HONDURAS Law and Practice Contributed by: Alberto Zúniga, Carlos Zúniga and Garhem Padilla, Baker Tilly Honduras
transactions and remain outstanding beyond 100 cal - endar days may be recharacterised as advance divi - dends, triggering dividend withholding tax treatment. Accordingly, while related-party borrowing is feasi - ble, inbound groups should ensure that intercom - pany loans and other balances reflect commercial substance, are correctly documented, and are admin - istered under clear repayment terms in order to avoid reclassification risk. 6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Honduras operates under a territorial tax system. As a general rule, corporate income tax applies only to income derived from Honduran sources. Accordingly, foreign-source income earned by a Honduran corpo - ration is not subject to Honduran corporate income tax. Income generated entirely outside the country and not attributable to a permanent establishment in Honduras falls outside the domestic tax base. The territorial approach is a defining characteristic of the Honduran tax framework. 6.2 Non-Deductible Local Expenses Under Honduran tax principles, deductible expenses must be directly linked to the generation of taxable income. Where a Honduran corporation incurs costs exclusively related to the production of foreign-source income that is exempt under the territorial system, those expenses are generally not deductible for cor - porate income tax purposes. This reflects the structural symmetry of the territorial regime: income not subject to tax cannot generate deductible costs. 6.3 Dividends From Foreign Subsidiaries Dividends received by a Honduran corporation from foreign subsidiaries are not subject to corporate income tax in Honduras. Because foreign-source income is excluded from the tax base, repatriated profits from non-resident subsidiaries do not trigger additional domestic taxation. No participation exemp -
tion regime is required, as the territorial system itself provides the relief. 6.4 Taxation of Intangibles Developed by Local Corporations Intangible assets developed by a Honduran corpora - tion may be licensed or transferred to foreign affili - ates. However, if the transaction generates Honduran- source income, it remains taxable locally. Where intellectual property is transferred or licensed to a related foreign entity, transfer pricing rules apply. The transaction must reflect arm’s length conditions, and appropriate compensation must be recognised at the Honduran entity level. If a transfer is structured in a way that effectively shifts value abroad without adequate remuneration, the Tax Administration may adjust the taxable base under transfer pricing prin - ciples. 6.5 Controlled Foreign Corporation-Type Rules Honduras does not have controlled foreign corpora - tion (CFC) legislation. Local corporations are not taxed on the undistributed income of their foreign subsidiar - ies. Foreign branches operating outside Honduras are likewise not subject to Honduran taxation on foreign- source income. The territorial system eliminates the need for CFC-type inclusion mechanisms. 6.6 The Substance of Non-Local Affiliates Honduran tax law does not contain formal substance requirements applicable to foreign subsidiaries of Honduran corporations. However, where cross-bor - der transactions occur between related parties, the Tax Administration may evaluate economic substance under transfer pricing rules and general anti-avoid - ance principles. 6.7 The Sale of Shares in Non-Local Affiliates Gains derived by a Honduran corporation from the sale of shares in a foreign affiliate are generally not subject to Honduran corporate income tax. Under the territorial tax system, only income derived from Honduran sources falls within the domestic tax base. Accordingly, capital gains arising from the disposal of shares in non-resident companies are typically treated as foreign-source income.
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