Tax Guide for US Expats Living and Working in Nicaragua
Who Is Liable For Income Taxes in Nicaragua
Resident and nonresident individuals, regardless of their nationality, are taxed on their income earned in Nicaragua. Foreign-source income is not taxed.
Individuals are considered resident if their nationality is Nicaraguan or if they have a resident migratory status (permanent or temporary) that allows them to work in Nicaragua.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Annual income in excess of C$75,000 is taxable, including salary, pensions, bonuses, premiums, commissions and allowances (for example, housing and educational allowances). However, the 13th month payment (Aguinaldo) and labor indemnification payments are not taxable.
Self-employment and business income. Income in excess of C$50,000 derived from self-employment or from a trade or business is taxable. However, professional services rendered by self-employed resident individuals to Nicaraguan entities are subject to a 10% flat withholding tax.
Investment income. Dividends paid or credited by local companies to resident or nonresident individuals are subject to a 10% withholding tax. Payments to nonresidents for royalties from franchises are subject to a 21% withholding tax. Payments to nonresident individuals for professional technical advice and similar payments are subject to a 20% withholding tax.
Directors’ fees. Directors’ fees paid to resident and nonresident individuals are subject to withholding tax at a rate of 10% for resident individuals and 20% for nonresident individuals.
Capital gains. Capital gains are included in taxable income. Capital losses are deductible only if they relate to the generation of taxable income.
Deductions
Personal deductions and allowances. The only allowable personal deductions are social security contributions by employees.
Business deductions. All costs and expenses that are necessary to generate taxable income and protect investments are deductible.
Relief for losses. Self-employed individuals may carry forward their losses for up to three years.
B. Social security
Social security contributions are levied on salaries at a rate of 16% for employers and 6.25% for employees. The maximum monthly salary subject to employer and employee social security contributions is C$37,518 (approximately, US$1,663.77) of employees’ total compensation.
D. Double tax relief and tax treaties
Nicaragua has not entered into tax treaties with any other countries.
To learn more about the history, culture, economy and other information about Nicaragua
We have been preparing US income tax returns for US Citizens and permanent residents living in Nicaragua for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Nicaragua and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Nicaragua.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email