In Nicaragua, the recent changes in tax legislation caused mainly by the entry into force of the Tax Concertation Law, its regulations and amendments, have established some new mechanisms and options that provide benefits for employees, while also, providing a benefit to the company. Saving pension/retirement accounts are one of the best new benefits an employer can provide and now Nicaraguan law allows employers to provide employees with this valued benefit.
Before the Tax Concertation Law entered into force, there was no legislative body containing the mentioned benefits; but now, this benefit is recognized by law, as a tax shield and with a valuable social purpose, which all companies must take into consideration. Below you will find a deeper analysis of such benefit:
First of all, Law No741, “Law on Trust Agreement”, adopted on Novem- ber 4th 2010, and published in the Official Gazette No 11 of January 19th, 2011, established under existing trusts area the retirement saving account:
“Article 56 Pension and Retirement Trusts:
The Retirement and pension trust is constituted by a company as settlor, regular cash contributions for the fiduciary to invest and manage them to obtain the best return, and give it to the employees of the grantor, as trustees, under the terms and conditions stipulated in the contract.
The contributions for this purpose made by companies will be deductible from income tax.”
Subsequently in December 2012, Law 822, “Tax Concertation Law” was published, in Article 19, paragraph 6 the following:
Carlos Navarro Amador Senior Associate
“Art. 19 Objective Exemptions:
The following are exempted from Income Tax derived from labor income, as follows:
6. – Benefits paid by savings funds and / or pensions other than social security, which have the endorse- ment of the competent authority, or are regulated by special laws.
Likewise article 21 of the aforementioned Law provides that “The contributions of employed natural persons to savings funds and / or pensions other than Social Security provided that these funds have the approval of the competent authority” are deductible of the total, not exempted, labor income.
The Regulations of the Tax Concertation Law, Decree N°. 01-2013 provides in article 15, paragraph 6 as follows: “The benefits paid for pensions or saving funds are perceived once the conditions have been fulfilled, agreed upon and approved by MITRAB (Ministry of Labor)”.
The Tax Concertation Law validates the exemptions contained in the Law on Trust Agreement, in its article 287, section 56.
Afterwards the Ministry of Labor issued Ministerial Agreement ALTB-5-9-13, adopted on September 20th, 2013 Published in Official Gazette No. 194 on October 14th, 2013 titled “Guidelines to approve savings funds or pensions established in the Tax Concertation Law and its regulations.”
It is important to note the provisions of Article 2, which states that savings funds established by employ- ers for their employees, cannot be invested in their own economic activities or company activities.
Employee benefits do not end there. Additionally, the Tax Concertation Law provides that all employees who contribute to this fund ( as long as they count with the corresponding endorsement extended by the Ministry of Labor), will not be taken as a part of the tax base to calculate employee’s income tax, this means that the amounts contributed by employees are no subject to Income Tax.
Regarding the performance and supervision of such fund, a committee must be formed and integrated by the employer, a union representative or a representative of employees (for the case that a Union does not exist), in order to establish control and supervision of the appropriate use of the saving fund.
In order to obtain endorsement by the Ministry of Labor, it is necessary to submit a draft of the Regula- tion of the Operation of the Saving and/or Pensions Fund, as a prerequisite in accordance to article 5 of the regulation and which must contain at least the following:
Term or duration of the plan.
- Enrollment form.
- Contribution system.
- Applicable conditions to enjoy the benefits’ plan.
- Constitution, method of election and functioning of the Committee.
- Dissolution and liquidation procedure.
- General provisions.
Therefore, the mentioned draft related to the regulation must establish the roles of the Committee mem- bers and/or workers in general; however, Agreement No. ALTB-5-9-13 it does not specify the guidelines to be followed; thus, it will be as judged or opinion of the Ministry.
Agreement No. ALTB-5-9-13 does not provide for employers or their legal representative with liability related to the management and sustainability of the Fund (besides the supervision, inspection and sus- tainability carried out by the Committee).
Finally, we strongly recommend for all points to be clearly outlined for the Ministry of Labor in the application request for approval so this benefit can be granted.
For additional information, please contact Carlos Navarro at Alvarado y Asociados firstname.lastname@example.org