Income Tax Law 12-04-2004 _2_

An annual tax denominated Income Tax is hereby established, which taxes income derived from capital, labor, or a combination of both, as determined by this Law. Income is understood to include all types of returns, profits, gains, rent, interest, proceeds, benefits, participation, salary, wages, fees, and in general, any receipt in cash, securities, goods, or credit that modifies the taxpayer's assets. The Income Tax is based on the principle of the taxpayer's ability or capacity to pay. The taxpayer's ability or capacity to pay is synonymous with the taxpayer's economic capacity, which is measured through income received in money, credit, securities, rights, goods, or any other form provided it can be objectively measured in monetary terms during the tax period or year.

Every person domiciled or resident in Honduras, whether natural or juridical, national or foreign, including those enjoying a concession from the State, shall pay this Income Tax on rent received by reason of business or commercial industries, products of all kinds of goods, whether movable or immovable, or from the performance within the country's territory of civil or commercial activities, or personal work or income received from any other activity, regardless of whether the source of rent or income is located within the country or abroad, and regardless of the place where the rent is distributed or paid. Also subject to this tax shall be merchant vessels that meet any of the following requirements:

• a)

  That operate with Honduras registry or under Honduran flag;

• b)

  That navigate habitually in territorial waters or that receive income from Honduran sources.

Rent or profit derived from the export of goods produced, manufactured, treated, or purchased in the country is entirely of Honduran source. This rent or profit shall be established by deducting from the wholesale price at the place of destination, the cost of such goods, transportation and insurance expenses to such place, commission and sales expenses, and expenses incurred insofar as necessary to obtain taxable rent. When no price is fixed or the declared price is less than the wholesale sales price in effect at the place of destination, it shall be presumed, absent proof to the contrary, that economic linkage exists between the exporter in the country and the importer abroad, and accordingly such wholesale price at the place of destination shall be used to determine the value of exported products. Export is also understood to include the shipment abroad of goods produced, manufactured, treated, or purchased in the country, made through branches, subsidiaries, representatives, purchasing agents, or other intermediaries of foreign persons or entities. Income obtained by foreign exporters from the mere introduction of their products in the Republic is of foreign source. However, when the sales price to the domestic buyer is higher than the wholesale price in effect at the place of origin plus transportation and insurance expenses to the Republic, it shall be presumed, absent proof to the contrary, that economic linkage exists between the domestic importer and the foreign exporter, with the difference constituting income of Honduran source, for which both are jointly and severally liable. In cases where, in accordance with the foregoing provisions, the wholesale price in effect at the place of origin is to be applied and such price is not of public and notorious knowledge, or doubts exist as to whether it corresponds to equal or analogous merchandise as the imported goods or other reasons make comparison difficult, the coefficients of results obtained by independent enterprises engaged in identical or similar activity shall be taken as the basis for calculating Honduran-source profits. In the absence of identical or similar activity, the Department is authorized to apply the net percentage it establishes, based on sectors that present certain analogies with the one under consideration.

Persons not resident or not domiciled in Honduras shall be subject to income tax on rent obtained from sources within the country, whether derived from property existing in Honduras, services rendered in national territory or abroad, or business carried on by a person domiciled or resident in the Republic, even when the income corresponding to such rent is paid or credited to the subject in question by persons resident or domiciled in the country or abroad. Persons temporarily in the Republic who execute acts of any nature or provide services that produce taxable income may file an income tax return before leaving the country and request its liquidation. The Department shall proceed immediately to determine the tax obligation in accordance with what is established in the following article.

Gross income obtained from Honduran sources by natural or juridical persons not resident or not domiciled in the country shall pay tax in accordance with the following percentages: TAX PERCENTAGES

• 1)

  Income from movable or immovable property, excepting those included in numerals 5 and 7 of this Article. 30%

• 2)

  Royalties from mining operations, quarries, or other natural resources. 10%

• 3)

  Salaries, wages, commissions, or any other compensation for services rendered whether within national territory or abroad. 35%

• 4)

  Income or profits obtained by foreign companies through branches, subsidiaries, affiliates, agencies, legal representatives, and others operating in the country. 15%

• 5)

  Rent, profits, dividends, or any other form of profit-sharing or reserves, of natural or juridical persons. 15%

• 6)

  Royalties and other sums paid for the use of patents, designs, procedures and secret formulas, trademarks and copyrights, except those listed in numeral 13. 25%

• 7)

  Interest on commercial operations, bonds, securities, or other types of obligations. 5%

• 8)

  Income from the operation of aircraft, ships, and land motor vehicles. 10%

• 9)

  Income from the operation of communications enterprises. 5%

• 10)

  Insurance premiums and bonds of any class of policies contracted. 15%

• 11)

  Income derived from public entertainment. 30%

• 12)

  Any other income not mentioned in the foregoing numbers. 20%

• 13)

  Films and video-tapes for cinemas, television, video clubs, and rights for cable television. 10% Natural or juridical persons making the payments are responsible for withholding and remitting the tax that arises, in accordance with what is established in Articles 50 and 51 of the Law. When the income described in Numerals 4 and 5 derives from dividends or any other form of profit or reserve-sharing that have been taxed under Article 25 of the Law, they shall pay only the difference existing between the rates established in Articles 5 and 25 of the Law, excepting the capitalization of reserves or profits which shall not be subject to tax on capitalization. NOTE: The tax rates established in numerals 6 and 13 correspond to reforms through Decree 4-99-E, published on 15-01-2000 Copyright and Related Rights Law. Article 25 Decree 194-2002 Reduce fifteen percent (15%) of the tax applied on rent, profits, dividends, or any form of profit or reserve-sharing, established in numerals 4 and 5, in accordance with the following scale: YEAR RATE 2002 10% 2003 5% 2004 0%

The tax shall also apply to income derived from inheritances while they remain undivided and to income from property administered by any person by virtue of a position.

The following are exempt from the tax established by this Law: a) The State, Districts, Municipalities, and their establishments and other autonomous and semi-autonomous institutions (amended by Article 7 of Decree 219-2003 LAW FOR THE RATIONALIZATION OF PUBLIC FINANCES published in Gazette No. 30287 on January 4, 2004) which reads "Public enterprises are subject to the payment of income tax. Public enterprises shall be understood to mean those referred to in Article 53 of the General Law of Public Administration" b) Officially recognized charitable institutions by the Government and organizations established with scientific, political, religious, cultural, or sports purposes and which do not have profit as their objective. c) The Church as an institution. d) Members of the Diplomatic and Consular Corps accredited in the country, but only with respect to income derived from remuneration or fees that they receive for their services from their respective country, without prejudice to the principle of international reciprocity. e) Professional and employer associations and labor unions, insofar as concerns their non-profit activities. f) Teachers in service in primary schools, in secondary education schools, teaching personnel in service of the National Autonomous University of Honduras (UNAH), and teachers in service of the Pedagogical National University "FRANCISCO MORAZAN", for salaries earned in such centers; retirees for amounts received as retirement benefits; and those included in Decree No. 71-88 of June 21, 1988. NOTE: Article No. 14 of Decree No. 194-2002 "Law of Financial Equilibrium and Social Protection" included within exemptions the following: Article No. 14: Natural persons over sixty-five (65) years of age, with gross income up to THREE HUNDRED FIFTY THOUSAND LEMPIRAS (L. 350,000.00) and who have paid tax in accordance with subsection b) of Article 22 of the Income Tax Law during five (5) consecutive tax periods are exempted from payment of this tax as of the effective date of this Decree. For the application of this provision, interest and capital gains are excluded from gross income, which are subject to taxes in accordance with Articles 10, second paragraph of the Income Tax Law; and 9 of the Tax Simplification Law contained in Decree No. 110-93 of July 20, 1993. In the event that natural persons benefiting from this exemption have suffered withholdings on income received by way of salary or wages, or professional fees, such withholdings shall be refunded following the procedure established by the Secretary of State in the Finance Department. CHAPTER II DEFINITIONS

For the purposes of this Law, the following is understood:

• a)

  By "Person": Natural or juridical persons or their representatives;

• b)

  By "Taxpayer": Persons, undivided inheritances, and the consolidation of various enterprises mentioned in Articles 6 and 25 (Note in the text of Decree No. 873 published in the Official Gazette "La Gaceta" No. 22,991 of December 29, 1979. The consolidation of various corporations or commercial enterprises was established in Art. 24 of Decree No. 25 of December 20, 1963, which contains the "Income Tax Law", which was interpreted in Decree No. 115 of November 4, 1966 and subsequently such rule was repealed by Decree No. 27-90-E of December 14, 1990, for which consolidation is not in effect.) of this Law, respectively, that receive income subject to this tax;

• c)

  By "Representative": Guardians, agents, administrators, fiduciaries, interveners, trustees, liquidators, and any natural or juridical person acting on behalf of another natural or juridical person;

• d)

  By "Resident": A person who currently lives in the country and is not a mere transient or traveler in Honduras. A mere indefinite floating intention regarding the time of moving to another country is not sufficient to qualify a person as a transient. A foreigner whose period of stay in the country is limited by Immigration Law is not a "resident", but this rule shall only apply when no other more specific circumstances arise indicating an intention to remain in Honduras for a period longer than originally requested. Persons who are part of the crew of a ship that navigates under Honduras registry or flag are considered, for purposes of this tax, as "residents".

• e)

  By "Non-Resident": A person whose residence is not within national territory and who is not a Honduran citizen, except in the case where a foreigner through acts or declarations demonstrates a definite intention to acquire residence in Honduras or where it is demonstrated that his stay in national territory has been extended to such a degree that in fact he becomes a "resident";

• f)

  By "Department" and by the initials "D.E.I.": The Executive Department of Revenue, created by Decree No. 159-94 of November 4, 1994;

• g)

  By "Being Current in Tax Payment": When the taxpayer pays the amounts or values that are chargeable to him for purposes of his own computation, settlement, assessment, additional tax, and installment payments;

• h)

  By "Commercial Enterprises": Any association of two or more persons, whether in the form of a personal company or by shares, of limited or unlimited liability, or any other organized or incorporated in accordance with the laws of the country, whether national or foreign, that earns or receives income from one or more of the activities mentioned in Articles 2, 3, and 4 of this Law. "Commercial Enterprises" shall also be understood to mean businesses that belong to a single natural or individual person who resides in the country or abroad and partnerships of any nature;

• i)

  By "Installment Payments": Each of the four quarterly installments of income tax payment to be made in accordance with this Law;

• j)

  By "Subjects of Installment Payments": All persons indicated in Article 2 of this Law, with the exception of those persons whose income derives from personal work and whose respective taxes are subject to monthly withholding at the source. CHAPTER III OF THE EXECUTIVE DEPARTMENT OF REVENUE

The Executive Department of Revenue as a deconcentrated organ of the Finance Department shall have charge of all matters concerning the application of this Law and other duties that by special laws are entrusted to it. CHAPTER IV OF INCOME

Gross income is understood to mean the total income received by the taxpayer during the year from any of the sources that produce it, whether in the form of cash or other goods or values of any kind. Notwithstanding the foregoing, capital gains obtained by natural or juridical persons, domiciled or not in Honduras, shall pay a Single Tax of ten percent (10%) so that they shall not be subject to the progressive rate of Income Tax established in Article 22 of this Law. Capital gains also form part of gross income, as determined in the respective regulations. For purposes of this law, a taxpayer's assets are considered indivisible. The following do not form part of gross income and consequently are not taxed by the tax it establishes: a) Sums received by way of insurance when they derive from Honduran institutions. b) Income from securities issued or guaranteed by the State, Districts, and Municipalities. (Repealed by Article 8, subsection a) of Decree 18-90 of March 3, 1990, effective as of March 12, 1990). "In the case of Article 10, literal b), income from securities issued prior to the effective date of this Decree does not form part of the taxpayer's gross income." c) Subsidies or allowances granted by the State, Municipalities, or Districts. d) The value of property that constitutes inheritances, legacies, and donations. e) National Charity Lottery prizes. f) Indemnifications received for occupational hazards and benefits provided by the Honduran Social Security Institute. g) Income derived from pension fund investments or other social welfare plans, when such funds are maintained in Honduran institutions. h) The value of labor benefits, vacation bonuses in accordance with the Labor Code up to an additional payment of thirty (30) days, retirement pensions, pensions and life annuities. Contributions made to the corresponding institutions to obtain these three (3) last benefits shall also be deductible from the taxpayer's taxable gross income. The thirteenth month as Christmas bonus, as well as the fourteenth month of salary, up to the amount of ten (10) average minimum salaries, in each case, from which amount shall be taxable. LEGAL NOTE: By means of Legislative Decree No. 36-97 of 28/04/97, the National Congress interpreted that for the purposes of applying subsection h) of Article 10 of the Income Tax Law, contributions in the form of retirement pensions and life annuities made to social security funds and institutions shall be deductible from the taxpayer's taxable gross income. Article 4 of Decree 51-2003 "Tax Equity Law" establishes: "Without prejudice to what is established in Article 10 of the Income Tax Law, net income received from the sale or realization of eventual or extraordinary assets by banks, insurance institutions, financial institutions, companies or entities that carry out financial activities on movable and immovable property shall be taxed as ordinary income in the same tax year of their sale or realization. Net income is understood to be the product of the sale minus the value of the asset (the judicial foreclosure value or acquisition cost less amortization in the case of dation in payment).

The Taxable Net Income of a commercial enterprise shall be determined by deducting from its gross income the amount of ordinary and necessary expenses of the contributive period, properly documented, that have been paid or incurred in the production of income, such as:

• a)

  Reasonable salaries, wages, commercial advertising expenses, use of materials, repair and maintenance of machinery or equipment, and the amount of any other normal expense, typical of the business or industry that is the source of income.

• b)

  Insurance premiums on property that is the source of income paid to national and foreign insurance companies that are properly incorporated in the country and that maintain at least 75% of their mathematical reserves of contracts invested in the country.

• c)

  Interest paid or accrued on amounts owed by the taxpayer, provided that in the Department's opinion the debts for which interest is paid were incurred to obtain income.

• d)

  The value of depreciation of property that is the source of income in accordance with the method or system approved by the Department, to be determined taking into account the nature, use, and normal wear of the property.

• e)

  Amounts paid as taxes and fiscal, district, or municipal contributions, with the exception of income tax.

• f)

  Damage occurring to property from which income derives, properly documented.

• g)

  One percent (1%) of the value of sales of goods or services on credit made during the tax period in question, with which a provision has been established to amortize uncollectible or doubtful accounts. The balance of this provision shall never exceed ten percent (10%) of the amount of accounts receivable from customers at the end of the fiscal year, excluding credit sales and accounts receivable corresponding to transactions with related or economically linked companies. Accounts deemed uncollectible shall be charged against this reserve. Uncollectibility of the debt is presumed when it is proven that more than twenty-four (24) months have elapsed since the due date. If the taxpayer fully or partially recovers debts deducted in prior years for having been considered uncollectible, the amount recovered must be included as taxable income in the year it is received. Not deductible under the concept of uncollectibles are debts incurred by transactions carried out between spouses or relatives within the fourth degree of consanguinity or second degree of affinity; between a general partnership or limited partnership and its partners; or between a corporation or limited partnership by shares and its directors, shareholders, or spouses or relatives within the fourth degree of consanguinity or second degree of affinity of such persons.

• h)

  A ten percent (10%) amortization for each contributive period during ten consecutive years on the value of new constructions built by employers for use and housing of their workers, provided that such constructions are provided free of charge and meet minimum hygiene, health, and social environment conditions.

• i)

  A twenty percent (20%) amortization for each contributive period during five consecutive years on the value of all works constructed by employers for the purpose of improving the social, hygiene, and cultural conditions of workers, such as sanitation works, reforms, repairs or improvements of houses, pipes, electrification works, clubs, libraries, and similar ones, provided they are subject to depreciation and provided to workers free of charge.

• j)

  Amounts paid as bonuses to the taxpayer's employees, provided they do not exceed the total salary earned by the beneficiary during the six-month period.

• k)

  A reasonable amortization to compensate for the depletion, wear, or destruction of property and other goods used in the business that are not subject to depreciation. The Department shall determine the deductions that prudentially can be made for this purpose, considering the nature, use, and normal wear of the property.

• l)

  Donations and legacies in favor of the State, the Central District, Municipalities, Educational Institutions, Educational Development or Similar institutions, charitable organizations, sports or sports development organizations, legally recognized. (This subsection is in accordance with Legislative Decree No. 8 of June 21, 1971). (Note: The Central District was transformed into the Municipality of the Central District by Decree No. 114-85 of July 30, 1985).

• m)

  Social security contributions made to the formation of an autonomous fund that does not produce direct or indirect financial benefit to the enterprise and approved by the Department, provided the fund is maintained with national institutions.

• n)

  Representation expenses properly documented as well as bonuses or gratuities that constitute part of the salary assigned to owners, partners, shareholders, executives, officials, directors, managers, counsel, technicians, or other employees or workers of the taxpayer; this deduction shall be recognized only for specific transactions of the taxpayer related to economically unlinked enterprises. The total amount of these expenses are taxable income for the natural persons mentioned who receive them during the respective tax year, as of the effective date of this Decree. The exception is representation expenses properly documented. Likewise, taxable income for the aforementioned persons are the amounts spent in the purchase, use, or rental of movable and immovable property, educational expenses, and other outlays intended for exclusive use of such executives or officials or for their family group. The exception is insurance premiums paid based on contracts executed with insurance companies authorized to operate in the country to cover insurance benefiting executives and officials of the commercial enterprise or their family group, provided they form part of benefits derived from collective labor agreements, or refers to medical insurance covered abroad by reason of their functions. NOTE: Article 11 of Decree 194-2002 "Law of Financial Equilibrium and Social Protection" dated June 5, 2002 amends Article 23 of the Law of the National Institute of Professional Training (INFOP) and its amendments, which shall read as follows:

Enterprises that contribute monthly to the Institute one percent (1%) of the amount of salaries and wages earned may deduct such contribution from gross income for purposes of Income Tax.

The following shall not be considered deductible expenses:

• a)

  Expenses to repair damage suffered by natural wear of property for which a deduction has been made for depreciation.

• b)

  Investments.

• c)

  Personal expenses of the taxpayer or his family, with the exception of those indicated in the following article.

• d)

  Gifts, gratuities, and profit-sharing concessions granted to partners of general partnerships, limited liability partnerships, limited partnerships, corporations, and limited partnerships by shares or to relatives of partners within the fourth degree of consanguinity or second degree of affinity, including spouses. Salaries, fees, and commissions earned by the persons indicated in the preceding paragraph shall be deductible by the partnerships only as compensation equivalent to the service rendered, without including any other compensation for the same and provided that in the Department's opinion it is proven that the work was actually performed and necessary for the purposes of the enterprise and that the salaries, fees, and commissions are proportional to the work performed and to the importance of the business, as well as normal in relation to those paid by enterprises of the same location, type, or volume of operations. This provision shall likewise be applicable to the natural person who is the owner of a business or commercial enterprise. (Amended by Decree No. 287 of December 5, 1975).

• e)

  Interest on capital invested or loaned in commercial enterprises by owners or their relatives, partners, or shareholders.

• f)

  Capital losses of the taxpayer and those suffered in investments of luxury, personal recreation, and similar, with the exception of capital losses established in Article 21 of this Law.

The following deductions shall be accepted from the taxable income of natural persons:

• a)

  An annual sum up to TWENTY THOUSAND LEMPIRAS (L. 20,000.00) for educational expenses and for fees paid to Doctors, Bacteriologists, Dentists, Hospitals, Medicines, and other professionals resident in the country for services rendered to the taxpayer or his dependents, without need to present any documentation.

• b)

  Expenses incurred in the exercise of a profession, art, or trade, or in the operation of a workshop, properly documented;

• c)

  In the case of farmers and ranchers, production and maintenance expenses of their farms, interest on credits for production and depreciation of equipment, machinery, and buildings in accordance with what is established in the Income Tax Law; and d) Donations and legacies in favor of the State, Municipalities, educational institutions or educational development institutions, charitable organizations, sports or sports development organizations legally recognized, up to an amount not exceeding ten percent (10%) of Taxable Net Income.

(Article repealed by Article 7 of Decree No. 18-90 of March 3, 1990)

(Article repealed by opposition to Decree No. 18-90 of March 3, 1990)

The deductions from individual income referred to in Article 13 shall be granted solely to individual taxpayers resident in the country.

The deductions specified in Article 13 shall be made effective proportionally by monthly periods, computing the entire month in which the causes that determine them occur. CHAPTER V DEDUCTIONS AND SPECIAL CREDITS

(Repealed by Art. 8 subsection a) of Decree No. 18-90 of March 3, 1990).

(Repealed by Art. 2 of Decree No. 80-91 of May 30, 1991).

"Natural or juridical persons engaged in agricultural, agro-industrial, manufacturing, mining, and tourism activities; that in a fiscal year suffer operating losses for purposes of the application of the Income Tax Law, from the effective date of this Law, shall have the right to carry them forward and amortize them with prior authorization from the Direction within the following three fiscal years and based on this rule: They may amortize annually an amount that does not exceed FIFTY PERCENT (50%) of the taxable net income of the tax year. In the case of taxpayers that develop diverse activities, it is understood that the carryforward and compensation of the loss shall only be made against the profits of the same activity that originated it. In no case shall the carryforward of losses exceed the three fiscal years established in the first paragraph of this Article. In order to recognize this deduction, it is the taxpayer's obligation to present, together with their annual sworn statement, the Statement of Results or Statement of Losses and Gains, certified by a Commercial Expert and Certified Public Accountant, duly registered, in which the operating loss and the justifications that in their judgment gave rise to it are established. In the recognition of operating losses, non-deductible expenses referred to in Article 12 of the Income Tax Law shall not be included as such."

(Repealed by Decree 18-90 of March 3, 1990) CHAPTER VI TAX RATE

"The tax established by this Law shall be collected from natural or juridical persons domiciled in the country, in accordance with the following provisions: a) Juridical persons shall pay a rate of twenty-five percent (25%) on the total taxable net income; and, b) Natural persons domiciled in Honduras shall pay for the fiscal year 1999 and successive periods in accordance with the following progressive tax rate scales: From L. 0.01 to L. 70,000.00 Exempt 70,000.01 to 100,000.00 10% 100,000.01 to 200,000.00 15% 200,000.01 to 500,000.00 20% 500,000.01 and above......................... 25%"

"For the calculation of the tax applicable to natural persons, the first Seventy Thousand Lempiras (L. 70,000.00) of income shall be exempt; to the excess shall be applied the rates corresponding to the respective income brackets."

(Expressly repealed by Art. 12 of Decree No. 27-90-E of December 14, 1990).

To reduce the rate of ten percent (10%) applied to income received by natural or juridical persons, resident or domiciled in the country, in the form of dividends or any other form of receipt of profits or reserves, as follows: YEAR RATE 2002 10% 2003 5% 2004 0% In this case, the income shall be excluded from the tax established in the progressive scale of Article 22 of this Law. Dividends or any other form of participation in profits or reserves that have been taxed in accordance with what is established in the preceding paragraph shall not be subject to new taxation at the time the juridical person receiving them distributes in turn dividends or any other form of participation in profits or reserves. For this purpose, juridical persons shall maintain a separate account of the amounts they receive for this purpose, with indication of the origin to which it corresponds. The capitalization of profit reserves is expressly exempt from payment of any tax.

(Reformed by Art. 1 of Decree No. 287 of December 5, 1975.) Every juridical person domiciled in the country is obligated to withhold the amount of the corresponding tax when it pays or credits the taxable income referred to in the preceding article. These withholdings must be made on the dates when the payments or credits that give rise to them are made and the withheld sums must be deposited within thirty days following such dates, at the Central Bank of Honduras or at the Finance Office determined by the Direction. Juridical persons that make the payments or credits are responsible for withholding the tax that is incurred and delivering it in accordance with what is established in Articles 50 and 51 of the Law to the extent applicable to them.- CHAPTER VII DECLARATION AND SETTLEMENT OF THE TAX

The annual period for the computation of the taxable income tax begins on January 1st and ends on December 31st. When a commercial enterprise has an annual fiscal year different from the civil year, it shall make its declaration and computation of the tax in accordance with such fiscal year. NOTE: Agreement Number 1375-2002 dated July 5, 2002 in Article 33 establishes: SPECIAL FISCAL PERIOD.- When a taxpayer has an annual fiscal year different from the fiscal year from January 1st to December 31st, they may: Notify in advance in writing to the Executive Direction of Revenue, the special period that shall govern for compliance with their tax obligations. Present and pay their declaration in accordance with said special period and other applicable provisions in accordance with the Law. The special period should be used primarily by taxpayers that develop cyclical or seasonal activities, such as agricultural, agro-industrial activities and similar. It may also be used by taxpayers that by affiliation, link or association with national or foreign companies require having equal fiscal periods.

Every taxpayer is obligated to present to the Executive Direction of Revenue, by themselves or through a legal representative or attorney-in-fact, from January 1st to April 30th or the following business day of each year, a Sworn Statement of the income they have obtained in the previous year. The following are exempt from this obligation: natural persons domiciled in Honduras, when their gross income does not exceed L. 70,000.00 (SEVENTY THOUSAND LEMPIRAS), and salaried taxpayers whose income comes from a single source of employment and who have fully satisfied the payment of the corresponding Income Tax for the year, through the Withholding at Source System. This statement shall be accompanied, regarding commercial enterprises, by a copy of the Balance Sheet and Statement of Profits and Losses, which must be certified by a licensed Honduran accountant or registered in accordance with the respective laws. Notwithstanding the foregoing, the taxpayer that has an annual fiscal year different from the civil or calendar year shall present the required sworn statement, the Balance Sheet and Statement of Profits and Losses, within three months following the end of their fiscal year. The obligations in this Article are applicable to liquidators, apportioners, custodians and administrators or persons in charge of any kind, regarding the income subject to the tax. When the taxpayer cannot present their declaration personally, they may send it through another person or by certified mail; and to non-resident persons in the country, who must present a declaration, an extension of up to three months shall be granted for presentation of the same. The taxpayer that does not present the sworn statement of their income within the time and in the terms established by this Article shall incur the penalties established in Article 41 of this Law." (Paragraphs repealed Article 222 Tax Code)

Every taxpayer when making the declaration of their income must indicate their own computation of the tax, against which they shall credit the amount of advance payments made in accordance with what is provided in Article 34. Likewise, they must present, in the last month of the civil or calendar year or of the fiscal year, as the case may be, the Statement of Advance Payments with the determination of the amount of advance payments of Income Tax for the following tax year. Those taxpayers that begin their activities shall present this statement within thirty (30) days following the date of commencement. The amount of advance payments to be paid in four installments shall be, at a minimum, the average resulting from the annual taxes corresponding to the three preceding fiscal years, the average shall be determined in relation to those that exist and in the case of taxpayers that are beginning, the statement must contain an estimate of their possible income and the advance payments to be made. The taxpayer that does not present the statement of advance payments shall be fined in the same manner established by Article 41 of this Law for declarations.

The employees of the Directorate shall verify declarations, and being duly authorized by it, may conduct all investigations, proceedings, and examinations that they deem necessary and useful for the verification thereof. Once verification is completed, the difference in tax owed by the taxpayer shall be collected, or ex officio the excess that has been paid shall be refunded. Each tax year shall be settled independently from the one preceding it and the one following it, so that the results of gains and losses cannot be affected by prior or subsequent events in the taxpayer's business or activities. Commercial enterprises shall maintain the accounting books established by the Commercial Code. Farmers and ranchers and persons engaged in the practice of their profession and workshop owners shall maintain a book of entries and exits, where at the end of the year they shall record the balance of their operations; agricultural and ranching partnerships shall, however, maintain the complete set of books. Importers shall mandatorily maintain a book of costs or allocation of merchandise. Accountants or bookkeepers who participate in accounting and those who certify balances and profit and loss statements shall be jointly and severally liable with the taxpayer for irregularities committed with the intent to defraud the Treasury. ARTICLE 30-A Taxpayers are obligated to maintain inventory control records for operations consisting of sales of goods, which clearly and truthfully reflect their actual movement, their valuation, result of operations, the effective and current value of inventoried goods, as well as the detailed description of the characteristics of the goods that allow them to be individualized and fully identified to the satisfaction of the Executive Revenue Directorate (DEI).

When statements of advance payments or sworn declarations have not been presented and without prejudice to applying the sanctions indicated by this Law, the Directorate shall proceed to determine ex officio the taxpayer's tax obligation, either directly, by certain knowledge of the taxable subject matter, or by means of estimation, if the known elements only permit presumption of its existence and magnitude. Likewise, even if the declaration has been presented, assessment by indications shall proceed if the following circumstances concur:

• a)

  That the taxpayer does not maintain the accounting books required by Law;

• b)

  That the supporting documents of accounting operations are not presented, nor are the data or information requested provided; and,

• c)

  That the accounting has been maintained in an irregular or defective manner or that the books are not up to date. For purposes of the foregoing provisions, the following shall be considered as revenue-revealing indications: The amount of purchases and sales for the year and the rotation of merchandise inventories; the current profit margin in the marketplace for items of greater consumption or sales; the personal expenses of the taxpayer and his family; the amount of his patrimony; the value of contracts for the execution of new works, labor, or improvements; the amount of interest that he pays or receives and any other sign that, prudentially and logically appreciated, may serve as an indication revealing the taxpayer's tax capacity.

(See Decree No. 152-87 of September 28, 1987 which contains the "Administrative Procedure Law.") (Completely repealed by art. 222 Tax Code) Note: The Secretariat of State in the Department of Finance and Public Credit was created by Decree No. 129 of February 5, 1971; and, the Taxation Directorate was created by Decree No. 87 of October 6, 1967. CHAPTER VIII TAX DOMICILE AND PLACE OF PAYMENT

(Completely repealed by art. 222 Tax Code)

Income Tax shall be paid as taxable income is generated in four quarterly installments. The tax installments to be paid shall result from dividing the tax from the prior year's own computation by four, and shall be declared on the same income tax declaration form. If no tax was incurred in the reference year, the four installments shall be declared in estimated form in accordance with the possible income that the taxpayer may receive. The first three installments must be paid during the tax year and shall be deposited no later than June 30, September 30, and December 31. The fourth installment shall be the balance of tax according to the own computation declared in favor of the Treasury, and shall be paid no later than April 30 following the tax year. (Decree No. 44-2003 of April 9, 2003). Commercial enterprises that have a fiscal year different from the calendar year shall pay each installment no later than the last day of each quarter of the corresponding period. When any of the foregoing dates coincides with a non-business day, payment shall be made on the following business day. The Directorate may adjust the advance payment installments when taxpayers request it and demonstrate to its satisfaction that the calculation base is influenced by extraordinary income or when losses are foreseen for the current tax period. Taxpayers whose annual advance payment amounts are less than two hundred lempiras (L. 200.00) shall accumulate them in a single payment that must be made no later than November 30. Taxpayers that have a special period shall pay the fourth installment, equivalent to the balance of the own computation, within three months following the end date of their special period. If a balance results in favor of the taxpayer, he may apply it to the advance payments that he is required to make in the tax period in which the declaration is presented. In duly qualified cases the Directorate may order the refund of excess taxes paid. Individual taxpayers subject to withholding at source shall continue with the system established by the respective Regulation, being required to pay the balance of the tax that results to them according to their own computation, no later than April 30 following the tax year. The additional tax resulting from the verification of declarations must be paid within three (3) months following the date of the respective settlement issued by the Directorate. Legal entities and individual merchants duly qualified as withholding agents who acquire from other merchants or producers, for the conduct of their business, in the bulk purchase or sale of goods or services, are obligated to retain as income tax two point five percent (2.5%) on the value of purchase or acquisition thereof, and monthly remit the withheld amounts to the collection office authorized by the Secretariat of State in the Department of Finance. The same percentage of two point five (2.5%) as income tax shall be applied by the wholesale seller or warehouseman when selling his products to retailers. This percentage shall be stated on the respective sales invoice, which shall not be subject to sales tax. The withholding agent shall deliver to the supplier of the good or the service provider the corresponding withholding receipt for the advance payment, so that this party may credit the amounts paid against the income tax established in the quarterly advance payment installments or, as applicable, that which results from their own computation in the annual income tax declaration. The withholdings referred to in the two preceding paragraphs must be made and remitted in accordance with what is established in Articles 50 and 51 of the Law. The Executive Revenue Directorate is authorized to propose to the Secretariat of Finance as withholding agents those who habitually acquire or sell certain goods or services subject to this withholding regime. Only in these cases approved by Executive Agreement shall such persons acquire the designation of withholding agents, who shall comply with monthly deposit or remittance of withheld amounts.

When there are multiple domiciles or the domicile cannot be determined, or the representative's domicile is not known in case of the taxpayer's absence, the Directorate shall fix the place of payment. CHAPTER IX OF PERSONS WHO CEASE TO BE TAXPAYERS

Any person who, by termination of their commercial or industrial business, or of their activities, except by reason of bankruptcy, ceases to be subject to tax, shall present the declaration of their income, accompanied by the Final Balance and Profit and Loss Statement, certified by a Honduran accountant, and pay the corresponding tax until the date of said Balance, within ninety days following the cessation of their activities. Natural persons who permanently leave the country shall, before departing, present the sworn declaration and pay the tax corresponding to them. With the death of the taxpayer, their tax period ends, and consequently, the declaration and payment of tax must be made by the persons called to succeed them, within ninety days following the date of death of the decedent. After this term passes without the foregoing obligation being fulfilled, the Directorate shall proceed to request the declaration of vacant inheritance and shall demand payment of the tax owed. The failure to present the declaration within the terms referred to in these provisions shall be sanctioned in accordance with Article 41 of this Law. Judges shall not extend certification of effective possession of inheritance, nor shall registrars inscribe it if the evidence of tax solvency is not exhibited as of the date of death of the decedent.

Any partnership, within ninety days following the date its dissolution was agreed upon, except by reason of bankruptcy, shall present a sworn declaration of its income and pay the tax corresponding to it until that date. To the declaration shall be attached a copy of the last General Balance Sheet and Profit and Loss Statement, certified by a Honduran accountant.

If a taxpayer is legally declared bankrupt, payment of taxes owed shall have priority over any other obligation at the time the bankrupt's assets are liquidated.

It is strictly prohibited to disclose in any manner the contents of the taxpayer's declarations; nor shall it be permitted that these or their copies and the documents accompanying them be seen by persons other than the taxpayer or his legal representative and the authorities or employees responsible for the Directorate. Notwithstanding the foregoing, judicial authorities and authorities of the Executive Branch may inspect said declarations and documents when necessary for the prosecution of lawsuits or investigations in which the Treasury has an interest in collecting taxes owed to it. In lawsuits in which a taxpayer is a party, personal inspections may be conducted in the same cases and with the same requirements and formalities permitted by law for the inspection of the books and documents of merchants.

(Expressly repealed by Art. 222 of Decree No. 22-97 "Tax Code")

Any taxpayer who does not present the sworn declaration of their income within the terms fixed by this Law shall be fined an amount equivalent to twenty-five percent (25%) of the tax incurred if the delay occurs within the first month; fifty percent (50%) if the delay occurs within the second month; seventy-five percent (75%) if within the third month; and one hundred percent (100%) from the third month forward, without prejudice to payment of said tax. If the person obligated to present the declaration does not incur tax, a fine of five thousand lempiras shall be imposed, to be set by the Directorate, in view of the taxpayer's economic capacity. (Repealed by opposition of Art. No. 177 of Decree No. 22-97 dated April 8, 1997)

(Expressly repealed by Art. 222 of Decree 22-97 "Tax Code" of April 8, 1997)

(Expressly repealed by Art. 222 of Decree 22-97 "Tax Code" of April 8, 1997)

Real property may not be transferred, nor may the acquirer register it in his name without the Directorate first certifying that the transferor is exempt from paying income tax, or is current on payment.

In no case may the attachment be terminated, nor may the mortgage be canceled or substituted, without the certification referred to in the preceding article.

Notaries shall not authorize, nor shall Registrars register deeds, if the certification established in Article 44 is not presented to them.

Business enterprises of any kind that are established or shall be established in the future, as well as Credit Institutions, Capitalizing Companies and Insurance Companies that operate in the country, and that distribute dividends among their stockholders, shall be obligated to provide to the Directorate, before the last day of the month of February of each year, a report that contains the name of their stockholders, in accordance with their registry, the number of shares that each one of them possesses, the par value of each share, the percentage of dividends distributed per share in the semesters prior to their report and the total amount in cash paid or to be paid to each stockholder. Corporations or partnerships organized outside of Honduras and incorporated in the country, including those granted concessions and their subsidiaries, shall submit the report referred to in this article.

(Explicitly repealed by Article 222 of Decree No. 22-97 "Tax Code" of April 8, 1997).

(Explicitly repealed by Article 12 of Decree No. 27-90-E of December 14, 1990.)

When the taxpayer fails to pay the Tax within the period established in this Law, the Directorate may order any person or paying office, public or private, that has to make any payment or payments to such taxpayer, to retain an amount equal to the tax owed plus the surcharge and interests established in Article 34 of the Law. The Executive Directorate of Revenue is authorized to establish, as a method of tax collection, withholding at the source, to facilitate the taxpayer in paying their tax obligation and for which the Directorate shall agree on the respective regulation. Without prejudice to the provisions of Article 34, commercial enterprises may pay the final settlement of their tax by anticipated periods in accordance with what is agreed between them and the Directorate. Likewise, the State, persons or enterprises that make payments to enterprises or individuals who are not residents or not domiciled in the country, for the concepts of income, earnings or profit indicated in Articles 4, 5, and 25 of this Law, shall retain the corresponding sums. Legal Entities of Public and Private Law that make payments or establish credits in favor of natural or legal persons resident in Honduras, not exempted from income tax, shall withhold and remit to the treasury twelve point five percent (12.5%) of the amount of the payments or credits that they make for the concept of professional fees, per diems, commissions, gratuities, bonifications, and remuneration for technical services. Excepted from this provision are payments made under employment contracts entered into during the tax year and whose fees as the sole source of income do not exceed ninety thousand lempiras (L. 90,000.00). The withholdings shall have the character of advances toward the payment of income tax by the respective taxpayers and shall be remitted within the first ten (10) days following the month in which the withholding was made. Such withholdings shall not be applicable to natural or legal persons subject to the tax payment account regime.

The non-compliance with the obligation to withhold and remit the tax empowers the Directorate to determine de officio the withholding and to hold the withholding agents jointly and severally responsible for the tax caused by the income; in cases of non-compliance, the withholding agents shall be subject to the surcharges and interests established in Article 34 of the Law for payments made after the dates and periods indicated, without prejudice to the fine established in Article 41 of the Law.

(Explicitly repealed by Article 222 of Decree No. 22-97 "Tax Code" of April 8, 1997).

Contractors and concessionaires who, in accordance with their respective contracts, concessions or special decrees, are obligated to pay to the State a percentage of their net profits, shall comply with such obligations in accordance with the tax scales established in the present Law.

(Repealed by Article 222 of Decree No. 22-97 "Tax Code" of April 8, 1997).

(Repealed by Article 222 of Decree No. 22-97 "Tax Code" of April 8, 1997).

The tax rate set forth in Article 22 of the present law shall begin to be applied as of January 1, 1964. In the cases of taxpayers with fiscal years different from the calendar year and when such fiscal years end within any month of the year 1964, the corresponding rate shall be applied to them in proportion to the time elapsed. For the purposes of this provision, a month begun shall be considered as a month completed. Non-resident or non-domiciled taxpayers in the country shall be subject to the application of the rate of Article 25 as of January 1, 1964.

For the proper application of this Law, the Executive Branch shall issue the regulations it deems necessary.

The present Law shall enter into force on January 1, 1964, thereby repealing from that date the law issued by Decree-Law No. 73 of March 31, 1955, and its reforms contained in Decree Laws Nos. 174 of December 2, 1955, No. 37 of January 16, 1957 and No. 56 of March 5, 1957. Legislative Decree No. 122 of June 6, 1963 is also repealed from that date. Given in Tegucigalpa, D.C., on the twentieth day of the month of December 1963. O. López A. Secretary of State in the Departments of Governance and Justice Darío Montes Secretary of State in the Department of Foreign Relations Jorge Fidel Durón. Secretary of State in the Departments of National Defense and Public Security A. Escalón. Secretary of State in the Department of Public Education Eugenio Matute C. Secretary of State in the Department of Economy and Finance T. Cáliz Moncada. Secretary of State in the Departments of Communications and Public Works Luis Bográn F. Secretary of State in the Departments of Public Health and Social Assistance A. Riera H. Secretary of State in the Departments of Labor and Social Security by Law, Nicolás Cruz Torres. Secretary of State in the Department of Natural Resources, Héctor Molina García. Reforms to the Income Tax Law, issued in Decree No. 25 of December 20, 1963 through December 19, 2003.

An annual cedular tax is established applicable to the Total Net Assets of legal entities, domiciled in Honduras that have the character of merchants in accordance with the Commercial Code.

For purposes of application of this Law, Net Assets shall be understood as the difference resulting from the value of assets shown in the Taxpayer's General Balance Sheet, less reserves for accounts receivable, accumulated depreciation allowed by the Income Tax Law, revaluations of assets as long as they are not disposed of, and the values corresponding to investment expansions recorded as projects under development or fixed assets not in operation. The balance of obligations with financial institutions directly related to the financing of fixed assets in operation shall also be deducted.

The rate of this categorical tax shall be one percent (1%) on the value of total net assets determined in the General Balance Sheet as of December 31st of the taxable year and shall be declared and paid on the same date of payment of the Income Tax of each fiscal year. In the case of legal entities with special fiscal years, the declaration and payment of this tax shall be made within three (3) months of the end thereof. Institutions of the financial system and insurance shall consider as assets subject to this categorical tax, fixed and contingent assets, land, constructions, and other assets composed of deferred expenses and charges. Commercial partnerships holding shares (Holding Companies) may deduct only the portion of assets invested in shares of other companies. This tax shall not be deductible from the taxpayer's taxable income for purposes of calculating the Income Tax.

Taxpayers shall present in the same Income Tax Declaration the declaration of the Total Net Assets Tax, using the special forms prepared by the Executive Tax Administration (DEI), which shall distribute them free of charge.

The lack of a form to present the Declaration shall not exempt taxpayers from their tax obligation. In such case, they may use ordinary paper providing the same information required through the official forms.

The Declaration may also be presented by electronic means in the form established by the Executive Tax Administration (DEI).

In the event that the taxpayer is unable to present their Declaration directly, they may send it through another person or by certified mail to the Executive Tax Administration (DEI). ARTICLE 12.- Failure to present the Declaration within the established period shall be sanctioned with a fine of ten percent (10%) of the tax to be paid. Non-payment or partial payment of the tax shall give rise to the application of a surcharge on the outstanding balance of ten percent (10%), plus an interest equivalent to the highest current banking rate in effect at the date of making the payment.

This tax shall be paid to the General Treasury of the Republic or at collection offices authorized by the State Secretariat of Finance.

Not obligated to declare or pay the tax provided for in this Law are: 1. Legal entities whose total assets do not exceed three million Lempiras (L. 3,000,000.00); when this value is exceeded, the categorical tax shall be applied to the difference. 2. Legal entities exempt from payment of Income Tax. 3. Merchants operating in Free Zones (ZOLI), Industrial Processing Zones (ZIP), Free Tourist Zones (ZOLT) and maquilas (RIT) and others under special fiscal exemption regimes. 4. Legal entities in the pre-operative stage of their activities. 5. Taxpayers who in a period suffered operating losses caused by fortuitous event or force majeure; such loss must be certified by an auditing firm duly registered in the respective Professional College, without prejudice to subsequent inspection. ARTICLE No. 15.- The amounts paid as total net assets tax, corresponding to the respective year, shall constitute a credit against the value of Income Tax to be paid. If in the taxable year to which the payment corresponds, the legal entity has paid in concept of Income Tax an amount equal to or greater than the tax to be paid for total net assets tax, the obligation derived from the latter shall be understood as fulfilled. In the event that the sum paid for Income Tax is less than what must be paid for total net assets tax, the difference shall be the tax to be paid for total net assets tax.

The administration and inspection of the categorical tax established in this Law corresponds to the Executive Tax Administration (DEI), which shall apply the Income Tax Law in a supplementary manner.