Nicaragua: Free Trade Zone Reform Introduces Indefinite Tax Incentives (Law No. 1278)
On April 9, 2026, Law No. 1278 entered into force, amending Nicaragua’s Free Trade Zone Law. While the reform is targeted in its wording, its implications are substantial: the tax incentive regime currently available to operators and users of free trade zones now acquires an indefinite nature in its core elements.
The law was published in the Official Gazette, thereby formalizing a significant shift in the legal framework governing this regime.
What Exactly Is Changing?
Until now, the law allowed for a single extension of the income tax exemption period. This meant that after twenty years—ten initial years plus one renewal—companies were required to transition into full ordinary taxation. The reform removes this cap. Extensions may now be requested successively and without limitation, subject to regulatory requirements and approval by the National Free Trade Zone Commission.
The second change is equally relevant for international investment structures: the law now expressly includes a dividend exemption, both at the corporate and shareholder levels. This resolves a grey area under the previous framework and facilitates the repatriation of profits without additional tax burdens during exemption periods.
The third—and perhaps most strategic—change is the introduction of Article 20 bis. This provision establishes two key elements. First, all tax benefits not subject to a defined term—such as customs, municipal, and indirect tax exemptions—are inherently indefinite. Second, even if a user company exhausts all extensions and is unable to obtain further renewals, its effective income tax rate will not revert to the standard 100%, but instead will be capped at 40%. In other words, Nicaragua’s free trade zone regime now provides a permanent floor of preferential taxation.
Why Does This Matter?
Legal certainty is one of the most critical factors in long-term investment decisions, particularly in manufacturing, logistics, and outsourcing services. Investors evaluating operations in Central America must assess their tax exposure not only in the short term, but across long-term horizons of fifteen to twenty years or more. Previously, Nicaragua’s regime imposed a time limitation that introduced uncertainty into these projections. This reform eliminates that constraint.
Nicaragua already offered one of the most comprehensive free trade zone regimes in the region in terms of tax coverage. With this reform, it adds what was previously missing: permanence.
Entry into Force
The law entered into force on the same day of its publication. Companies with existing authorizations before the National Free Trade Zone Commission should review their current conditions to assess whether they can benefit from the new extension framework.
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