Corporate Tax 2022 Comparisons

Businesses commonly adopt a corporate form. Regardless of the corporate form adopted by the business, each entity is taxed as a separate legal taxpayer from its members, partners or shareholders. The Guatemalan Commercial Code defines five basic types of corporate entity for business purposes, whose key differences may be generally described as falling under one of two categories: separate corporate entities and partnerships.

Separate corporate entities:

• limited liability company (LLC) (sociedad de responsabilidad limitada, or SRL); and
• stock corporation (sociedad anónima, or SA).

Partnerships:

• general partnership (sociedad colectiva);
• limited partnership (sociedad en comandita simple); and
• partnership limited by shares (sociedad comandita por acciones).

Businesses may also operate as branches of foreign companies.

The main corporate forms used as business vehicles are the stock company and the limited liability company.

Stock Company

This is the most common corporate form used in Guatemala. It offers the most flexibility, allowing shares to be freely transferred, which is not the case in a limited liability company. The shareholders of an SA are not personally liable for the SA's obligations beyond the amount of capital each shareholder subscribes and pays. An SA's obligations are guaranteed by the company's assets and the shareholders' subscribed and paid capital.

An SA's governance structure includes:

• the shareholders of the company (generally, there are no prohibitions for foreign individuals and/or corporations to be shareholders of an SA);
• the board of directors or a sole administrator; and
• the general manager (CEO) of the company.

Limited Liability Company

Limited liability companies are used less commonly by foreign investors than SAs. It is, however, more difficult to transfer ownership in a limited liability company, as this requires the amendment of the company's articles of association, and to register with the Commercial Registry a certified copy of the deed needed to make the transfer. A limited liability company is often used where a "tick the box" tax arrangement is preferred by US corporations for the purpose of paying taxes only at the level of the parent corporation. Only the limited liability company (up to the value of the available assets belonging to it) is liable for its obligations in Guatemala.

For local purposes, there are no entities considered as transparent. However, the Guatemalan LLC is commonly used for transparency purposes before tax authorities in the USA and other jurisdictions.

Guatemala has no double taxation treaties currently in force. However, Guatemalan tax law sets the minimum standards regarding residence. These are:

• being incorporated under Guatemalan laws;
• having the effective place of management in Guatemala; and
• having its tax or corporate seat, a permanent establishment or the centre of economic interests located in Guatemala.

Guatemalan income tax has a specific applicable rate for different kinds of income.

For income derived from the ordinary course of business, there are two types of regimens:

• the general statutory corporate income tax regimen, with a tax rate of 25% on net income; and
• the flat rate regimen, with tax rates of 7% or 5% on gross income, minus exempt income.

Under the latter regimen, the applicable tax rate will depend on the amount of taxable income. When the taxable income is less than (approximately) USD3,870.96, the applicable tax rate is 5%. When the taxable income is equal to or above that amount, the applicable tax rate is 7% on the surplus, plus a fixed amount of USD193.54.

Non-residents without a permanent establishment are subject to a final withholding tax of between 5% and 25% on Guatemalan-sourced income.

As a rule, profits are taxed on an accrual basis and based on accounting profits. However, tax adjustments must be made to comply with legal requirements for determining the taxable base. The most common tax adjustments are limitations set by law on deductibility of expenses actually incurred for generating taxable income.

There are currently no special incentives under Guatemalan law.

Guatemala grants certain tax incentives to specific activities developed within the country, such as power generation using clean energy technology, manufacture of goods and the provision of telecommunication services (including call centres and business process outsourcing).

Generally, these tax incentives are:

• an income tax exemption for up to ten years;
• an exemption or suspension (as applicable) from customs duties on the importation of machinery and capital goods related to the activity; and
• an exemption or suspension (as applicable) from VAT on the importation of machinery and goods related to the activity.

Losses incurred during a tax year can only be offset against earnings from the same period. Therefore, no carry forward or backward is allowed. However, capital losses may be offset against capital gains only and carried forward for up to two years.

Interest payments are deductible as long as they are incurred in order to generate taxable income and up to a limit of multiplying the applicable interest rate (defined by financial authorities according to the law) by three times the average net assets in one tax year.

Group consolidation is not permitted for tax purposes. All entities are considered separate taxpayers. Companies cannot utilise separate company losses.

Capital gains are taxed at a rate of 10%. The taxable gain is determined by the difference between the book value or purchase value (as applicable) and the sale price. Although there are no exemptions relative to capital gains, it is possible to deduct up to 15% of the transaction value as transaction costs.

VAT and stamp tax are payable by an incorporated business on a transaction.        

In addition to income tax, Guatemala’s tax system also includes the following notable taxes.

• Value added tax (VAT), or Impuesto al Valor Agregado (IVA) – general rate of 12%. VAT liability is the difference between the total tax debits and the total tax credits generated. Such credit must be related to the taxpayer’s course of business in order to be offset against tax debit. There is a reduced rate of 5% for small taxpayers (roughly under USD16,375.00 yearly income).
• Stamp tax (impuesto de timbres fiscales) – general fixed rate of 3% on certain taxable documents, and specific rates for other documents and acts.
• Alternative minimum tax (impuesto de solidaridad, or ISO) – fixed 1% rate on the greater value between a quarter of annual gross income and a quarter of the value of net assets.

Property (real estate) tax (impuesto único sobre inmuebles, or IUSI) – variable rate (0.2%, 0.6% or 0.9%) depending on the declared value of the property.

Most closely held local businesses operate in a non-corporate form.

Although Guatemalan law does not include a formal concept equivalent to closely held corporations, the VAT Law includes a special regime for small businesses (individuals and corporations), as stated in 2.9 Incorporated Businesses and Notable Taxes.

Under Guatemalan tax law, individuals may generate income as employees or as independent professionals or technicians.

With regard to labour income, tax-resident employees are liable to pay income tax at 5% or 7%. Employees with an income less than USD40,518.75 are taxed at 5%. Those making that amount or more are taxed at 7% on the surplus, plus a fixed amount of USD2,025.94. Deductions allowed are:

• a cost of living allowance of about USD8,103.75 per year;
• social security contributions and contributions to pension funds; and
• life insurance premiums (that do not provide for rescue value).

The employer must calculate and withhold the monthly tax throughout the year, and a final payment or refund is made at the end of the fiscal year, if more or less than the required tax has been withheld.

Regarding professional or technical services and business income, the same tax regimes are available for both professionals and corporations (see 1.4 Tax Rates). Thus, the same tax rates would apply in similar circumstances.

Under the gross income tax regime, payment is generally made through withholding.

There are no statutory provisions preventing closely held corporations from accumulating earnings for investment purposes. However, the partners or shareholders may freely establish provisions on the matter in the by-laws.

Dividend/profit distributions are subject to a final 5% withholding tax. The disposal of shares or participations in a company is subject to capital gains tax (10% rate). The taxable gain is determined by the difference between the book value or purchase value (as applicable) and the sale price.

Dividend/profit distributions are subject to a final 5% withholding tax. The disposal of shares or participations in a company is subject to capital gains tax (10% rate). The taxable gain is determined by the difference between the book value or purchase value (as applicable) and the sale price.

The Income Tax Act includes a general provision subjecting non-residents without permanent establishment to final withholding taxes on Guatemalan-sourced income. These are final rates without tax reliefs, and applicable depending on the type of income as described in the law.

The applicable withholding rates for each source are:

• dividends and profit distributions – 5%;
• interest – 10% (not applicable to interest paid to regulated banking and financial institutions); and
• royalties – 15%.

The law grants a wide definition of what are considered interest and royalty payments, which sometimes differ from their usual concept.

Guatemala currently has no tax treaties in force.

Guatemala currently has no tax treaties in force.

Transfer pricing rules are fairly new in Guatemala. The biggest issue that the tax authorities have raised is regarding the import and export value method (sixth method, not OECD). Authorities tend to request the application of this method before one of the five OECD procedures. They have also focused on verifying the filing of the report as a formal obligation.

The tax authorities, as mentioned above, have focused on the formal obligation of filing the report and application of the sixth method. Limited risk distribution arrangements have not been an issue with the authorities yet. However, any related-party arrangement that does not comply with transfer pricing rules should be challenged by the tax authorities.

Although Guatemalan income tax law generally follows the five OECD methods, it also includes a sixth method for determining arm’s-length transactions (the import and export value method).

Guatemala does not have any double taxation treaties in force, nor does it currently make use of mutual agreement procedures.

Guatemala currently has no tax treaties in force.

The law treats local branches of non-local corporations and local subsidiaries of non-local corporations identically.

The Guatemalan Income Tax Act does not include a provision levying indirect disposal of Guatemalan companies. However, direct disposal of Guatemalan companies is subject to capital gains tax.

There are no change of control provisions.

There are no formulas used for determining the income of foreign-owned local affiliates.

There are no applicable standards. In order for expenses to be deductible, they must be related to the generation of taxable income.

There are thin capitalisation and transfer pricing rules, as well as withholding tax, with regard to related-party borrowing by foreign-owned local affiliates paid to non-local affiliates.

Foreign-sourced income is not subject to taxation, since Guatemala adopts a territorial taxation system.

Since foreign-sourced income is not subject to taxation, any expense incurred related to such source is not deductible.

Dividends from foreign subsidiaries of local corporations are not taxed.

Under transfer pricing regulations, intangibles developed by a local company (as its main course of business) cannot be used by non-resident related parties without incurring local corporate tax.

Guatemala does not have controlled foreign corporation (CFC) rules.

Guatemalan tax law does not establish rules related to the substance of non-local affiliates.

Although gains on the sale of shares in non-local affiliates should be considered as foreign income, and therefore not subject to taxation in Guatemala, there is a risk that the local tax authority may consider such a transaction as a taxable event.

Guatemala does not have general anti-avoidance rules, other than those related to the tax adjustments for determining the taxable base.

Guatemala does not have a regular routine audit cycle.

Guatemala is not a member of the OECD. Therefore, it has not yet strictly implemented the BEPS recommended changes. However, the new Income Tax Act (issued in 2012) includes some provisions that partly reflect BEPS guidelines, such as transfer pricing regulations that are heavily influenced by Action 13.

The government seeks to comply with most of the OECD guidelines, including BEPS. However, there is no strict policy developed for this purpose. Pillars One and Two are not likely to be given effect in Guatemala.

Since the Guatemalan taxation system follows the territoriality principle, international taxation does not have a high profile in the jurisdiction.

Guatemala’s tax policy is not highly influenced by BEPS.

The most important key features of the Guatemalan tax system are its basis on the territoriality principle and its simplicity. They do not conflict with BEPS. There are no state aid or other similar constraints.

Since Guatemala has not yet implemented BEPS, the proposals for dealing with hybrid instruments do not appear to be a relevant issue for the near future. There is currently no legislation or proposal on the matter.

Strictly speaking, there are no tailor-made provisions for interest deductibility limitations. Guatemala has general provisions such as thin capitalisation rules and all interest payments to non-residents are subject to a 10% withholding. However, the thin capitalisation rule differs from general rules of its kind by subjecting the limit calculation to local thresholds; eg, the interest rate published by the local financial authority must be used in order to determine the ratio.

Guatemala follows a strict territoriality principle and therefore foreign-sourced income is not relevant to local authorities. Since Guatemala does not have CFC rules, the general drift of the proposal should not greatly affect current practice.       

Guatemala does not have double taxation conventions in force.

Since transfer pricing regulation is a relatively recent matter in the Guatemalan tax system, it already followed OECD guidelines when introduced. Consequently, BEPS implementation is not seen as a radical change.

As mentioned, some provisions of Guatemalan law partly align with BEPS, including Action 13. The Guatemalan Income Tax Act includes a provision similar to country-by-country reporting but it is only triggered if certain conditions are met. The authors consider this approach to be reasonable.

No changes have been made or are being discussed or proposed in relation to this issue.

The Guatemalan Tax Administration has taken initial steps towards implementing the Digital Economy Compliance (DEC) system, which seeks to force VAT compliance upon foreign providers of digital services without physical presence in Guatemala.

The Tax Administration announced in September 2021 that this system has been successfully adopted in Brazil and Chile, and Guatemala would be the third Latin American country to implement it.

Guatemala has not introduced any other provisions dealing with this issue, other than withholding taxes on royalty payments.