Nicaragua has enacted Law No. 1278, published on 9 April 2026, significantly expanding tax incentives for free trade zone operators and companies. The reform introduces extended income tax and dividend exemptions—up to 15 years for operators and 10 years for companies—with structured reductions thereafter, while maintaining targeted relief for non-resident payments and excluding employee income from the regime.
Nicaragua has introduced a major overhaul of its free trade zone framework through Law No. 1278, published in the Official Gazette on 9 April 2026 and signed into law on 8 April 2026. The reform strengthens fiscal incentives for both free trade zone operators and user companies while setting clearer timelines, extension rules, and post-exemption tax obligations.
Expanded tax relief for free trade zone operators
Under the revised regime, free trade zone operators benefit from a 100% exemption on Income Tax (IR) from economic activities and a 100% exemption on dividend taxes for an initial period of 15 years. These exemptions may be extended for additional equal periods, subject to approval by the National Free Zones Commission. The dividend tax exemption also applies to shareholders or partners of the operating entities. After the exemption period expires (including any extensions), operators become fully liable for taxes, including 100% Income Tax and dividend tax obligations on activities conducted under the regime.
Tiered incentives for user companies
Companies operating within free trade zones receive a structured benefit system:
- First 10 years: 100% exemption from Income Tax on economic activity and dividend taxes
- From year 11 onward: a reduced 60% exemption, unless an extension is granted
- Extensions of the initial 10-year full exemption are possible, subject to approval by the National Free Zones Commission
If no extension is granted, companies transition to partial taxation, eventually paying 40% of Income Tax on economic activity and dividend taxes after the exemption period ends, continuing until operations cease. Dividend tax exemptions also extend to shareholders or partners of user companies.
Scope, exemptions, and long-term rules
The law maintains broad incentives but clearly separates corporate tax relief from employment taxation. Exemptions do not apply to personal income tax, wages, salaries, or other compensation paid to Nicaraguan or foreign employees.
However, the regime provides significant relief for cross-border transactions. Payments to non-residents—such as interest on loans, commissions, legal fees (domestic or foreign), and services related to promotion, marketing, and consulting—are fully exempt from withholding tax obligations.
A key feature of the reform is its long-term structure. While most incentives apply indefinitely, the Income Tax and dividend exemptions are time-bound, governed by the initial periods and any approved extensions. Once these expire, standard taxation resumes as defined under the law.
