HONDURAS Law and Practice Contributed by: Alberto Zúniga, Carlos Zúniga and Garhem Padilla, Baker Tilly Honduras
These taxes operate alongside the standard 25% cor - porate income tax and may increase the effective tax burden for certain entities. 3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Most closely held businesses in Honduras operate through incorporated entities, particularly Sociedad Anónima (SA) or Sociedad de Responsabilidad Limita- da (SRL). Although individuals may conduct business activities directly as sole proprietors, the corporate form is generally preferred due to limited liability pro - tection, clearer governance structures and operational flexibility. There is no separate tax regime applicable to closely held entities. The corporate tax framework applies uniformly, regardless of ownership concentration. 3.2 Individual and Corporate Rates Honduras does not operate a materially lower corpo - rate tax rate compared to the top marginal individual rate. Corporations are taxed at 25%, while individuals are subject to progressive rates that reach 25% at the highest bracket. Because the top marginal indi - vidual rate aligns with the corporate rate, there is lim - ited incentive to incorporate purely for rate arbitrage purposes. However, individuals conducting business activities directly are not subject to the net asset tax or the 5% solidarity contribution, which apply only to corporate entities and other qualifying legal persons. As a result, in certain cases, operating as an individual entrepre - neur may produce a lower effective tax burden com - pared to operating through a corporation. Distributions from corporations are subject to a 10% withholding tax on dividends, which may further increase the combined effective tax burden at the shareholder level. Honduran law does not establish specific anti-incor - poration rules targeting professionals. The system relies primarily on rate alignment and the separate
taxation of dividends rather than anti-deferral mecha - nisms. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations Honduran tax law does not impose specific anti-accu - mulation rules preventing closely held corporations from retaining earnings for reinvestment purposes. There is no accumulated earnings tax or deemed dis - tribution mechanism triggered solely by the retention of profits. Corporations are required under commercial law to allocate 5% of annual net profits to a legal reserve until that reserve reaches 20% of the subscribed capi - tal. Once this threshold is achieved, the reserve may be capitalised, although the annual allocation obliga - tion continues. Beyond this statutory reserve require - ment, retained earnings are not subject to additional taxation until they are formally distributed. Dividend tax is triggered only upon declaration and payment. Accordingly, closely held corporations may accumu - late profits without immediate tax consequences at the shareholder level. 3.4 Taxation of Individuals on Shares in Closely Held Corporations Dividends distributed by closely held corporations to individuals are subject to a final withholding tax of 10%. This withholding applies regardless of whether the shareholder is resident or non-resident, and gener - ally constitutes final taxation at the shareholder level. Capital gains realised by individuals on the sale of shares are taxed at a flat rate of 10% on the net gain. The taxable gain is determined as the difference between the acquisition cost (or book value, as appli - cable) and the sale price. Where the seller is a non-resident individual, the pur - chaser must withhold 4% of the gross transaction value at the time of transfer. A subsequent settlement before the Tax Administration determines the final tax liability based on the 10% rate applied to the net gain. The tax treatment does not vary based on the degree of ownership concentration; closely held corpora -
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