Nicaragua: Branches of Foreign Companies: Their Limited Regulation, and Practical Realities

Published on Mar 24, 2024

Our lawyers in Nicaragua, experts in Corporate Law, share with us this article on the challenges faced by branches of foreign companies in the practical reality in Nicaragua due to the lack of regulation.

Branches of foreign companies in Nicaragua: their limited regulation and practical realities

In the practical reality of the Nicaraguan business environment, branches of foreign companies face significant challenges that lead them to adopt distinct corporate identities due to the lack of precise regulation. This lack of specific guidelines not only generates uncertainty but also pushes these entities to assume roles that do not reflect their legal nature, transforming into other forms of commercial entities, in some way, to facilitate their operation in the country. Naturally, questions arise: How do these branches manage to operate efficiently amidst regulatory uncertainty? What are the practical realities they face in the Nicaraguan market?

To begin in this vast world of corporate law concerning branches of foreign companies, we must start by understanding the legal nature of these entities. Doctrinally, there has been a debate on whether the terminology of "foreign company" is correct. Certain doctrinaire, such as Bernardo de Irigoyen, consider that legal entities are neither national nor foreign since they owe their existence solely to the laws of the place of incorporation, justifying that those laws govern the formalities of the founding act and, in general, the issues that shape the social status, namely, typicality, capacity, administration, and governing bodies.

This perspective is debatable since, under the same doctrinal foundations, legal entities are bound by the laws of the territory of their incorporation, thus establishing a legal connection that implies compliance with the elements of nationality.

The significance of this doctrinal approach lies in the question of whether branches have their own legal personality and how their rights and obligations should be determined they operate in a different country from that of their parent company's incorporation. In this context, regulations such as the Bustamante Code, ratified by Nicaragua, support the recognition of the international legal personality of these entities, allowing their coexistence and operation in line with the corresponding territorial laws.

However, beyond this doctrinal debate, reality translates into a legislative challenge. Nicaragua, like other countries in the region, recognizes branches of foreign companies in its legal system, regulating their commercial activities within its territory. Although Nicaragua's main commercial legal framework dates to 1916 and underwent its first reform in 2022, the legislation has recognized the figure of branches of foreign companies since 1916. Despite its obsolescence in certain aspects, commercial legislation, has attempted to address gaps through supplementary norms and other specific regulatory bodies.

In this context, branches of foreign companies have gained relevance in Nicaraguan commercial practice in recent decades. This type of entity presents itself as a strategic vehicle for foreign companies wishing to do business in Nicaragua without creating new corporate structures, maintaining full control from the parent company.

However, when these foreign entities seek to participate in the country's economic activity, public interest reasons arise, demanding state control mechanisms to ensure certainty and morality in commercial transactions. It is crucial to address this challenge from a legislative perspective that updates and strengthens existing regulations, adapting them to the changing dynamics of the international commercial environment.

In this regard, Nicaraguan legislation offers limited guidelines regarding branch regulation. The Commercial Code establishes that these foreign companies may engage in commerce in Nicaragua, subject to specific prescriptions of the Code, concerning the establishment of their establishments, commercial operations, and jurisdiction. These prescriptions, limited to aspects such as registration in the Commercial Registry, annual publication of balance sheets, and the appointment of a representative with general power of attorney, highlight the need for a thorough review and update of the regulations to address the modern complexities of international trade and cross-border operations.

The lack of clear guidelines is the main reason branches are forced to adopt different corporate structures. Besides creating an uncertain environment, this also induces these entities to assume functions that do not align with their legal nature, transforming into other forms of national commercial entities to facilitate their operations.

The same Commercial Code stipulates that branches of foreign companies are treated as national entities in specific situations. These branches are considered national when established within the national territory and engage in commercial operations subject to the provisions of the Commercial Code, including the jurisdiction of local courts.

An element of relevance is the tax perspective, where Nicaraguan branches of foreign companies are recognized as permanent establishments. This means they must comply with all tax obligations required of local companies, including registering, and maintaining the company's accounting books in the country, as well as having a representative with general power of attorney duly registered in the corresponding registry.

But what is the real impact of this equivalence? In practical terms, this implies that foreign branches must contribute to the Nicaraguan tax system in the same way local companies do, posing a practical separation from their parent entity, contradicting their legal nature.

This equivalence also presents an interesting paradox. Although branches are treated as separate entities for tax purposes, their legal nature reflects an intrinsic connection with their parent company abroad, as they are legally the same entity. This separation occurs because, in Nicaragua, there is no tax regulation to apply the legal concept that branches are the same entity as their parent company.

A crucial aspect highlighted in this dynamic is the limited regulation that public institutions have. For practical purposes, this lack of adequate regulation on the branch figure poses a challenge for its treatment, contributing to decisions that, in many cases, deviate from its legal nature. In that sense, branches end up forced to adopt corporate structures that do not align with their legal nature.

In practice, it is common to observe that branches of foreign companies in Nicaragua are treated and end up adopting the form of joint stock companies.. This trend is largely due to the fact that anonymous societies are the most predominant type of society in the country. Given the lack of specific regulation on branches and the challenges faced by public institutions to determine their proper treatment, it is common for them to be treated as anonymous societies. However, this approach generates significant inconveniences, as it goes against the true legal nature of branches and slows down their operational processes. By being treated as anonymous societies, these branches often fail to fully comply with the requirements established by local authorities. Additionally, as entities subordinate to their parent company abroad, their decision-making capacity is limited by the laws of another state, adding complexity to their operation in the Nicaraguan context.

Despite the challenges, branches remain an attractive option for doing business in Nicaragua for a number of reasons, including the ability to expand a foreign company's operations in the country without the need to establish a new legal entity, which saves time and resources. In addition, by maintaining control from the parent company, branches can leverage the expertise and resources of the parent company to manage their operations more efficiently, although in the current legal environment, they must contend with such challenges.

To deal with the challenges brought about by the lack of specific regulation on the subject and the practical realities, it is important to look for practical solutions. This could include establishing clear contractual agreements between the branch and the parent company that clearly define their relationships and responsibilities, accompanied by adequate specialized legal advice to ensure compliance with local laws.

This does not obviate the need to improve the legal atmosphere in Nicaragua. In order for branches to operate correctly in accordance with their legal nature, it is necessary to implement legislative reforms that recognize and adequately regulate the figure, this would imply the creation of clear laws and regulations that define the legal status of branches and establish clear procedures for their registration and operation. In addition, it is important to improve the country's legal and administrative infrastructure to facilitate compliance with tax and regulatory obligations by branches of foreign companies.

It is crucial to work on a solid and well-defined legal framework that provides greater legal certainty for branches, which would provide a more conducive environment to encourage investment and business in Nicaragua.


Ana Victoria Ruiz. - Associate, Nicaragua.

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, and does not constitute, an attorney-client relationship. Readers should not act upon this information without seeking advice from professional advisers.