GENERAL OVERVIEW
Honduras, officially Republic of Honduras, Spanish República de Honduras, country of Central America situated between Guatemala and El Salvador to the west and Nicaragua to the south and east. The Caribbean Sea washes its northern coast, the Pacific Ocean its narrow coast to the south. Its area includes the offshore Caribbean department of the Bay Islands. The capital is Tegucigalpa (with Comayagüela), but—unlike most other Central American countries—another city, San Pedro Sula, is equally important industrially and commercially, although it has only half the population of the capital.
The bulk of the population of Honduras lives a generally isolated existence in the mountainous interior, a fact that may help to explain the rather insular policy of the country in relation to Latin and Central American affairs. Honduras, like its neighbours in the region, is a developing nation whose citizens are presented with innumerable economic and social challenges, a situation that is complicated by rough topography and the occasional violence of tropical weather patterns.
ECONOMIC OVERVIEW
Honduras, the second poorest country in Central America, suffers from extraordinarily unequal distribution of income, as well as high underemployment. While historically dependent on the export of bananas and coffee, Honduras has diversified its export base to include apparel and automobile wire harnessing.
Honduras’s economy depends heavily on US trade and remittances. The US-Central America-Dominican Republic Free Trade Agreement came into force in 2006 and has helped foster foreign direct investment, but physical and political insecurity, as well as crime and perceptions of corruption, may deter potential investors; about 15% of foreign direct investment is from US firms.
The economy registered modest economic growth of 3.1%-3.6% from 2010 to 2016, insufficient to improve living standards for the nearly 65% of the population in poverty. In 2016, Honduras faced rising public debt but its economy has performed better than expected due to low oil prices and improved investor confidence. The IMF continues to monitor the three-year standby arrangement signed in December 2014, aimed at easing Honduras’s poor fiscal position.
Approximately 80 percent of the privately held land in Honduras is either untitled or improperly titled. Resolution of title disputes in court often takes years, partly because of the judicial system’s weakness. Rampant corruption and weak state institutions make it virtually impossible to combat threats posed by violent transnational gangs and organized criminal groups. Honduras has one of the world’s highest murder rates.
Government Size
The top individual income and corporate tax rates are 25 percent (27.5 percent for corporations with an added social contribution tax). The overall tax burden equals 20.6 percent of total domestic income. Government spending has amounted to 29.1 percent of total output (GDP) over the past three years, and budget deficits have averaged 4.4 percent of GDP. Public debt is equivalent to 47.4 percent of GDP.
Regulatory Efficiency
The inefficient regulatory environment does not encourage dynamic entrepreneurship, and the cost of forming a business is burdensome. Labor regulations are outmoded, and a large proportion of the labor force is dependent on the informal sector. The government is continuing to overhaul the struggling state-owned ENEE electricity utility but maintains price controls for basic food items along with water, telecommunications, and port services.
Trade is extremely important to Honduras’s economy; the value of exports and imports taken together equals 109 percent of GDP. The average applied tariff rate is 5.8 percent. In general, the government does not screen or discriminate against foreign investment. The financial sector has regained stability following the liquidation of Banco Continental in late 2015. Capital markets are not fully developed.
TRADE ECONOMY
Honduras is the 92nd largest export economy in the world and the 66th most complex economy according to the Economic Complexity Index (ECI). In 2015, Honduras exported $8.34B and imported $10B, resulting in a negative trade balance of $1.67B. In 2015 the GDP of Honduras was $20.4B and its GDP per capita was $5.1k.
The top exports of Honduras are Coffee , Knit Sweaters , Knit T-shirts , Insulated Wire and Bananas , using the 1992 revision of the HS (Harmonized System) classification. Its top imports are Refined Petroleum , Non-Retail Pure Cotton Yarn , Non-Retail Synthetic Staple Fibers Yarn , Light Rubberized Knitted Fabric and Insulated Wire.
The top export destinations of Honduras are the United States , El Salvador, Germany, Guatemala and Mexico. The top import origins are the United States, Guatemala, China, El Salvador and Mexico.
INVEST IN HONDURAS
More than 300 international companies have discovered Honduras in the last years. The country has shown outstanding capacities and skills in the light manufacturing area, mainly in textile and confection sectors, agrindustry, assembly for vehicle components and electronics, as well as furniture elaboration.
Currently, Honduras promotes an active direct foreign investment participation in order to create a high added value en such sector including agrindustry, tourism, and services.
Corporate – Tax credits and incentives
Companies operating under a special tax regime are exempted from CIT, sales tax, customs duties, and some municipal taxes. These special tax regimes are the following:
- Industrial processing zone (Zona Industrial de Procesamiento or ZIP).
- Temporary import regime (Régimen de Importación Temporal or RIT).
- Tourism incentive law.
- Law promoting the generation of electric energy with renewable resources (Ley de Promoción a la Generación de Energía Eléctrica con Recursos Renovables), which provides tax exemptions for ten years for projects generating 50MW and over.
- In the regulations for the FTZs there is a consideration for international service companies (e.g. business processing operations [BPOs], call centres and contact centres, shared service centres) that will have the same tax exoneration provided by this regime.
- The Call Centre and BPO Promotion Law, which provides a tax holiday on import of tools, parts, accessories, furniture and office equipment, and all goods involved with the company’s active business as well as an income tax holiday on revenue from all the business activities carried out within the FTZs.
Special benefits exist for industries that import semi-manufactured materials for assembly in Honduras and export finished products. Benefits consist of duty-free imports of raw materials for subsequent export as manufactured products. Machinery for these industries may also be imported duty-free.
There are no provisions for foreign tax credits in Honduras.
New Tourism Incentives Law in Honduras
Last August 17th came into force the new tourism incentives law in Honduras with the objective of promoting the investment in the sector and ensuring compliance of the projects currently in portfolio.
In the last 5 years the tourism sector has claimed a major surge for the Central American countries and their economy. Honduras for its diversity of cultural places, colonial cities, archeology, natural reserves and beaches, has strengthened the sector by means of its promotion through Marca País and other national efforts.
According to The Travel & Tourism Competitiveness Report 2017, made by World Economic Forum, Honduras is in the 90th position of 138 countries worldwide. This shows that tourism has a significant input within its economy.
Tourism Incentives Law
Considering the important growth of the tourism industry in our country and in accordance with the generation of employment proposed in the program Honduras 20/20, the Congress of the Republic through the Decree 68-2017 issued the Tourism Incentives Law, which purpose is to grant tax and customs benefits to investments of established or to be established companies in the tourism sector, in order to create new sources of employment.
The benefits of the new law are aimed to natural or juridical persons that are involved in touristic activities or services. The beneficiaries, according to the law, are:
- Services of touristic industry
- Related infrastructure
- Targeted investment in tourism
- Related touristic activities
- Services of tourist offering
- Tourist services of transport
The Tourism Incentives Law grants the beneficiaries the following benefits:
- Exemption from income tax, net asset tax and the solidarity contribution and related rights for 15 years.
- Exemption from income tax and any other retention of payment for services and linked fees to the construction in all its facets for 5 years.
- Exemption from income tax in local works of good and services linked directly to the construction, renovation or restoration, new infrastructure, complementary investment in touristic activities.
- Benefits in import of machinery and all the necessary equipment for the construction and maintenance of the projects.
- Exemption of custom import duties, selective consumption and tariffs tax and other custom duties for the touristic projects up to 10 years.
Besides the benefits previously mentioned, the law establishes some investment incentives, as well as the creation of a fund of investment, promotion and development tourism.