Policies Toward Foreign Direct Investment

The Honduran government is generally open to foreign investment.  Low labor costs, proximity to the U.S. market, and the large Caribbean port of Puerto Cortes make Honduras attractive to investors.  At the same time, however, inconsistent and expensive energy, corruption, weak institutions, high levels of crime, low educational levels, and poor infrastructure hamper Honduras’ investment climate.

Entities that make up the legal framework for investment include the Honduran constitution; the investment chapter of CAFTA-DR; a self-executing international agreement that takes precedence over most domestic law; and the 2011 Law for the Promotion and Protection of Investments.  The Honduran constitution requires all foreign investment 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 in Honduras with the constitution in most sectors of the Honduran economy.

Critics complain that lack of clarity and overlapping responsibilities among the multiple entities charged with attracting increased foreign direct investment hinder results.  As of April 2019, the Government of Honduras put forward draft legislation currently being debated by the Honduran Congress that would merge the National Investment Council, ProHonduras, and President Hernandez’s signature initiative Honduras 20/20, an ambitious plan to create 600,000 jobs in six targeted sectors by the year 2020.  It remains uncertain whether the proposed changes will galvanize the political will required to push forward significant reforms.

Limits on Foreign Control and Right to Private Ownership and Establishment

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 USD 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 benefiting from the Agrarian Reform Law, including in sectors of commercial fishing, forestry, local transportation, radio, and television.  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.

Investors can establish, acquire, and dispose of enterprises at market prices under freely negotiated conditions without government intervention.  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.”

Other Investment Policy Reviews

In 2016, the World Trade Organization conducted a Trade Policy review of Honduras: https://www.wto.org/english/tratop_e/tpr_e/s336_e.pdf .

Business Facilitation

The Honduran government simplified administrative procedures for establishing a company in recent years.  According to the 2019 World Bank Doing Business Report, the average time required for starting a business in Honduras is 13 days and requires 11 procedures.  Honduras’ business registration information portal (http://www.honduras.eregulations.org/  ) provides information on registering a business, including information fees, agencies, and required documents.  The World Bank’s Honduras Investment Regulation Portal provides quantitative indicators on Honduras’ laws, regulations, and practices affecting foreign companies (http://iab.worldbank.org/data/exploreeconomies/honduras  ).

Outward Investment

Honduras does not promote or incentivize outward investment.

Investment Incentives

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 and 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.

In October 2018 President Hernandez introduced legislation creating a number of new tax incentives to promote job growth for small and medium enterprises.  The new laws entered into effect in November 2018 following publication in the official Gazette. The legislation provides access to credit and tax relief to encourage existing businesses to go through the formal registration process as well as encourage the creation of new companies.  The legislation includes provisions granting tax exemptions on national and municipal taxes and reduced permitting and licensing fees for new businesses.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Honduran government does not provide direct export subsidies, but does offer tax exemptions to firms in a free trade zone.  The Temporary Import Law 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).  The government allows the establishment of export processing zones anywhere in the country. Companies operating in export processing zones are exempt from paying import duties and other charges on goods and capital equipment. In addition, the production and sale of goods within export processing zones are exempt from state and municipal income taxes for the first 10 years of operation.  The government permits companies operating in an export processing zone unrestricted repatriation of profits and capital. Companies are required, however, to purchase the Lempiras needed for their local operations from Honduran commercial banks or from foreign exchange trading houses registered with the Central Bank.

Most industrial parks and export processing zones are located in the northern Department of Cortes, with close access to Puerto Cortes, Honduras’ major Caribbean port, and San Pedro Sula, Honduras’ major commercial city.  The government treats industrial parks and export processing zones as offshore operations and therefore companies must pay customs duties on products manufactured in the parks and sold in Honduras. In addition, the government treats Honduran inputs as exports, which companies must pay for in U.S. dollars.  Most companies operating in these parks are involved in apparel assembly, though the government and park operators have begun to diversify into other types of light industry, including automotive parts and electronics assembly. Additional information on Honduran free trade zones and export processing zones is available from the Honduran Manufacturers Association (http://www.ahm-honduras.com/  ).

In 2013, the Government of Honduras signed a law to allow establishment of Economic Development and Employment Zones (ZEDEs) to boost job growth and attract foreign investment.  Following a backlash from local and international NGOs concerned about labor rights, land issues, and environmental protection, the push for ZEDEs remained dormant until August 2017, when President Hernández revived the concept as a key job creation tool in conjunction with Honduras Plan 20/20 and his reelection campaign.  Per the Tourism Law, privately owned tourism zones permit free importation of equipment, supplies, and vehicles. As of May 2019 there are no ZEDEs operating in Honduras, though officials insist the first ZEDE will soon be operational.

Performance and Data Localization Requirements

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.

Most state-owned enterprises are in telecommunications, electricity, water utilities, and commercial ports.  The main state-owned Honduran telephone company, Hondutel, has private contracts with eight foreign and domestic carriers.  The Government of Honduras 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 greatest contributor to the country’s fiscal deficit.  Energy reform legislation, passed in 2014, called for the separation of ENEE into three independent units for distribution, transmission, and generation. International energy observers, including the World Bank, cite a lack of…political will and vested interests from Honduran political and economic elite who profit from inflated generation contracts, stalling efforts to unbundle ENEE.  While the Honduran government is leading efforts to reform the energy sector and reform ENEE, they face 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).  ENEE experienced an operational deficit of USD 191.4 million in 2017, up USD 28.4 million from the previous full year. In 2017, the Honduran government issued USD 700 million in sovereign bonds to cover payment arrears and refinance the most expensive existing debtThe IMF recommended thatENEE lower the cost of power generation, increase tariffs, invest in transmission upgrades, and reduce losses in order to reduce its deficit.

ENEE controls most hydroelectric generation, which accounts for about one-third of total capacity.  Approximately 50 percent of all power generation comes from diesel and bunker fuel oil plants and the remaining 20 percent comes from wind, solar, and biomass.  Following a push for renewable energy in 2014, the government approved more than 80 contracts between ENEE and private producers for almost 2000 megawatts of new clean energy, although many of these projects are unlikely to materialize.  In 2018, the government cancelled an incentive programs offering a USD 0.03 per kilowatt-hour for renewable power due to high costs. Many businesses have installed on-site power generation systems to supplement or substitute for power from ENEE due to high costs and uncertainty about the semi-privatization process.

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.  The Honduran National Port Company (ENP) is the state-owned organization that oversees management 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.

Privatization Program

The Honduran government is not actively seeking to privatize state-owned enterprises though it is seeking to increase private sector participation in the electric system.  As part of the International Monetary Fund (IMF) December 2014 standby arrangement, concluded in December 2017, the Honduran government initiated reform of the state-owned energy company ENEE and created an independent Electric Energy Regulatory Commission.  In preparation for another IMF standby arrangement, the Honduran government is preparing a plan to separate ENEE. While the structure of the new entity is unclear, under the previous standby arrangement, Honduras was supposed to reform ENEE by creating a holding company with four components: a distribution company with an operations subcontractor supported by a trust agreement; a concession for the transmission network; a not-for-profit organization with public-private ownership to control the overall electrical system; and a privatized generation company that owns all ENEE generating facilities.  The majority of the reforms were not realized, with the exception of a 2016 sub-contract by a Colombian-Honduran consortium to manage energy distribution.

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) leads 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 members can apply for the foundation’s “Corporate Social Responsibility Enterprise” seal for exemplary responsible business conduct involving activities in health, education, environmental, codes of ethics, employment relations, and responsible marketing.

RBC related to the environment and outreach to local communities are 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.  Efforts to pass legislation in support of International Labor Organization Convention 169 on Indigenous and Tribal Peoples has stalled in congress, although nascent efforts within the business community to revive the legislative process are underway. Successful foreign investors in Honduras implement a proactive strategy to build trust and effective dialogue with local communities.  Investors should both meet Honduran legal obligations and employ international best practices and standards to engage with communities 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.

Following anticorruption protests in 2015, President Hernandez signed an agreement with the Organization of American States to form the Mission Against Corruption and Impunity in Honduras (MACCIH).  MACCIH has four principle objectives:

• Prevent and combat corruption and impunity
• Criminal justice system reform
• Political and electoral reform
• Public security

Since its inception in April 2016, MACCIH has worked with the Public Ministry to achieve success on several significant cases, including against current and former public officials.  MACCIH advanced justice reform by lobbying the Honduran Congress to pass a Law on Financing, Transparency, and Oversight of Political Parties in Honduras.  They also presented draft legislation for a Law of Effective Collaboration (similar to plea-bargaining) to the Honduran authorities.  MACCIH worked with the Public Ministry to create a special anti-corruption unit (UFECIC) to pursue large-scale corruption cases.  MACCIH established a Civil Society Observatory to monitor the criminal justice system in the country and work with civil society to implement a cohesive strategy to address systemic corruption.  MACCIH faces the end of its mandate in January 2020 without agreement for an extension between the OAS and the Honduran government.

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.  Since 2012, the Honduran government signed agreements with Transparency International, the Construction Sector Transparency Initiative, and the Extractive Industry Transparency Initiative. Honduras is also receiving support from the Millennium Challenge Corporation in the development of an e-procurement platform and public procurement auditing.

Honduras’s Rankings on Key Corruption Indicators

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 is a member of the UN Anticorruption Convention, which entered into force on December 14, 2005.  The UN Convention is the first global comprehensive international anticorruption agreement and 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 to 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 is a member of the Inter-American Convention against Corruption (OAS Convention), which entered into force in March 1997.  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.

Resources to Report Corruption

Companies that face corruption-related challenges in Honduras may contact the following organizations to request assistance.

Public Ministry
Eva Naza
Coordinator for External Cooperation
Email: cooperacionexterna.mp@gmail.com

The Public Ministry is the Honduran government agency responsible for criminal prosecutions, including corruption cases.

Association for a More Just Society (ASJ)
Yahayra Yohana Velasquez Duce
Director of Transparency
Residencial El Trapiche, 2da etapa Bloque B, Casa #25
Telephone: +504-2235-2291
Email: info@asjhonduras.com

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)
Alejandra Ferrera
Executive Board Assistant
Colonia San Carlos, calle Republica de Mexico
Telephone: 504-2221-1181
Email: aferrera@cna.hn

CAN is a Honduran civil society organization comprised of Honduran business groups, labor groups, religious organizations, and human rights groups.

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  .