Central America Tax Overview

In 2021, the average individual tax rate for Central American countries was 31.89%. Some countries in the region have a lower individual tax rate.
Central America Tax Overview

Every country has their own tax code by which individuals and corporations must abide. The tax policy of individual countries is one of the main determining factors for whether a business relocating to a given country is a viable option. Let’s take a look at taxation in Central America in three main categories: Personal Taxes, Corporate Taxes, and VAT Taxes. 

SERVIAP can help with your global expansion needs. Contact us today to learn how you can expand your business with PEO in Central America. 

Central America Personal Taxes 

Here’s everything you need to know about personal taxes in Central America: 

Who is Taxed? 

Both residents and non-residents are taxed in the Central American countries of Honduras, Guatemala, El Salvador, Nicaragua, and Panama. Typically speaking, individuals are considered residents if they’ve spent at least six months in any tax year in the country. 

What is the Tax Rate? 

The individual tax rates for each Central American country can vary slightly. Most employ a progressive tax rate based on the total earnings of the individual for the year.  

In 2021, the average individual tax rate for Central American countries was 31.89%. Some countries in the region have a lower individual tax rate, while some have a higher rate—depending on income.  

National vs International Income 

Most Central American countries tax residents on any income they earn, no matter where it’s from. There are some exceptions to this rule such as Panama, which taxes residents and non-residents only on their Panama-sourced income.  

Typically, non-residents are taxed only on the income they derive from the Central American country they are in. Foreign income is exempt from local Central American individual taxes. 

Capital Gains, Exemptions & Other Considerations 

Many Central American countries apply a small capital gains tax between 1% and 2%. Others have exceptions to this rule and offer deductions for the normal cost of doing business.  

Central America Corporate Taxes 

Here’s everything you need to know about corporate taxes in Central America: 

Who is Taxed? 

Both resident and non-resident corporations are taxed in most Central American countries. For the most part, companies are considered residents they were incorporated in the country. Some countries may also consider a corporation to be resident if its central management or an essential part of its operations is located in the country, even if the company was incorporated in a foreign country. 

What is the Tax Rate? 

Corporate tax rates can vary greatly from country to country. In 2021, the average corporate tax rate in Central America is 27%. By comparison, tThe average corporate tax rate in South America was 27.54%.  

What is Taxable Income? 

Each country will have slightly different rules on what is considered taxable income. Most will consider net profits (or net income) to be taxable. That means corporations are allowed to deduct normal expenses for doing business from their gross income.  

Tax Incentives & Deductions 

Most Central American countries offer tax incentives for companies that do business in particular sectors or that locate their business within Free Trade Zones. Each country will have their own specifics for these incentives.  

Central America VAT Taxes 

Value-added taxes, better known as VAT, are a common form of consumption tax. Here’s what you need to know about VAT in Central America: 

Who is Taxed? 

Central American countries tax many products and/or services that take place within their countries or that are imported from another country. Many countries try to incentivize certain economic activities by providing either full exemptions to the VAT or a reduced rate for certain activities. Almost all Central American countries make exports completely exempt from VAT. 

What is the Tax Rate? 

VAT rates can vary in Central America, but they generally hover around 15%. The reduced rates can be 5% of 10% on certain goods and services, depending on what each individual country is trying to incentivize. 

Is Central America Right for Your Business? 

SERVIAP is a leading Professional Employer Organization (PEO) ready to help your business expand operations throughout the Western Hemisphere. PEO is a model of co-employment, where we assume total responsibility for your talent, allowing you to focus on the strategic activities of your organization. Contact us today to learn more about how you can expand your business in Central America. 

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