TAX BENEFITS AND INCENTIVES FOR INVESTMENT IN TOURISM

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TAX BENEFITS AND INCENTIVES FOR INVESTMENT IN TOURISM

[/vc_column_text][us_separator][vc_column_text]The Tourism Sector was one of the most affected as a result of the COVID-19 Pandemic, mainly due to the movement and capacity restrictions that occurred in most of the world. In Honduras, the Tourism Sector was not only affected by said Pandemic, since during 2020, two natural phenomena unfortunately occurred that forced the authorities to cancel one of the most anticipated holidays. Consequently, there is no doubt that the chimney industry was deeply affected and many entrepreneurs closed their businesses due to the difficulties caused by these three events. Fortunately, the Sector has already begun its recovery according to official reports from the Honduran Tourism Institute (IHT).[1]According to the IHT, the country welcomed 1.9 million visitors in 2022, generating foreign exchange earnings of approximately $548.9 million. This is undoubtedly excellent news for the industry, which has been severely affected over the past three years. That said, it is important to promote the development of the industry and, to do so, understand the benefits and incentives it offers.The regime of the Tourism Promotion Law(hereinafter "LFT”), given that these can be very useful and beneficial for entrepreneurs working in the tourism sector to consolidate and/or strengthen their projects. The regulations that shape the current tourism legal regime are:(1)the LFT, which came into force on August 17, 2017; and,(2)the LFT Regulations, which came into force on November 8 of the same year.Beneficiary categories:The first thing you should know is that, to qualify as a beneficiary of the LFT regime, the IHT must classify the project as a tourism project. This step is known as“tourist rating”,and is basically the process by which a project's tourism eligibility is determined. For this process, the LFT establishes six categories that encompass all activities that may benefit from the LFT regime. These categories are[2]:

1. Tourism Industry Services: This category includes Hotels (Small and Large), Mixed-Use Developments for Tourism, Condo-Hotels, Time-Shared Accommodations, among others.
2. Related Infrastructure Enabling Tourism: This category includes convention centers, intercity bus terminals, maritime terminals, golf courses, theme parks, diving centers, among others.
3. One-Time Investments in Tourism: This category includes investments linked to protected areas of tourist interest, such as biological reserves, national parks, nature reserves, national monuments, among others.
4. Related Tourist Activities:where there are activities such as filming movies for tourism or cultural benefits, sporting events for tourism purposes, among others.
5. Tourist Offer ServicesThis category includes inbound tourism operators, i.e., travel agencies that offer products or services to foreigners in Honduras through organized packages.
6. Tourist Transportation ServicesThis category applies to air, water, or land transportation services, and also applies to the leasing of land and water vehicles. In this case, the company providing the service must be established for the sole purpose of developing tourism.

Ways to access benefits:Now, the owner of a tourism project can access the benefits of the LFT through:

1. The development of a new tourism project, that is, a novel project that has not been previously developed by another person; or
2. An investment within an existing tourism project. This investment can be realized through improvements, expansions, or renovations to the tourism project. In this case, there are three types:
   • Make an investment equal to or greater than 35% of the project's initial investment, for which it is required to present an investment plan with a maximum execution period of 3 years counted from the date on which the project is qualified by the IHT.
   • Prove the completion of an investment equal to or greater than 35% of the initial investment of the project, as long as said investment was made while the LFT was in force (August 17, 2017).
   • Proof of an investment made between January 1, 2014, and August 16, 2017, regardless of the amount.

Tax benefits and investment incentives:Once a tourism project has been qualified, the LFT distinguishes two types of subjects entitled to benefits and incentives:

1. Natural or legal persons who operate tourism projects, who are creditors oftax benefits.
2. Natural or legal persons who invest in tourism projects, who are creditors ofinvestment incentives.

Keeping this distinction in mind is important to understand how the benefits and incentives of the LFT Regime work. On the one hand,tax benefitsfor qualified tourism project operators are[3]:

1. Exemption from paying income tax (ISR), net asset tax, and temporary solidarity contributions for a period of 15 years with no possibility of extension.
2. Exemption from income tax and any withholdings for a period of 5 years. This benefit applies to payments for services agreed upon with national and foreign individuals or legal entities, provided that these services are essential for the studies, installation, implementation, engineering, construction, and monitoring of the tourism project.
3. Exemption from paying Sales Tax (ISV) on local purchases of goods or services for a period of 10 years. In this case, the goods or services must be related to construction, renovation, or restoration, new infrastructure, complementary investments, or new investments in tourism activities developed through the project.
4. Free importation of goods, machinery, and equipment for a period of 10 years. This means that project operators benefit from exemption from paying import customs duties, selective consumption taxes, tariffs, fees, surcharges, duties, general and special contributions, and other customs taxes levied on the importation of inputs, goods, materials, and equipment related to the development, installation, construction, equipping, repair, replacement, and maintenance of the tourism project.
5. Regarding municipal permits and taxes, the LFT grants certain prerogatives to tourism project operators. This law primarily establishes that tourism projects:
   • They must pay the municipalities the Property Tax, the Industry, Commerce, and Services Tax, the operating permit tax, the construction permit tax, and municipal utility rates. Except for the first two taxes, municipalities must maintain proportionality between the cost and the service actually provided when determining the corresponding charges.
   • They are exempt from any other payment of fees, taxes, rates, surcharges, contributions, permits, and tariffs of any kind created through a tax plan or general acts.
   • They enjoy preference and priority in the granting of environmental and municipal permits.

The enjoyment of these tax benefits begins on the date of notification of the resolution of incorporation into the tourism regime, that is, the tourism qualification resolution issued by the IHT. However, it is important to clarify that, for the effective use of the exemptions, the Secretariat of State for Finance (SEFIN) must approve them through an administrative resolution. Still regarding tax benefits, it is worth highlighting the main obligations of duly qualified beneficiaries. That said, the main obligations are:(a)register in the SEFIN Registry of Exonerated Persons and keep it updated;(b)keep the tax address up to date;(c)submit a sworn declaration of tax sacrifice;(d)Collect and pay the tourist tax to the Revenue Administration Service (equivalent to 4%) and the ISV;(and)start a certification process for a standard or quality seal;(f)maintain a detailed record of the exonerated items and property;(g)If applicable, invest the funds indicated in the qualification application;(h)Start the construction and restoration of the properties within a maximum period of 12 months from the date of notification of the SEFIN resolution (effective granting of benefits);(i)start their activities within a period of no more than 3 years from the date of notification of the SEFIN resolution (effective granting of benefits); and,(j)register as a tourism service provider with the National Chamber of Tourism, and keep it updated. Finally, there are theincentives for investment in tourism projectsduly qualified by the IHT. As mentioned above, the creditors of these benefits are the partners or third parties who decide to contribute funds to a duly qualified tourism project. In this regard, the incentives are as follows:[4]:

1. The first incentive is aimed at buyers of real estate located in areas of the country declared by the State of Honduras as priority areas for the tourism sector, provided that these buyers acquire the property through mortgage-backed loans or financial leasing. Given these circumstances, the incentive the buyer receives consists of a deduction of all interest paid on said loans. In this case, the incentive is reflected as an expense in the buyer's income tax return.

However, this first incentive is limited to the interest corresponding to the first 250 times the average minimum wage of the property's purchase price. For this purpose, the average minimum wage published by the Ministry of State in the Labor and Social Security Offices on the date of filing the income tax return must be used. In theory, the buyer does not need to complete any formalities to qualify for this incentive, but in practice, it is recommended that the tourism project operator notify the IHT each time the benefit is used.

2. The second incentive focuses on investment trusts established exclusively to serve as investment vehicles for duly qualified tourism projects. This type of entity can be very useful for large-scale tourism projects that require a large number of partners and significant capital for their operation. Consequently, the incentive is that the investment vehicle will be exempt from paying income tax.
3. The third incentive focuses on capital contributions made by partners of a company that owns a duly qualified tourism project. In this sense, the incentive for partners consists of the right to reduce contributions from their own net taxable income. This incentive should be considered a reduction benefit and not an expense (unlike the first incentive mentioned above).

The contributions received by the tourism project operator can be used for the construction of new facilities or improvements to existing ones, for working capital, as debt payments, and, in general, any other expenditure that constitutes a direct benefit to the project. This third incentive requires certain conditions for a partner to qualify, which are as follows:(a)For new projects, it must be verified that the project was duly qualified by the IHT and that the initial investment amount has been recorded in the resolution;(b)For existing projects, the IHT must qualify the present value of the investments to determine that they are equal to or greater than 35% of the existing initial investment;(c)The tourism project operator will be required to use the funds exclusively for the purposes established in Article 13 of the LFT Regulations and, in addition, must maintain the nature, line of business of the project, or business model under which it was classified by the IHT; and,(d)The reduction benefit must be applied only once during the fiscal period in which the investments are made. Like the first incentive, the current legal framework does not require the partner to complete any formalities. However, the company operating the tourism project is required to provide a copy of the certification by which the IHT (Tax on Property Tax) set the 35% of the initial investment (in the case of existing projects) or the initial investment amount (in the case of new projects). Finally, it should be noted that this last incentive will only be valid for 15 years from the date the LFT comes into effect. If you have a developed tourism project or wish to start a new one, it could be very useful to conduct a study of the current tourism regime to determine whether it is feasible to access the aforementioned benefits and incentives. At Lexincorp, we have the experience and knowledge to advise you on this matter. If you are interested, do not hesitate to contact us atinfohn@lexincorp.comIacaceres@lexincorp.com *Legal Notice: The general information contained in this document is provided for informational purposes only and should not be construed as legal advice on any of the topics discussed. You should not act or refrain from acting on the basis of any content contained herein without seeking legal or other professional advice. We disclaim any liability for any actions you take or refrain from taking based on any content in this communication. [1]https://www.iht.hn/es/honduras-reporta-crecimiento-en-el-sector-turismo-19-millones-de-visitantes-durante-el-2022 [2]Article 3 of the LFT.[3]Articles 5 and 9 of the LFT.[4]Article 12 of the LFT.[/vc_column_text][us_separator][vc_column_text] Written by: Lic. Alejandro Cáceres [/vc_column_text][/vc_column][/vc_row]