El Salvador

Executive Summary

Since President Nayib Bukele took office on June 1, 2019, his administration has sought to attract foreign investment and has taken steps to reduce cumbersome bureaucracy and improve security conditions. The COVID-19 pandemic complicated implementation of reforms and dampened investment.

To respond to COVID-19, the Government of El Salvador (GOES) implemented several emergency measures, including travel restrictions beginning in February 2020 and a nationwide lockdown from March to June 2020. Unclear or conflicting wording among the numerous emergency decrees created uncertainty, complicated business operations, and increased the risks of inadvertent non-compliance. The discretionary application of emergency measures and severe penalties for non-compliance contributed to the uncertainty. Lockdown measures disrupted and limited business operations with even manufacturers of medical supplies and other essential products unable to receive formal permission to reopen. The Supreme Court found the GOES phased reopening decrees to be unconstitutional, mandating a complete nationwide reopening of the economy at the end of August 2020.

As a result of the lockdown and worldwide recession, El Salvador lost approximately 20 percent of formal jobs in 2020. El Salvador’s Gross Domestic Product (GDP) is forecasted to drop by 8.5 percent in 2020 according to the Central Bank, with recovery to pre-pandemic production in 2022.

Following the reopening, perceptions of the investment climate began to slowly recover. However, political gridlock and electoral uncertainty dampened business confidence. The victory of President Bukele’s New Ideas Party in the February 28 legislative and municipal elections should remove obstacles to governability during the remaining three years of Bukele’s presidential term. With a large majority of the seats in the Legislative Assembly, Bukele should be able to pass legislation and reforms. His administration has pledged to enact legislation to strengthen institutions and improve the regulatory environment to spur investment and create jobs. Policies and reforms, however, will take time to implement and show results.

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. The GOES has established a technical working group to help prioritize investment projects and attract private sector participation. Project proposals include enhancing road connectivity and logistics, expanding airport capacity and improving access to water and energy, as well as sanitation. Having inherited a large public debt, the Bukele administration has begun pursuing Public-Private Partnerships (PPPs) to execute infrastructure projects. El Salvador awarded its first PPP project in October 2020 to expand the cargo terminal at the international airport. The contract award is pending legislative approval. It launched a second PPP to install highway lighting and video surveillance in January 2020 and extended the deadline to submit bids until March 15, 2021 due to COVID-19. With these two PPPs, the Bukele administration delivered on its commitment under the Millennium Challenge Corporation (MCC) Compact, which ends April 30, 2021.

As a small energy-dependent country with no Atlantic coast, El Salvador relies on trade. It is a member of the Central American Dominican Republic Free Trade Agreement (CAFTA-DR) and 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 has stalled. The Bukele administration announced in 2020 that it would prioritize bilateral trade facilitation with Guatemala.

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 contains 60 strategic measures focused on simplifying procedures, reducing trade costs, and improving connectivity and border infrastructure. In 2020, NTFC technical committees continued working to implement the action plan, as well as develop a national trade facilitation strategy. However, the NFTC has not presented progress on the action plan. The NFTC did not convene in 2020.

Table 1
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 104 of 180 http://www.transparency.org/research/cpi/overview 
World Bank’s Doing Business Report “Ease of Doing Business” 2020 91 of 190 http://www.doingbusiness.org/rankings 
Global Innovation Index 2020 92 of 131 http://www.globalinnovationindex.org/content/page/data-analysis 
U.S. FDI in partner country ($M USD, stock positions) 2019 3,380 https://apps.bea.gov/international/factsheet/factsheet.cfm 
World Bank GNI per capita 2019 4,000 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD 

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Toward Foreign Direct Investment

The GOES recognizes the benefits of attracting FDI. El Salvador does not have laws or practices that discriminate against foreign investors. The GOES does not screen or prohibit FDI. However, FDI levels still lag behind regional neighbors, except for Nicaragua. The Central Bank reported net FDI inflows of $232.95 million at the end of September 2020.

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 http://www.proesa.gob.sv/investment/sector-opportunities .

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 coordinating the Economic Cabinet. In addition, the Bukele administration created the Presidential Commission for Strategic Projects to lead the GOES major projects.

Limits on Foreign Control and Right to Private Ownership and Establishment

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, unless Salvadoran nationals face restrictions in the corresponding country. Rural land to be used for industrial purposes is not subject to the reciprocity requirement.

The 1999 Investments Law grants equal treatment to foreign and domestic investors. With the exception of limitations imposed on micro businesses, which are defined as having 10 or fewer employees and yearly sales of $121,319.40 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.

Other Investment Policy Reviews

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). https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/s/*)%20and%20((%20@Title=%20el%20salvador%20)%20or%20(@CountryConcerned=%20el%20salvador))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true# 

https://docs.wto.org/dol2fe/Pages/FE_Search/FE_S_S006.aspx?Query=(@Symbol=%20wt/tpr/s/*)%20and%20((%20@Title=%20el%20salvador%20)%20or%20(@CountryConcerned=%20el%20salvador))&Language=ENGLISH&Context=FomerScriptedSearch&languageUIChanged=true# 

The latest investment policy review performed by the United Nations Conference on Trade and Development (UNCTAD) was in 2010. http://unctad.org/en/Docs/diaepcb200920_en.pdf

Business Facilitation

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.

Business Registration

Per the World Bank, registering a new business in El Salvador requires nine steps taking an average of 16.5 days. According to the World Bank’s 2020 Doing Business Report, El Salvador ranks 148 in the “Starting a Business” indicator. El Salvador launched an online business registration portal in 2017 designed as a one-stop shop for registering new companies. The online portal allows new businesses the ability to formalize registration within three days and conduct administrative operations online. The portal ( https://miempresa.gob.sv/ ) is available to all, though services are available only in Spanish.

The GOES’ Business Services Office (Oficina de Atención Empresarial) caters to entrepreneurs and investors. The office has two divisions: “Growing Your Business” (Crecemos Tu Empresa) and the National Investment Office (Dirección Nacional de Inversiones, DNI). “Growing Your Businesses” provides business advice, especially for micro-, small- and medium-sized enterprises. The DNI administers investment incentives and facilitates business registration.

Contact information:

Business Services Office
Telephone: (503) 2590-5107
Address: Boulevard Del Hipódromo, Colonia San Benito, Century Tower, 7th Floor , San Salvador. Schedule: Monday-Friday, 7:30 a.m. – 3:30 p.m.
Crecemos Tu Empresa
E-mail: crecemostuempresa@minec.gob.sv
Website: http://www.minec.gob.sv/ 

The National Investment Office:

Stephanie Argueta de Rengifo , National Director of Investments, sargueta@minec.gob.sv;
Sandra Llirina Sagastume de Sandoval, Deputy Director of Special Investments , llirina.sagastume@minec.gob.sv Christel Schulz, Business Climate Deputy, cdearce@minec.gob.sv 
Laura Rosales de Valiente, Deputy Director of Investment Facilitation, lrosales@minec.gob.sv
Telephone: (503) 2590-5116/ (503) 2590-5264.

The Productive Development Fund (FONDEPRO) provides grants to small enterprises to strengthen competitiveness. Website: http://www.fondepro.gob.sv/ 

The National Commission for Micro and Small Businesses (CONAMYPE) supports micro and small businesses by providing training, technical assistance, financing, venture capital, and loan guarantee programs. CONAMYPE also provides assistance on market access and export promotion, marketing, business registration, and the promotion of business ventures led by women and youth. Website: https://www.conamype.gob.sv/ 

The Micro and Small Businesses Promotion Law defines a microenterprise as a natural or legal person with annual gross sales up to 482 minimum monthly wages, equivalent to $146,609.94 and up to ten workers. A small business is defined as a natural or legal person with annual gross sales between 482 minimum monthly wages ($146,609.94) and 4,817 minimum monthly wages ($1,465,186.89) and up to 50 employees. To facilitate credit to small businesses, Salvadoran law allows for inventories, receivables, intellectual property rights, consumables, or any good with economic value to be used as collateral for loans.

El Salvador provides equitable treatment for women and under-represented minorities. The GOES does not provide targeted assistance to under-represented minorities. CONAMYPE provides specialized counseling to female entrepreneurs and women-owned small businesses.

Outward Investment

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, Czech Republic, Finland, France, Germany, Israel, Republic of Korea, Morocco, the Netherlands, Paraguay, Peru, Spain, Switzerland, United Kingdom, and Uruguay. El Salvador is one of the five Central American Common Market countries, which 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 and the FTA remains in force pending a Supreme Court ruling.

In January 2020, the South Korea -Central America FTA entered into effect. 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. 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 is a signatory of the Central American Mutual Assistance and Technical Cooperation Agreement in Tax and Customs Matters in force since 2012. On October 2018, El Salvador’s Legislative Assembly ratified the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters . The jurisdictions participating in the Convention can be found at:  www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf

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.”

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 incurred legal costs and increased financial exposure.

3. Legal Regime

Transparency of the Regulatory System

The laws and regulations of El Salvador are relatively transparent and generally foster competition. 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.

Companies note the GOES has enacted laws and regulations without following 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, 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 2020, only three GOES agencies drafted and published their regulatory agendas. GOES agencies performed only three 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 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, but work continues on licensing digital certification providers. 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 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.

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. 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.

However, the GOES provided incomplete information about its execution of $8.1 billion, including extraordinary resources to tackle COVID-19. The GOES also has not disclosed expenditure information requested by the Assembly nor provided the Court of Accounts with unrestricted access to pandemic-related financial records and procurement documentation, as well as to the accounts of the Intelligence Agency.

International Regulatory Considerations

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. El Salvador has established a National Trade Facilitation Committee (NTFC) as required by the TFA, which was reactivated in July 2019 as it had not met since 2017.

El Salvador is a member of the U.N. Conference on Trade and Development’s international network of transparent investment procedures: http://tramites.gob.sv . 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.

Legal System and Judicial Independence

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. The judicial system is independent of the executive branch, but may be subject to manipulation by diverse interests. 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.

In February 2021, the Constitutional Chamber of the Supreme Court declined to review a 2019 civil judgement against a foreign bank on grounds that the case had no constitutional merits. The civil ruling that ordered the bank to pay substantial compensation caused widespread concern in the private sector due to perceived irregularities. .

Laws and Regulations on Foreign Direct Investment

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. Website: https://www.miempresa.gob.sv/ 

The country’s eRegulations site provides information on procedures, costs, entities, and regulations involved in setting up a new business in El Salvador. Website: http://tramites.gob.sv/ 

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. Website: http://www.proesa.gob.sv/ 

Competition and Anti-Trust Laws

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. Website: http://www.sc.gob.sv/home/ 

Expropriation and Compensation

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. 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, and the government expropriated 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.

Dispute Settlement

ICSID Convention and New York Convention

El Salvador is a member state to the ICSID Convention. ICSID is included in a number of El Salvador’s investment treaties as the forum available to foreign investors.

Investor-State Dispute Settlement

In 2016, ICSID ruled in favor of El Salvador on a case brought by an international mining company that sought to force government acceptance of a gold-mining project.  Following the ruling, El Salvador banned the exploration and extraction of metal mining in the country.

The rights of investors from CAFTA-DR countries are protected under the trade agreement’s dispute settlement procedures. There have been no successful claims by U.S. investors under CAFTA-DR. There are currently no pending claims by U.S. investors.

For foreign investors from a country without a trade agreement with El Salvador, amended Article 15 of the 1999 Investment Law limits access to international dispute resolution and may obligate them to use national courts. Submissions to national dispute panels and panel hearings are open to the public. Interested third parties have the opportunity to be heard.

International Commercial Arbitration and Foreign Courts

A 2002 law allows private sector organizations to establish arbitration centers to resolve commercial disputes, including those involving foreign investors. In 2009, El Salvador modified its arbitration law to allow parties to appeal a ruling to the Salvadoran courts. Investors have complained that the modification dilutes the efficacy of arbitration as an alternative method of resolving disputes. Arbitrations takes place at the Arbitration and Mediation Center, a branch of the Chamber of Commerce and Industry of El Salvador. Website: http://www.mediacionyarbitraje.com.sv/ 

El Salvador is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the Inter-American Convention on International Commercial Arbitration (Panama Convention). Local courts recognize and enforce foreign arbitral awards and judgments, but the process can be lengthy and difficult.

Bankruptcy Regulations

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. According to data collected by the 2020 World Bank’s Doing Business report, resolving insolvency in El Salvador takes 3.5 years on average and costs 12 percent of the debtor’s estate, with the most likely outcome being that the company will be sold piecemeal. The average recovery rate is 32.4 percent. Globally, El Salvador ranks 92 out of 190 on Ease of Resolving Insolvency. Website: http://www.doingbusiness.org/content/dam/doingBusiness/country/e/el-salvador/SLV.pdf

4. Industrial Policies

Investment Incentives

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;

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 October 2020, the GOES awarded the first-ever PPP project to design, expand, construct, and operate expanded cargo operations of El Salvador’s primary international airport.  The estimated $57 million contract award is pending Legislative Assembly approval. 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 estimated investment for the project is $17 million.  Due to COVID-19, the deadline for the submission of bids was extended to March 15, 2021. El Salvador has also 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.

Foreign Trade Zones/Free Ports/Trade Facilitation

The 1998 Free Trade Zone Law is designed to attract investment in a wide range of activities, although the vast majority 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.

Foreign Trade Zones/Free Ports/Trade Facilitation

There are 17 free trade zones in El Salvador. They host 202 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 73,000 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 1998 law established 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 located 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: http://www.ciexelsalvador.gob.sv/registroSIMP/ 

Performance and Data Localization Requirements

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. Business-related data may be freely transferred outside of El Salvador.

Labor laws require that 90 percent of the workforce in plants and in clerical positions be Salvadoran citizens. Nationality restrictions are relaxed for professional and technical jobs.

Foreign investors and domestic firms are eligible for the same incentives. Exports of goods and services are exempt from value-added tax.

A new Immigration Law, enacted in May 2019, introduces the investment, business, or commercial representation visa for foreign nationals of countries with a visa requirement who want to conduct temporary business-related activities in El Salvador. This visa can be issued for a single entry or multiple entries with a duration of up to two years. Eligible nationals can enter El Salvador for business purposes without a visa for up to 90 days, extendable once for an additional 90 days, for a total maximum stay of 180 days.  The law institutes the Frequent Traveler Card for foreign nationals who frequently visit El Salvador for business. This card can be issued for up to three years and allows multiple entries for stays of up to 90 days per entry.

Investors who plan to live and work in El Salvador for an extended period need to obtain temporary residency, which may be renewed periodically. Under Article 11 of the Investment Law, foreigners with investments totaling more than $1 million may obtain Investor’s Residency status, which allows them to work and remain in the country. This residency may be requested within 30 days of registering the investment. It allows residency for the investor and family members for a period of two years and may be extended thereafter.

It is customary for companies to hire local attorneys to manage the process of obtaining residency. The American Chamber of Commerce in El Salvador can also provide information regarding the process. Website: http://amchamsal.com/ 

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 $10 million, if surgical services are provided, or a minimum of $3 million, if surgical services are not provided. 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

Real Property

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 ranks 79th of 190 economies on the World Bank’s Doing Business 2020 report in the Ease of Registering Property category. According to the report, registering a property takes an average of six steps over a period of 31 days, and costs 3.8 percent of the reported property value.

Intellectual Property Rights

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.

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 three 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 National Directorate of Medicines (DNM) has 42 products registered for data protection, including five in 2019. The DNM protects the confidentiality of relevant test data and the list of such protected medications is available on the DNM website: https: https://www.medicamentos.gob.sv/index.php/es/servicios-m/informes/unidad-de-registro-y-visado/listado-de-productos-farmaceuticos-con-proteccion-de-datos-de-prueba .

The Salvadoran Intellectual Property Association (ASPI – Asociacion 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.

In 2020, the PNC arrested five individuals for copyright and trademark infringement. The PNC also conducted five inspections and ten raids, where it seized pirated optical media discs (CDs and DVDs) and fake products, including , footwear, belts and buckles. . Customs officials have identified some counterfeit products arriving directly from China through the Salvadoran seaport of Acajutla. In 2020, Customs officials seized 36 shipments based on the presumption of containing counterfeit products. These shipments primarily involved toys (e.g. Disney, Mattel and Nickelodeon), clothing and handbags (e.g. Cartier, Puma, Nike, and Tommy Hilfiger), mobile phone accessories (e.g. Huawei, iPhone, and Samsung), and accessories for vehicles (e.g. Toyota, Honda 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.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/details.jsp?country_code=SV 

6. Financial Sector

Capital Markets and Portfolio Investment

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 1994 Securities Market Law established the present 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 2020, the exchange traded $5.8 billon, with average daily volumes between $10 million and $24 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/ 

Money and Banking System

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 35 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 2020 were $20.4 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.

Foreign Exchange and Remittances

Foreign Exchange Policies

There are no restrictions on transferring investment-related funds out of the country. Foreign businesses can freely remit or reinvest profits, repatriate capital, and bring in capital for additional investment. The 1999 Investment Law allows unrestricted remittance of royalties and fees from the use of foreign patents, trademarks, technical assistance, and other services. Tax reforms introduced in 2011, however, levy a five percent tax on national or foreign shareholders’ profits. Moreover, shareholders domiciled in a state, country or territory that is considered a tax haven or has low or no taxes, are subject to a tax of twenty-five percent.

The Monetary Integration Law dollarized El Salvador in 2001. The U.S. dollar accounts for nearly all currency in circulation and can be used in all transactions. Salvadoran banks, in accordance with the law, must keep all accounts in U.S. dollars. Dollarization is supported by remittances – almost all from workers in the United States – that totaled $5.91 billion in 2020.

Remittance Policies

There are no restrictions placed on investment remittances. The Caribbean Financial Action Task Force’s Ninth Follow-Up report on El Salvador ( https://www.cfatf-gafic.org/index.php/member-countries/el-salvador ) noted that El Salvador has strengthened its remittances regimen, prohibiting anonymous accounts and limiting suspicious transactions. In 2015, the Legislature approved reforms to the Law of Supervision and Regulation of the Financial System so that any entity sending or receiving systematic or substantial amounts of money by any means, at the national and international level, falls under the jurisdiction of the Superintendence of the Financial System.

Sovereign Wealth Funds

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 production, water supply and sanitation, ports and airports, and the national lottery (see chart below).

SOE 2021 Budgeted Revenue Number of Employees
National Lottery $ 50,974,850 147
State-run Electricity Company (CEL) $ 250,180,895 831
Water Authority (ANDA) $ 231,991,560 4,291
Port & Airport Administrator (CEPA) $ 117,556,539 2,537

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. The primary water service provider is the National Water and Sewer Administration (ANDA), which provides services to 97 percent of urban areas and 78 percent of rural areas in El Salvador. As an umbrella institution, ANDA defines policies, regulates, and provides services. 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 September 2020, public procurement using BOLPROS totaled $86.7 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. 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. Civil society organizations challenged the order, claiming it violates transparency standards and facilitates the manipulation of procurement information. The order is pending review in the Supreme Court of Justice.

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 diminishing number of gasoline service stations and businesses in other industries, including energy production, food production, medicines, micro-lending, supermarkets, 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).

Privatization Program

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 effectively and fairly enforce domestic laws is limited by a lack of resources. El Salvador does not allow metal mining activity.

Additional Resources

Department of State

Country Reports on Human Rights Practices ( https://www.state.gov/reports-bureau-of-democracy-human-rights-and-labor/country-reports-on-human-rights-practices/);

Trafficking in Persons Report ( https://www.state.gov/trafficking-in-persons-report/);

Guidance on Implementing the “UN Guiding Principles” for Transactions Linked to Foreign Government End-Users for Products or Services with Surveillance Capabilities ( https://www.state.gov/key-topics-bureau-of-democracy-human-rights-and-labor/due-diligence-guidance/) and;

North Korea Sanctions & Enforcement Actions Advisory ( https://home.treasury.gov/system/files/126/dprk_supplychain_advisory_07232018.pdf ).

Department of Labor

Findings on the Worst forms of Child Labor Report ( https://www.dol.gov/agencies/ilab/resources/reports/child-labor/findings  );

List of Goods Produced by Child Labor or Forced Labor ( https://www.dol.gov/agencies/ilab/reports/child-labor/list-of-goods );

Sweat & Toil: Child Labor, Forced Labor, and Human Trafficking Around the World ( https://www.dol.gov/general/apps/ilab ) and;

Comply Chain ( https://www.dol.gov/ilab/complychain/ ).

9. Corruption

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 104 out of 180 countries in Transparency International’s 2020 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 September 2019, El Salvador signed an agreement with the Organization of American States (OAS) for the establishment of the International Commission Against Impunity and Corruption (CICIES), which was followed by an agreement to determine CICIES objectives and competences. The CICIES will run for four years as an independent entity outside the GOES and underneath the OAS. The OAS has signed Memorandums of Understanding (MOUs) with the Attorney General’s Office, the Supreme Court of Justice, and the Ministry of Justice and Public Security codifying the role of the CICIES with each entity. CICIES will assist in instituting policies to combat corruption and impunity, support investigations conducted by the Attorney General‘s Office and the National Civil Police, and capacity building to strengthen institutions actively involved in the fight against corruption.

In April 2020, CICIES announced the deployment of a team of 30 multidisciplinary professionals to audit and implement a follow-up mechanism on the use of funds devoted to fight the pandemic. In November 2020, the Attorney General’s Office launched a series of investigations into COVID-19 contracts and expenditures based on the preliminary results of CICIES audits. The Attorney General’s Office is currently investigating at least 17 government agencies for alleged procurement fraud and misuse of public funds.On March 25,2021, CICIES submitted to the GOES a proposal to amend a several laws to prevent corruption and strengthen transparency and accountability, as well as to create crime typologies.

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, 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, and the former Minister of Defense during two FMLN governments is under arrest for providing illicit benefits to gangs in exchange for reducing homicides (an agreement known as the 2012-2014 Truce). The law provides criminal penalties for corruption, but implementation is generally perceived as ineffective. In 2017, a civil court found former president Mauricio Funes guilty of illicit enrichment and ordered him to repay over $200,000. Additionally, Funes faces criminal charges for embezzlement and money laundering. In 2020, the Attorney General formally filed charges against Funes and other public officials for allegedly misappropriating $45 million in public funds in connection with a procurement fraud involving the Chaparral Hydroelectric Dam . 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. However, 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.

El Salvador has an active, free press that reports on corruption. 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 July 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. The enacted regulations seek to avoid discretion and enhance transparency on corruption-related investigations. 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 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. In 2020, in response to press reports about irregular purchases using COVID-19 funds, several government agencies declared pandemic-related procurements and financial records to be reserved (i.e., confidential) information. Transparency advocates raised concerns about shielding information to avoid citizen oversight of public funds.

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 ).

UN Anticorruption Convention, OECD Convention on Combating Bribery

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.

Resources to Report 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 Etica Gubernamental)
87 Avenida Sur, No.7, Colonia Escalón, San Salvador (503) 2565-9403
(503) 2565-9403
Email: n.castaneda@teg.gob.sv 
http://www.teg.gob.sv/ 

Licenciado Raúl Ernesto Melara Morán
Fiscalia General de La Republica (Attorney General’s Office)
Edificio Farmavida, Calle Cortéz Blanco
Boulevard y Colonia Santa Elena
(503) 2593-7400
(503) 2593-7172
Email: xvpocasangre@fgr.gob.sv
http://www.fiscalia.gob.sv/ 

Chief Justice
Oscar Armando Pineda Navas
Avenida Juan Pablo II y 17 Avenida Norte
Centro de Gobierno
(503) 2271-8743
Email: conchita.presidenciacsj@gmail.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):

Roberto Rubio-Fabián
Executive Director
National Development Foundation (Fundación Nacional para el Desarrollo – FUNDE)
Calle Arturo Ambrogi #411, entre 103 y 105 Avenida Norte, Colonia Escalón, San Salvador (503) 2209-5300
(503) 2209-5300
Email: direccion@funde.org 

Resources to request government information

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
(503) 2205-3800
Email: gomez@iaip.gob.sv
https://www.iaip.gob.sv/ 

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.

In September 2020, the State Department adjusted the U.S. travel advisory for El Salvador from Level 2 (Exercise Increased Caution) to Level 3 (Reconsider Travel), due to COVID-19 Level 4 (Very High) Travel Health Notice issued by the Centers for Disease Control and Prevention (CDC).   The travel advisory also warns U.S citizens of high rates of crime and violence. . Most serious crimes in El Salvador are never solved. El Salvador lacks sufficient resources to properly investigate and prosecute cases and to deter crime.  For more information, visit: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/ElSalvador.html

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, car-jacking, 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

In 2020, El Salvador had a labor force of just over three million, according to the Ministry of Economy. Informal employment accounts for approximately 75 percent of the economy. 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 antiunion 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 the majority of workers.

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. In 2018, a minimum wage increase went into effect that included increases of nearly 40 percent for apparel assembly workers and more than 100 percent for workers in coffee and sugar harvesting. All of these wage rates were above poverty income levels.

On March 14, 2020, the Legislative Assembly unanimously approved Legislative Decree 593, which stated that workers could not be fired for being quarantined for COVID-19 or because they could not report to work due to immigration or health restrictions. President Bukele also mandated persons older than 60 and pregnant women to work from home.

Responding to COVID-19 pandemic and to legalize telework, El Salvador adopted the Telework Regulation Law on March 20, 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 that employers are 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. According to the Exports and Investment Promotion Agency of El Salvador (PROESA), the implementation of the Telework Bill enabled El Salvador to save around 20,000 jobs that otherwise could have been lost to the pandemic, especially in the call center sector.

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
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2019 $27,022.64 2019 $27,023 https://data.worldank.org/country/el-salvador 
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data: BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) 2019 $22,183.96 2019 $3,380 BEA data available at
https://apps.bea.gov/international/
factsheet/factsheet.cfm?Area=209 
Host country’s FDI in the United States ($M USD, stock positions) 2019 N.A. 2019 $26.0 BEA data available at
http://bea.gov/international/direct_
investment_multinational_companies_
comprehensive_data.htm 
Total inbound stock of FDI as % host GDP 2019 37% 2019 126%

* Central Bank, El Salvador. In 2018, the Central Bank released GDP estimates using the new national accounts system from 2008 and using 2005 as the base year.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data (2019)*
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 10,113 100% Total Outward 4.4 100%
Panama 3,304 32.7% Guatemala 2.57 64.3%
United States 2,184 21.6% Honduras 1.32 33%
Spain 1,087 10.7% Costa Rica 0.48 12%
Colombia 819 8.1% Nicaragua 0.07 1.8%
Mexico 764 7.6%
“0” reflects amounts rounded to +/- USD 500,000.

*Coordinated Direct Investment Survey, International Monetary Fund 

Table 4: Sources of Portfolio Investment
Data not available.

14. Contact for More Information

Michael L. Benton
Deputy Economic Counselor
U.S. Embassy San Salvador
Address: Final Blvd. Santa Elena, Antiguo Cuscatlán, La Libertad, El Salvador
Phone: + (503) 2501-2999
Email: bentonML2@state.gov 
Website: http://sansalvador.usembassy.gov/index.html
To reach the U.S. Foreign Commercial Service (FCS) Office, please email: Office.Sansalvador@trade.gov 

Guatemala

Executive Summary

Guatemala has the largest economy in Central America, with a $ 77.4 billion gross domestic product (GDP) in 2020. The economy contracted by an estimated 1.5 percent in 2020 due to the impacts of COVID-19 and tropical storms Eta and Iota. Remittances, mostly from the United States, increased by 7.9 percent in 2020 and were equivalent to 14.6 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 $17.3 billion in 2020, a 4.2 percent increase over 2019. Despite increased stock, FDI flows dropped by 6.1 percent in 2020. Some of the activities that attracted most of the FDI flows in the last three years were 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.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 149 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 96 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 106 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 USD 746 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita 2019 USD 4,610 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct 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, 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.

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. The two areas where the country had the highest rankings 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, or directly with specific government ministries. PRONACOM began to prioritize investment retention in 2020.

Limits on Foreign Control and Right to Private Ownership and Establishment

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 any screening mechanisms 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. In July 2010, the Guatemalan congress approved an insurance law that 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.

Other Investment Policy Reviews

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 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 has not been approved as of March 2021. 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 2021.

Business Facilitation

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. As a result of the entry into force of the commercial code amendments in January 2018, the time to register a new business online for a locally incorporated company went down from an average of 18.5 days in 2016 to an average of six days in 2019. The legal cost to register a business also fell by approximately 75 percent. The new procedures allow locally incorporated businesses 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.

Outward Investment

Guatemala does not incentivize nor restrict outward investment.

3. Legal Regime

Transparency of the Regulatory System

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 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. Such inconsistencies can favor local firms with more familiarity about the system as well as more extensive local networks.

Public participation in the formulation of laws or regulations is rare. In some cases, private sector or 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 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 going 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 contingent liabilities and state-owned enterprise debt.

The Guatemalan congress passed a law to strengthen fiscal transparency and governance of Guatemala’s Tax and Customs Authority (SAT) in July 2016, which included amendments to SAT’s organic law, the tax code, and other legislation to allow SAT access to banking records for auditing purposes with a judge’s approval. Guatemala’s Constitutional Court (CC) suspended the 2016 law’s provision that allowed SAT access to banking records in August 2018 due to a claim of unconstitutionality filed against that provision, later issuing its final decision in August 2019, in which it revoked the provisional suspension and restored SAT’s access to banking records.

International Regulatory Considerations

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 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. Guatemala transmitted its list of official websites with information for governments and trade participants to the WTO’s Committee on Trade Facilitation in March 2019.

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 is currently considering a draft law to create a community consultation mechanism to fulfill its ILO-mandated obligations. The lack of a clear consultation process significantly impedes investment in large-scale projects.

Legal System and Judicial Independence

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 continued accusations of corruption within the judicial branch.

Laws and Regulations on Foreign Direct Investment

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. The Guatemalan government does not regulate online payments outside of the formal financial sector, however.

The United States has filed two separate cases related to the Guatemalan government’s adherence to its CAFTA-DR obligations. For a labor law case, the government established an arbitration panel, pursuant to CAFTA-DR procedures, to consider whether Guatemala met its obligations to effectively enforce its labor laws. The arbitration panel held a hearing in June 2015 and issued a decision favorable to Guatemala in June 2017. Regarding an 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. 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. Local and foreign companies continue to experience significant delays in receiving their 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, which were expected to contribute to expediting VAT credit refunds to exporters, but there were still delays in VAT refunds as of March 2021.

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.

Competition and Antitrust Laws

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 2021.

Expropriation and Compensation

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.

In June 2007, a U.S. company operating in Guatemala filed a claim under the investment chapter of CAFTA-DR against the Guatemalan government with the International Centre for Settlement of Investment Disputes (ICSID Convention). The claimant alleged the Guatemalan government indirectly expropriated the company’s assets through a breach of contract. The company requested $65 million in compensation and damages from the government. The ICSID court issued its ruling on this case in June 2012 and stated that the Guatemalan government had in fact breached the minimum standard of treatment under Article 10.5 of CAFTA-DR and required the government to pay an award of $14.6 million. The government paid the award in November 2013.

Dispute Settlement

ICSID Convention and New York Convention

Guatemala is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention), the Inter-American Convention on International Commercial Arbitration (Panama Convention), and is a member state to the International Convention on the Settlement of Investment Disputes between States and Nationals of Other States (ICSID Convention).

Investor-State Dispute Settlement

CAFTA-DR incorporated dispute resolution mechanisms for investors. Over the past ten years, two investment disputes involving U.S. businesses were filed under the investment chapter of CAFTA-DR against the Guatemalan government with the ICSID –one in 2010 and the other in 2018. A Colombian investor filed a claim with the ICSID in November 2020 on a dispute related to the 2009 Power Transmission System Expansion Plan. The ICSID suspended the proceeding in accordance with the parties’ agreement a few days later.

In October 2010, a U.S. company operating in Guatemala filed the second claim against the Guatemalan government with the ICSID. The claim seeks to resolve a dispute against the government regarding the regulation of electricity rates and the eventual sale of the company. In 2013, ICSID’s arbitration tribunal issued its judgment and awarded the company over $ 21 million in damages over electricity rates and $ 7.5 million to cover legal expenses. In 2014, the Guatemalan government filed an appeal to have the 2013 award annulled. On the same date, the company also filed for a partial annulment of the award. The ICSID ad-hoc committee issued its decision on both annulment proceedings in April 2016. The company then filed a request to resubmit the dispute over the sale to a new tribunal in October 2016. The new ICSID tribunal issued its ruling on the resubmission proceeding over the sale of the company in May 2020 and awarded the company over $27.5 million in damages to recover the cash flow shortfall and the pre-sale interest. The company filed a request for supplementary decision of the award with ICSID in June 2020. The ICSID tribunal issued its ruling on the supplementary decision in October 2020 and stated that the Guatemalan government shall pay the company $7.5 million of its costs incurred in the original arbitration plus interest running from December 2013. The Guatemalan government paid $37 million to the company in November 2020 that corresponded to the 2013 award. In February 2021, the ICSID Secretary General registered an application for annulment of the award filed by the Republic of Guatemala and notified the parties of the provisional stay of enforcement of the award. The case remains pending before the ICSID as of April 2021.

In December 2018, a U.S company operating in Guatemala filed the third claim against the Guatemalan government under the investment chapter of CAFTA-DR with the ICSID. The claim seeks to resolve a dispute against the government regarding the suspension of the claimant’s mining exploitation license by the Guatemalan courts in 2016 due to lack of consultations with local communities pursuant to International Labor Organization (ILO) Convention 169. The ICSID tribunal, constituted in July 2019, held a hearing on preliminary objections in December 2019. The company filed a memorial, (an arbitration specific term similar to a pleading) on the merits with the ICSID in July 2020 and the Guatemalan government filed a memorial on jurisdiction and a counter-memorial on the merits including a counter-claim with the ICSID in December 2020. The case is pending before the ICSID as of April 2021.

International Commercial Arbitration and Foreign Courts

Guatemala’s Foreign Investment Law allows alternative dispute resolution mechanisms, if agreed to by the parties. Currently, there are two alternative dispute resolution mechanisms available in Guatemala to settle disputes between two private parties: the Center of Arbitration and Conciliation of the Guatemalan Chamber of Commerce (CENAC) and the Conflict Resolution Commission of the Guatemalan Chamber of Industry (CRECIG). Both dispute resolution centers provide support with arbiters and logistics. Guatemala’s Arbitration Law of 1995 uses the U.N. Commission on International Trade Law (UNCITRAL) Model Law as the basis for its rules on international arbitration. The Convention on the Recognition and Enforcement of Foreign Arbitration Awards (1958 New York Convention), of which Guatemala is a signatory, recognizes the subsequent enforcement of arbitration awards under these arbitration rules. The Law of the Judiciary recognizes judgments of foreign courts, but judgments must be final and comply with a legalization process to corroborate validity of the judgment.

Bankruptcy Regulations

Guatemala does not have an independent bankruptcy law. However, the Code on Civil and Mercantile Legal Proceedings 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. The Ministry of Economy and members of the Congressional Economic and Foreign Trade Committee submitted a draft bankruptcy law to Congress in May 2018, which is pending Congressional approval as of March 2021.

4. Industrial Policies

Investment Incentives

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 produce products in free trade zones) – 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, but its beneficiaries include only some services providers and a limited number of manufacturing activities such as apparel manufacturers and motorcycle assemblers. 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.

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.

Foreign Trade Zones/Free Ports/Trade Facilitation

Decree 65-89, Guatemala’s Free Trade Zones Law and its amendments approved through Decree 19-2016, Law for Conservation of Employment, 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 2021, there were seven authorized FTZs operating in Guatemala. Currently, services and a limited number of manufacturing activities are the only beneficiaries of Guatemala’s Free Trade Zones Law. The Guatemalan congress is considering amendments to the Free Trade Zones Law 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 has approved two special public economic development zones as of March 2021.

Performance and Data Localization Requirements

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. The Labor Code requires that at least 90 percent of employees must be Guatemalan, but the requirement does not apply to high-level positions such as managers and directors. 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 in the software license contract 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

Real Property

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 20 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.

Intellectual Property Rights

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.. The Guatemalan government is currently reviewing draft amendments to the Industrial Property Law to incorporate TLT provisions into local law.

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.

Guatemala has a sound intellectual property rights (IPR) legal framework. 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 the U.S. Trade Representative (USTR) Special 301 Report’s Watch List in 2021 and has been on the Watch List for more than 10 years. Despite a generally strong legal framework, IPR enforcement is weak due to lack of resource prioritization and poor 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 is not included in USTR’s 2020 Review of Notorious Markets for Counterfeiting and Piracy.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

Guatemala’s capital markets are weak and inefficient because they 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) and the Superintendent of Banks (SIB) were drafting an updated capital markets bill that included a chapter on securitization companies and the securitization process as of March 2021. Notwithstanding the lack of a modern capital markets law, the government debt market continues to develop. Domestic treasury bonds represented 56.9 percent of total public debt as of December 2020.

Guatemala lacks a market for publicly traded equities, which raises the cost of capital and complicates mergers and acquisitions. As of December 2020, borrowers faced a weighted average annual interest rate of 15.5 percent in local currency and 6.6 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 6.8 percent in local currency as of December 2020. 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.

Money and Banking System

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. Non-performing loans represented 2 percent of total loans as of January 2021. According to information from the SIB, Guatemala’s 17 commercial banks had an estimated $51 billion in assets in December 2020. The six largest banks control about 87 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 has 17.2 access points per 10,000 adults at the national level and 24.1 access points per 10,000 adults in the capitol area as of December 2020. There were 15,024 banking accounts per 10,000 adult at the national level and 35,901 banking accounts per 10,000 adults in the capital area as of December 2020. 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 may 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 2020.

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 April 2021.

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 increased in 2020.

Alternative financial services in Guatemala include credit and savings unions and microfinance institutions.

Foreign Exchange and Remittances

Foreign Exchange

Guatemala’s Foreign Investment Law and CAFTA-DR commitments protect the investor’s right to remit profits and repatriate capital. There are no restrictions on converting or transferring funds associated with an investment into a freely usable currency at a market-clearing rate. U.S. dollars are freely available and easy to obtain within the Guatemalan banking system. In October 2010, monetary authorities approved a regulation to establish limits for cash transactions of foreign currency to reduce the risks of money laundering and terrorism financing. The regulation establishes that monthly deposits over $3,000 will be subject to additional requirements, including a sworn statement by the depositor stating that the money comes from legitimate activities. There are no legal constraints on the quantity of remittances or any other capital flows and there have been no reports of unusual delays in the remittance of investment returns.

The Law of Free Negotiation of Currencies allows Guatemalan banks to offer different types of foreign-currency-denominated accounts. In practice, the majority of such accounts are in U.S. dollars. Some banks offer pay through dollar-denominated accounts in which depositors make deposits and withdrawals at a local bank while the bank maintains the actual account on behalf of depositors in an offshore bank.

Capital can be transferred from Guatemala to any other jurisdiction without restriction. The exchange rate moves in response to market conditions. The government sets one exchange rate as reference, which it applies only to its own transactions and which is based on the commercial rate. The Central Bank intervenes in the foreign exchange market only to prevent sharp movements. The reference exchange rate of quetzals (GTQ) to the U.S. dollar has remained relatively stable since 1999. However, as U.S. inflation has been lower than Guatemalan inflation over this period there has been significant real exchange appreciation of about 100 percent of the quetzal against the dollar since 1999 that has reduced Guatemala’s export competitiveness.

Remittance Policies

There are no time limitations on remitting different types of investment returns.

Sovereign Wealth Funds

Guatemala does not have a sovereign wealth fund.

7. State-Owned Enterprises

Guatemala has three state owned enterprises: 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 President appoints the Ports’ boards of directors, and each board of Directors hires the respective general managers.

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 also appoints the manager of GUATEL, the former state-owned telephone company dedicated to providing rural and government services that split off from the fixed-line telephone company during its privatization in 1998. 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.

Privatization Program

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 does not have a definition of RBC as of March 2021. 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 starts on July 23, 2021. On December 24, 2020, the EITI board agreed to postpone the date to start Guatemala’s second validation process to April 1, 2022.

In January 2014, the State Department recognized a U.S.-based company as one of twelve finalists for the Secretary of State’s 2013 Award for Corporate Excellence for its contributions to sustainable development in Guatemala. The Department has also 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. The Guatemalan government continues to improve its capacity to respond to protests and help facilitate a peaceful resolution. Protests against companies are normally peaceful and usually take place only after the aggrieved parties have attempted to dialogue directly with the company in question.

Additional Resources

Department of State

Department of Labor

9. Corruption

Bribery is illegal under Guatemala’s Penal Code. However, corruption remains a serious problem that companies may encounter at many levels. Guatemala scored 25 out of 100 points on Transparency International’s 2020 Corruption Perception Index, ranking it 149 out of 180 countries globally, and 28 out of 32 countries in the region. The score dropped one point compared to the score observed in the 2019 report.

Investors find corruption pervasive in government procurement. In the past few years, the Public Ministry (MP – equivalent to the U.S. Department of Justice) has investigated and prosecuted various corruption cases that involved the 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 away from the capital. 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. 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. Notably, CICIG unveiled a customs corruption scheme in 2015 that led to the resignations of the former president and vice president.

Guatemala’s Government Procurement Law requires most government purchases over $116,580 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 improved transparency of 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. 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 increases penalties for existing crimes and adds new crimes such as illicit enrichment, trafficking in influence, and illegal charging of commissions.

Resources to Report Corruption

Contact at government agencies responsible for combating corruption:

Public Ministry
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: fiscaliacontracorrupcion@mp.gob.gt 

Comptroller General’s Office
Address: 7a Avenida 7-32 Zona 13
Phone: (502) 2417-8700

Contact at “watchdog” organization:

Accion Ciudadana (Guatemalan Chapter of Transparency International)
Address: Avenida Reforma 12-01 Zona 10, Edificio Reforma Montufar, Nivel 17, Oficina 1701
Phone: (502) 2388- 3400
Toll free to submit corruption complaints: 1-801-8111-011
Email address: alac@accionciudadana.org.gt ; accionciudadana@accionciudadana.org  

10. Political and Security Environment

Historically, Guatemala had one of the highest violent crime rates in Latin America; however, according to the National Civil Police (PNC), the murder rate in 2020 was 15 per 100,000, a 28% drop from 2019.  The Attorney General’s Office (AG) recorded 455 femicides in 2020 and reported 23 in the first month of 2021. Departments reporting the highest rate of violent crimes were Guatemala, Escuintla, and Izabal.  The AG credits the general decline in violence to the economic shutdown due to the corona virus pandemic, including interdepartmental travel restrictions and the prohibition of most alcohol sales.  Rule of law is still lacking, and the judicial system is weak, overworked, and inefficient. The police are often understaffed and sometimes corrupt.  Local police may lack the resources to respond effectively to serious criminal incidents.  Although security remains a widespread concern, foreigners are not usually singled out as targets of crime.  Recent examples of violence include extrajudicial killings, illegal detentions, and property damage as a result of protests of against some investment projects.

The political climate in Guatemala, marked by its 36 years of armed conflict, is characterized by occasional civil disturbances and politically motivated violence.  The most recent example is the November 2020 civil unrest sparked by congressional approval of the 2021 budget proposal, which added to long-standing grievances.  Peaceful protests marred by acts of vandalism and violence resulted in fire damage to the national congress building, as well as allegations of brutality against protestors by Guatemalan security forces, as well as acts of violence 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.

11. Labor Policies and Practices

The Guatemala workforce consists of an estimated 2.5 million individuals employed in the formal sector and roughly 4.7 million individuals who 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 available, child labor, particularly in rural areas, remains a serious problem in certain industries. 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.

No special laws or exemptions from regular labor laws cover export-processing zones. In December 2015, then-President Alejandro Maldonado issued an executive order establishing a lower minimum wage for workers employed by light manufacturing export companies in four of 340 municipalities of the country, with the intention of attracting foreign investment and creating jobs in those areas. The order never took effect due to a temporary injunction. The Morales Administration revoked the executive order in February 2016. The Labor Code requires that at least 90 percent of employees be Guatemalan, but the requirement does not apply to high-level positions. 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. An employer may dismiss an employee at any time, for any reason (except pregnancy) and without giving the employee any notice during the trial period. 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 (MinTrab) and their leadership must obtain credentials from MinTrab 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 to MinTrab 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. The PDH’s 2019 report indicates that there were 532 active unions.64 percent in the public sector. The PDH report notes a reduction of 34 percent in the number of private sector active unions in 2019.

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.

13. Foreign Direct Investment and Foreign Portfolio Investment Statistics

Guatemala has the largest economy in Central America, reaching a USD 77.4 billion gross domestic product (GDP) in 2020 with an estimated contraction of 1.5 percent in 2020 due to COVID-19 impact.  Remittances, mostly from the United States, increased by 7.9 percent in 2020 from the $10.5 billion received in 2019 to $11.34 billion in 2020 and were equivalent to 14.6 percent of GDP.  The United States is Guatemala’s most important economic partner. According to preliminary Banguat data, FDI stock was $17.3 billion in 2020, a 4.2 percent increase in relation to 2019.  Preliminary foreign portfolio investment totaled $7.59 billion in 2020, with about 79.4 percent invested in government bonds.  There is no official data available on sources of stock of FDI or foreign portfolio investment.

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
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) ($M USD) 2020 $77,431 2019 $76,710 www.worldbank.org/en/country
Foreign Direct Investment Host Country Statistical source* USG or international statistical source USG or international Source of data:  BEA; IMF; Eurostat; UNCTAD, Other
U.S. FDI in partner country ($M USD, stock positions) N/A N/A 2019 $746 BEA data available at https://apps.bea.gov/international/factsheet/
Host country’s FDI in the United States ($M USD, stock positions) N/A N/A 2019 $9 BEA data available at
https://www.bea.gov/international/direct-investment-and-multinational-enterprises-comprehensive-data
Total inbound stock of FDI as % host GDP 2020 22.3 2019 21.1 UNCTAD data available at
https://stats.unctad.org/handbook/
EconomicTrends/Fdi.html 

* Bank of Guatemala http://www.banguat.gob.gt.  Preliminary GDP year-end figures were published in December 2020 and preliminary FDI year-end data were published in March 2021.

Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions)
Inward Direct Investment Outward Direct Investment
Total Inward 17,299 100% Total Outward 1,665 100%
United States 3,852 22.3% El Salvador 324 19.5%
Mexico 2,609 15.1% The Bahamas 294 17.7%
Colombia 2,022 11.7% Barbados 184 11.1%
Spain 854 4.9% Mexico 182 10.9%
Switzerland 818 4.7% Costa Rica 112 6.7%
“0” reflects amounts rounded to +/- USD 500,000.

According to data from the Coordinated Investment Survey for 2019 published by the IMF, about one fifth of FDI in Guatemala comes from the United States.  Other important sources of FDI are Mexico, Colombia, and Spain (please see Table 3 on sources and destinations of FDI above).  Preliminary data from Banguat also show that the flow of FDI totaled $915.2 million in 2020 (1.18 percent of GDP), a 6.1 percent decline compared to $974.7 million (1.27 percent of GDP) received in 2019.  Some of the activities that attracted most of the FDI flows in the last three years were financial and insurance activities, manufacturing, commerce and vehicle repair, and water, electricity, and sanitation services.

Table 4: Sources of Portfolio Investment
Portfolio investment data are not available for Guatemala.

14. Contact for More Information

Tim Sarraille
sarrailletc@state.gov
Economic Officer
U.S. Embassy Guatemala
Av. Reforma 7-01 Zona 10, Guatemala (502) 2326-4000
(502) 2326-4000
GuatemalaPOL-ECON@state.gov
Drafters: Maricely Maldonado and Chris Kane +512 4861-1520

Honduras

Executive Summary

The United States is Honduras’ most important economic partner.  During the past year, the Honduran government has continued to implement reforms to attract investment and promote economic growth, but meaningful improvement has been slow.  Macroeconomic reforms and continued commitment to fiscal stability have led to a stable macroeconomic environment, ongoing financial assistance from the International Monetary Fund (IMF), and stable credit ratings from the major international agencies.

Foreign investors operating in Honduras operate thriving enterprises, but all 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 a growing problem in Honduras and anti-squatting laws are poorly enforced. Continued low-level protests and uncertainty surrounding the November 2021 general elections are additional concerns for private investors. The World Bank’s Ease of Doing Business Report points to the difficulty of starting a new business, the high burden of paying taxes, and poor contract law enforcement as major disincentives to private investment.

The impact of the COVID-19 pandemic on the economy was both immediate and severe.  The March 2020 shutdown of the formal and informal economies placed a tremendous strain on workers who rely on daily wages.  Approximately 175,000 Hondurans were temporarily suspended from their jobs, 250,000 became unemployed, and almost 300,000 saw their income decrease by at least 40 percent.  This economic contraction was further exacerbated by back-to-back Category 4 hurricanes in November, which caused severe flooding and mudslides, damaging roads, washing away 134 bridges, and killing over 100 people. The combined effects of COVID-19 and the November hurricanes caused an economic recession, with GDP contracting by 8 percent in 2020 and job losses as high as 800,000 workers (18 percent of the labor force). Honduran authorities report economic destruction as high as $10 billion from the storms. The storms’ effects were particularly damaging to the agriculture and tourism industries, both crucial for millions of Hondurans. NGOs, development banks and Honduran officials are working to reactivate the economy via cash injections and technical assistance for small business and farms, rehabilitation of key infrastructure, and improving climate change resiliency.

The Government of Honduras (GOH) implements a variety of measures to attract investment and facilitate trade.  Trade policy is overseen by the National Trade Committee, chaired by the Minister of Economic Development.  Honduras is a ratifying country of the WTO Trade Facilitation Agreement, which contains provisions for expediting the movement, release, and clearance of goods, and sets out measures for effective cooperation on customs compliance and trade facilitation.  Honduras, Guatemala, and El Salvador operate a trilateral customs union to foster and increase efficient cross-border trade, but implementation remains inconsistent.  In June 2020, Honduras switched to digitized import permits for agricultural products, reducing costs and dispatch times dramatically. Also in 2020, Honduras and Guatemala launched an online pre-arrival screening protocol to reduce border times and transit costs for goods. Many processes, including applications for permitting and licensing businesses are now available online as part of Honduras’ Sin Filas (no lines) initiative.

Many of the approximately 200 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).  Through its participation in CAFTA-DR, Honduras has enhanced U.S. export opportunities and diversified the composition of bilateral trade.  Substantial intra-industry trade now occurs in textiles and electrical machinery, alongside continued trade in traditional Honduran exports such as coffee and bananas.  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.

Table 1: Key Metrics and Rankings
Measure Year Index/Rank Website Address
TI Corruption Perceptions Index 2020 157 of 180 http://www.transparency.org/research/cpi/overview
World Bank’s Doing Business Report 2020 133 of 190 http://www.doingbusiness.org/en/rankings
Global Innovation Index 2020 103 of 131 https://www.globalinnovationindex.org/analysis-indicator
U.S. FDI in partner country ($M USD, historical stock positions) 2019 $1,281 https://apps.bea.gov/international/factsheet/
World Bank GNI per capita (USD) 2019 $2,390 http://data.worldbank.org/indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The GOH is open to foreign investment, and low labor costs, proximity to the U.S. market, and the large Caribbean port of Puerto Cortes can make Honduras attractive to investors.

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.

Critics complain that lack of clarity and overlapping responsibilities among the multiple entities charged with attracting increased foreign direct investment undermine the government’s ability to effectively promote Honduras as a profitable destination for foreign capital. 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.

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 $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.”

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/tp436_e.htm .

Business Facilitation

The Honduran government has worked to simplify administrative procedures for establishing a company in recent years, including by offering many processes online. 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 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 59.2 percent.

During the past year the GOH moved 38 of its ministries and agencies into the newly finished Centro Civico government complex, where it hopes to achieve efficiencies in business facilitation and other processes. In addition to moving information storage to digital formats across the government, the GOH plans to streamline public services though use of single windows for multiple services at the new center.

Outward Investment

Honduras does not promote or incentivize outward investment.

2. Bilateral Investment Agreements and Taxation Treaties

A Bilateral Investment Treaty (BIT) between the United States and Honduras entered into force in 2001. The U.S.-Honduras Treaty of Friendship, Commerce and Consular Rights (1928) provides for Most Favored Nation treatment for investors of either country. The United States and Honduras also signed an agreement for the guarantee of private investments in 1955 and an agreement on investment guarantees in 1966. CAFTA-DR supersedes most provisions of these agreements. Honduras and the United States signed a Tax Information Exchange Agreement in 1990. In 2014, Honduras and the United States signed the Foreign Account Tax Compliance Act.

Provisions for investment are included in free trade agreements between Honduras and the United States, Canada, Chile, Costa Rica, El Salvador, Guatemala, Mexico, Nicaragua, Panama, Peru, the Dominican Republic, Colombia, Taiwan, South Korea, and the European Union. These agreements supersede many of the provisions of Honduras’ separate Bilateral Investment Treaties with these countries. Honduras also has separate Bilateral Investment Treaties with the Republic of Korea and with Switzerland.

3. Legal Regime

Transparency of the Regulatory System

The government of Honduras publishes approved regulations in the official government Gazette. Honduras lacks an indexed legal code so lawyers and judges must maintain the publication of laws on their own.

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 easily influenced by political factors. 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

International Regulatory Considerations

As a member of the WTO, Honduras notifies all draft technical regulations to the WTO Committee on Technical Barriers to Trade (TBT).

Legal System and Judicial Independence

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 improved protection of commercial transactions, property rights, and land tenure. It also offered a more efficient 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. 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.

Laws and Regulations on Foreign Direct Investment

Honduras’ Investment Law requires all local and foreign direct investment be registered with the Investment Office in the Secretariat of Industry and Commerce. 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
  • Telecommunications
  • Generation, transmission, and distribution of electricity
  • Air transport
  • 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.

Competition and Anti-Trust Laws

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.

Expropriation and Compensation

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.

Government expropriation of land owned by U.S. companies is rare. Seizure actions by squatters on both Honduran and non-U.S. foreign landowners are most common in agricultural areas. Some occupations have turned violent. Owners of disputed land have found pursuing legal avenues costly, time consuming, and legally inconclusive. 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.

Dispute Settlement

ICSID Convention and New York Convention

Honduras is a member state to the International Centre for the Settlement of Investment Disputes (ICSID) Convention. Honduras has also ratified the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention)

Investor State Dispute Settlement

CAFTA-DR provides dispute settlement procedures between the United States and Honduras. CAFTA-DR’s Investment Chapter dispute settlement mechanism allows an investor who believes the government has not honored a substantive obligation under CAFTA-DR to request a binding international arbitration. Proceedings and documents submitted to substantiate the claim are generally open to the public. The agreement provides basic protections, such as non-discriminatory treatment, limits on performance requirements, the free transfer of funds related to an investment, protection from expropriation other than in conformity with customary international law, a minimum standard of treatment, and the ability to hire key managerial personnel regardless of nationality.

International Commercial Arbitration and Foreign Courts

Honduras’ Conciliation and Arbitration Law, established in 2000, outlines procedures for arbitration and defines the procedures under which they take place. The Investment Law permits investors to request arbitration directly, a swifter and more cost-effective means of resolving disputes between commercial entities. Arbitrators and mediators may have specialized expertise in technical areas involved in specific disputes. Local courts recognize and enforce foreign arbitral awards issues against the government. Judgements from foreign courts are recognized and enforceable under local courts.

The following links provide more localized information:

  • Tegucigalpa Chamber of Industry and Commerce – Center for Conciliation and Arbitration:
  • San Pedro Sula Chamber of Industry and Commerce – Center for Conciliation and Arbitration:

Numerous U.S. investors who have been involved with the judicial system in Honduras mention it can be inefficient, lacks transparency, and is subject to political influence and/or corruption.

Bankruptcy Regulations

Companies that default in payment of their obligations in Honduras can declare bankruptcy. A Honduran court must ratify a bankruptcy in order 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

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, 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 view of grave losses suffered by small and medium enterprises from the 2020 Hurricanes Eta and Iota, the GOH and the Honduran Association of Banking Institutions (AHIBA) agreed to greater flexibility for restructuring loans and credit card debt, as well as a 2 percent reduction in applicable interest rates. The expectation is that with the implementation of these financial relief measures, vulnerable SMEs could avoid bankruptcy and contribute to the reactivation of the Honduran economy.

Foreign Trade Zones/Free Ports/Trade Facilitation

The Honduran government does not provide direct export subsidies, but does offer tax exemptions to firms operating 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 (EPZ) anywhere in the country. Companies operating in EPZs are exempt from paying import duties and other charges on goods and capital equipment. In addition, the production and sale of goods within EPZs are exempt from state and municipal income taxes for the first 10 years of operation. In May 2020 the Honduran Congress updated the law to extend the tax incentives and duty and surcharge exemptions from 10 to 15 years, renewable for an additional 10 years if the company meets certain investment and job creation criteria. Also in 2020, the GOH announced the ability to apply for EPZ status and status extensions through an online portal.

The government permits companies operating in an EPZ 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 EPZs are located in the northern Department of Cortes, with close access to Puerto Cortes, Honduras’ major Caribbean port, and San Pedro Sula, Honduras’ largest commercial city. The government treats industrial parks and EPZs as offshore operations, requiring companies to 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 EPZs 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 a second type of Economic Development and Employment Zone (ZEDE) with its own governance structure, 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 promoted the concept as a key job creation policy of his reelection campaign.  In 2019, two companies received Government of Honduras (GOH) approval to move forward with ZEDE planning and development.

Completion of enough construction on the country’s new Palmerola International Airport to allow a soft opening is expected in 2022.  Located on an open plateau in the center of the country, Palmerola will not require specially licensed pilots to land in mountainous terrain, unlike the airport in Tegucigalpa. The airport will facilitate trade by reducing costs for airlines, passengers, and shipping companies. Its development will impact freight, logistics, distribution, the ease of doing business, and tourist travel for the entire country.  The airport connects with a newly 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.

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.

5. Protection of Property Rights

Real Property

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.

Intellectual Property Rights

The legislative framework for the protection of intellectual property rights (IPR), which includes the Honduran copyright law and its industrial property law, is generally adequate but often poorly implemented. Honduras implements 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 (IP) and Public Ministry handle IPR protection and enforcement.

CAFTA-DR Chapter 15 on Intellectual Property Rights further provides for the protection and enforcement of a range of IPR, which are consistent with U.S. and international standards as well as with emerging international standards of IPR protection and enforcement. 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.

In spite of this regulatory framework, digital piracy is widespread and frequently ignored in Honduras, especially by telecommunications companies.

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.

Resources for Rights Holders

A list of local attorneys is available at https://hn.usembassy.gov/u-s-citizen-services/local-resources-of-u-s-citizens/attorneys/. The U.S. Commercial Service office also maintains a screened list of attorneys through its Business Service Provider (BSP) directory . The Honduran-American Chamber of Commerce works with U.S. and Honduran companies that encounter commercial challenges, including intellectual property rights issues ( http://www.amchamhonduras.org/ ). For additional information about national laws and points of contact at local IP offices, please see World Intellectual Property Organization’s country profiles: http://www.wipo.int/directory/en/ .

6. Financial Sector

Capital Markets and Portfolio Investment

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.

Money and Banking System

The Honduran financial system is comprised of commercial banks, state-owned banks, savings and loans institutions, and financial companies. There are currently 16 commercial banks 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.

Foreign Exchange and Remittances

Foreign Exchange

Article 10.8 of CAFTA-DR ensures the free transfer of funds related to a covered investment. Local financial institutions freely exchange U.S. dollars and other foreign currencies. Foreigners may open bank accounts with a valid passport. For deposits exceeding the maximum deposits specified for different account types (corporate or small-medium enterprises), banks require documentation verifying the fund’s origin.

The Investment Law guarantees foreign investors access to foreign currency needed to transfer funds associated with their investments in Honduras, including:

  • Imports of goods and services necessary to operate
  • Payment of royalty fees, rents, annuities, and technical assistance
  • Remittance of dividends and capital repatriation

The Central Bank of Honduras  instituted a crawling peg in 2011 that allows the lempira to fluctuate against the U.S. dollar by seven percent per year. The Central Bank mandates any daily price of the crawling peg be no greater than 100.075 percent of the average for the prior seven daily auctions. These restrictions limit devaluation to a maximum of 4.8 percent annually. As of March 31, 2021, the exchange rate is 24.0199 lempira to the U.S. dollar.

The Central Bank uses an auction system to allocate foreign exchange based on the following regulations:

  • The Central Bank sets base prices every five auctions according to the differential between the domestic inflation rate and the inflation rate of Honduras’ main commercial partners.
  • The Central Bank’s Board of Directors determines the procedure to set the base.
  • The Board of Directors establishes the exchange commission and the exchange agencies in their foreign exchange transactions.
  • Individuals and corporate bodies can participate in the auction system for dollar purchases, either by themselves or through an exchange agency. The offers can be no less than $10,000, no more than $300,000 for individuals, and no more than $1.2 million for corporations.

To date, the U.S. Embassy in Honduras has not received complaints from individuals regarding the process for converting or transferring funds associated with investments.

Remittance Policies

The Investment Law guarantees investors the right to remit their investment returns and, if they liquidate their investments, to remit the principal capital invested. Foreign investors that choose to remit their investment proceeds from Honduras do so through foreign exchange transactions at Honduran banks or foreign banks operating in Honduras. These exchange transactions are subject to the same foreign exchange process and regulation as other transactions.

Sovereign Wealth Funds

Honduras does not have a sovereign wealth fund.

7. State-Owned Enterprises

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.  According to the IMF, in 2019, ENEE’s total losses reached 1.2 percent of GDP, while its $3.2 billion debt level was almost ten percent of GDP. Energy reform legislation, passed in 2014, called for the separation of ENEE into three independent units for distribution, transmission, and generation. Lack of political will and vested interests, however, have stalled efforts to unbundle ENEE. The electrical sector 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 are often awarded directly to companies with political connections instead of via a fair and transparent tendering and procurement process.

ENEE controls most hydroelectric generation, which made up about 28 percent of total installed capacity and 24 percent of all power generation in 2020. Fossil fuels accounted for about 33 percent of installed capacity and 45 percent of power generation, while other renewable sources (wind, solar, biomass, and geothermal) accounted for about 40 percent of installed capacity and 21 percent of power generation. Together, renewable sources accounted for about 53 percent of power generation. The Honduran government plans to increase renewable energy sources to 80 percent of installed capacity by 2037. 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. 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.

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 IMF’s December 2014 Stand-By Arrangement (SBA), concluded in December 2017, the Honduran government began to reform the state-owned energy company ENEE, creating an independent regulator, the Electric Energy Regulatory Commission. Under a new IMF SBA signed in July 2019, the Honduran government is preparing a plan to separate ENEE. While the structure of the new entity is unclear, under the previous SBA, 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. These reforms were not realized, with the exception of a 2016 sub-contract by a Colombian-Honduran consortium to manage energy distribution.

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 approximately110 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.

Additional Resources

Department of State

Department of Labor

9. Corruption

Despite international pressure, President Hernandez allowed the four-year mandate of the OAS Mission Against Corruption and Impunity in Honduras (MACCIH) to expire in January 2020.  MACCIH began work in 2015 following widespread anti-corruption protests in the wake of a scandal involving Honduras’ social security fund. During its tenure, MACCIH worked with the Public Ministry to bring cases against current and former public officials and to advance justice reform, including by presenting draft legislation for a Law of Effective Collaboration (plea-bargaining law) which remains stalled in Congress.  MACCIH and the Public Ministry created a special anti-corruption unit (UFECIC) to pursue large-scale corruption cases which continues to exist despite the end of MACCIH’s mandate. Its replacement, UFERCO, operates within the Public Ministry with fewer resources and personnel.

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 law that gives the highly politicized government audit agency a first look at corruption cases.  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.  Since 2012, the Honduran government has signed agreements with Transparency International, the Construction Sector Transparency Initiative, and the Extractive Industry Transparency Initiative.  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.

Honduras’s Rankings on Key Corruption Indicators:

Measure Year Index/Ranking
TI Corruption Index 2020 24/100, 157 of 180
World Bank Doing Business May 2020 133/190
MCC Government Effectiveness FY 2021 -0.19 (32 percent)
MCC Rule of Law FY 2021 -0.59 (7 percent)
MCC Control of Corruption FY 2021 -0.29 (18 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.

Resources to Report Corruption

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

Public Ministry
Eva Nazar
Coordinator for External Cooperation
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
+504-2235-2291
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
504-2221-1181
aferrera@cna.hn 

CNA 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 .

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. Tensions could increase significantly in advance of the November 2021 presidential and general elections.

U.S. citizens should be aware that large public gatherings might become unruly or violent quickly. For more information, consult the Department of State’s latest travel warning: https://travel.state.gov/content/travel/en/international-travel/International-Travel-Country-Information-Pages/Honduras.html.

Although violent crime remains a persistent problem, Honduras has successfully reduced homicides to less than 40 per 100,000 inhabitants, the lowest in a decade.  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 13 in 2020, primarily through the establishment of the USG-supported Honduran National Police National Anti-Kidnapping Unit. Although violent crime rates are trending downward, there is a neutral to upward trend in corruption and white-collar crime, including money laundering, that negatively affects 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.

Many employers hire employees on a temporary basis under the Temporary Employment Law. In some cases, employers will renew employees under short-term contracts, sometimes over a period of years. Labor groups allege that some employers use temporary contracts to avoid responsibility for severance, provide employee benefits, and prevent union formation. The STSS 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 STSS 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 STSS 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 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. In October 2018, the U.S. Department of Labor released a MAP assessment update noting significant progress toward addressing areas of concern and extending the MAP’s mandate. The MAP was further extended in May 2020 as a result of the COVID-19 pandemic.

The U.S. Department of State Country Report on Human Rights Practices describes a number of labor and human rights compliance issues that affect the Honduran labor market (https://www.state.gov/reports/2020-country-reports-on-human-rights-practices/honduras/). These include employers’ anti-union discrimination, refusal to engage in collective bargaining, and employer control of unions.

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 Source
Economic Data Year Amount Year Amount
Host Country Gross Domestic Product (GDP) N/A N/A 2019 $25.095 billion World Bank Honduras
https://data.worldbank.org/country/honduras
Foreign Direct Investment Host Country Statistical source USG or International Statistical Source Source
U.S. FDI in Partner Country N/A N/A 2019 $1.3
billion
BEA Data
http://bea.gov/international/direct
_investment_multinational_companies_
comprehensive_data.htm
Host Country’s FDI in the United States N/A N/A 2019 $-84 BEA Data
http://bea.gov/international/direct
_investment_multinational_companies
_comprehensive_data.htm
Total Inbound Stock of FDI as % host GDP N/A N/A 2019 2% UNCTAD data available at
https://stats.unctad.org/handbook/Economic
Trends/Fdi.html
    
Table 3: Sources and Destination of FDI
Direct Investment from/in Counterpart Economy Data
From Top Five Sources/To Top Five Destinations (US Dollars, Millions), 2019
Inward Direct Investment Outward Direct Investment
Total Inward $16,479 100% Total Outward $2,456 100%
USA $3,944 24% Panama $1,194 49%
Panama $2,903 18% El Salvador    $481 20%
Guatemala $1,612 10% Guatemala    $314 13%
Mexico $1,409   9% Costa Rica    $224 9%
Colombia $1,050   6% Colombia    $151  6%
“0” reflects amounts rounded to +/- USD 500,000.
Table 4: Sources of Portfolio Investment
Portfolio Investment Assets
Top Five Partners (Millions, US Dollars)
Total Equity Securities Total Debt Securities
All Countries $322 100% All Countries $8 100% All Countries $315 100%
International Organizations $190 59% United States $6 75% International Organizations $190 61%
Unites States $81 26% Panama $1 12.5% United States $75 24%
Costa Rica $25 8% Not Specified $8 3%
Not Specified $8 3% N/A N/A N/A Canada $4 1%
Canada $4 2% N/A N/A N/A France $4 1%

14. Contact for More Information

Deputy Economic Counselor Matt Yarrington
U.S. Embassy
Avenida La Paz
Tegucigalpa, M.D.C.
Tel: (504) 2236-9320, Ext. 4531
E-mail: YarringtonMD@state.gov

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