Free Zones: Nicaragua’s successful model
- 27 January 2021
The Free Zones in Nicaragua have become a highly attractive investment opportunity for export-oriented operations.
Published by PRONicaragua
During the last decade, Nicaragua has emerged as one of Central America’s highest growing economies. One of the sectors most closely related to this economic growth is the Free Zones, which has consistently performed successfully and has generated a significant impact in the country’s economy. The Free Zones in Nicaragua have become a highly attractive investment opportunity for export-oriented operations of either goods or services.
Special Economic Zones
The Special Economic Zones (SEZs) are delimited geographic areas within the national borders of a country where business rules are different, typically more liberal, than those that prevail in the national territory. The SEZs were designed as a tool for commerce, investment, and industrial space policy, with the objective of overcoming the barriers that prevent investment in a broader economy.
The SEZs have a vast trajectory in international business. Since the mid-80s, the establishment of new zones has grown rapidly in almost every region. In 1986, the International Labor Organization (ILO) reported the establishment of 176 zones in 47 countries; only twenty years later, this number increased to 3,500 zones in 130 countries.
Free Zones in Nicaragua
In Nicaragua, the establishment of the first zone program took place in 1976, and in 1991 the creation of the Free Zones System was formalized. According to the National Free Zone Commission (CNZF, for its acronym is Spanish), a free zone in Nicaragua is every area of the national territory that is properly fenced, without resident population, under the vigilance of the Customs General Administration, and subject to a special customs control. Its main goal is to promote investment and exports via the establishment and operation of different companies in free zones that engage in transforming raw material into finished products to sell them abroad. For tax purposes, free zones must be considered as based outside of the national territory, and might be located in any part of the national territory, with the exception of protected areas and national parks.
The benefits offered by the Free Zones vary from country to country. Nicaragua offers attractive fiscal incentives through its Industrial Free Zones for Export Law (917) that can reduce the operating costs for companies interested in establishing export-oriented operations of either goods or services.
The tax incentives granted by this law include 100 percent exemption from several taxes payments, including Income Tax (IR, in Spanish) during the first ten years of operation; Custom Duties; Municipal Taxes; Value Added Taxes (IVA, in Spanish); Capital Gains; and Property Taxes. To obtain these benefits, the company must register and request their admission to the Free Zones Regime.
Impact in the economy
Despite the continuous proliferation of zones in the world, the history of success is variable. Nicaragua’s Free Zone System, along with the economies of the “Asian Tigers” and other Latin American countries, can be considered among the most successful and in constant growth. In Nicaragua, free zone exports have increased from one third of total exports in 2001, to a little over 50 percent in 2019.
The Free Zones System has played a crucial role in the economic development of Nicaragua, in terms of the country’s industrialization and job creation. According to the CNZF, the Free Zones System generated a total of 118,744 jobs by November 2020. Additionally, exports totaled US$1.9 billion, making it the country’s main exporting sector.
Likewise, this system has a direct impact in the country’s exports, not only in amount and quantity, but also in sophistication. Currently, it houses a total of 222 companies from diverse sectors, including Agribusiness, Automotive Harnesses, Outsourcing Services, Tobacco, and Textile and Apparel. Specifically in the automotive sector, Nicaragua has positioned itself as the main automotive harnesses exporter in Central America, and the country is provider for brands such as Ford, GMC, BMW, Volkswagen and Chrysler.
For producers and buyers from the United States, Nicaragua offers the possibility of delivery terms that are much faster than the Asian supply chains, which allows them not only a faster response to their clients’ needs, but also bigger flexibility and security in the production process’ management.
Tripartite Alliance Model
The success of the Free Zone Regime in Nicaragua is also thanks to its innovative “Tripartite Alliance” model between business owners, the government and labor unions. When the global economic downturn hit in 2008-9, Nicaragua’s Free Zone community turned to an innovative approach to deal with the crisis. Representatives from the government, the business owners, and the labor unions met, worked out and signed a Tripartite Agreement designed to give the business sector increased predictability as to wage increases and give the labor sector more assurance of continued employment, wage stability, and access to social benefits.
This agreement has been so successful that it has now been extended three times, and the process has become semi-institutionalized as the “Tripartite Alliance”. Likewise, the spirit of success of the original Agreement made Nicaragua the only Central American country to officially join the “Better Work” labor program jointly promoted by the International Labor Organization (ILO) and U.S. Department of Labor.
Download our infographic and find the main figures of the industry.
Contact us to learn more about the Free Zone System in Nicaragua and the investment process in the country.