El Salvador’s location and natural attributes make it an attractive investment destination. The macroeconomic context and declining rule of law present some challenges. El Salvador’s economy has registered the lowest levels of growth in the region for many years, with average annual GDP growth of 2.5 percent from 2016 to 2019. After a deep pandemic-related contraction (7.9 percent) in 2020, the Central Bank estimates GDP rebounded to 10.3 percent growth in 2021. The IMF expects the economy to grow 3.2 percent in 2022, with growth rates declining to 2 percent in the medium-term. Economic underperformance is mainly driven by fiscal constraints. Persistent budget deficits and increased government spending – exacerbated by the pandemic – have contributed to a heavy debt burden. With public debt at an estimated 88.5 percent of GDP in 2021, the Government of El Salvador (GOES) has limited capacity for public investment and job creation initiatives. Large financing needs are projected for 2022.
The Bukele administration continues to make efforts to attract foreign investment and has taken measures to reduce cumbersome bureaucracy and improve security conditions. However, the implementation of the reforms has been slow, and laws and regulations are occasionally passed and implemented quickly without consulting with the private sector or assessing the impact on the business climate.
After being announced in June 2021, Bitcoin became a legal tender in El Salvador on September 7, 2021, alongside the U.S. dollar. The Bitcoin Law mandates that all businesses must accept Bitcoin, with limited exceptions for those who do not have the technology to carry out transactions. Prices do not need to be expressed in Bitcoin and the U.S. dollar is the reference currency for accounting purposes. The GOES created a $150 million trust fund managed by El Salvador’s Development Bank to guarantee automatic convertibility and subsidize exchange fees. The rapid implementation caused uncertainty in the investment climate and added costs to businesses.
Government of El Salvador actions have eroded separation of powers and independence of the judiciary over the past year. In May 2021, the Legislative Assembly dismissed the Attorney General and all five justices of the Supreme Court’s Constitutional Chamber and immediately replaced them with officials loyal to President Bukele. Furthermore, in August 2021, the legislature amended the Judicial Career Organic Law to force into retirement judges ages 60 or above and those with at least 30 years of service. The move was justified by the ruling party as an effort to root out corruption in the judiciary from past administrations. A September 2021 ruling from the newly appointed Constitutional Chamber allows for immediate presidential re-election, despite the Constitution prohibiting presidential incumbents from re-election to a consecutive term. Legal analysts believe these measures were unconstitutional and have enabled the Legislative Assembly and the Bukele administration to exert control over the judiciary.
The Legislative Assembly is not required to publish draft legislation and opportunities for public engagement are limited. With the NuevasIdeasruling party holding a supermajority, legislation is often passed quickly with minimal analysis and debate in parliamentary committees and plenary sessions, contributing to an overall climate of regulatory uncertainty.
Commonly cited challenges to doing business in El Salvador include the discretionary application of laws and regulations, lengthy and unpredictable permitting procedures, as well as customs delays. El Salvador has lagged its regional peers in attracting foreign direct investment (FDI). The sectors with the largest investment have historically been textiles and retail establishments, though investment in energy has increased in recent years.
The Bukele administration has proposed several large infrastructure projects which could provide opportunities for U.S. investment. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Given limited fiscal capacity for public investment, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. In August 2021, El Salvador’s Legislative Assembly approved the contract award of the first PPP project to expand the cargo terminal at the international airport.
As a small energy-dependent country with no Atlantic coast, El Salvador heavily relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR); the United States is El Salvador’s top trading partner. Proximity to the U.S. market is a competitive advantage for El Salvador. As most Salvadoran exports travel by land to Guatemalan and Honduran ports, regional integration is crucial for competitiveness. Although El Salvador officially joined the Customs Union established by Guatemala and Honduras in 2018, implementation stalled following the Bukele administration’s decision to prioritize bilateral trade facilitation with Guatemala. In October 2021, however, the GOES announced it would proceed with Customs Union implementation. El Salvador rejoined technical level working group discussions and resumed testing of system interconnectivity.
The Bukele administration has taken initial steps to facilitate trade. In 2019, the government of El Salvador (GOES) relaunched the National Trade Facilitation Committee (NTFC), which produced the first jointly developed private-public action plan to reduce trade barriers. The plan contained 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. Measures were not fully implemented in 2020 due to the coronavirus pandemic. In 2021, the NTFC revised the action plan to adjust measures under implementation and finalized drafting the national trade facilitation strategy, which will be launched in March 2022. In January 2022, the NFTC met to evaluate progress on the action plan. The NFTC released the action plan for 2022 on February 17th. The 2022 action plan has 29 measures to facilitate cross-border trade and improve road and border infrastructure.
1. Openness To, and Restrictions Upon, Foreign Investment
The GOES recognizes the benefits of attracting FDI. El Salvador does not have laws or practices that discriminate against foreign investors, nor does the GOES screen or prohibit FDI. However, FDI levels are among the lowest in Central America. The Central Bank reported net annual FDI inflows of $408.5 million, or approximately 1.5 percent of GDP, at the end of September 2021.
The Exports and Investment Promotion Agency of El Salvador (PROESA) supports investment in seven main sectors: textiles and apparel; business services; tourism; aeronautics; agro-industry; light manufacturing; and energy. PROESA provides information for potential investors about applicable laws, regulations, procedures, and available incentives for doing business in El Salvador. Websites: https://investelsalvador.com/ and https://proesa.gob.sv/servicios/servicios-al-inversionista/.
The National Association of Private Enterprise (ANEP), El Salvador’s umbrella business chamber, serves as the primary private sector representative in dialogues with GOES ministries. http://www.anep.org.sv/.
In 2019, the Bukele administration created the Secretariat of Commerce and Investment, a position within the President’s Office responsible for the formulation of trade and investment policies, as well as overall coordination of the Economic Cabinet. In addition, the Bukele administration created the Presidential Commission for Strategic Projects to lead the GOES’ major infrastructure projects.
Foreign citizens and private companies can freely establish businesses in El Salvador.
No single natural or legal person – whether national or foreign – can own more than 245 hectares (605 acres) of land. The Salvadoran Constitution stipulates there is no restriction on foreign ownership of rural land in El Salvador except in cases where Salvadoran nationals face ownership restrictions in the corresponding country. Rural land to be used for industrial purposes is not subject to this reciprocity requirement.
The Investments Law grants equal treatment to foreign and domestic investors. Apart from limitations imposed on micro businesses, which are defined as having 10 or fewer employees and yearly sales of $175,930 or less, foreign investors may freely establish any type of domestic business. Investors who begin operations with 10 or fewer employees must present plans to increase employment to the Ministry of Economy’s National Investment Office.
The Investment Law provides that extractive resources are the exclusive property of the state. The GOES may grant private concessions for resource extraction, though concessions are infrequently granted.
El Salvador has been a World Trade Organization (WTO) member since 1995. The latest trade policy review performed by the WTO was published in 2016 (document: WT/TPR/S/344/Rev.1).
In 2018, the Salvadoran Foundation for Economic and Social Development (FUSADES) published a position paper on investment policies, expanding on a 2015 study of the role of policies in productive development and investment. The report, written in Spanish, contains an analysis of policies, competitive advantages, constraints to investment attraction, and private sector views of the business climate. The report recommends that the government formulate a long-term development strategy, strengthen the cohesion between investment, trade facilitation and competitiveness policies, and develop an infrastructure policy that includes investment and PPP portfolios, among others. In addition, a September 2021 report on foreign direct investment in El Salvador, also by FUSADES, points out that investment attraction continues to be constrained by the lack of a comprehensive development and competitiveness strategy, poor coordination among government agencies on investment issues, including promotion and aftercare, and institutional capacity limitations. The analysis also notes that stabilizing public finances would contribute to supporting capital flows to El Salvador.
El Salvador has various laws that promote and protect investments, as well as providing benefits to local and foreign investors. These include: the Investments Law, the International Services Law; the Free Trade Zones Law; the Tourism Law, the Renewable Energy Incentives Law; the Law on Public Private Partnerships; the Special Law for Streamlining Procedures for the Promotion of Construction Projects; and the Legal Stability Law for Investments.
While the government encourages Salvadoran investors to invest in El Salvador, it neither promotes nor restricts investment abroad.
2. Bilateral Investment Agreements and Taxation Treaties
El Salvador has bilateral investment treaties in force with Argentina, Belize, BLEU (Belgium-Luxembourg Economic Union), Chile, the Czech Republic, Finland, France, Germany, Israel, Republic of Korea, Morocco, the Netherlands, Paraguay, Peru, Spain, Switzerland, the United Kingdom, and Uruguay. El Salvador is one of the five Central American Common Market countries that have an investment treaty among themselves.
The CAFTA-DR entered into force in 2006 between the United States and El Salvador. CAFTA-DR’s investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. Under this agreement, U.S. investors enjoy the right to establish, acquire, and operate investments in El Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protections and the right to receive a fair market value for property in the event of expropriation. Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement that is transparent and open to the public.
El Salvador also has free trade agreements (FTAs) with Mexico, Chile, Panama, Colombia, and Taiwan. Although the GOES announced the cancellation of the Taiwan FTA in February 2019, the Supreme Court halted the cancellation in March 2019. The FTA remains in force pending a Supreme Court ruling.
In January 2020, the South Korea-Central America FTA became effective. This FTA includes investment provisions. El Salvador’s FTAs with Mexico, Chile, Dominican Republic, and Panama also include investment provisions. El Salvador continues trade agreement negotiations with Canada, which will likely include investment provisions. The Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba in 2011 and an additional Protocol to the PSA in October 2018. El Salvador and Bolivia signed a PSA in November 2018 that is pending ratification in the Legislative Assembly. A PSA with Ecuador entered into force in 2017.
El Salvador, along with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that establishes a Free Trade Area. The agreement entered into force with El Salvador in 2013. On March 1, 2022, El Salvador ratified the Protocol to the Association Agreement to take account of the accession of the Republic of Croatia to the European Union. The United Kingdom-Central America Association Agreement entered into force in January 2021. The agreement ensures continuity of commercial ties following Brexit and provides a framework for cooperation and investment.
El Salvador does not have a bilateral taxation treaty with the United States. El Salvador has one tax agreement with Spain, in effect since 2008.
El Salvador became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2011. The OECD published El Salvador’s Phase 1 peer review report, which demonstrates its commitment to international standards for tax transparency and exchange of information, in 2015. The Phase 2 peer review on implementation of the standards, published in 2016, concluded that El Salvador is “largely compliant.”
El Salvador is not a member of the OECD Inclusive Framework on Base Erosion and Profit Shifting.
In November 2020, El Salvador eliminated the Security Special Contribution on Large Taxpayers (CESC). Enacted in 2015, the CESC levied a five-percent tax on companies whose net income exceeded $500,000 to finance security measures, including the GOES’ Plan Control Territorial (Territorial Control Plan).
In May 2019, the legislature also approved an Authentic Interpretation of the Income Tax Law to clarify that energy distributors may deduct energy losses from the income tax, as energy losses are an unavoidable cost of distribution. Prior to the authentic interpretation, tax authorities repeatedly imposed back taxes, interest, and penalties for improper deductions. Companies successfully challenged most of the tax assessments but had incurred legal costs and increased financial exposure.
3. Legal Regime
The laws and regulations of El Salvador are relatively transparent and generally foster competition, but government accountability has weakened in recent years. Legal, regulatory, and accounting systems are transparent and consistent with international norms. However, the discretionary application of rules can complicate routine transactions, such as customs clearances and permitting applications. Regulatory agencies are often understaffed and inexperienced in dealing with complex issues. New foreign investors should review the regulatory environment carefully. In addition to applicable national laws and regulations, localities may impose permitting requirements on investors.
Environmental, social and governance (ESG) disclosures are not mandatory in El Salvador. However, the financial services industry is introducing ESG factors into investment portfolios and strategies. In 2019, 12 private banks signed the “Sustainable Finance Protocol” to develop green finance strategies, design specialized products and services for sustainable development, and implement result-based frameworks for achieving environmental and social sustainability. In June 2021, the Stock Exchange issued guidelines for the issuance of sustainability-linked bonds and announced dedicated listing segments for thematic bonds (green, social and sustainable bonds).
Companies note the GOES has enacted laws and regulations without adhering to established notice and comment procedures. The Regulatory Improvement Law, which entered into force in 2019, requires GOES agencies to publish online the list of laws and regulations they plan to approve, reform, or repeal each year. Institutions cannot adopt or modify regulations and laws not included in that list. The implementation of the law is gradual; the regulatory agenda is required for the executive branch since 2020, for the legislative and judicial branches, and autonomous entities in 2022, and municipalities in 2023. Prior to adopting or amending laws or regulations, the Simplified Administrative Procedures Law requires the GOES to perform a Regulatory Impact Analysis (RIA) based on a standardized methodology. Proposed legislation and regulations, as well as RIAs, must be made available for public comment. In practice, however, the Legislative Assembly does not publish draft legislation on its website and does not solicit comments on pending legislation. The GOES does not yet require the use of a centralized online portal to publish regulatory actions. The reforms have not been fully implemented. In 2021, 13 ministries (out of 16) drafted and published their regulatory agendas. Only five ministries revised their regulatory agendas to publish modifications. GOES agencies performed only five RIAs prior to approving new legislation. Although the implications of the reforms are still not apparent, private sector stakeholders have expressed support for the measures.
El Salvador continues to develop the National Procedures Registry, an online platform listing all investment and trade-related procedures and requirements. The registry aims at increasing transparency and legal certainty, as only registered procedures and requirements will be enforceable. Procedures and requirements of central government agencies will be registered in 2022, autonomous institutions and state-owned companies in 2023, and municipalities in 2024. In 2021, ten ministries registered their procedures and requirements.
El Salvador began implementing the Simplified Administrative Procedures Law in February 2019. This law seeks to streamline and consolidate administrative processes among GOES entities to facilitate investment. In 2016, El Salvador adopted the Electronic Signature Law to facilitate e-commerce and trade. Policies, procedures and needed infrastructure (data centers and specialized hardware and software) are in place for implementation. The first digital certification providers were licensed in 2021. Six GOES agencies plan to implement electronic signature in 2022, including the Ministry of Economy, the National Directorate of Medicines, the National Registry Center, and the Planning Office of the Metropolitan Area of San Salvador. El Salvador also enacted the Electronic Commerce Law, which entered into force in February 2021. The law establishes the framework for commercial and financial activities, contractual or not, carried out by electronic and digital means, introduces fair and equitable standards to protect consumers and providers, and sets processes to minimize risks arising from the use of new technologies. The law aims to support rapidly growing online businesses and financial technology (FinTech).
In 2018, El Salvador enacted the Law on the Elimination of Bureaucratic Barriers, which created a specialized tribunal to verify that regulations and procedures are implemented in compliance with the law and to sanction public officials who impose administrative requirements not contemplated in the law. However, the law is pending implementation until the GOES appoints members of the tribunal.
The GOES controls the price of some goods and services, including electricity, liquid propane gas, gasoline, public transport fares, and medicines. The government also directly subsidizes water services and residential electricity rates. Electricity price is set by supply and demand and traded on a spot market. The market also operates with Power Purchase Agreements (PPAs) and long-term contracts. The GOES took over some private buses and routes in March 2022 in an effort to confront rising inflation, which critics said violated the Constitution.
The Superintendent of Electricity and Telecommunications (SIGET) oversees electricity rates, telecommunications, and distribution of electromagnetic frequencies. The Salvadoran government subsidizes residential consumers for electricity use of up to 105 kWh monthly. The electricity subsidy costs the government between $50 million to $64 million annually.
El Salvador’s public finances are relatively transparent, but do not fully meet international standards. Budget documents, including the executive budget proposal, enacted budget, and end-of-year reports, as well as information on debt obligations are accessible to the public at: http://www.transparenciafiscal.gob.sv/ptf/es/PTF2-Index.html An independent institution, the Court of Accounts, audits the financial statements, economic performance, cash flow statements, and budget execution of all GOES ministries and agencies. The results of these audits are publicly available online.
The GOES has not disclosed information on the use of public funds devoted for Bitcoin implementation, including information about bitcoin holdings and operations. In addition, the GOES continues to shield the accounts of the Intelligence Agency from Court of Accounts and has limited the Court’s capacity to audit state-owned enterprise subsidiaries.
El Salvador belongs to the Central American Common Market and the Central American Integration System (SICA), organizations which are working on regional integration, (e.g., harmonization of tariffs and customs procedures). El Salvador commonly incorporates international standards, such as the Pan-American Standards Commission (Spanish acronym COPANT), into its regulatory system.
El Salvador is a member of the WTO, adheres to the Agreement on Technical Barriers to Trade (TBT Agreement), and has adopted the Code of Good Practice annexed to the TBT Agreement. El Salvador is also a signatory to the Trade Facilitation Agreement (TFA) and has notified its Categories A, B, and C commitments. In 2017, El Salvador established a National Trade Facilitation Committee (NTFC) as required by the TFA, which was reactivated in July 2019.
El Salvador is a member of the U.N. Conference on Trade and Development’s international network of transparent investment procedures: https://elsalvador.eregulations.org/ Investors can find information on administrative procedures applicable to investment and income-generating operations including the name and contact details for those in charge of procedures, required documents and conditions, costs, processing time, and legal bases for the procedures.
El Salvador’s legal system is codified law. Commercial law is based on the Commercial Code and the corresponding Commercial and Civil Code of Procedures. There are specialized commercial courts that resolve disputes.
Although foreign investors may seek redress for commercial disputes through Salvadoran courts, many investors report the legal system to be slow, costly, and unproductive. Local investment and commercial dispute resolution proceedings routinely last many years. Final judgments are at times difficult to enforce. The Embassy recommends that potential investors carry out proper due diligence by hiring competent local legal counsel.
According to the Constitution, the judicial system is independent of the executive branch. Recent actions by the Legislative Assemblyhave eroded separation of powers and independence of the judiciary. In May 2021, the Legislative Assembly dismissed the Attorney General and all five justices of the Supreme Court’s Constitutional Chamber and immediately replaced them with officials loyal to President Bukele. Furthermore, in August 2021, the legislature amended the Judicial Career Organic Law to force into retirement judges ages 60 or above and those with at least 30 years of service. The move was justified by the ruling party as an effort to root out corruption in the judiciary from past administrations. Legal analysts believe these measures were unconstitutional and enabled the Legislative Assembly and the Bukele administration to exert control over the judiciary.
Miempresa is the Ministry of Economy’s website for new businesses in El Salvador. At Miempresa, investors can register new companies with the Ministry of Labor (MOL), Social Security Institute, pension fund administrators, and certain municipalities; request a tax identification number/card; and perform certain administrative functions. https://www.miempresa.gob.sv/
The country’s e-Regulations site provides information on procedures, costs, entities, and regulations involved in setting up a new business in El Salvador. https://elsalvador.eregulations.org/
The Exports and Investment Promoting Agency of El Salvador (PROESA) is responsible for attracting domestic and foreign private investment, promoting exports of goods and services, evaluating and monitoring the business climate, and driving investment and export policies. PROESA provides technical assistance to investors interested in starting operations in El Salvador, regardless of the size of the investment or number of employees. http://www.proesa.gob.sv/
The Office of the Superintendent of Competition reviews transactions for competition concerns. The OECD and the Inter-American Development Bank note the Superintendent employs enforcement standards that are consistent with global best practices and has appropriate authority to enforce the Competition Law effectively. Superintendent decisions may be appealed directly to the Supreme Court, the country´s highest court. https://www.sc.gob.sv/
The Constitution allows the government to expropriate private property for reasons of public utility or social interest. Indemnification can take place either before or after the fact.
In November 2021, the Legislative Assembly passed the Eminent Domain Law for Municipal Works to enable the National Directorate of Municipal Works (DOM) to expropriate land necessary for the development of infrastructure projects in the 262 municipalities of the country. The law allows the DOM to begin works before condemnation proceedings are finalized and without depositing the estimated value of the property. Landowners can appeal the court’s determination of the compensation but cannot challenge the grounds for the seizure. Legal experts have noted that the law’s broad expropriation parameters and insufficient guarantees for landowners could lead to arbitrary land seizures.
There are no recent cases of expropriation. In 1980, a rural/agricultural land reform established that no single natural or legal person could own more than 245 hectares (605 acres) of land, leading to the government expropriating the land of some large landholders. In 1980, private banks were nationalized but were subsequently returned to private ownership in 1989-90. A 2003 amendment to the Electricity Law requires energy-generating companies to obtain government approval before removing fixed capital from the country.
The Commercial Code, the Commercial Code of Procedures, and the Banking Law contain sections that deal with the process for declaring bankruptcy. There is no separate bankruptcy law or court. Bankruptcy proceedings are cumbersome, lengthy, and costly. In practice, bankruptcy proceedings are uncommon. In El Salvador, real estate mortgages and pledges grant the creditor privileged rights to obtain payment from assets given in guarantee. Thus, in case of insolvency, creditors with preferred guarantees file individual lawsuits. In addition, any creditor can request the judge the appointment of a receiver, procedure much simpler than bankruptcy.
Companies in financial distress can request a payment deferral from the judge to prevent bankruptcy. If approved by the judge and the creditors, the company may be able to negotiate a rescue plan with creditors.
Bankruptcy is not criminalized, but it can become a crime if the judge determines there was intent to defraud.
4. Industrial Policies
The International Services Law, approved in 2007, established service parks and centers with incentives similar to those received by El Salvador’s free trade zones. Service Park developers are exempted from income tax for 15 years, municipal taxes for ten years, and real estate transfer taxes. Service Park administrators are exempted from income tax for 15 years and municipal taxes for ten years.
Firms located in the service parks/service centers may receive the following permanent incentives:
Tariff exemption for the import of capital goods, machinery, equipment, tools, supplies, accessories, furniture, and other goods needed for the development of the service activities, along with full exemption from income tax and municipal taxes on company assets.
Service firms operating under the existing Free Trade Zone Law are also eligible for the incentives, though firms providing services to the Salvadoran market cannot receive the incentives. Eligible services include: international distribution, logistical international operations, call centers, information technology, research and development, marine vessels repair and maintenance, aircraft repair and maintenance, entrepreneurial processes (e.g., business process outsourcing), hospital-medical services, international financial services, container repair and maintenance, technology equipment repair, elderly and convalescent care, telemedicine, cinematography postproduction services, including subtitling and translation, and specialized services for aircraft (e.g., supply of beverages and prepared food, laundry services and management of inventory).
The Tourism Law establishes tax incentives for those who invest a minimum of $25,000 in tourism-related projects in El Salvador, including: value-added tax exemption for the acquisition of real estate; import tariffs waiver for construction materials, goods, equipment (subject to limitation); and a ten-year income tax waiver. The investor also benefits from a five-year exemption from land acquisition taxes and a 50 percent reduction of municipal taxes. To take advantage of these incentives, the enterprise must contribute five percent of its profits during the exemption period to a government-administered Tourism Promotion Fund. More information about tax incentives for tourism, please visit: http://www.mitur.gob.sv/ii-aspectos-legales-en-beneficio-de-la-inversion-contemplados-en-la-ley-de-turismo/
The Renewable Energy Incentives Law promotes investment projects that use renewable energy sources. In 2015, the Legislative Assembly approved amendments to encourage the use of renewable energy sources and reduce dependence on fossil fuels. These reforms extended the incentives to power generation using renewable energy sources, such as hydro, geothermal, wind, solar, marine, biogas, and biomass. The incentives include a 10-year exemption from customs duties on the importation of machinery, equipment, materials, and supplies used for the construction and expansion of substations, transmission, or sub-transmission lines. Revenues directly derived from renewable power generation enjoy full income tax exemptions for a period of five years in case of projects above 10 MW and 10 years for smaller projects. The Law also provides a tax exemption on income derived directly from the sale of certified emission reductions (CERs) under the Mechanism for Clean Development of the Kyoto Protocol, or carbon markets (CDM).
El Salvador does not issue guarantees or directly co-finance foreign direct investment projects. However, El Salvador has a Public-Private Partnerships Law that allows private investment in the development of infrastructure projects, including in areas of health, education, and security. Under the second MCC Compact, El Salvador launched international tenders for two Public-Private Partnerships projects. In August 2021, the Legislative Assembly approved the contract award of the first-ever PPP project to design, expand, construct, and operate expanded cargo operations of El Salvador’s primary international airport. The estimated budget for the PPP is $57 million. A second PPP tender was released in January 2020 for the design, financing, installation, equipment, operation and maintenance of a public lighting and video surveillance systems on approximately 143 kilometers of roads in San Salvador, La Libertad and La Paz departments. The GOES, however, cancelled the tender in 2022, because the key components of the project were dated after passing nearly two years since it was initially published. It is unclear if the GOES will relaunch the tender. El Salvador has undertaken pre-feasibility studies on other potential PPP projects, including a second airport in eastern El Salvador, a toll road concession to connect its biggest port (Acajutla) to the La Hachadura border with Guatemala, and improvements of four border crossings (La Hachadura, Anguiatu, El Poy and El Amarillo) and three intermediate customs facilities (Metalio, Santa Ana and San Bartolo). The GOES has planned a total of 16 PPPs.
The Free Trade Zone Law is designed to attract investment in a wide range of activities, although most of the businesses in free trade zones are textile plants. A Salvadoran partner is not needed to operate in a free trade zone, and some textile operations are completely foreign owned.
There are 17 free trade zones in El Salvador. They host 206 companies in sectors including textiles, distribution, call centers, business process outsourcing, agribusiness, agriculture, electronics, and metallurgy. Owned primarily by Salvadoran, U.S., Taiwanese, and Korean investors, free trade zone firms employ more than 81,000 people. The point of contact is the Chamber of Textile, Apparel and Free Trade Zones of El Salvador (CAMTEX) at: https://www.camtex.com.sv/site/.
The Free Trade Zone Law establishes rules for free trade zones and bonded areas. The free trade zones are outside the nation’s customs jurisdiction while the bonded areas are within its jurisdiction, but subject to special treatment. Local and foreign companies can establish themselves in a free trade zone to produce goods or services for export or to provide services linked to international trade. The regulations for the bonded areas are similar.
Qualifying firms located in the free trade zones and bonded areas may enjoy the following benefits:
Exemption from all duties and taxes on imports of raw materials and the machinery and equipment needed to produce for export;
Exemption from taxes for fuels and lubricants used for producing exports if they not domestically produced;
Exemption from income tax, municipal taxes on company assets and property for either 15 years (if the company is in the metropolitan area of San Salvador) or 20 years (if the company is located outside of the metropolitan area of San Salvador);
Exemption from taxes on certain real estate transfers, e.g., the acquisition of goods to be employed in the authorized activity; and
Exemption from value-added tax on goods and services sourced locally to be employed in the authorized activity, including goods that are not incorporated into the final product, security and transportation services, as well as construction services and materials.
Companies in the free trade zones are also allowed to sell goods or services in the Salvadoran market if they pay applicable taxes on the proportion sold locally. Additional rules apply to textile and apparel products.
Regulations allow a WTO-complaint “drawback” to refund custom duties paid on imported inputs and intermediate goods exclusively used in the production of goods exported outside of the Central American region. Regulations also included the creation of a Business Production Promotion Committee with the participation of the private and public sector to work on policies to strengthen the export sector, and the creation of an Export and Import Center.
All import and export procedures are handled by the Import and Export Center (Centro de Trámites de Importaciones y Exportaciones – CIEX El Salvador). More information about the procedures can be found at: https://www.ciexelsalvador.gob.sv/ciexelsalvador/
El Salvador’s Investment Law does not require investors to meet export targets, transfer technology, incorporate a specific percentage of local content, turn over source code or provide access to surveillance, or fulfill other performance criteria.
In August 2021, the Legislative Assembly passed amendments to the Credit History Law. The amendments introduce data localization requirements mandating credit bureaus and economic agents that report on credit history to store data and its backup exclusively in El Salvador and grant unrestricted access to the Central Bank and the Superintendence of the Financial System. The amendments took effect September 9, 2021, with a grace period of six months for companies to comply as the Central Bank develops technical norms for implementation. U.S. stakeholders have expressed concerns that these new requirements could compromise consumer data privacy and protection. There are no restrictions on cross-border transfers of other business-related data.
Foreign investors and domestic firms are eligible for the same incentives. Exports of goods and services are exempt from value-added tax.
The International Services Law establishes tax benefits for businesses that invest at least $150,000 during the first year of operations, including working capital and fixed assets, hire at least 10 permanent employees, and have at least a one-year contract. For hospital/medical services, the minimum capital investment must be $1 million and a minimum of $250,000 for care services for the elderly and convalescent. Hospitals or clinics must be located outside of major metropolitan areas, and medical services must be provided only to patients with insurance.
5. Protection of Property Rights
Private property, both non-real estate and real estate, is recognized and protected in El Salvador. Mortgages and real property liens exist. Companies that plan to buy property are advised to hire competent local legal counsel to guide them on the property’s title prior to purchase.
Per the Constitution, no single natural or legal person- whether national or foreign- can own more than 245 hectares (605 acres) of land. Reciprocity applies to the ownership of rural land, i.e., El Salvador does not restrict the ownership of rural land by foreigners, unless Salvadoran citizens are restricted in the corresponding states. The restriction on rural land does not apply if used for industrial purposes.
Real property can be transferred without government authorization. For title transfer to be valid regarding third parties, however, it needs to be properly registered. Laws regarding rental property tend to favor the interests of tenants. For instance, tenants may remain on property after their lease expires, provided they continue to pay rent. Likewise, the law limits the permissible rent and makes eviction processes extremely difficult.
Squatters occupying private property in “good faith” can eventually acquire title. If the owner of the property is unknown, squatters can acquire title after 20 years of good faith possession through a judicial procedure; if the owner is known, squatters can acquire title after 30 years.
Squatters may never acquire title to public land, although municipalities often grant the right of use to the squatter.
Zoning is regulated by municipal rules. Municipalities have broad power regarding property use within their jurisdiction. Zoning maps, if they exist, are generally not available to the public.
The perceived ineffectiveness of the judicial system discourages investments in real estate and makes execution of real estate guarantees difficult. Securitization of real estate guarantees or titles is legally permissible but does not occur frequently in practice.
El Salvador’s intellectual property rights (IPR) legal framework is strong. El Salvador revised several laws to comply with CAFTA-DR´s provisions on IPR, such as extending the copyright term to 70 years. The Intellectual Property Promotion and Protection Law (1993, revised in 2005), Law of Trademarks and Other Distinctive Signs (2002, revised in 2005), and Penal Code establish the legal framework to protect IPR. Investors can register trademarks, patents, copyrights, and other forms of intellectual property with the National Registry Center´s Intellectual Property Office. In 2008, the government enacted test data exclusivity regulations for pharmaceuticals (for five years) and agrochemicals (for 10 years) and ratified an international agreement extending protection to satellite signals.
In November 2021, the National Registry Center inaugurated the first Technology and Innovation Support Center (TISC) to assist innovators and entrepreneurs create, protect, and manage IP rights. The TISC provides access to patent and non-patent (scientific and technology) databases and IP-related publications, and information on IP laws and regulations.
El Salvador’s enforcement of IPR protections falls short of its written policies. Salvadoran authorities have limited resources to dedicate to enforcement of IPR laws. The National Civil Police (PNC) has an Intellectual Property Section with five investigators, while the Attorney General’s Office (FGR) has 13 prosecutors in its Private Property division that also has responsibility for other property crimes including cases of extortion. According to ASPI, the PNC section coordinates well with other government and private entities. Nevertheless, the PNC admits that a lack of resources and expertise (e.g., regarding information technology) hinders its effectiveness in combatting IPR crimes.
The Salvadoran Intellectual Property Association (ASPI – Asociación Salvadoreña de Propiedad Intelectual) notes that piracy is common in El Salvador because the police focus on investigating criminal networks rather than points of sale. Trade in counterfeit medicines and pirated software is common.
Customs officials have identified some counterfeit products arriving directly from China through the Salvadoran seaport of Acajutla. In 2021, Customs officials seized 20 shipments based on the presumption of containing counterfeit products. These shipments primarily involved toys (e.g., Mattel and Rubin Cube), clothing, handbags, and footwear (e.g., Victoria’s Secret, Pink, Levi’s, Guess, Ralph Lauren, Cartier, Puma, Nike, Adidas, Vans, and Tommy Hilfiger), perfumes and colognes (e.g., Chanel, Dior, Hugo Boss and Lacoste), mobile phone accessories (e.g., Samsung), and accessories for vehicles (e.g., Kia and Hyundai). Contraband and counterfeit products, especially cigarettes, liquor, toothpaste, and cooking oil, remain widespread. According to the GOES and private sector contacts, most unlicensed or counterfeit products are imported to El Salvador. The Distributors Association of El Salvador (ADES) estimated in 2019 that the annual cost of illicit trade in El Salvador amounts to $1 billion. Most contraband cigarettes come in from China, Panama, South Korea, and Paraguay and undercut legitimately imported cigarettes, which are subject to a 39 percent tariff. According to ADES, most contraband cigarettes are smuggled in by gangs, with the complicity of Salvadoran authorities.
The national Intellectual Property Registry has 22 registered geographical indications for El Salvador. In 2018, the GOES registered four geographical indications involving Denominations of Origin for “Jocote Barón Rojo San Lorenzo” (a sour fruit), “Pupusa de Olocuilta” (a variant of El Salvador’s traditional food), “Camarones de la Bahía de Jiquilisco” (shrimp from the Jiquilisco Bay), and “Loroco San Lorenzo” (flower used in Salvadoran cuisine). Existing geographic indications include “Balsamo de El Salvador” (balm for medical, cosmetic, and gastronomic uses – since 1935), “Café Ilamatepec” (coffee – since 2010), and “Chaparro” (Salvadoran hard liquor- since 2016).
El Salvador is not listed in the U.S. Trade Representative’s Special 301 Report or its Review of Notorious Markets for Counterfeiting and Piracy. There are no IP-related laws pending.
El Salvador is a signatory of the Berne Convention for the Protection of Literary and Artistic Works; the Paris Convention for the Protection of Industrial Property; the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication; the World Intellectual Property Organization (WIPO) Copyright Treaty; the WIPO Performance and Phonograms Treaty; the Rome Convention for the Protection of Performers, Phonogram Producers, and Broadcasting Organizations; and the Beijing Treaty on Audiovisual Performances (2012), which grants performing artists certain economic rights (such as rights over broadcast, reproduction, and distribution) of live and recorded works.
The Superintendent of the Financial System (https://www.ssf.gob.sv/) supervises individual and consolidated activities of banks and non-bank financial intermediaries, financial conglomerates, stock market participants, insurance companies, and pension fund administrators. Foreign investors may obtain credit in the local financial market under the same conditions as local investors. Interest rates are determined by market forces, with the interest rate for credit cards and loans capped at 1.6 times the weighted average effective rate established by the Central Bank. The maximum interest rate varies according to the loan amount and type of loan (consumption, credit cards, mortgages, home repair/remodeling, business, and microcredits).
In January 2019, El Salvador eliminated a Financial Transactions Tax (FTT), which was enacted in 2014 and greatly opposed by banks.
The Securities Market Law establishes the framework for the Salvadoran securities exchange. Stocks, government and private bonds, and other financial instruments are traded on the exchange, which is regulated by the Superintendent of the Financial System.
Foreigners may buy stocks, bonds, and other instruments sold on the exchange and may have their own securities listed, once approved by the Superintendent. Companies interested in listing must first register with the National Registry Center’s Registry of Commerce. In 2021, the exchange traded $3.7 billion, with average daily volumes between $12 million and $30 million. Government-regulated private pension funds, Salvadoran insurance companies, and local banks are the largest buyers on the Salvadoran securities exchange. For more information, visit: https://www.bolsadevalores.com.sv/
All but two of the major banks operating in El Salvador are regional banks owned by foreign financial institutions. Given the high level of informality, measuring the penetration of financial services is difficult; however, it remains relatively low, between 30 percent – according to the Salvadoran Banking Association (ABANSA) – and 37 percent – reported by the Superintendence of the Financial System (SSF). The banking system is sound and generally well-managed and supervised. El Salvador’s Central Bank is responsible for regulating the banking system, monitoring compliance of liquidity reserve requirements, and managing the payment systems. No bank has lost its correspondent banking relationship in recent years. There are no correspondent banking relationships known to be in jeopardy.
The banking system’s total assets as of December 2021 were $21.1 billion. Under Salvadoran banking law, there is no difference in regulations between foreign and domestic banks and foreign banks can offer all the same services as domestic banks.
The Cooperative Banks and Savings and Credit Associations Law regulates the organization, operation, and activities of financial institutions such as cooperative banks, credit unions, savings and credit associations, and other microfinance institutions. The Money Laundering Law requires financial institutions to report suspicious transactions to the Attorney General. Despite having regulatory scheme in place to supervise the filing of reports by cooperative banks and savings and credit associations, these entities rarely file suspicious activity reports.
The Insurance Companies Law regulates the operation of both local and foreign insurance firms. Foreign firms, including U.S., Colombian, Dominican, Honduran, Panamanian, Mexican, and Spanish companies, have invested in Salvadoran insurers.
El Salvador does not have a sovereign wealth fund.
7. State-Owned Enterprises
El Salvador has successfully liberalized many sectors, though it maintains state-owned enterprises (SOEs) in energy generation and transmission, water supply and sanitation, ports and airports, and the national lottery (see chart below).
2022 Budgeted Revenue
Number of Employees
State-run Electricity Company (CEL)
Water Authority (ANDA)
Port Authority (CEPA)
Although the GOES privatized energy distribution in 1999, it maintains significant energy production facilities through state-owned Rio Lempa Executive Hydroelectric Commission (CEL), a significant producer of hydroelectric and geothermal energy.
In October 2021, El Salvador’s legislature enacted the Creation Law of the Power, Hydrocarbons, and Mines General Directorate. The new General Directorate will be responsible for dictating the national energy policy and proposing amendments to energy legislation and by-laws, as well as implementing the energy policy. The law allows the President of the state-owned power company (CEL) to serve as the Director General of the new entity. The law will enter into force in November 2022. Industry stakeholders are concerned about the potential conflict of interest that would result from CEL making energy policy and participating in the sector as SOE.
The primary water service provider is the National Water and Sewer Administration (ANDA), which provides services to 96.6 percent of urban areas and 77 percent of rural areas in El Salvador.
The Autonomous Executive Port Commission (CEPA) operates both the seaports and the airports. CEL, ANDA, and CEPA Board Chairs hold Minister-level rank and report directly to the President.
The Law on Public Administration Procurement and Contracting (LACAP) covers all procurement of goods and services by all Salvadoran public institutions, including the municipalities. Exceptions to LACAP include: procurement and contracting financed with funds coming from other countries (bilateral agreements) or international bodies; agreements between state institutions; and the contracting of personal services by public institutions under the provisions of the Law on Salaries, Contracts and Day Work. Additionally, LACAP allows government agencies to use the auction system of the Salvadoran Goods and Services Market (BOLPROS) for procurement. Although BOLPROS is intended for use in purchasing standardized goods (e.g., office supplies, cleaning products, and basic grains), the GOES uses BOLPROS to procure a variety of goods and services, including high-value technology equipment and sensitive security equipment. As of October 2021, public procurement using BOLPROS totaled $157.1 million. The United Nations Office for Project Services (UNOPS) and United Nations Development Program (UNDP) also support government agencies in the procurement of a wide range of infrastructure projects. Procurement for municipal infrastructure works is governed by the Simplified Procurement Law for Municipal Works in force since November 2021 and centralized in the National Directorate of Municipal works created by the Bukele administration to oversee investment in infrastructure and social projects in municipalities. The GOES has created a dedicated procurement website to publish tenders by government institutions. https://www.comprasal.gob.sv/comprasal_web/).
In August 2020, President Bukele signed an executive order allowing the submission of bids for contractual services via email and eliminating bidders’ obligation to register online with the public procurement system (Comprasal), as well as lifting the responsibility of procurement officers to keep a record of companies and individuals who receive tender documents. Transparency advocates and legal experts have noted that the order would decrease potential bidders’ ability to access and compete fairly for government tenders. The order is pending review in the Supreme Court of Justice, but without injunctive effect.
Alba Petroleos is a joint venture between a consortium of mayors from the FMLN party and a subsidiary of Venezuela’s state-owned oil company PDVSA. As majority PDVSA owned, Alba Petroleos has been subject to Office of Foreign Assets Control (OFAC) sanctions since January 2019. Alba Petroleos operates a reduced number of gasoline service stations and businesses in other industries, including energy production, food production, convenience stores, and bus transportation. Alba Petroleos has been surrounded by allegations of mismanagement, corruption, and money laundering. Critics charged that the conglomerate received preferential treatment during FMLN governments and that its commercial practices, including financial reporting, are non-transparent. In May 2019, the Attorney General’s Office initiated an investigation against Alba Petroleos and its affiliates for money laundering. Alba Petroleos’ assets are frozen by court order and some of its gasoline service stations are being managed by the National Council for Asset Administration (CONAB).
El Salvador is not engaged in a privatization program and has not announced plans to privatize.
8. Responsible Business Conduct
The private sector in El Salvador, including several prominent U.S. companies, has embraced the concept of responsible business conduct (RBC). Many companies donated to COVID-19 relief efforts in 2020. Several local foundations promote RBC practices, entrepreneurial values, and philanthropic initiatives. El Salvador is also a member of international institutions such as Forum Empresa (an alliance of RBC institutions in the Western Hemisphere), AccountAbility (UK), and the InterAmerican Corporate Social Responsibility Network. Businesses have created RBC programs to provide education and training, transportation, lunch programs, and childcare. In addition, RBC programs have included inclusive hiring practices and assistance to communities in areas such as health, education, senior housing, and HIV/AIDS awareness. Organizations monitoring RBC are able to work freely.
Following a reorganization under the Bukele administration, the Legal Secretariat is responsible for developing strategies and actions to promote transparency and accountability of government agencies, as well as fostering citizen participation in government. The watchdog organization Transparency International is represented in-country by the Salvadoran Foundation for Development (FUNDE).
El Salvador does not waive or weaken labor laws, consumer protection, or environmental regulations to attract foreign investment. El Salvador’s ability to enforce domestic laws effectively and fairly is limited by a lack of resources. El Salvador does not allow metal mining activity.
El Salvador has a high exposure to natural hazards, such as earthquakes and volcanic eruptions, and is highly vulnerable to climate change impacts, including frequent occurrences of floods, droughts, and tropical storms. Climate change, contamination, and overexploitation have contributed to water insecurity. Aquifers in the coastal and central zones of El Salvador have receded by as much as 13 feet (4 meters) due to climate change and at least 90 percent of surface water sources are contaminated by untreated sewage, agricultural and industrial waste, according to a 2018 study by the Ministry of Environment and Natural Resources (MARN).
After nearly 15 years of a polarized debate over water management, the Legislative Assembly passed the Water Resources Law in December 2021. The law prohibits the privatization of water resources and establishes access to water and sanitation as a human right, as well as prioritizes water usage towards human consumption. The law creates an all-public governing body the Salvadoran Water Authority (ASA) charged with drafting policies and guidelines for water extraction and wastewater discharge. The ASA will issue water permits for industrial purposes and other GOES ministries will issue permits relevant to their sectors. ASA will be the sole issuer of effluent discharge permits. The law will take effect in July 2022 as by-laws and regulations needed for implementation are drafted. The private sector has expressed concerns about legal uncertainty, as the law does not differentiate existing water permits from new ones and does not clearly define regulatory entity by sector.
MARN released for public consultation the National Environmental Policy on February 7, 2022. The policy focuses on climate change management and adaptation, biodiversity mainstreaming in the economy, restoration and conservation of water resources, and environmental zoning. To enable implementation, three cross-cutting issues are highlighted in the policy (education and awareness- raising, research and scientific innovation, and governance) as action required by the GOES.
El Salvador presented the update of its Nationally Determined Contributions (NDC) to the United Nations Framework Convention on the Climate Change (UNFCCC) on January 6, 2022. The updated NDCs include actions to reduce greenhouse gas emissions (GHG) in the energy sector; a cumulative emissions reduction target, and activities to increase carbon sinks and reservoirs in the agricultural landscape of the agriculture, forestry, and land-use change sector if large-scale financing is obtained from international and national sources with the participation of the private sector.
El Salvador carried out a capacity needs assessment as the initial phase in the process of formulating its long-term low emission development strategy. The evaluation helped identify national strengths, priority sectors, institutional framework, relevant actors, and capacity constraints, as well as served as input to draft a roadmap to guide the development and implementation of the strategy. The assessment and roadmap were published on January 18, 2022. Work is underway to design El Salvador’s 2050 Low Emission and Resilient Development Strategy.
The Environmental Law creates the National Incentives and Disincentives Program and establishes parameters for its design. The program is prepared by MARN in conjunction with the Ministries for Finance and Economy. In 2021, MARN finalized drafting the program that focuses on restoration of ecosystems and productive landscapes and includes tools such as reputational incentives (National Price for the Environment), financial incentives (payments for ecosystem services and lines of credit with state-owned banks to undertake restoration actions in productive landscapes), non-financial incentives (technical assistance), and market incentives (eco-labels and certifications). The program is pending approval of the Economic Cabinet.
Protected areas, use of nature-based solutions, sustainable forest management, and other ecosystem management plans are regulated in the Natural Protected Areas Law and Wildlife Conservation Law. El Salvador does not have green public procurement policies.
U.S. companies operating in El Salvador are subject to the U.S. Foreign Corrupt Practices Act (FCPA).
Corruption can be a challenge to investment in El Salvador. El Salvador ranks 115 out of 180 countries in Transparency International’s 2021 Corruption Perceptions Index. While El Salvador has laws, regulations, and penalties to combat corruption, their effectiveness is at times questionable. Soliciting, offering, or accepting a bribe is a criminal act in El Salvador. The Attorney General’s Anticorruption and Anti-Impunity Unit handles allegations of public corruption. The Constitution establishes a Court of Accounts that is charged with investigating public officials and entities and, when necessary, passing such cases to the Attorney General for prosecution. Executive-branch employees are subject to a code of ethics, including administrative enforcement mechanisms, and the government established an Ethics Tribunal in 2006.
In June 2021, El Salvador terminated its 2019 agreement with the organization of American States (OAS) to back the International Commission Against Impunity and Corruption (CICIES). CICIES audited pandemic spending in 2020. After receiving CICIES preliminary findings in November 2021, the Attorney General’s Office began criminal investigations in 17 government agencies for alleged procurement fraud and misuse of public funds. In May 2021, the Legislative Assembly passed the “Law for the Use of Products for Medical Treatments in Exceptional Public Health Situations Caused by the COVID-19 Pandemic” to protect vaccine manufacturers from liability, a precondition for Pfizer to sell vaccines to El Salvador. However, the law’s broad liability shield provisions, including civil and criminal immunity for a wide range of medical product manufacturers and healthcare providers, raised concerns about the future of investigations into fraudulent purchases of medical supplies and PPE. The law was subsequently amended in October 2021 to clarify there is no immunity for acts of corruption, fraud, bribery, theft, counterfeiting or piracy and trafficking of stolen goods. Even though the reforms removed some of the most controversial aspects of the bill, investigations stalled after the Attorney General appointed by the Bukele Administration removed prosecutors working on pandemic-related probe against GOES officials.
Corruption scandals at the federal, legislative, and municipal levels are commonplace and there have been credible allegations of judicial corruption. Three of the past four presidents have been indicted for corruption, a former Attorney General is in prison on corruption-related charges, and a former president of the Legislative Assembly, who also served as president of the investment promotion agency during the prior administration, faces charges for embezzlement, fraud, and money laundering. The former Minister of Defense during two FMLN governments is being prosecuted for providing illicit benefits to gangs in exchange for reducing homicides (an agreement known as the 2012-2014 Truce). In February 2020, the Attorney General’s Office indicted high-ranking members of the ARENA and FMLN parties under charges of conspiracy and electoral fraud for negotiating with gangs for political benefit during the run up to the 2014 presidential elections. In September 2020, the Attorney General’s Office launched a probe against the Director of Penal Centers, the Vice Minister of Justice, and the Chief of the Social Fabric Reconstruction Unit for covert dealings with gangs on a homicide reduction in exchange for better prison conditions. Since the appointment of the current Attorney General, the investigation into Bukele administration’s gang pacts has not progressed. U.S Treasury designated the two officials and Bukele’s Chief of Cabinet for financial sanctions in December 2021. The law provides criminal penalties for corruption, but implementation is generally perceived as ineffective. Former President Funes faces criminal charges for embezzlement, money laundering, and misappropriation of public funds. Although there are several pending arrest warrants against Funes, he has fled to Nicaragua and cannot be extradited because he was granted Nicaraguan citizenship. In 2018, former president Elias Antonio (Tony) Saca pleaded guilty to embezzling more than $300 million in public funds. The court sentenced him to 10 years in prison and ordered him to repay $260 million.
The NGO Social Initiative for Democracy stated that officials, particularly in the judicial system, often engaged in corrupt practices with impunity. Long-standing government practices in El Salvador, including cash payments to officials, shielded budgetary accounts, and diversion of government funds, facilitate corruption and impede accountability. For example, the accepted practice of ensuring party loyalty through off-the-books cash payments to public officials (i.e., sobresueldos) persisted across five presidential administrations. President Bukele eliminated these cash payments to public officials and the “reserved spending account,” nominally for state intelligence funding. At his direction, in July 2019, the Court of Accounts began auditing reserve spending of the Sanchez Ceren administration. In July 2021, the Attorney General’s Office accused ten former FMLN legislators and former cabinet members who served in the Funes administration (2009-2014), including former President Salvador Sanchez, of money laundering, embezzlement, and illicit enrichment for allegedly receiving sobresueldos from the President’s Office reserved spending account.
El Salvador has an active, free press that reports on corruption. The Illicit Enrichment Law requires appointed and elected officials to declare their assets to the Probity Section. The declarations are not available to the public, and the law only sanctions noncompliance with fines of up to $500. In 2015, the Probity Section of the Supreme Court began investigating allegations of illicit enrichment of public officials. In 2017, Supreme Court Justices ordered its Probity Section to audit legislators and their alternates. In 2019, in observance of the Constitution, the Supreme Court instructed the Probity Section to focus its investigations only on public officials who left office within ten years. In 2020, the Supreme Court issued regulations to standardize the procedures to examine asset declarations of public officials and carry out illicit enrichment investigations, as well as to set clear rules for decision-making. At the end of 2021, the Probity Section had a total of 452 active investigations on illicit enrichment. Between 2015 and 2021, the office completed economic examinations in 58 cases, but the Supreme of Court recommended civil prosecution for illicit enrichment in only 21 of those cases. In an October 2021 interview, the President of the Criminal Chamber of the Supreme Court indicated that 127 illicit enrichment cases were nearing the end of the 10-year constitutional statute of limitations.
In 2011, El Salvador approved the Law on Access to Public Information. The law provides for the right of access to government information, but authorities have not always effectively implemented the law. The law gives a narrow list of exceptions that outline the grounds for nondisclosure and provide for a reasonably short timeline for the relevant authority to respond, no processing fees, and administrative sanctions for non-compliance. The Bukele administration has weakened the autonomy of the Access to Public Information Agency (IAIP) – charged with ensuring compliance with the law – by reforming IAIP’s regulations to increase the President’s Office control over the appointment of its commissioners. Enacted amendments also add requirements for accessing information, including for the release of restricted information. Civil society organizations claim it is common practice of the Bukele administration to declare information to be reserved (confidential) or deny information without justification and in violation of the law to avoid citizen oversight and accountability.
In 2011, El Salvador joined the Open Government Partnership. The Open Government Partnership promotes government commitments made jointly with civil society on transparency, accountability, citizen participation and use of new technologies (http://www.opengovpartnership.org/country/el-salvador).
El Salvador is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. El Salvador is a signatory to the UN Anticorruption Convention and the Organization of American States’ Inter-American Convention against Corruption.
The following government agency or agencies are responsible for combating corruption:
Doctor Jose Nestor Castaneda Soto, President of the Court of Government Ethics
Court of Government Ethics (Tribunal de Ética Gubernamental)
87 Avenida Sur, No.7, Colonia Escalón, San Salvador
Email: firstname.lastname@example.org http://www.teg.gob.sv/
Licenciado Rodolfo Delgado
Fiscalía General de La República (Attorney General’s Office)
Edificio Farmavida, Calle Cortéz Blanco
Boulevard y Colonia Santa Elena
Email: radelgado@ fgr.gob.sv http://www.fiscalia.gob.sv/
Oscar Alberto López Jerez
Avenida Juan Pablo II y 17 Avenida Norte
Centro de Gobierno
(503) 2271-8888 Ext. 1424
Email: email@example.com http://www.csj.gob.sv
Contact at “watchdog” organization (international, regional, local, or nongovernmental organization operating in the country/economy that monitors corruption, such as Transparency International):
National Development Foundation (Fundación Nacional para el Desarrollo – FUNDE)
Calle Arturo Ambrogi #411, entre 103 y 105 Avenida Norte, Colonia Escalón, San Salvador
Access to Public Information Institute (IAIP for its initials in Spanish)
Ricardo Gómez Guerrero
Commissioner President of the IAIP
Prolongación Ave. Alberto Masferrer y
Calle al Volcán, Edif. Oca Chang # 88
10. Political and Security Environment
El Salvador’s 12-year civil war ended in 1992. Since then, there has been no political violence aimed at foreign investors.
El Salvador has thousands of known gang members from several gangs including Mara Salvatrucha (MS-13) and 18th Street (M18). Gang members engage in violence or use deadly force if resisted. These “maras” concentrate on extortion, violent street crime, carjacking, narcotics and arms trafficking, and murder for hire. Extortion is a common crime in El Salvador. U.S. citizens who visit El Salvador for extended periods are at higher risk for extortion demands. Bus companies and distributors often must pay extortion fees to operate within gang territories, and these costs are passed on to customers. The World Economic Forum’s 2019 Global Competitiveness Index reported that costs due to organized crime for businesses in El Salvador are the highest among 141 countries.
11. Labor Policies and Practices
According to the National Directorate of Statistics and Censuses (DIGESTYC), in 2021 El Salvador had a labor force of about 2.9 million people. Female labor force participation remained low at 41.2 percent. Around 70 percent of the workers were employed in the informal sector. The number of people working in the informal sector increased during the pandemic due to high unemployment rates. These workers do not have access to government health and pension benefits, and according to the 2020-2021 Salvadoran Foundation for Economic and Social Development report, 63.9 percent of workers the informal sector belong to vulnerable groups, such as women, children, and the rural poor.
Labor laws require 90 percent of the workforce in plants and in clerical positions be Salvadoran citizens. While Salvadoran labor is regarded as hard-working, general education and professional skill levels are low. According to many large employers, there is a lack of middle management-level talent, which sometimes results in the need to bring in managers from abroad. Employers do not report labor-related difficulties in incorporating technology into their workplaces.
The law provides for the right of most workers to form and join independent unions, to strike, and to bargain collectively. The law also prohibits anti-union discrimination, although it does not require reinstatement of workers fired for union activity. Military personnel, national police, judges, and high-level public officers may not form or join unions. Workers who are representatives of the employer or in “positions of trust” also may not serve on a union’s board of directors. Only Salvadoran citizens may serve on unions’ executive committees. The labor code also bars individuals from holding membership in more than one trade union.
Unions must meet complex requirements to register, including having a minimum membership of 35 individuals. If the Ministry of Labor (MOL) denies registration, the law prohibits any attempt to organize for up to six months following the denial. Collective bargaining is obligatory only if the union represents most workers.
In 2021, some unions were concerned about the MOL’s delay in approving their organization’s credentials, required to continue operating as a union and to participate in various tripartite consultative committees between government, the private sector, and the unions. Without credentials, unions cannot participate in decision-making within tripartite committees on subjects such as worker social security benefits, minimum wage, housing, and other worker benefits. The members of the unions also lose their immunity from termination by their employers if their unions do not have credentials. As of January 2022, the MOL failed to grant credentials to more than 250 unions before their certifications expired. These unions represent workers in municipal, healthcare, education, and judicial trades, leaving these workers vulnerable to termination by their employers. The unions receiving their credentials quickly were those aligned with the political party of the Nuevas Ideas dominated government.
The law contains cumbersome and complex procedures for conducting a legal strike. The law does not recognize the right to strike for public and municipal employees or for workers in essential services. The law does not specify which services meet this definition, and courts therefore interpret this provision on a case-by-case basis. The law requires that 30 percent of all workers in an enterprise must support a strike for it to be legal and that 51 percent must support the strike before all workers are bound by the decision to strike. Unions may strike only to obtain or modify a collective bargaining agreement or to protect the common professional interests of the workers. They must also engage in negotiation, mediation, and arbitration processes before striking, although many unions often skip or expedite these steps. The law prohibits workers from appealing a government decision declaring a strike illegal.
The government did not effectively enforce the laws on freedom of association and the right to collective bargaining. Penalties remained insufficient to deter violations. Judicial procedures were subject to lengthy delays and appeals. According to union representatives, the government inconsistently enforced labor rights for public workers, maquiladora/textile workers, food manufacturing workers, subcontracted workers in the construction industry, security guards, informal-sector workers, and migrant workers.
Unions functioned independently from the government and political parties, although many generally were aligned with the traditional political parties of ARENA and the FMLN. Workers at times engaged in strikes regardless of whether the strikes met legal requirements.
Employers are free to hire union or non-union labor. Closed shops are illegal. Labor laws are generally in accordance with internationally recognized standards but are not enforced consistently by government authorities. Although El Salvador has improved labor rights since the CAFTA-DR entered into force and the law prohibits all forms of forced or compulsory labor, there remains room for better implementation and enforcement.
The MOL is responsible for enforcing the law. The government proved more effective in enforcing the minimum wage law in the formal sector than in the informal sector. Unions reported the ministry failed to enforce the law for subcontracted workers hired for public reconstruction contracts. The government provided its inspectors updated training in both occupational safety and labor standards and conducted thousands of inspections in 2019.
The law sets a maximum normal workweek of 44 hours, limited to no more than six days and to no more than eight hours per day, but allows overtime, which is to be paid at a rate of double the usual hourly wage. The law mandates that full-time employees receive pay for an eight-hour day of rest in addition to the 44-hour normal workweek. The law provides that employers must pay double time for work on designated annual holidays, a Christmas bonus based on the time of service of the employee, and 15 days of paid annual leave. The law prohibits compulsory overtime. The law states that domestic employees are obligated to work on holidays if their employer makes this request, but they are entitled to double pay in these instances. The government does not adequately enforce these laws.
There is no national minimum wage; the minimum wage is determined by sector. On July 1, 2021, the government announced an increase in the minimum wage by about 20 percent for all industries in the formal sector. This was implemented on August 1, 2021, resulting in a one-month implementation period for industry. The increase had no impact on the majority of workers because most are employed in the informal sector.
El Salvador adopted the Telework Regulation Law in March 2020. The law is applicable in both private and public sectors and requires a written agreement between employer and employee outlining the terms and conditions of the arrangement, including working hours, responsibilities, workload, performance evaluations, reporting and monitoring, and duration of the arrangement, among others. Legislation prescribes employers as responsible for providing the equipment, tools, and programs necessary to perform duties remotely. Employers are subject to the obligations contained in labor laws, while workers are entitled to the same rights as staff working at the employer’s premises, including benefits and freedom of association.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
Host Country Statistical source*
USG or international statistical source
USG or International Source of Data: BEA; IMF; Eurostat; UNCTAD, Other
Host Country Gross Domestic Product (GDP) ($M USD)
Guatemala has the largest economy in Central America, with a $ 85.9 billion gross domestic product (GDP) in 2021. The economy grew by an estimated 7.5 percent in 2021 following a 1.5 percent retraction in 2020. Remittances, mostly from the United States, increased by 34.9 percent in 2021 and were equivalent to 17.8 percent of GDP. The United States is Guatemala’s most important economic partner. The Guatemalan government continues to make efforts to enhance competitiveness, promote investment opportunities, and work on legislative reforms aimed at supporting economic growth. More than 200 U.S. and other foreign firms have active investments in Guatemala, benefitting from the U.S. Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). Foreign direct investment (FDI) stock was $21.4 billion in 2021, a 21.9 percent increase over 2020. FDI flows increased by 272.6 percent in 2021 mostly due to the purchase of outstanding shares of a local company by a foreign telecommunications company. Some of the activities that attracted most of the FDI flows in the last three years were information and communications, financial and insurance activities, manufacturing, commerce and vehicle repair, water, electricity, and sanitation services.
Despite steps to improve Guatemala’s investment climate, international companies choosing to invest in Guatemala face significant challenges. Complex laws and regulations, inconsistent judicial decisions, bureaucratic impediments, and corruption continue to impede investment.
Citing Guatemala’s CAFTA-DR obligations, the United States has raised concerns with the Guatemalan government regarding its enforcement of both its labor and environmental laws.
Guatemala’s Climate Change Framework Law established the groundwork for Guatemala’s Low Emission Development Strategy (LEDS) and is designed to align Guatemala’s emissions and development targets with national planning documents in six sectors: energy, transportation, industry, land use, agriculture, and waste management. In November 2020, the Guatemala government endorsed the LEDS as the country’s official strategy for climate change mitigation.
As part of the government’s efforts to promote economic recovery during and after the COVID-19 pandemic, the Ministry of Economy (MINECO) began implementing an economic recovery plan in September 2020, which focuses on recovering lost jobs and generating new jobs, attracting new strategic investment, and promoting consumption of Guatemalan goods and services locally and globally.
1. Openness To, and Restrictions Upon, Foreign Investment
The Guatemalan government continues to promote investment opportunities and work on reforms to enhance competitiveness and the business environment. As part of the government’s efforts to promote economic recovery during and after the COVID-19 pandemic, the Ministry of Economy (MINECO) began implementing an economic recovery plan in September 2020, which focuses on recovering lost jobs and generating new jobs, attracting new strategic investment, and promoting consumption of Guatemalan goods and services locally and globally. Private consultants contributed to the government’s September 2020 economic recovery plan, which focuses on increasing exports and attracting foreign direct investment. During 2021 and first months of 2022 the Guatemalan congress approved some key economic legislation included in the economic recovery plan to improve the investment climate and foster economic growth, such as a leasing law, amendments to the free trade zone law, a law to simplify administrative procedures and requirements, and an insolvency law.
Guatemala’s investment promotion office operates within MINECO’s National Competitiveness Program (PRONACOM). PRONACOM supports potential foreign investors by offering information, assessment, coordination of country visits, contact referrals, and support with procedures and permits necessary to operate in the country. Services are offered to all investors without discrimination. The World Bank’s Doing Business 2020 report ranked Guatemala 96 out of 190 countries, one position lower than its rank in 2019. (Word Bank discontinued its Doing Business report in September 2021.) The two areas where the country had the highest rankings that year were electricity and access to credit. The areas of the lowest ranking were protecting minority investors, enforcing contracts, and resolving insolvency.
International investors tend to engage with the Guatemalan government via chambers of commerce and industry associations, and/or directly with specific government ministries. PRONACOM began to prioritize investment retention in 2020 and continued this policy throughout 2021.
The Guatemalan Constitution recognizes the right to hold private property and to engage in business activity. Foreign private entities can establish, acquire, and dispose freely of virtually any type of business interest, with the exception of some professional services as noted below. The Foreign Investment Law specifically notes that foreign investors enjoy the same rights of use, benefits, and ownership of property as Guatemalan citizens. Guatemalan law prohibits foreigners, however, from owning land immediately adjacent to rivers, oceans, and international borders.
Guatemalan law does not prohibit the formation of joint ventures or the purchase of local companies by foreign investors. The absence of a developed, liquid, and efficient capital market, in which shares of publicly owned firms are traded, makes equity acquisitions in the open market difficult. Most foreign firms operate through locally incorporated subsidiaries.
The law does not restrict foreign investment in the telecommunications, electrical power generation, airline, or ground-transportation sectors. The Foreign Investment Law removed limitations to foreign ownership in domestic airlines and ground-transport companies in January 2004. The Guatemalan government does not have a screening mechanism for inbound foreign investment.
Some professional services may only be supplied by professionals with locally-recognized academic credentials. Public notaries must be Guatemalan nationals. Foreign enterprises may provide licensed, professional services in Guatemala through a contract or other relationship with a Guatemalan company. As of 2010, Guatemalan law allows foreign insurance companies to open branches in Guatemala, a requirement under CAFTA-DR. This law requires foreign insurance companies to fully capitalize in Guatemala.
Guatemala has been a World Trade Organization (WTO) member since 1995. The Guatemalan government had its last WTO trade policy review (TPR) in November 2016. In 2011, the United Nations Conference on Trade and Development (UNCTAD) conducted an investment policy review (IPR) on Guatemala. The WTO TPR highlighted Guatemala’s efforts to increase trade liberalization and economic reform efforts by eliminating export subsidies for free trade zones, export-focused manufacturing, and assembly operations (maquilas) regimes, as well as amendments to the government procurement law to improve transparency and efficiency. The WTO TPR noted that Guatemala continues to lack a general competition law and a corresponding competition authority. The UNCTAD IPR-recommended strengthening the public sector’s institutional capacity and highlighted that adopting a competition law and policy should be a priority in Guatemala’s development agenda. The government agreed to approve a competition law by November 2016 as part of its commitments under the Association Agreement with the European Union, but the draft law had not been approved as of March 2022. Other important recommendations from the UNCTAD IPR were to further explore alternative dispute resolution mechanisms and the establishment of courts for commercial and land disputes, though the government had not made substantive progress on these recommendations as of March 2022.
The Guatemalan government has a business registration website (https://minegocio.gt/), which facilitates on-line registration procedures for new businesses. Foreign companies that are incorporated locally are able to use the online business registration window, but the system is not yet available to other foreign companies. The commercial code amendments that entered into force in January 2018 reduced the time and costs to register a new business online. As of March 2022, the estimated time to register a new mercantile company online was from four to 36 hours and the estimated time to register a limited liability company was between 11 and 15 days.. The estimated costs to register a new mercantile company and a new limited liability company were $19 and $77, respectively, as of March 2022. The procedures allow mercantile companies to receive their business registration certificates online. Every company must register with the business registry, the tax administration authority, the social security institute, and the labor ministry. Licenses, if required from the Ministry of Environment and Natural Resources, Ministry of Agriculture, Livestock and Food, and/or Ministry of Health and Social Assistance, add considerable additional time.
Guatemala does not incentivize nor restrict outward investment.
3. Legal Regime
Tax, labor, environment, health, and safety laws do not directly impede investment in Guatemala. Bureaucratic hurdles are common for both domestic and foreign companies, including lengthy processes to obtain permits and licenses as well as to clear shipments through Customs. The legal and regulatory systems can be confusing and administrative decisions are often not transparent. Laws and regulations often contain few explicit criteria for government administrators, resulting in ambiguous requirements that are applied inconsistently by different government agencies and the courts.
Public participation in the formulation of laws or regulations is rare. In some cases, private sector groups, and to a lesser extent civil society groups are able to submit comments to the issuing government office or to the congressional committee reviewing the bill, but with limited effect. There is no legislative oversight of administrative rule making. The Guatemalan congress publishes all draft bills on its official website, but it does not make them available for public comment. The congress often does not disclose last-minute amendments before congressional decisions. Final versions of laws, once signed by the President, must be published in the official gazette before entering into force. Congress publishes scanned versions of all laws that are published in the official gazette. Information on the budget and debt obligations is publicly available at the Ministry of Finance’s primary website, but information on debt obligations does not include state-owned enterprise debt.
Guatemala is a member of the Central American Common Market and has adopted the Central American uniform customs tariff schedule. As a member of the WTO, the Guatemalan government notifies the WTO Committee on Technical Barriers to Trade (TBT) of draft technical regulations. The Guatemalan congress approved the WTO’s Trade Facilitation Agreement (TFA) in January 2017, which entered into force for Guatemala March 8, 2017. Guatemala classified 63.9 percent of its commitments under Category A, which includes commitments implemented upon entry into the agreement; 8.8 percent under Category B, which includes commitments to be implemented between February 2019 to July 2020; and 27.3 percent under Category C, which includes commitments to be implemented between February 2020 and July 2024. In February 2022, Guatemala requested an extension of time for a commitment to implement a single window for importation, exportation, and transit of goods, established under Article 10.4.1 and 10.4.2 of the TFA from the initial date of July 2022 to January 2024.
In 1996, Guatemala ratified Convention 169 of the International Labor Organization (ILO 169), which entered into force in 1997. Article 6 of the Convention requires the government to consult indigenous groups or communities prior to initiating a project that could affect them directly. Potential investors should determine whether their investment will affect indigenous groups and, if so, request that the Guatemalan government lead a consultation process in compliance with ILO 169. The Guatemalan congress began considering a draft law to create a community consultation mechanism to fulfill its ILO-mandated obligations in March 2018, but the bill was still pending congressional approval as of March 2022. The lack of a clear consultation process significantly impedes investment in large-scale projects.
Guatemala has a civil law system. The codified judicial branch law stipulates that jurisprudence or case law is also a source of law. Guatemala has a written and consistently applied commercial code. Contracts in Guatemala are legally enforced when the holder of a property right that has been infringed upon files a lawsuit to enforce recognition of the infringed right or to receive compensation for the damage caused. The civil law system allows for civil cases to be brought before, after, or concurrently with criminal claims. Guatemala does not have specialized commercial courts, but it does have civil courts that hear commercial cases and specialized courts that hear labor, contraband, or tax cases.
The judicial system is designed to be independent of the executive branch, and the judicial process for the most part is procedurally competent, fair, and reliable. There are frequent and wide-ranging accusations of corruption within the judicial branch.
More than 200 U.S. firms as well as hundreds of foreign firms have active investments in Guatemala. CAFTA-DR established a more secure and predictable legal framework for U.S. investors operating in Guatemala. Under CAFTA-DR, all forms of investment are protected, including enterprises, debt, concessions, contracts, and intellectual property. U.S. investors enjoy the right to establish, acquire, and operate investments in Guatemala on an equal footing with local investors in almost all circumstances. The U.S. Embassy in Guatemala places a high priority on improving the investment climate for U.S. investors. Guatemala passed a foreign investment law in 1998 to streamline and facilitate processes in foreign direct investment. In order to ensure compliance with CAFTA-DR, the Guatemalan congress approved in May 2006 a law that strengthened existing legislation on intellectual property rights (IPR) protection, government procurement, trade, insurance, arbitration, and telecommunications, as well as the penal code. Congress approved an e-commerce law in August 2008, which provides legal recognition to electronically executed communications and contracts; permits electronic communications to be accepted as evidence in all administrative, legal, and private actions; and, allows for the use of electronic signatures.
Guatemala previously faced two for violating its CAFTA-DR obligations—one under the labor chapter and the other under the environmental chapter. In the 2008 labor case filed by the AFL-CIO and six Guatemalan worker organizations, the arbitration panel found that the Guatemalan government failed to effectively enforce its labor laws, particularly by failing to enforce labor court orders for anti-union dismissals and to take enforcement actions in response to worker complaints. The panel determined that beyond the noted enforcement failures, evidence did not rise to a level sufficient to prove a violation of CAFTA-DR. Regarding the environmental case, the CAFTA-DR Secretariat for Environmental Matters suspended its investigation in 2012 when the Guatemalan government provided evidence that the relevant facts of the case were under consideration by Guatemala’s Constitutional Court. The constitutional court dismissed the case on procedural grounds in 2013.
Complex and confusing laws and regulations, inconsistent judicial decisions, bureaucratic impediments and corruption continue to constitute practical barriers to investment. According to the World Bank’s Doing Business Reports for 2015 and 2016, Guatemala made paying taxes easier and less costly by improving the electronic filing and payment system (“Declaraguate”) and by lowering the corporate income tax rate. Despite these measures, World Banks Doing Business Report for 2020 (the last available) ranked Guatemala 104 of 190 countries with respect to paying taxes. The Guatemalan government developed a useful website to help navigate the laws, procedures and registration requirements for investors (http://asisehace.gt/). The website provides detailed information on laws and regulations and administrative procedures applicable to investment, including the number of steps, names, and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time and legal grounds justifying the procedures.
Companies that carry out export activities or sell to exempted entities have the right to claim value added tax (VAT) credit refunds for the VAT paid to suppliers and documented with invoices for purchases of the goods and services used for production. Some local and foreign companies continue to experience significant delays in receiving refunds. Guatemala’s Tax and Customs Authority (SAT) began implementing a new plan in 2017 to streamline the process and expedite VAT credit refunds. The Guatemalan congress approved legal provisions in April 2019 that went into effect in November 2019. SAT established in December 2019 an electronic tax credit refund regime that expedites VAT credit refunds to exporters, but exporters claiming refunds outside the electronic tax credit refund regime continued to reportdelays in VAT refunds as of March 2022.
As part of its 2012 income tax reform, the Guatemalan government began implementing transfer pricing provisions in 2016. The Guatemalan congress approved a leasing law in February 2021 to regulate real estate and other types of leasing operations, including lease contracts with an option to purchase. A Guatemalan law to simplify, streamline, and digitize requirements and administrative procedures that are carried out with Executive Branch’s offices entered into force in August 2021.
Guatemala does not have a law to regulate monopolistic or anti-competitive practices. The Guatemalan government agreed to approve a competition law by November 2016 as part of its commitments under the Association Agreement with the European Union. The Guatemalan government submitted a draft competition law to Congress in May 2016, but it was still pending approval by Congress as of March 2022.
Guatemala’s constitution prohibits expropriation, except in cases of eminent domain, national interest, or social benefit. The Foreign Investment Law requires proper compensation in cases of expropriation. Investor rights are protected under CAFTA-DR by an impartial procedure for dispute settlement that is fully transparent and open to the public. Submissions to dispute panels and dispute panel hearings are open to the public, and interested parties have the opportunity to submit their views.
The Guatemalan government maintains the right to terminate a contract at any time during the life of the contract, if it determines the contract is contrary to the public welfare. It has rarely exercised this right and can only do so after providing the guarantees of due process.
Guatemala does not have an independent bankruptcy law in effect as of March 2022. However, the Guatemalan congress passed an insolvency law that applies to both individuals and businesses and regulates the renegotiation procedure between debtors and creditors in case of insolvency in February 2022. The new law will enter into force in August 2022 and requires the judicial branch to create specialized bankruptcy/insolvency courts within five years of the law’s enactment. Meanwhile, individuals and businesses that are facing insolvency can continue to use the Code on Civil and Mercantile Legal Proceedings, which contains a specific chapter on bankruptcy proceedings. Under the code, creditors can request to be included in the list of creditors; request an insolvency proceeding when a debtor has suspended payments of liabilities to creditors; and constitute a general board of creditors to be informed of the proceedings against the debtor. Bankruptcy is not criminalized, but it can become a crime if a court determines there was intent to defraud. According to the World Bank’s 2020 Doing Business Report, Guatemala ranked 157 out of 190 countries in resolving insolvency.
4. Industrial Policies
Guatemala’s main investment incentive programs are specified in law and are offered nationwide to both foreign and Guatemalan investors without discrimination.
Guatemala’s primary incentive program – the Law for the Promotion and Development of Export Activities and Maquilas (factories that import duty-free materials and assemble products for export) – is aimed mainly at the apparel and textile sector and at services exporters such as call centers and business processes outsourcing (BPO) companies. The government grants investors in these two sectors a 10-year income tax exemption. Additional incentives include an exemption from duties and value-added taxes (VAT) on imported machinery and equipment and a one-year suspension of the same duties and taxes on imports of production inputs, samples, and packing material. The Free Trade Zone Law provides similar incentives to the incentive program described above. The Guatemalan congress approved the Law for Conservation of Employment (Decree 19-2016) in February 2016,amending Guatemala’s two major incentive programs to replace tax incentives related to exports that Guatemala dismantled on December 31, 2015, per WTO requirements. Congress approved new amendments to the Free Trade Zones (FTZ) Law in May 2021 to reincorporate some of the economic activities that had been excluded during the 2016 reforms, such as manufacturing of plastic products, medications, and electronic devices and household appliances. The amendments to the FTZ law establish that local and foreign businesses and individuals with activities already taxed in the national customs territory may not migrate to FTZ or benefit from the incentives provided by this law. However, companies already operating in country that create new businesses with different activities than those already taxed are exempt from this provision.
The public Free Trade Zone of Industry and Commerce Santo Tomas de Castilla (ZOLIC) that operates contiguous to the state-owned port Santo Tomas de Castilla issued a regulation in January 2019 allowing the establishment of ZOLIC’s special public economic development zones outside of ZOLIC’s customs perimeter. The ZOLIC law grants businesses operating within the new special public economic development zones a 10-year income tax exemption. Additional exemptions include an exemption from VAT, customs duties, and other charges on imports of goods entering the area, including raw materials, supplies, machinery and equipment, as well as a VAT exemption on all taxable transactions carried out within the free trade zone when goods are exported. The law states that the incentives are available to local and foreign investors engaged in manufacturing and commercial activities as well as the provision of services.
The Law on Incentives for the Development of Renewable Energy Projects (Decree 52-2003) is aimed at municipalities, the National Electricity Institute (INDE), joint ventures, individuals and businesses that develop any renewable energy projects. It grants a 10-year exemption from import duties, including value added tax on imported machinery and equipment used exclusively for the generation of electricity in the area where the renewable projects are located. This incentive is valid only during the pre-investment and construction periods. The law also provides a 10-year income tax exemption valid from the date when a project starts commercial operation. The incentive is granted only to individuals and businesses that directly develop the project and only for the project.
Decree 65-89, Guatemala’s Free Trade Zones Law and its amendments approved through Decree 19-2016, Law for Conservation of Employment and Decree 6-2021, permits the establishment of free trade zones (FTZs) in any region of the country. Developers of private FTZs must obtain authorization from MINECO to install and manage a FTZ. Businesses operating within authorized FTZs also require authorization from MINECO. The law specifies investment incentives, which are available to both foreign and Guatemalan investors without discrimination. As of March 2022, there were four authorized FTZs operating in Guatemala. The Guatemalan congress approved amendments to the Free Trade Zones Law in May 2021 to reinstate tax incentives to some of the activities removed during the previous reform. Decree 22-73, ZOLIC’s law and its amendments approved through Decree 30-2018, allow the establishment of ZOLIC’s special public economic development zones outside of ZOLIC’s customs perimeter as described under the Investment Incentives subsection above. Special public economic development zones can be installed in ZOLIC’s facilities or property owned by third parties that is leased or granted in usufruct to ZOLIC. Administrators of special public economic development zones must obtain authorization from ZOLIC’s board of directors for a minimum period of 12 years. ZOLIC´s board of directors had approved nine special public economic development zones as of March 2022.
Guatemalan law does not impose performance, purchase, or export requirements nor does the government require foreign investors to use domestic content in goods or technology. Companies are not required to include local content in production.
Guatemalan companies do not require foreign IT providers to turn over source code. Some industries, such as the banking and financial sector, can request that their institution or a source code facilities management company receive a copy of the source code in case of potential problems with the IT provider.
5. Protection of Property Rights
Guatemala follows the real property registry system. Defects in the titles and ownership gaps in the public record can lead to conflicting claims of land ownership, especially in rural areas. The government stepped up efforts to enforce property rights by helping to provide a clear property title. Nevertheless, when rightful ownership is in dispute, it can be difficult to obtain and subsequently enforce eviction notices.
Mortgages are available to finance homes and businesses. Most banks offer mortgage loans with terms as long as 25 years for residential real estate. Mortgages and liens are recorded at the real estate property registry. According to the 2020 World Bank’s Doing Business Report, registering property in Guatemala takes 24 days, and it costs 3.6 percent of the property value. In the 2020 report, Guatemala ranked 89 out of 190 countries in the category of Registering Property.
The legal system is accessible to foreigners who may buy, sell, and file suit under the law. However, the legal system is not easily navigated without competent counsel. Foreign investors are advised to seek reliable local counsel early in the investment process.
Guatemala has been a member of the WTO since 1995 and the World Intellectual Property Organization (WIPO) since 1983. It is also a signatory to the Paris Convention, Berne Convention, Rome Convention, Phonograms Convention, and the Nairobi Treaty. Guatemala has ratified the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT). In June 2006, as part of CAFTA-DR implementation, Guatemala ratified the Patent Cooperation Treaty and the Budapest Treaty on the International Recognition of the Deposit of Microorganisms for the Purposes of Patent Procedure. Also in June 2006, the Guatemalan congress approved the International Convention for the Protection of New Varieties of Plants (UPOV Convention). Implementing legislation that would allow Guatemala to become a party to the convention, however, is still pending. The Guatemalan congress approved the Trademark Law Treaty (TLT) and the Marrakesh Treaty in February 2016. Legislation to incorporate TLT provisions into local law is pending as of March 2022. The Guatemalan congress passed amendments to the Copyright and Related Rights Law to adapt Marrakesh Treaty provisions into local law in October 2018, and the Guatemalan government issued its implementing regulation in March 2022.
Guatemala has a registry for intellectual property. Trademarks, copyrights, patents rights, industrial designs, and other forms of intellectual property must be registered in Guatemala to obtain protection in the country.
The Guatemalan congress passed an industrial property law in August 2000, bringing the country’s intellectual property rights laws into compliance with the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) agreement. Congress modified the legislation in 2003 to provide pharmaceutical test data protection consistent with international practice and again in 2005 to comply with IPR protection requirements in CAFTA-DR. CAFTA-DR provides for improved standards for the protection and enforcement of a broad range of IPR, which are consistent with U.S. standards of protection and enforcement as well as emerging international standards. Congress approved a law to prohibit the production and sale of counterfeit medicine in November 2011. It approved amendments to the Industrial Property Law in June 2013 to allow the registration of geographical indications (GI), as required under the Association Agreement with the European Union. Guatemalan administrative authorities issued rulings on applications to register GIs that appear sound and well-reasoned for compound GI names, but U.S. exporters are concerned that 2014 rulings on single-name GIs will effectively prohibit new U.S. products in the Guatemalan market from using what appear to be generic or common names when identifying their goods locally.
Guatemala remains on USTR’s Special 301 Watch List in 2022 and has been on the Watch list for more than 10 years. Despite a generally sound legal framework, IPR enforcement remains limited due to resource constraints, and limited coordination among law enforcement agencies. Piracy and copyright and trademark infringement, including those of some major U.S. food and pharmaceutical brands, remain problematic in Guatemala.
Guatemala’s capital markets lack a securities regulator. The local stock exchange (Bolsa Nacional de Valores) deals almost exclusively in commercial paper, repurchase agreements (repos), and government bonds. The Guatemalan Central Bank (Banguat),the Superintendency of Banks (SIB), and the Ministry of Economy were drafting an updated capital markets bill that included a chapter on securitization companies and the securitization process as of March 2022. Notwithstanding the lack of a modern capital markets law, the government debt market continues to develop. Domestic treasury bonds represented 58.1 percent of total public debt as of December 2021.
Guatemala lacks a market for publicly traded equities, which raises the cost of capital and complicates mergers and acquisitions. As of December 2021, borrowers faced a weighted average annual interest rate of 15.4 percent in local currency and 6.1 percent in foreign currency, with some banks charging over 40 percent on consumer or micro-credit loans. Commercial loans to large businesses offered the lowest rates and were on average 5.5 percent in local currency as of December 2021. Dollar-denominated loans typically are some percentage points lower than those issued in local currency. Foreigners rarely rely on the local credit market to finance investments.
Overall, the banking system remains stable. The Monetary Board, Banguat, and SIB approved various temporary measures during 2020 to increase liquidity of the banking system during the first months of the pandemic and to allow banks to approve restructuring of loans or deferral of loans to businesses and individuals affected by the pandemic. About 5.8 percent of the total number of loans remained subject to the temporary measures approved in 2020 as of December 2021. Non-performing loans represented 1.8 percent of total loans as of January 2022. According to information from the SIB, Guatemala’s 17 commercial banks had an estimated $56 billion in assets in December 2021. The six largest banks control 88 percent of total assets. In addition, Guatemala has 11 non-bank financial institutions, which perform primarily investment banking and medium- and long-term lending, and three exchange houses. Access to financial services is very high in Guatemala City, as well as in major regional cities. Guatemala had 23.7 access points per 10,000 adults at the national level and 29.1 access points per 10,000 adults in the capital area as of December 2021. There were 12,446 banking accounts per 10,000 adults at the national level and 24,915 banking accounts per 10,000 adults in the capital area as of December 2021. Most banks offer a variety of online banking services.
Foreigners are normally able to open a bank account by presenting their passport and a utility bill or some other proof of residence. However, requirements vary by bank.
In April 2002, the Guatemalan congress passed a package of financial sector regulatory reforms that increased the regulatory and supervisory authority of the SIB, which is responsible for regulating the financial services industry. The reforms brought local practices more in line with international standards and spurred a round of bank consolidations and restructurings. The 2002 reforms required that non-performing assets held offshore be included in loan-loss-provision and capital-adequacy ratios. As a result, a number of smaller banks sought new capital, buyers, or mergers with stronger banks, reducing the number of banks from 27 in 2005 to 17 in 2021.
Guatemalan banking and supervisory authorities and the Guatemalan congress actively work on new laws in the business and financial sectors. In August 2012, the Guatemalan congress approved reforms to the Banking and Financial Groups Law and to the Central Bank Organic Law that strengthened supervision and prudential regulation of the financial sector and resolution mechanisms for failed or failing banks. The Guatemalan government submitted to congress proposed amendments to the Banking and Financial Groups Law in November 2016 and an anti-money laundering and counter-terrorism financing draft law in August 2020. Both proposed laws were pending congressional approval as of March 2022.
Foreign banks may open branches or subsidiaries in Guatemala subject to Guatemalan financial controls and regulations. These include a rule requiring local subsidiaries of foreign banks and financial institutions operating in Guatemala to meet Guatemalan capital and lending requirements as if they were stand-alone operations. Groups of affiliated credit card, insurance, financial, commercial banking, leasing, and related companies must issue consolidated financial statements prepared in accordance with uniform, generally accepted accounting practices. The groups are audited and supervised on a consolidated basis.
The total number of correspondent banking relationships with Guatemala’s financial sector showed a slight decline in 2016, but the changes in the relationships were similar to those seen throughout the region and reflected a trend of de-risking. The situation stabilized in 2017. The number of correspondent banking relationships remained stable in 2021.
Alternative financial services in Guatemala include credit and savings unions and microfinance institutions.
Guatemala does not have a sovereign wealth fund.
7. State-Owned Enterprises
Guatemala has three main state-owned enterprises: The National Electricity Institute (INDE) and two state-owned ports, Santo Tomas on the Caribbean coast, and Port Quetzal on the Pacific coast. INDE is a state-owned electricity company responsible for expanding the provision of electricity to rural communities. INDE owns approximately 14 percent of the country’s installed effective generation capacity, and it participates in the wholesale market under the same rules as its competitors. It also provides a subsidy to consumers of up to 88 kilowatt-hours (kWh) per month. Its board of directors comprises representatives from the government, municipalities, business associations, and labor unions. The board of directors appoints the general manager. The Guatemalan President appoints Santo Tomas Ports’ board of directors, and the board of directors appoints the general manager. The Guatemalan President also appoints the president of Port Quetzal’s board, and the president of the board appoints the general manager. The Guatemalan government also appoints the manager of state-owned telephone company GUATEL, which split off from the fixed-line telephone company during the 1998 privatization program. GUATEL’s operations are small, and it continuously fails to generate sufficient revenue to cover expenses. The GUATEL director reports to the Guatemalan President and to the board of directors.
The Guatemalan government currently owns 16 percent of the shares of the Rural Development Bank (Banrural), the second largest bank in Guatemala, and holds 3 out of 10 seats on its board of directors. Banrural is a mixed capital company and operates under the same laws and regulations as other commercial banks.
The Guatemalan government privatized a number of state-owned assets in industries and utilities in the late 1990s including power distribution, telephone services, and grain storage. Guatemala does not currently have a privatization program.
8. Responsible Business Conduct
There is a general awareness of expectations of standards for responsible business conduct (RBC) on the part of producers and service providers, as well as Guatemalan business chambers. A local organization called the Center for Socially Responsible Business Action (CentraRSE) promotes, advocates, and monitors RBC in Guatemala. They operate freely with multiple partner organizations, ranging from private sector to United Nations entities. CentraRSE currently has over 100 affiliated companies from 20 different sectors that provide employment to over 150,000 individuals. CentraRSE defines RBC as a business culture based on ethical principles, strong law enforcement, and respect for individuals, families, communities, and the environment, which contributes to businesses competitiveness, general welfare, and sustainable development. The Guatemalan government did not have a definition of RBC as of March 2022. Guatemala joined the Extractive Industries Transparency Initiative (EITI) in February 2011 and was designated EITI compliant in March 2014. The EITI board suspended Guatemala in February 2019 for failing to publish the 2016 EITI report and the 2017 annual progress report by the December 31, 2018 deadline. Guatemala published the 2016-2017 EITI report and the 2017 annual progress report in February and March 2019. The EITI board suspended Guatemala again in January 2020 after deciding that Guatemala has made inadequate progress in implementing the 2016 EITI standard. The EITI board requested Guatemala to undertake corrective actions before a second validation related to the requirements started on July 23, 2021. On December 24, 2020, the EITI board postponed the date to start Guatemala’s second validation process to April 1, 2022. Guatemala published the 2018-2020 EITI report in November 2021 but remained suspended as of March 2022.
The State Department has recognized U.S. companies such as McDonald’s, Starbucks, and Denimatrix for corporate social responsibility (CSR) programs in Guatemala that aimed to foster safe and productive workplaces as well as provide health and education programs to workers, their families, and local communities. Communities with low levels of government funding for health, education, and infrastructure generally expect companies to implement CSR practices.
Conflict surrounding certain industrial projects – in particular mining and hydroelectric projects – is frequent, and there have been several cases of violence against protestors in the recent past, including several instances of murder. On October 24, 2021, President Alejandro Giammattei declared a State of Siege in El Estor as dozens of protestors, including environmental defenders, indigenous activists, and outside agitators blocked coal trucks from accessing a nickel mine and clashed with National Police (PNC). Media reported that the government maintained a force of 500 police and military in El Estor during the 30-day State of Siege to carry out patrols, manage vehicle checkpoints, and conduct raids. Indigenous leaders, journalists, and civil society organizations alleged that they faced arbitrary detentions and persecution for participating in anti-mining protests. Lack of clarity over indigenous consultations continues to impact Guatemala’s investment climate. On December 10, 2021, the government declared the successful conclusion of the ILO consultations with those indigenous groups they designated as participants in the consultation process for the nickel mine. The community’s self-determined governance structure, the Ancestral Council of Q’eqchi Peoples, was excluded from the consultations, and critics claimed that the government purposely neglected to include the group.
The Climate Change Framework Law (Decree 7-2013) outlines requirements for the government’s response to the impacts of climate change, in particular by reducing climate change vulnerability, improving adaptive capacity, and promoting mitigation activities. The law also creates a National Climate Change Information System, managed by the Ministry of Environment and Natural Resources (MARN), as well as a National Climate Change Council to supervise implementation of the law and its associated Climate Change Fund. The Climate Change Framework Law also enables development of the National Reducing Emissions from Deforestation and Degradation (REDD+) Strategy, which clarifies questions about carbon emission reduction ownership and charges MARN with the creation of the National Registry for Greenhouse Gas Emission Reduction Projects. The law establishes the groundwork for Guatemala’s Low Emission Development Strategy (LEDS) and is designed to align Guatemala’s emissions and development targets with national planning documents in six sectors: energy, transportation, industry, land use, agriculture, and waste management. In November 2020, the Guatemalan government endorsed the LEDS as the country’s official strategy for climate change mitigation.
In 2015, Guatemala submitted its first nationally determined contribution (NDC) under the Paris Accords, pledging to reduce current greenhouse gas (GHG) emissions by 11.2 percent by 2030 by its own means. With the support of the international community, Guatemala also committed to reducing GHG emissions by 22.6 percent compared to its emissions growth trend from 1990-2005. Guatemala’s NDC does not target net zero emissions by 2050, nor do local climate experts believe the country is likely to achieve its current goals, primarily due to resource and capacity constraints. Guatemala failed to submit a revised NDC at COP-26 in 2021 but continues to prepare a revision to its NDCs led by MARN, the Ministry of Finance (MINFIN) and SEGEPLAN with the support of United Nations Development Programme (UNDP) in Guatemala and the NDC Partnership’s Climate Action Enhancement Package. The revised NDC pledges the same level of GHG reductions as the 2015 version. The document assigns few specific emissions reductions targets except in the agricultural and energy sectors. It does not delineate specific targets for the private sector. Critics say the NDC lacks the specific policies necessary to achieve even these modest reductions.
In 2018, Guatemala submitted to the UNFCCC the second edition of its National Climate Change Action Plan known in general, as a National Adaptation Plan. It is important to highlith the updated NDC claims to integrate cross-cutting issues, such as gender and inclusion of indigenous peoples by integrating inputs from the strategy for mainstreaming gender considerations in climate change in support of the NDC (UNDP-MARN, 2020), institutional gender representatives, and the Indigenous Climate Change Roundtable. Furthermore, Guatemala stated it will undertake an analysis of available funding and gaps for implementing NDC goals, identifying capacity-building needs, and managing information.
The Law on Protected Areas (Decree 4-89) created both the Guatemalan System of Protected Areas (SIGAP) and the National Council of Protected Areas (CONAP), which oversees SIGAP. The general objectives of this law are to ensure the optimal functioning of essential ecological processes and key natural systems; preserve biological diversity; attain sustained utilization of species and ecosystems in the national territory; defend and preserve the natural patrimony of the country; and establish the protected areas in the country as a matter of public utility and social interest. Protected areas are defined as those created with the purpose of conserving, managing, and restoring wild flora and fauna, other related resources, and natural and cultural interactions. Guatemala’s congress must approve the designation of a new protected area and had so designated 349 areas as of January 2021. The Protected Areas law requires CONAP to determine fines for infractions, up to and including prison sentences for crimes against the nation’s natural and cultural patrimony, illegal wildlife trafficking, and squatting in protected areas. Regulatory fines are often challenged in the courts, delaying enforcement.
Within the Guatemala NDC, the Agriculture, Forestry, and Other Land Use sectors (AFOLU) are recognized as the largest sources of GHG emissions in the country and offer opportunities for emission reductions. Guatemala has experienced some of the highest deforestation rates in Latin America. From 1990 to 2015, overall forest cover declined by more than 1.2 million hectares, which accounts for nearly 12 percent of Guatemala’s total land area. To prevent further emissions in the AFOLU sectors, the Government maintains contracts with eleven community groups in northern Guatemala that derive significant income by sustainably managing over 500,000 hectares of certified forests. Both former President Morales and current President Giammattei directed their cabinets to approve the renewal of 25-year contracts for the concessions. So far, five of the original nine have been approved and President Giamattei in 2021 established two additional community managed concessions bringing the total to eleven community forest concessions. PROBOSQUE (created by Decree 2-2015) is a forestry program that devotes one percent of the national budget to incentivize the protection of natural forests, reforestation, and the establishment of agroforestry practices. While PROBOSQUE builds on past forestry incentive programs, key differences include a wider range of eligible activities and eligible groups, a minimum project size of 0.5 hectares, and the removal of earmarks distinguishing between plantation and natural forest subsidies. The Forest Incentives Law for Owners of Small Extensions of Forest or Agroforestry Land (PINPEP, created by Decree 51-2010) is a forest incentive program for forest and agroforestry plots of fewer than 15 hectares. PINPEP provides landowners with funds to plant trees or maintain existing forests.
Bribery is illegal under Guatemala’s Penal Code. Guatemala scored 25 out of 100 points on Transparency International’s 2021 Corruption Perception Index, ranking it 150 out of 180 countries globally, and 28 out of 32 countries in the region. The law provides criminal penalties for official corruption, but the Public Ministry (MP) prosecuted very few government corruption cases.
Investors find corruption pervasive in government procurement, including payment of bribes in exchange for awarding public construction contracts. Investors and importers are frequently frustrated by opaque customs transactions, particularly at ports and borders. The Tax and Customs Authority (SAT) launched a customs modernization program in 2006, which implemented an advanced electronic manifest system and resulted in the removal of many corrupt officials. However, reports of corruption within customs’ processes remain. In 2021, SAT implemented additional customs reforms that route flagged shipments to a dedicated secondary inspection team for resolution, rather than assigning the case to the original inspector. The change eliminates opportunity for an inspector to impose deliberate delays.
From 2006 to 2019, the UN-sponsored International Commission against Impunity in Guatemala (CICIG) undertook numerous high-profile official corruption investigations, leading to significant indictments. For example, CICIG unveiled a customs corruption scheme in 2015 that led to the resignations of the former president and vice president. Since then-President Morales terminated CICIG in 2019 and actions by Attorney General Consuelo Porras to impede anti-corruption prosecutors, impunity has increased and poses significant risks for potential new investors.
Guatemala’s Government Procurement Law requires most government purchases over $116,363 to be submitted for public competitive bidding. Since March 2004, Guatemalan government entities are required to use Guatecompras (https://www.guatecompras.gt/), an Internet-based electronic procurement system to track government procurement processes. Guatemalan government entities must also comply with government procurement commitments under CAFTA-DR. In August 2009, the Guatemalan congress approved reforms to the Government Procurement Law, which simplified bidding procedures; eliminated the fee previously charged to receive bidding documents; and provided an additional opportunity for suppliers to raise objections over the bidding process. Despite these reforms, large government procurements are often subject to appeals and injunctions based on claims of irregularities in the bidding process (e.g., documentation issues and lack of transparency). In November 2015, the Guatemalan congress approved additional amendments to the Government Procurement Law that tried to improve the transparency of the procurement processes by barring government contracts for some financers of political campaigns and parties, members of congress, other elected officials, government workers, and their immediate family members. However, there continue to be multiple allegations corruption and nepotism in the procurement process. The 2015 reforms expanded the scope of procurement oversight to include public trust funds and all institutions (including NGOs) executing public funds. The U.S. government continues to advocate for the use of open, fair, and transparent tenders in government procurement as well as procedures that comply with CAFTA-DR obligations, which would allow open participation by U.S. companies.
Guatemala ratified the U.N. Convention against Corruption in November 2006, and the Inter-American Convention against Corruption in July 2001. Guatemala is not a party to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. In October 2012, the Guatemalan congress approved an anti-corruption law that increased penalties for existing crimes and added new crimes such as illicit enrichment, trafficking in influence, and illegal charging of commissions.
Contact at the government agency or agencies that are responsible for combating corruption:
Address: 23 Calle 0-22 Zona 1, Ciudad de Guatemala
Phone: (502) 2251-4105; (502) 2251-4219; (502) 2251-5327; (502) 2251-8480; (502) 2251-9225 Email address: firstname.lastname@example.org
According to the National Civil Police (PNC), the murder rate in 2020 dropped 28 percent – from 20.8 per 100,000 to 15 per 100,000, compared to 2019, continuing a downward trend in recent years. The Guatemalan government attributed the general decline in violence to the economic downturn during the first months of the coronavirus pandemic, including interdepartmental travel restrictions and the prohibition of most alcohol sales. The murder rate increased to 16.6 per 100,000 in 2021, a 9 percent increase compared to 2020. Rule of law is a challenge and the judicial system is faces significant delays in case processing and inefficiency. Local police may lack the resources to respond effectively to serious criminal incidents. Major criminal groups operating in Guatemala are involved in a number of illicit activities, including violent street crime, drug trafficking, kidnaping, extortion, arms trafficking, illegal adoption rings, and environmental crimes. Although security remains a concern, foreigners are not usually singled out as targets of crime.
The political climate in Guatemala, marked by its 36 years of armed conflict, is characterized by periodic civil disturbances. For example, in October 2021, President Alejandro Giammattei declared a State of Siege in El Estor as dozens of protestors, including environmental defenders, indigenous activists, and outside agitators blocked coal trucks from accessing a nickel mine and allegedly clashed with National Police (PNC) forces who attempted to clear the road for mining traffic. Protests and highway roadblocks organized by transportation workers and military veterans have caused disruption and heightened security, impacting general mobility and traffic condition, on a recurring basis in recent years.
In November 2020 civil unrest sparked by congressional approval of the 2021 budget proposal, which added to long-standing grievances. Largely peaceful protests were marred by isolated acts of vandalism and violence, including fire damage to the national congress building, as well as acts of violence by both security forces against some protestors and by some protestors against security forces. The main source of tension among indigenous communities, Guatemalan authorities, and private companies is the lack of prior consultation and alleged environmental damage.
Damage to projects or installations is rare. However, there were instances in October 2018 and January 2019 in which unidentified arsonists burned machinery and other equipment at the site of a hydroelectric construction project near the northern border with Mexico. Additionally, activist groups at times have engaged in blockades to prevent personnel, materials, and equipment from entering or leaving disputed installations.
11. Labor Policies and Practices
According to the 2021 national survey of employment and income, the Guatemalan workforce consists of an estimated 2.1 million individuals employed in the formal sector. Additionally, roughly 5.1 million individuals, or 70.8 percent of the total workforce, work in the informal sector, including some who are too young for formal sector employment. According to the 2017 Survey on Employment and Income, the most recent survey with child labor data available, child labor, particularly in rural areas, remains a serious problem in certain economic activities. The informal economy represented 22 percent of GDP in 2019 according to official data. About 75.7 percent of female workers and 84.9 percent of indigenous workers were employed in the informal sector. Approximately 30 percent of the total labor force is engaged in agricultural work. The availability of a large, unskilled, and inexpensive labor force led many employers, such as construction and agricultural firms, to use labor-intensive production methods. Roughly, 14 percent of the employed workforce is illiterate. In developed urban areas, however, education levels are much higher, and a workforce with the skills necessary to staff a growing service sector emerged. Even so, highly capable technical and managerial workers remain in short supply, with secondary and tertiary education focused on social science careers. The Ministry of Labor issued a regulation in March 2022 that requires recruiters of Guatemalans being employed outside of Guatemala to be registered and to comply with all the requirements related to contracts established in Article 34 of the Labor Code.
No special laws or exemptions from regular labor laws cover export-processing zones. The Ministry of Labor issued a regulation in December 2021 that allows to set different minimum wages for two economic regions of the country starting in 2023. In July 2021, the Constitutional Court revoked the provisional suspension of the Ministry of Labor’s agreement on part-time work, based on ILO Convention 175, which enabled companies to hire workers for six hours or fewer per workday for wages equivalent to the fraction of full time work they complete.
The Labor Code requires that at least 90 percent of employees be Guatemalan, but the requirement does not apply to high-level positions, such as managers and directors. The Labor Code sets out: employer responsibilities regarding working conditions, especially health and safety standards; benefits; severance pay; premium pay for overtime work; minimum wages; and bonuses. Mandatory benefits, bonuses, and employer contributions to the social security system can add up to about 55 percent of an employee’s base pay. However, many workers, especially in the agricultural sector, do not receive the full compensation package mandated in the labor law. All employees are subject to a two-month trial period during which time they may resign or be discharged without any obligation on the part of the employer or employee. For any dismissal after the two-month trial period, the employer must pay unpaid wages for work already performed, proportional bonuses, and proportional vacation time. If an employer dismisses an employee without just cause, the employer must also pay severance equal to one month’s regular pay for each full year of employment. Guatemala does not have unemployment insurance or other social safety net programs for workers laid off for economic reasons.
Guatemala’s Constitution guarantees the right of workers to unionize and to strike, with an exception to the right to strike for security force members and workers employed in hospitals, telecommunications, and other public services considered essential to public safety. Before a strike can be declared, workers and employers must engage in mandatory conciliation and then approve a strike vote by 50 percent plus one worker in the enterprise. If conciliation fails, either party may ask the judge for a ruling on the legality of conducting a strike or lockout. Legal strikes in Guatemala are extremely rare. The Constitution also commits the state to support and protect collective bargaining and holds that international labor conventions ratified by Guatemala establish the minimum labor rights of workers if they offer greater protections than national law. In most cases, labor unions operate independently of the government and employers both by law and in practice. The law requires unions to register with the Ministry of Labor and their leadership must obtain credentials to carry out their functions. Delays in such proceedings are common. The law prohibits anti-union discrimination and employer interference in union activities and requires employers to reinstate workers dismissed for organizing union activities. A combination of inadequate allocation of budget resources for labor rights enforcement to the Ministry of Labor and other relevant state institutions, and inefficient administrative and justice sector processes, act as significant impediments for more effective enforcement of labor laws to protect these workers’ rights. As a result, investigating, prosecuting, and punishing employers who violate these guarantees remain a challenge, particularly the enforcement of labor court orders requiring reinstatement and payment of back wages resulting from dismissal. The rate of unionization in Guatemala is very low.
Both the U.S. government and Guatemalan workers have filed complaints against the Guatemalan government for allegedly failing to adequately enforce its labor laws and protect the rights of workers. In September 2014, the U.S. government convened an arbitration panel alleging that Guatemala had failed to meet its obligations under CAFTA-DR to enforce effectively its labor laws related to freedom of association and collective bargaining and acceptable conditions of work. The panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Separately, the Guatemalan government faced an International Labor Organization (ILO) complaint filed by workers in 2012 alleging that the government had failed to comply with ILO Convention 87 on Freedom of Association. The complaint called for the establishment of an ILO Commission of Inquiry, which is the ILO’s highest level of scrutiny when all other means failed to address issues of concern. In 2013, the Guatemalan government agreed to a roadmap with social partners in an attempt to avoid the establishment of a Commission. The government took some steps to implement its roadmap, including the enactment of legislation in 2017 that restored administrative sanction authority to the labor inspectorate for the first time in 15 years. As part of a tripartite agreement reached at the ILO in November 2017, a National Tripartite Commission on Labor Relations and Freedom of Association was established in February 2018 to monitor and facilitate implementation of the 2013 roadmap. Based in large part on the 2017 tripartite agreement, the ILO Governing Body closed the complaint against Guatemala in November 2018.
14. Contact for More Information
Trade and Investment Officer
U.S. Embassy Guatemala
Av. Reforma 7-01 Zona 10, Guatemala
Honduras contains all the ingredients for a thriving, prosperous economy: strategic location next to U.S. markets with a deep-water port, a rich endowment of natural resources, breathtaking tourist destinations, and hard-working people, including a significant cadre of skilled labor. Despite these advantages, per capita income in Honduras is the third lowest in all Latin America. Investors cite corruption, crime, and poor infrastructure and weak or nonexistent rule of law as the primary reasons that Honduras does not attract more of the private investment it needs to stimulate inclusive economic growth. According to the International Monetary Fund (IMF), real Honduran GDP grew by 12.5 percent in 2021, a rebound from the devastating effects in 2020 of the COVID-19 pandemic and twin hurricanes Eta and Iota. The IMF predicts the economy will grow by 3.8 percent in 2022.
The 2022 inauguration of Honduras first woman president, Xiomara Castro, marked the beginning of a new era in the country’s political economy. The participation of U.S. Vice President Harris at President Castro’s inauguration exemplified the strong U.S. commitment to Honduras. The two countries have committed to work jointly to address the root causes of migration, including by combating corruption and expanding economic opportunity. Since taking office, the Castro administration has launched initiatives to reduce corruption, improve education and public health, and create jobs.
These laudable efforts have been frustrated by fiscal challenges, including budget planning and debt management. Although the United States and international organizations including the IMF assess Honduras as low risk for debt distress, public messaging from the administration announcing a fiscal crisis roiled international bond markets, driving up the risk premium on Honduran debt. To address these budget shortfalls, the government announced it will utilize its foreign reserves to finance operations, which could put additional inflationary pressure on the economy. To help Honduras implement its social agenda without increasing its debt burden, the United States has begun a debt management technical assistance program with the Ministry of Finance.
In both public and private, the Castro administration emphasizes the need for job creation and private investment in Honduras. The government approved a new law in 2022 to facilitate the development and formalization of Micro, Small, and Medium Enterprises (MSMEs). The government’s Results-Based Governance system and other anti-corruption efforts are excellent examples of efforts to improve the investment climate. From the perspective of the private sector, however, these efforts have been overshadowed by policy decisions that have dramatically increased the uncertainty of investment returns. Chief among these was the May 2022 approval of a new energy law that threatens power generators with forced sale at a “just price” if they do not reduce their tariffs to the government’s satisfaction. The law provides no guarantee of future payment, stipulates that new energy investment must be majority state-owned, and all but eliminates private trade in energy. As a result of the new law, several private energy companies have discontinued planned projects in Honduras and are exploring investment opportunities in other countries in the region.
The Castro administration also eliminated the special economic zones known as “ZEDEs” by their initials in Spanish. The ZEDEs were broadly unpopular, and viewed by some as a vector for corruption, but their elimination raised concerns in the business community about the government’s commitment to commercial stability and the rule of law.
Another government policy contributing to uncertainty in the investment climate has been the elimination of the legal framework used by most businesses to employ per-hour workers. The law’s repeal fulfilled a Castro campaign promise, responding to criticism by labor unions that temporary work allowed companies to evade their social security obligations and exploit workers. Business representatives note, however, that many industries, including retail, tourism, and food service rely heavily on hourly labor and will be constrained by the new framework. Civil society representatives also point out that the change adversely affects women and students, who relied on hourly work to manage households and school schedules, although union leaders counter that the previous framework allowed employers to target women and young people for economic exploitation, given that their personal circumstances often do not allow them to take on full-time employment.
Many foreign investors in Honduras operate thriving enterprises. At the same time, all investors face challenges including unreliable and expensive electricity, corruption, unpredictable tax application and enforcement, high crime, low education levels, and poor infrastructure. Squatting on private land is an increasingly severe problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and strikes are additional concerns for private investors.
Despite these setbacks, over 200 American companies operate businesses in Honduras. Honduras enjoys preferential market access to the United States under CAFTA-DR, which has allowed for the development of intra-industry trade in textiles and electrical machinery, among other sectors. The proximity to the United States and established supply chain linkages means that opportunities exist to increase nearshoring sourcing to meet U.S. demand for a variety of goods. The White House “Call to Action to Deepen Investment in the Northern Triangle” is designed to coordinate increased U.S. investment in the region, including Honduras. This program, along with others, aims to support sustained and inclusive economic development in Honduras and surrounding countries.
1. Openness To, and Restrictions Upon, Foreign Investment
Honduras is generally open to foreign investment and government leaders consistently assert their desire to attract investment. At the same time, recent government actions have increased uncertainty in the investment climate. The legal framework for investment includes the Honduran constitution, the investment chapter of CAFTA-DR (which takes precedence over most domestic law), and the 2011 Law for the Promotion and Protection of Investments. The Honduran constitution requires all foreign investment to complement, but not substitute for, national investment. Honduras’ legal obligations guarantee national treatment and most favored nation treatment for U.S. investments in most sectors of the Honduran economy and include enhanced benefits in the areas of insurance and arbitration for domestic and foreign investors. CAFTA-DR has equal status with the constitution in most sectors of the Honduran economy. In addition to liberalizing trade in goods and services, CAFTA-DR includes important requirements relating to investment, customs administration and trade facilitation, technical barriers to trade, government procurement, telecommunications, electronic commerce, intellectual property rights, transparency, and labor and environmental protection.
Representatives from the international investment community have voiced concerns that several Castro administration policies have made the investment climate in Honduras less attractive. For example, after the hourly employment law was repealed in April 2022, all Honduran employees must now be salaried, eliminating flexible hiring practices vital for seasonal work. In addition, the threat of expropriation in a May 2022 energy law damaged perceptions of commercial rule of law in Honduras, increasing state control of the sector and leaving many investors wondering which other sectors will be subjected to government coercion and threats. The repeal of the framework establishing the special economic “ZEDE” zones further contributed to uncertainty over the government’s commitment to investment protections required by international treaties. And the Castro administration’s tendency to pass important laws very quickly, with little consultation or consideration of secondary and tertiary effects has created concerns about the stability and predictability of the investment environment.
The National Investment Council, the Ministry of Investment Promotion, and the Ministry of Economic Development all have equities in attracting foreign investment and an ambitious job creation mandate. Critics complain that lack of clarity and overlapping responsibilities among these entities undermine the government’s ability to effectively promote Honduras as a profitable destination for foreign capital.
Honduras’ Investment Law does not limit foreign ownership of businesses, except for those specifically reserved for Honduran investors, including small firms with capital less than $6,300 and the domestic air transportation industry. For all investments, at least 90 percent of companies’ labor forces must be Honduran, and companies must pay at least 85 percent of their payrolls to Hondurans. Majority ownership by Honduran citizens is required for companies in the commercial fishing sector, forestry, local transportation, radio, television, or benefiting from the Agrarian Reform Law. There is no screening or approval process specific to foreign direct investments in Honduras. Foreign investors are subject to the same requirements for environmental and other regulatory approvals as domestic investors.
According to the law, investors can establish, acquire, and dispose of enterprises at market prices under freely negotiated conditions without government intervention, but some foreign business operators report difficulty closing businesses. Private enterprises fairly compete with public enterprises on market access, credit, and other business operations. Foreign investors have the right to own property, subject to certain restrictions established by the Honduran constitution and several laws relating to property rights. Investors may acquire, profit, use, and dispose of property ownership with the exception of land within 40 kilometers of international borders and shorelines. Honduran law does permit, however, foreign individuals to purchase properties close to shorelines in designated “tourism zones.”
The Honduran government has worked to simplify administrative procedures for establishing a company in recent years, including by offering many processes online. Government of Honduras (GOH) officials are pressing for, and have made good progress in, the digitalization of business, import, permitting and licensing, and taxation processes to increase efficiency and transparency, but procedural red tape to obtain government approval for investment activities remains common, especially at the local level. Honduras’ business registration information portal (https://honduras.eregulations.org/ ) provides clear step-by-step information on registering a business, including fees, agencies, and required documents.
Honduras does not promote or incentivize outward investment.
3. Legal Regime
The GOH publishes approved regulations in the official government Gazette. Honduras lacks an indexed legal code so lawyers and judges must maintain their own libraries of law publications. The government does not have a process to solicit comments on proposed regulations from the general public.
CAFTA-DR requires host governments publish proposed regulations that could affect businesses or investments. Honduras made significant progress in 2019 and 2020 in relation to the publication and availability of information under CAFTA-DR. Honduras notified Article 1 technical provisions, per CAFTA-DR requirements, and the Customs Administration (ADUANAS) and Sanitary Regulatory Agency (ARSA) have improved publication of regulations through their official online portals.
Some U.S. investors experience long waiting periods for environmental permits and other regulatory and legislative approvals. Sectors in which U.S. companies frequently encounter problems include infrastructure, telecoms, mining, and energy. Generally, regulatory requirements are complex and lengthy and vulnerable to rent-seeking and corruption. Regulatory approvals require congressional intervention if the time exceeds a presidential term of four years. Current regulations are available at the Honduran government’s eRegulations website (http://honduras.eregulations.org/ ). While the majority of regulations are at the national level, municipal level regulations also exist and can be very discouraging to investment. No significant regulatory changes of relevance to foreign investors were announced since the last report. Public comments received by regulators are not published. The government does not promote or require companies’ environmental, social, and governance (ESG) disclosure to facilitate transparency and/or help investors and consumers distinguish between high- and low-quality investments.
As a member of the WTO, Honduras notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).
Honduras has a civil law system. The Honduran Commercial Code, enacted in 1950, regulates business operations and falls under the jurisdiction of the Honduran civil court system. The Civil Procedures Code, which entered into force in 2010, introduced the use of open, oral arguments for adversarial procedures. The Civil Procedures Code provides for protection of commercial transactions, property rights, and land tenure. It also established a process for the enforcement of rulings issued by foreign courts. Despite these codes, U.S. claimants have noted the lack of transparency and the slow administration of justice in the courts. U.S. firms report favoritism, external pressure, and bribes within the judicial system. They also mention the poor quality of legal representation from Honduran attorneys.
Resolving an investment or commercial dispute in the local Honduran courts is often a lengthy process. Foreign investors report dispute resolution typically involves multiple appeals and decisions at different levels of the Honduran judicial system. Each decision can take months or years, and it is usually not possible for the parties to predict the time required to obtain a decision. An electronic case management system has recently been introduced with US Government support to increase transparency and reduce corruption. This system is gradually being rolled out to the different courts. Final decisions from Honduran courts or from arbitration panels often require subsequent enforcement from lower courts to take effect, requiring additional time. Foreign investors sometimes prefer to resolve disputes with suppliers, customers, or partners out of court when possible. Honduras has a very high-quality mechanism for alternate dispute resolution.
Honduras’ Investment Law requires all local and foreign direct investment be registered with the Investment Office in the Ministry of Economic Development. Upon registration, the Investment Office issues certificates to guarantee international arbitration rights under CAFTA-DR. An investor who believes the government has not honored a substantive obligation under CAFTA-DR may pursue CAFTA-DR’s dispute settlement mechanism, as detailed in the Investment Chapter. The claim’s proceedings and documents are generally open to the public.
The Government of Honduras requires authorization for both foreign and domestic investments in the following areas:
Basic health services
Generation, transmission, and distribution of electricity
Fishing, hunting, and aquaculture
Exploitation of forestry resources
Agricultural and agro-industrial activities exceeding land tenancy limits established by the Agricultural Modernization Law of 1992 and the Land Reform Law of 1974
Insurance and financial services
Investigation, exploration, and exploitation of mines, quarries, petroleum, and related substances.
The Government of Honduras offers one-stop business set-up at its My Business Online website, which helps domestic and international investors submit initial business registry information and provides step-by-step instructions. (https://www.miempresaenlinea.org/ ) However, formalizing a business still requires visiting a municipal chamber of commerce window for registration and permits, a process vulnerable to rent-seeking and corruption.
The Commission for the Defense and Promotion of Competition (CDPC) is the Honduran government agency that reviews proposed transactions for competition-related concerns. Honduras’ Competition Law established the CDPC in 2005 as part of the effort to implement CAFTA-DR. The Honduran Congress appoints the members of the CDPC, which functions as an independent regulatory commission.
Laws that grant sole companies exclusive distribution rights for imported goods have created artificial monopolies in Honduras, hindering the availability and raising the price of imported goods in the Honduran market.
The Honduran government has the authority to expropriate property for purposes of land reform or public use. The National Agrarian Reform Law provides that idle land fit for farming can be expropriated and awarded to indigent and landless persons via the Honduran National Agrarian Institute. In 2013, the Honduran government passed legislation regarding recovery and reassignment of concessions on underutilized assets. Both local and foreign firms have expressed concerns that the law does not specify what the government considers “underutilized.” The government has not published implementing regulations for the law nor indicated plans to use the law against any private sector firm. The May 2022 energy law threatens energy producers with expropriation if they do not renegotiate their power-purchasing agreements to the government’s satisfaction.
Government expropriation of land owned by U.S. companies is rare. CAFTA-DR’s Investment Chapter Section 10.7 states no party may expropriate or nationalize a covered investment either directly or indirectly, with limited public purpose exceptions that require prompt and adequate compensation. Under the Agrarian Reform Law, the Honduran government must compensate expropriated land partly in cash and partly in 15-, 20-, or 25-year government bonds. The portion to be paid in cash cannot exceed $1,000 if the expropriated land has at least one building and it cannot exceed $500 if the land is in use but has no buildings. If the land is not in use, the government will compensate entirely in 25-year government bonds.
Land invasions by squatters on both Honduran and foreign-owned land are increasingly common, especially in agricultural areas. These invasions have grown more frequent in 2022, sometimes leading to violent confrontations. Owners of disputed land have found pursuing legal avenues costly, time consuming, and ineffective at enforcing property rights.
Companies that default in payment of their obligations in Honduras can declare bankruptcy. A Honduran court must ratify a bankruptcy for it to take effect. These cases are regulated by the country’s Commercial Code.
The judicial ruling that declares the bankruptcy of the company establishes the value of the assets, the recognition and classification of the credits, the procedure for the sale of assets and the schedule for the payment of the obligations, in the case that it is not possible for the company to continue its operations. The ruling must be published in the Gazette. The liquidation of companies is always a judicial matter, except in the case of banking institutions which are liquidated by the National Banking and Insurance Commission.
Any creditor or a company itself may initiate the liquidation procedure, which is generally a civil matter. The judge appoints a liquidator to execute the procedure. A mechanism that a company may exercise to prevent bankruptcy is to request a suspension of payments from the judge. If approved by the judge and the creditors, the company may be able to reach an agreement with its creditors that allows the same administrative board to maintain control of the company.
A company may be prosecuted for fraudulently declaring bankruptcy in the case that the administrative board or shareholders withdraw their assets before the declaration, alter accounting books making it impossible to determine the real situation of the company, or favor certain creditors granting them benefits that they would not be entitled to otherwise.
4. Industrial Policies
The 2017 Tourism Incentives Law offers tax exemptions for national and international investment in tourism development projects. The law provides income tax exemptions for the first 10 years of a project and permits the duty-free import of goods needed for a project, including publicity materials. To receive benefits, a business must be located in a designated tourism zone. Restaurants, casinos, nightclubs, movie theaters, and certain other businesses are not eligible for incentives under this law. Foreigners or foreign companies seeking to purchase property exceeding 3,000 square meters for tourism or other development projects in designated tourism zones must present an application to the Honduran Tourism Institute at the Ministry of Tourism. The buyer must prove a contract to purchase the property exists and present feasibility studies and plans about the proposed tourism project.
The Honduran government historically has offered four primary tax-advantaged structures to incentivize investment in Honduras: the Free Trade Zone (ZOLI), the Free Tourism Zone (ZOLT), the Industrial Zone for Export Processing (ZIP) and the Temporary Import Law (RIT). Although there has been no formal announcement, the Castro administration has expressed its intentions both publicly and privately to eliminate these tax incentive structures.
Both ZOLIs and ZIPs allow foreign investors tariff and tax incentives for export-only manufacturing. The following cities have been designated as free zones: Puerto Cortes, Omoa, Choloma, Tela, La Ceiba, and Amapala. The government allows the establishment of ZIPs anywhere in the country. Currently, ZIPs are located in Choloma, Buffalo, La Lima, San Pedro Sula, Tegucigalpa, and Villanueva. Companies operating in ZIPs are exempt from paying import duties and other charges on goods and capital equipment. The RIT allows exporters to introduce raw materials, parts, and capital equipment (except vehicles) into Honduras exempt from surcharges and customs duties if a manufacturer incorporates the input into a product for export (up to five percent can be sold locally). Additional information on these incentive programs is available from the National Investment Council (https://www.cni.hn).
In April 2022, President Castro abolished Honduras’ Zones for Employment and Economic Development (ZEDEs), the largely autonomous economic zones created by the Honduran National Congress in 2013. Opponents viewed ZEDEs as an unconstitutional abrogation of Honduran sovereignty, ceding national territory and resources to rich investors who would elude Honduras’ already weak oversight of environmental standards, property laws, human rights, and labor standards, while providing no economic benefit to ordinary Hondurans. ZEDE owners saw them as an opportunity to spur economic growth through secure, privately-run enclaves with their own tax and regulatory schemes, security forces, and dispute-resolution mechanisms, as well as a model of how life could be in Honduras with more government efficiency and less corruption. ZEDE owners, who are exploring possible litigation, say they relied in good faith on the legality of the ZEDE law and have tried to negotiate with the Castro Administration to identify a mutually satisfactory way forward, but the government has so far been unwilling to engage in talks.
Honduras ratified the World Trade Organization’s (WTO) Trade Facilitation Agreement (TFA) in July 2016, agreeing to expedite the movement, release, and clearance of goods, including goods in transit. The TFA also sets out measures for effective cooperation between customs and other appropriate authorities on trade facilitation and customs compliance issues. According to the WTO/TFA database, Honduras’ current rate of implementation of TFA Category A notification commitments stands at 58.4 percent. The Honduran government has received significant technical assistance from the U.S. government to meet compliance requirements in publication, notification, advance rulings, border agency cooperation, and establishing a national trade facilitation committee. Honduras, Guatemala, and El Salvador operate a trilateral customs union to foster and increase efficient cross-border trade, but implementation challenges persist. Honduras uses digitized import permits for agricultural products to reduce costs and dispatch times. Honduras and Guatemala also use an online pre-arrival screening protocol to reduce border times and transit costs for goods.
With U.S. support, the GOH has advanced several initiatives to facilitate trade and reduce dispatch times and costs at key land and sea borders. Use of high-spec tablets by Aduanas (Customs) at Puerto Cortes has reduced dispatch times by over 30 percent; expansion of tablet use is envisioned to La Mesa as well (San Pedro Sula airport Customs). A streamlined inspections manual for to be adopted by Aduanas and the National Health and Agrifood Safety Entity (SENASA) as well as additional IT developments to integrate Aduanas and SENASA inspection systems will further compound time and cost reductions at key land and border crossings. Trade policy is overseen by the National Trade Committee, chaired by the Minister of Economic Development.
Many U.S. companies that operate in Honduras take advantage of the commercial framework established by the Central American and Dominican Republic Free Trade Agreement (CAFTA-DR). Substantial intra-industry trade now occurs in textiles and electrical machinery, alongside continued trade in traditional Honduran exports such as coffee and bananas.
The government rushed the opening in December 2021 of an incomplete, controversial new airport, Palmerola, designed to reduce costs for airlines, passengers, and shipping companies once cargo processing procedures have been fully implemented. The airport connects with a recently completed highway (the ‘Dry Canal’) to the Pacific coast and with another highway to the Caribbean coast and its deep-water port – for a sea-to-sea logistics and transit system. As of this writing, cargo functions are not operational at the airport and drive time to Tegucigalpa is approximately an hour and a half.
The Honduran government encourages foreign investors to hire locally and to make use of domestic content, especially in manufacturing and agriculture. The government looks favorably on investment projects that contribute to employment growth, either directly or indirectly. U.S. investors in Honduras have not reported instances in which the government has imposed performance or localization requirements on investments.
The Honduran government and courts can require foreign and domestic investors that operate in Honduras to turn over data for use in criminal investigations or civil proceedings. Honduran law enforcement, prosecutors, and civil courts have the authority to make such requests.
5. Protection of Property Rights
Honduran law recognizes secured interests in movable and real property. The Chamber of Commerce and Industry of Tegucigalpa (CCIT) and the Chamber of Commerce and Industry of San Pedro Sula (CCIC) both manage their own merchant records. The national property registry is managed by the Property Institute. The right for CCIT and CCIC to administer their own merchant registries is derived from a concession in Honduras’ secured transactions law.
Land title procedures have been an issue leading to investment disputes involving U.S. nationals who are landowners, especially, but not limited to, the tourist destination of Roatan. Title insurance is not widely available in Honduras and approximately 80 percent of the privately held land in the country is either untitled or improperly titled. Resolution of disputes in court often takes years. There are claims of widespread corruption in land sales, deed filing, and dispute resolution, including claims against attorneys, real estate companies, judges, and local officials. Although Honduras has made some progress, the property registration system is perceived as unreliable and represents a constraint on investment, particularly in the Bay Islands. In addition, a lack of implementing regulations leads to long delays in the awarding of titles in some regions.
The legislative framework for the protection of intellectual property (IP) rights , which includes the Honduran copyright law and its industrial property law, is generally adequate, but often poorly enforced. Honduras has enacted legislation to implement its obligations under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) of the World Trade Organization (WTO). Honduran law protects data exclusivity for a period of five years and protects process patents, but does not recognize second-use patents. The Property Institute and Public Ministry handle IP protection and enforcement.
CAFTA-DR Chapter 15 on Intellectual Property Rights further provides for the protection and enforcement of a range of IP rights, which are consistent with U.S. and international standards . There are also provisions on deterrence of piracy and counterfeiting. Additionally, CAFTA-DR provides authorities the ability to confiscate pirated goods and investigate intellectual property cases on their own initiative.
The Honduran legal framework provides deterrence against piracy and counterfeiting by requiring the seizure, forfeiture, and destruction of counterfeit and pirated goods and the equipment used to produce them. The law also provides for statutory damages for copyright and trademark infringement, to ensure monetary damages are awarded even when losses associated with an infringement are difficult to assign.
Digital piracy is widespread and frequently ignored in Honduras, especially by telecommunications companies. The Special Prosecutor for IP will not investigate a case unless it receives a complaint from a rights holder. Often, rights holders do not submit complaints because of either the perceived bureaucratic process or the fear of losing business. In addition, sentencing for IP crimes remains ineffective to deter future violations. IP violators typically receive a three-to-six-year sentence and an approximately $2,000 fine. If a sentence is less than five years, however, the convicted party can choose to pay a larger fine and not serve any jail time.
Honduras is not listed in United States Trade Representative’s 2021 Special 301 Report or its 2020 Review of Notorious Markets for Counterfeiting and Piracy.
There are no government restrictions on foreign investors’ access to local credit markets, though the local banking system generally extends only limited amounts of credit. Investors should not consider local banks a significant capital resource for new foreign ventures unless they use specific business development credit lines made available by bilateral or multilateral financial institutions such as the Central American Bank for Economic Integration.
A limited number of credit instruments are available in the local market. The only security exchange operating in the country is the Central American Securities Exchange (BCV) in Tegucigalpa, but investors should exercise caution before buying securities listed on it. Supervised by the National Banking and Insurance Commission (CNBS), the BCV theoretically offers instruments to trade bankers’ acceptances, repurchase agreements, short-term promissory notes, Honduran government private debt conversion bonds, and land reform repayment bonds. In practice, however, the BCV is almost entirely composed of short- and medium-term government securities and no formal secondary market for these bonds exists.
A few banks have offered fixed rate and floating rate notes with maturities of up to three years, but outside of the banks’ issuances, the private sector does not sell debt or corporate stock on the exchange. Any private business is eligible to trade its financial instruments on the BCV, and firms that participate are subject to a rigorous screening process, including public disclosure and ratings by a recognized rating agency. Historically, most traded firms have had economic ties to the other business and financial groups represented as shareholders of the exchange. As a result, risk management practices are lax and public confidence in the institution is limited.
The Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans institutions, and financial companies. There are currently 15 commercial banks, and 10 financial groups operating in Honduras. There is no offshore banking or homegrown blockchain technology in Honduras. Honduras has a highly professional, independent Central Bank and an effective banking regulator, the Comisión Nacional de Bancos y Seguros. While access to credit remains limited in Honduras, especially for historically underserved populations, the financial sector is a source of economic stability in the country.
Honduras does not have a sovereign wealth fund.
7. State-Owned Enterprises
Most state-owned enterprises are in telecommunications, electricity, water utilities, banking, and commercial ports. The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers. The GOH has yet to establish a legal framework for foreign companies to obtain licenses and concessions to provide long distance and international calling. As a result, investors remain unsure if they can become fully independent telecommunication service providers.
The state-owned National Electric Energy Company (ENEE) is the single largest contributor to the country’s fiscal deficit. Due to years of mismanagement and corruption, ENEE loses over $30 million every month and its debt amounts to more than 10 percent of Honduran GDP. With the May 2022 energy law, the government has reversed energy reform legislation that called for the separation of ENEE into three independent units for distribution, transmission, and generation. The law also weakened the electricity regulator and eliminated the independent systems operator. Electricity subsector experts say that dispatch decisions have become much less transparent since the elimination of the systems operator, a disincentive for new investment. The electrical subsector faces serious structural problems, including high electricity system losses, a transmission system in need of upgrades, vulnerability of generation costs to volatile international oil prices, an electricity tariff that does not reflect actual costs, and the high costs of long-term power purchase agreements (PPAs), which have often been awarded directly to companies with political connections instead of via a fair and transparent tendering and procurement process. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to frequent blackouts and high tariffs.
Honduran law grants municipalities the right to manage water distribution and to grant concessions to private enterprises. Major cities with public-private concessions include San Pedro Sula, Puerto Cortes, and Choloma. The state water authority National Autonomous Aqueduct and Sewer Service (SANAA) manages Tegucigalpa’s water distribution. Persistent water shortages are another constraint on private enterprise in Honduras, especially during the spring dry season. The Honduran National Port Company (ENP) is the state-owned organization that oversees management of the country’s government-operated maritime ports, including Puerto Cortes, La Ceiba, Puerto Castilla, and San Lorenzo. Private companies Central American Port Operators and Maritime Ports of Honduras have 30-year concessions to operate container and bulk shipping facilities at Honduras’ principal port Puerto Cortes.
The Honduran government is not seeking to privatize state-owned enterprises. The May 2022 energy law aims to increase government control over the electricity sector.
8. Responsible Business Conduct
Awareness of the importance of Responsible Business Conduct (RBC) is growing among both producers and consumers in Honduras. An increasing number of local and foreign companies operating in Honduras include conduct-related responsibility practices in their business strategies. The Honduran Corporate Social Responsibility Foundation (FUNDAHRSE) has become a strong proponent in its efforts to promote transparency in the business climate and provides the Honduran private sector, particularly small- and medium-sized businesses, with the skills to engage in responsible business practices. FUNDAHRSE’s approximately 110 members can apply for the foundation’s “Corporate Social Responsibility Enterprise” seal for exemplary responsible business conduct involving work in areas related to health, education, environment, codes of ethics, employment relations, and responsible marketing.
RBC related to the environment and outreach to local communities is especially important to the success of investment projects in Honduras. Several major foreign investment projects in Honduras have stalled due to concerns about environmental impact, land rights issues, lack of transparency, and problematic consultative processes with local communities, particularly indigenous communities. Although the International Labor Organization Convention 169 on Indigenous and Tribal Peoples was ratified by the GOH in 1995 and Honduras voted in favor of UN’s Indigenous People’s rights in 2007, there is still much to do in the area. There is still a need for foreign investors to build trust with local communities, while employing international best practices and standards to reduce the risk of conflict and promote sustainable and equitable development.
Examples of international best practices include the following:
Voluntary Principles on Security and Human Rights Initiative
The UN Guiding Principles on Business and Human Rights
The Organization for Economic Co-operation and Development Guidelines for Multinational Enterprises.
GOH has a National Adaptation and Climate Strategy and a Biodiversity Strategy. In 2022, the Castro Administration created the Environmental Cabinet comprised of Ministries of Environment, Forestry, Agriculture, Energy, Economic Development and Finance and the Protected Areas and Wildlife Institute. The purpose of this body is to coordinate interagency efforts to address climate change, biodiversity conservation and Forestry Management. The GOH has taken positive steps to implement climate related policies including a National Adaption and Climate Strategy and a Biodiversity Strategy. The GOH has not established policies to reach net-zero carbon emissions by 2050. However, in collaboration with the UN, GOH conducted sectoral studies to determine Nationally Determined Contributions (NDC) and drafted a greenhouse gases mitigation strategy. While sectoral studies provided recommendations and targets for NDCs, these recommendations have not translated into official policy. The GOH does have an ecotax to support efforts to administer protected areas, which generally adds additional taxes on imported cars. At this time, the GOH has not implemented public procurement policies that include environmental and green growth consideration such as resources efficiency, pollution abatement, and climate resilience.
In February 2022, President Castro fulfilled her campaign promise to request support from the UN for an international anti-corruption commission (CICIH). A UN Technical Assistance Mission visited Honduras in May 2022 to begin work on the request. The commission would continue the work started by the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) which left Honduras in 2020 after the former administration failed to renew its mandate. Though details are still under discussion, the commission would likely fill an investigative and prosecutorial role similar to MACCIH. Its mandate would likely extend beyond the current administration. Several risks remain; notably, a broad amnesty law passed in February 2022 that would prevent the commission from investigating a significant number of cases, and unclear financing for the commission.
U.S. businesses and citizens report corruption in the public sector and the judiciary is a significant constraint to investment in Honduras. Historically, corruption has been pervasive in government procurement, issuance of government permits, customs, real estate transactions (particularly land title transfers), performance requirements, and the regulatory system. Civil society groups are critical of recent legislation granting qualified immunity to government officials and a 2019 law that gave the highly politicized government audit agency a first look at corruption cases. Congress repealed the latter in 2022. In 2018, Congress passed a revision of the 1984 penal code that lowered penalties for some corruption offenses. The new code went into effect in June 2020 and was retroactively applied to several high-profile corruption cases resulting in a spate of dismissals and retrials. In late 2020, the GOH created a new Ministry of Transparency to act as the government’s lead institution in coordinating and implementing efforts to promote transparency and integrity and prevent government corruption. The Castro government further institutionalized the ministry’s anti-corruption mandate, naming it the Ministry of Transparency and the Fight against Corruption. The Castro administration’s Government by Results initiative should pay off in decreased vulnerability to corruption, and the ministers of Health and Economic Development both signed cooperation agreements with the country’s Anticorruption Council.
Honduras’s Rankings on Key Corruption Indicators:
TI Corruption Index
23/100, 157 of 180
MCC Government Effectiveness
-0.12 (35 percent)
MCC Rule of Law
-0.42 (10 percent)
MCC Control of Corruption
-0.40 (16 percent)
The United States Foreign Corrupt Practices Act (FCPA) deems it unlawful for a U.S. person, and certain foreign issuers of securities to make corrupt payments to foreign public officials for the purpose of obtaining or retaining business for directing business to any person. The FCPA also applies to foreign firms and persons who take any act in furtherance of such a corrupt payment while in the United States. For more information, see the FCPA Lay-Person’s Guide: http://www.justice.gov/criminal/fraud/ .
Honduras ratified the UN Anticorruption Convention in December 2005. The UN Convention requires countries to establish criminal penalties for a wide range of acts of corruption. The UN Convention covers a broad range of issues from basic forms of corruption such as bribery and solicitation, embezzlement, trading in influence, and the concealment and laundering of the proceeds of corruption. The UN Convention contains transnational business bribery provisions that are functionally similar to those in the Organization for Economic Cooperation and Development Anti-Bribery Convention.
Honduras ratified the Inter-American Convention against Corruption (OAS Convention) in1998. The OAS Convention establishes a set of preventive measures against corruption; provides for the criminalization of certain acts of corruption, including transnational bribery and illicit enrichment; and contains a series of provisions to strengthen the cooperation between its states’ parties in areas such as mutual legal assistance and technical cooperation.
Companies that face corruption-related challenges in Honduras may contact the following organizations to request assistance.
José Mario Salgado
Director General of the Prosecutor’s Office
Honduran Public Ministry
The Public Ministry is the Honduran government agency responsible for criminal prosecutions, including corruption cases.
Association for a More Just Society (ASJ)
Honduras Country Director
Residencial El Trapiche, 2da etapa Bloque B, Casa #25
ASJ is a nongovernmental Honduran organization that works to reduce corruption and increase transparency. It is an affiliate of Transparency International.
National Anti-Corruption Council (CNA)
Executive Board Assistant
Colonia San Carlos, calle Republica de Mexico
CNA is a Honduran civil society organization.
U.S. Embassy Tegucigalpa, Honduras
Attention: Economic Section
Avenida La Paz Tegucigalpa M.D.C., Honduras
Telephone Numbers: (504) 2236-9320, 2238-5114
Fax Number: (504) 2236-9037
Companies can also report corruption through the Department of Commerce Trade Compliance Center Report a Trade Barrier website: http://tcc.export.gov/Report_a_Barrier/index.asp .
10. Political and Security Environment
Crime and violence rates remain high and add cost and constraint to investments. Demonstrations occur regularly in Honduras and political uncertainty poses a challenge to ongoing stability.
Although violent crime remains a persistent problem, Honduras has successfully reduced homicides to less than 40 per 100,000 inhabitants. Cases of violence, extortion, and kidnapping are still relatively common, particularly in urban areas where gang presence is more pervasive. Drug traffickers continue to use Honduras as a transit point for cocaine and other narcotics en route to the United States and Europe, which fuels local turf battles in some areas and injects illicit funds into judicial proceedings and local governance structures to distort justice. The business community historically had been a target for ransom kidnappings, but the number of such kidnappings dropped from 92 in 2013 to 15 in 2021, primarily through the work of the USG-supported Honduran National Police National Anti-Kidnapping Unit. Although violent crime rates are trending downward, corruption and white-collar crime, including money laundering, negatively affect economic prosperity and stability for the business community.
11. Labor Policies and Practices
The Honduran Labor Law prescribes a maximum eight-hour workday, 44-hour workweek, and at least one 24-hour rest period per week. The Labor Code provides for paid national holidays and annual leave. Most employment sectors also receive two one-month bonuses as part of the base salary, known as the 13th and 14th month salary, issued in mid-December and mid-June, respectively. New hires receive a prorated amount based on time-in-service during their first year of employment. The Labor Code requires companies to pay one month’s salary to employees terminated without cause. Companies do not owe severance to employees who resign or are terminated for cause. Employees terminated for cause can contest the basis for the termination in court to claim severance. There are no government-provided unemployment benefits in Honduras, although unemployed individuals may have access to their accumulated pension funds.
As mentioned above, in April 2022, President Castro signed the repeal of the Hourly Employment Law. Labor groups had alleged that some employers used hourly contracts to avoid responsibility for severance, provide employee benefits, and prevent union formation. The repeal did not stipulate the process for transitioning employees from hourly to salaried, but it did prevent the termination of employees.
The Secretariat of Labor and Social Security (SETRASS) is responsible for registering collective bargaining agreements. The Labor Code prohibits the employment of persons under the age of 14. Minors between the ages of 14 and 18 must receive special permission from SETRASS to work. The majority of the violations of the labor-related provisions of the children’s code occur in the agricultural sector and informal economy.
While Honduran labor law closely mirrors International Labor Organization standards, the U.S. Department of Labor has raised serious concerns regarding the effective enforcement of Honduran labor laws. Labor organizations allege the SETRASS fails to enforce labor laws, including laws on the right to form unions, reinstating employees unjustly fired for union activities, child labor, minimum wages, hours of work, and occupational safety and health. A 2015 U.S. Department of Labor report provided recommendations to address labor concerns in Honduras and called for a monitoring and action plan (MAP) to improve labor law enforcement in Honduras following a 2012 submission brought under the labor chapter of CAFTA-DR. While the government has made significant progress toward addressing areas of concern, outstanding issues to completing the Honduran government’s obligations under the MAP include resolution of emblematic collective bargaining cases and the enforcement and collection of fines for labor violations.