purchases, and an income tax exemption for 15 years renewable for ten more years.
Honduras has also created “Zede” economic zones to attract foreign investment through reduced tax rates. The first such zone is called ZEDE Próspera and was established in Roatán, a paradisiac island in the Caribbean. This ZEDE is expected to reach 10,000 inhabitants by 2025.
Why Set up in Guatemala?
Guatemala’s economy is experiencing a highly positive moment: the World Bank now projects that in 2021, the country’s economy will grow 5.1%, surpassing the January forecast of 3.6%.
Guatemala, the largest economy in Central America, offers opportunities in the free trade zone regime under a law called ZOLIC, which was recently renewed to develop special economic zones. These are geographic areas under a special customs regime that allows the development of agricultural, industrial, and commercial activities to enjoy tax incentives.
The entire purpose of the recent changes is to expand the development to other geographic areas outside the capital.
Congress in 2021 also approved a decree that amends the Free Zones Law. In Guatemala, free zones represent an attractive opportunity for investment since operations developed under the law’s jurisdiction give an investor the right to tax exemptions or preferential tax treatment.
Guatemala is betting on new sectors, including the production of animal food, leather, and footwear, the plastic industry and its manufacturers, recreation centres and hotels, ceramic products, medications, cosmetics, paintings, furniture, and processed food.
Why Set up in El Salvador?
El Salvador is the smallest country in Central America; however, it has excellent capabilities to boost its economic growth. Its dollarized economy eliminates foreign exchange risk and lowers investor transaction and financial costs.
The country has a high potential for generating renewable energy such as hydropower, wind power, solar, geothermal, and bioenergy. El Salvador has approved a Renewable Energy Tax Incentives law, aiding investment in the sector.
More specifically, investors may have the opportunity to participate in international bidding for long-term twenty-year contracts that guarantee energy purchases. In addition, there are opportunities for bilateral agreements and smaller energy projects.
The country also promotes the establishment of international service centres and operations that provide BPO services to global clients. El Salvador has seen this sector grow in recent years, with the Government giving tax incentives for companies that provide services to clients located abroad, such as call centres, shared services centres, and information technologies operations.
Finally, El Salvador has approved a Free Zones Law to encourage production for export and import and export activities through authorized distribution centres.
Conclusion
Central America offers numerous opportunities for investors, especially those seeking highly qualified human talent, cost-efficiency, diversification of the supply chain, and excellent trade connections with other markets. It is also a land blessed with magnificent natural attractions, the perfect setting to combine high-level business operations with unforgettable leisure hours.
