Central America is an exciting region to do business. Often overshadowed by larger neighbouring markets, this region offers many important commercial advantages. This includes special economic zones, tax and other commercial benefits, regional integration, and ease of doing business.
Entrepreneurs and foreign investors looking at expanding into Latin America should consider the benefits posed by a rapidly developing region. We look at 5 valuable elements that enable investors to incorporate a company in Central America.
Table of Contents
1. Incorporate a company in Central America’s Free Trade Zones
Central America houses several special economic areas known as Free Trade Zones (FTZs) that offer businesses preferential commercial conditions to support their operations. The FTZs in this region are most concentrated in:
- Costa Rica, housing around 39 free zones
- El Salvador, known as the 17 ‘Zonas Francas’
- 12 special economic areas in Panama – the most notable being the Colon Free Trade Zone (this territory alone generates around US$5 billion in exports and imports each year).
Businesses that choose to operate within these zones are offered special tax and trading benefits, including tax exemptions on imports and re-exporting of goods to and from the zones, reduced local and national tax compliance, and lower leasing costs for land within FTZ territory. There’s also a higher level of automated and digitalized processes that offer improved efficiency for commercial and logistical operations.
Besides these trading hotspots, the governments of Nicaragua, Honduras, El Salvador, Guatemala and Costa Rica form part of what’s called the Central American Common Market (CACM). The CACM was founded in 1960 (with Costa Rica becoming a member in 1962). This group aims to nurture economic development in the region through greater emphasis on free trade and economic integration.
Working out of a Free Trade Zone or other special economic area lowers overall operational costs for your business, and in many aspects, improves the efficiency of your activities. Central American governments have designed these zones to optimize business’ experience and give access to strong commercial frameworks.
2. Ease of offshore company formation
Central American leaders want to encourage greater foreign investment flows and business activity in the region, and ensure their countries are competitive against other high-performing regional players.
As a result, countries like Costa Rica, Panama and Belize offer straightforward processes for setting up a business – and even obtaining residency as a foreign investor.
Particularly, countries in Central America offer appealing options for forming offshore companies. In Costa Rica, offshore companies are exempt from income and property tax, and company tax is largely reduced.
Incorporating an offshore company in Panama and Belize, however, offers significantly higher advantages than other countries in the area, including:
|Offshore company advantages in Belize||Offshore company advantages in Panama|
Exempt from income and business taxes
Stamp duty only applies if the company owns property in Belize
Privacy protections for directors and shareholders
Low entry requirements and feesIncorporation time can be as quick as one day.
Exemptions on income, capital gains and dividend taxes
No requirement to reside in Panama
Privacy protections for directors and shareholders
Low entry requirements and fees
Incorporation time can be as quick as 5 days.
3. Trade integration and opportunities
Commercial actors operating in the Central American region can enjoy expansive reach into major consumer markets in both Northern and Southern America. In the North, the US and Canada hold a collective population of nearly 367.5 million people, according to United Nations estimates. Approximately 422.5 million live in South America. The diversity and accessibility of these markets ensure ample support for trading businesses in Central American countries.
Furthermore, Central America has a number of trade agreements supporting these connections and the region’s economic integration with its neighbours.
One important trade deal for the region is the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR). This deal aims to reduce trade barriers and strengthen ties between the US, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Dominican Republic. Many key markets in Southern America also connect with their central counterparts for two-way trade activity, making Central America a viable location for businesses expanding into Latin America looking for secure trade channels.
4. World-class facilities for international trade
Central America offers integrated transport and logistics facilities, topped by the world-class ranking Panama Canal.
This facility, opened in 1914, is the largest in Latin America, and connects the Pacific and Atlantic Oceans. Without this man-made canal – considered one of the 2 most strategic in the world alongside the Suez Canal – ships would have otherwise had to travel around Cape Horn in Chile.
Operating from Central America, especially as an exporter or importer, offers easy access to and use of maritime trade for your business.
5. Developing markets with untapped potential
Generally speaking, Latin America has fallen behind other regions in terms of development during the Age of Information. Major technological changes appear to be sweeping through larger markets such as Colombia, Brazil, Mexico, Chile, and Argentina. However, most of the region is still navigating best practice for welcoming these changes and the significant amounts of foreign investment that come with them. This includes Central America.
Central American countries are taking diverse, successful approaches to welcoming innovation and new business, such as the City of Knowledge in Panama and introduction of 5G connectivity in El Salvador. Costa Rica is a shining example of energy consumption, obtaining 98.53% of its energy from renewable sources over the last 4 years.
Central America offers a dynamic environment for commercial change and technological development. There are several emerging markets that entrepreneurs would benefit from taking an early-mover approach to in this region. This includes fintech, renewable energy, agritech, online commerce, and education.
Doing business in Central America
The advantages to doing business in Central America include access to Free Trade Zones, limited requirements for company formation, and tax benefits.
Countries like Panama and Belize also use the US Dollar as their currency, improving ease of transactions by removing foreign exchange considerations. Along with Costa Rica, they also have a large English-speaking population, which significantly improves the ease of doing business for English-speaking foreigners. Local workforces are well-educated, and employment and other operational costs are relatively low, offering greater profit margins for companies.
Set up your business in Central America with Biz Latin Hub
Central America is a region to watch for emerging commercial success stories. Collectively, it’s a relatively unsaturated market that is welcoming to foreign investment. Companies considering their expansion options in this exciting business environment should ensure they have the right legal services and other commercial support behind them.
At Biz Latin Hub, our team of local and expatriate professionals are equipped with the local experience and knowledge to guide new entrants to the market. With our customizable range of market entry and back-office services, we’ll ensure your business has the best possible start.
Contact us today for personalized support.
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