Libro I Título II. Renta de las actividades lucrativas

The obtaining of income from profitable activities carried out on a habitual or occasional basis by individuals, legal entities, entities or estates specified in this book, resident in Guatemala, constitutes the taxable event for the Income Tax regulated in this title.

Profitable activities shall mean those involving the combination of one or more factors of production, for the purpose of producing, transforming, marketing, transporting or distributing property for its sale or provision of services, at the taxpayer's own account and risk.

Included among them, but not limited to, as income from profitable activities, are the following:

1.Those originating in civil, construction, real estate, commercial, banking, financial, industrial, agricultural and livestock, forestry, fishing, mining activities or from the exploitation of other natural resources and others not included.

2.Those originating from the provision of public or private services, including, among others, the supply of electrical energy and water.

3.Those originating from telephone, telecommunications, computer services and the service of transporting persons and goods.

4.Those originating from the production, sale and marketing of property in Guatemala.

5.Those originating from the export of property produced, manufactured, treated or marketed, including the mere shipment thereof abroad carried out through agencies, branches, representatives, purchasing agents and other intermediaries of individuals, legal entities, entities or estates.

6.Those originating from the provision of services in Guatemala and the export of services from Guatemala.

7.Those originating from the practice of professions, trades and arts, even when such are practiced on a not-for-profit basis.

8.Those originating from attendance fees, commissions or travel allowances not subject to settlement or that do not constitute reimbursement of expenses, representation expenses, bonuses or other remuneration, obtained by members of boards of directors, boards of administration, municipal councils and other boards or managing or advisory bodies of public or private entities paid or credited to persons or entities, with or without legal personality, resident in the country, regardless of where they act or meet.

Being a taxpayer of the Income Tax regulated in this title does not confer merchant status on those to whom the Commercial Code does not attribute such status.

The following are exempt from the tax:

1.Income obtained by entities that allocate exclusively to the nonprofit purposes of their creation and in no case distribute, directly or indirectly, profits or property among their members, such as: professional associations; political parties; civic committees; nonprofit associations or foundations legally authorized and registered as exempt with the Tax Administration, whose purpose is charity, assistance or social service, cultural, scientific, education and instruction, artistic, literary, sports, political, union, trade, religious activities, or the development of indigenous communities; only for the portion derived from donations or ordinary or extraordinary dues. Excepted from this exemption and taxed are the income obtained by such entities in the conduct of for-profit commercial, agricultural and livestock, financial or service activities, and they must declare as taxable income the revenue obtained from such activities.

2.Income of cooperatives legally constituted in the country, derived from transactions with their members and with other cooperatives, federations and confederations of cooperatives. However, income derived from transactions with third parties is taxed.

Individual persons, juridical persons and entities or patrimonies, resident in the country, that obtain income taxable under this Title are taxpayers.

The following entities or patrimonies shall be considered taxpayers with respect to the income they obtain: trusts, participation contracts, co-ownerships, communities of property, irregular companies, de facto companies, trust mandates, management of business affairs, undivided hereditary patrimonies, branches, agencies or permanent or temporary establishments of foreign enterprises or persons operating in the country and the other productive or economic units that hold patrimony and generate taxable income.

Those who pay or credit income to taxpayers, as withholding agents, where applicable, are passive subjects of the tax regulated in this Title and are jointly and severally liable for payment of the tax.

The following regimes are established for income from lucrative activities:

1.Regime on Profits from Lucrative Activities.

2.Optional Simplified Regime on Income from Lucrative Activities.

Capital income and capital gains are taxed separately in accordance with the provisions of Title IV of this Book.

The provisions of the preceding paragraph do not apply to movable capital income, capital gains of the same nature, nor to gains from the sale of extraordinary assets obtained by banks, finance companies and legally authorized cooperatives, nor to salvages of insurers and bonding companies subject to the supervision and inspection of the Superintendency of Banks, which are taxed in accordance with the provisions contained in this Title. Also excepted from the first paragraph, and which must be taxed in accordance with the provisions contained in this Title, are immovable and movable capital income derived from the lease, sublease, as well as from the creation or assignment of rights or powers of use or enjoyment of immovable property and movable property, obtained by individual or legal persons resident in Guatemala whose habitual business is such activity.

Individual or legal persons who keep complete accounting in accordance with the Commercial Code and whom the Tax Administration authorizes to issue special invoices on behalf of the seller of goods or the service provider, in accordance with the Value Added Tax Law, shall withhold, as a final payment, the Income Tax, applying the tax rate of five percent (5%) on the value of the invoice not including the Value Added Tax.

In each special invoice that the taxpayers referred to in the first paragraph of this article issue on behalf of the seller of goods, or the service provider, they shall record the amount of the tax withheld. The copy of such special invoice shall serve as a record of withholding of the Income Tax, which they shall deliver to the seller of goods or service provider.

Taxpayers, through the means that the Tax Administration makes available to them, must file and remit the tax withheld with the sworn withholding return, accompanying the same with an annex specifying the full first and last name, fiscal domicile and Tax Identification Number or personal identification number of each of the persons to whom they issued the special invoice, the description thereof, the income credited or paid and the amount of the withholding, within the first ten (10) days of the month following the month to which the payment of the remuneration corresponds.

When a university professional has received income and is not registered as a taxpayer, or is registered but has not filed his income returns, it is presumed, unless evidence to the contrary, that he derives from the independent practice of his profession taxable income of thirty thousand quetzales per month.

The aforementioned taxable income shall be reduced by fifty percent (50%) when the professional concerned has been graduated for less than three (3) years or is over sixty (60) years of age.

In the determination of the tax based on presumed income carried out in accordance with the provisions of this article, the tax rate of the regime in which the professional is registered shall apply. For the settlement of the tax obligation, the taxpayer is obligated to declare all of his income subject to tax. If the amount stated in this return differs from the income presumed by the Tax Administration, the taxpayer shall submit for review all documentation supporting what was declared. In any case, the taxpayer remains subject to the sanctions provided for in the Tax Code, without prejudice to the power of the Tax Administration to determine the taxable income on a certain basis.

If the professional is not registered under any regime, the Tax Administration shall register him on its own initiative under the Regime on Profits from Lucrative Activities and shall determine the tax in accordance with the preceding paragraph.

Costs, expenses, income, assets and liabilities are valued, for tax purposes, according to the acquisition price or the cost of production, or as provided in other parts of this Book.

Taxpayers who register under the Regime on Profits from Lucrative Activities must determine their taxable income, deducting from their gross income the exempt income and the deductible costs and expenses in accordance with this Law and must add the costs and expenses for the generation of exempt income.

The aggregate of income and benefits of all kinds, taxable or exempt, habitual or not, accrued or received in the settlement period, derived from sales of property or provision of services and other lucrative activities, constitutes gross income.

Likewise, income derived from exchange gains in the purchase and sale of foreign currency and those arising from revaluations, restatements or remeasurements in foreign currency that are recorded by mere accounting entries constitutes gross income. Benefits arising from the collection of compensation in the case of extraordinary losses suffered in fixed assets, in the amount of the compensation exceeding the book value of the assets, also constitute gross income.

The following shall be considered deductible costs and expenses, provided they are useful, necessary, pertinent or indispensable to produce or preserve the income-producing source of taxable income:

1.The cost of production and sale of property.

2.Expenses incurred in the provision of services.

3.Transportation and fuel expenses.

4.Salaries, wages, year-end bonuses, bonuses, commissions, gratuities, per diems and other remuneration in money.

The maximum deduction for salaries paid to partners or directors of civil and commercial companies, spouses, as well as to their relatives within the degrees established by law, is limited to a total annual amount of ten percent (10%) on gross income.

5.Both the year-end bonus and the annual bonus for workers in the private and public sector (bonus 14), shall be deductible up to one hundred percent (100%) of the monthly wage, except as established in the collective agreements on working conditions duly approved by the competent authority, in accordance with the Labor Code.

6.Employer contributions paid to the Guatemalan Institute of Social Security -IGSS-, Institute for Recreation of Workers of Private Enterprise of Guatemala -IRTRA-, Technical Institute for Training and Productivity -INTECAP- and other mandatory contributions or disbursements established by law. The Guatemalan Institute of Social Security and the Superintendency of Tax Administration are obligated to exchange the information provided by employers regarding workers, in detailed form, without including data protected by the confidentiality reserve established in the Political Constitution of the Republic of Guatemala and other laws. Said exchange of information must be periodic, in periods not exceeding three months.

7.Employer allocations for retirement, pensions and premiums for social welfare plans, such as retirement insurance, pensions, medical insurance, under collective plans for the exclusive benefit of workers and their family members, provided they have due authorization from the competent authority.

8.Indemnities paid for termination of the employment relationship in the amount corresponding to the worker in accordance with the provisions of the Labor Code or the corresponding collective agreement; or reserves established up to the limit of eight point thirty-three percent (8.33%) of total annual remuneration. Such deductions are admissible, insofar as they are not covered by insurance policies covering the respective risks for such benefits.

9.The amount of expense derived from maintenance and operation of housing, schools, clinics, hospitals, medical assistance services, medicines and educational services, for the free benefit of workers and their family members who are not partners of the legal person, subject to the tax, nor relatives of the taxpayer or of said partners within the degrees established by Law. Depreciation on assets that have been built or acquired for the provision of the indicated services shall also be deductible. Such deduction shall be admissible provided the taxpayer separately records in accounting and individually documents the investments and expenses incurred, in such a way as to allow the Tax Administration specific audit of the admissibility of the deductions. Any payment or compensation that workers make to their employers for the items indicated in the preceding paragraph must be deducted from the expense incurred by the taxpayer.

10.The value of arable land registered in the fiscal roll, which owners of agricultural enterprises gratuitously convey in ownership to their workers, provided the conveyance is recorded in the General Property Register, in favor of workers who are not relatives of the taxpayer within the degrees established by law, nor of the decedent in the case of successions, nor partners of the legal person, subject to the tax.

11.Life insurance premiums to cover risks exclusively in case of death, provided the insurance contract does not include any refund for return, reimbursement or surrender, for whoever contracts the insurance or for the insured subject. Premiums for accident or illness insurance for personnel employed by the taxpayer may also be deducted, for the portion corresponding to the employer to pay, during the time the employment relationship remains in force. These deductions are only applicable if the insurance is contracted for the exclusive benefit of the employee or worker or his family members.

12.Insurance premiums against fire, robbery, theft, earthquake or other risks, provided they cover property or services that produce taxable income.

13.Leases of movable property or immovable property used for the production of income.

14.The cost of improvements made by lessees in buildings of leased immovable property, insofar as they are not compensated by lessors, when so agreed in the contract. The costs of improvements must be deducted during the time limit of the lease contract, in successive and equal installments.

Except in cases of constructions on leased land, when it has been agreed in the contract that the lessees shall be the owners of the construction, who must record them as fixed assets, for purposes of depreciation for the time the contract remains in force.

15.Taxes, fees, contributions and municipal levies, effectively paid by the taxpayer. Surcharges, interest and fines for tax or other violations imposed by the State, municipalities or their entities are excepted; the Income Tax, the Value Added Tax and other taxes are also excepted, when they do not constitute cost.

16.Interest, price differentials, financing charges or yields paid as derived from: i) financial instruments; ii) opening of credit, documentary credit or money loans; iii) issuance of credit instruments; iv) repurchase agreement operations; v) financial leasing; factoring, asset securitization or any type of credit or financing operations. All interest, to be deductible, must originate from operations that generate taxable income for the taxpayer and its deduction is established in accordance with the article regarding the limitation on the deduction of interest established in this Book.

17.Losses due to misplacement, breakage, damage, evaporation, decomposition or destruction of property, duly proven, and those caused by crimes against property committed to the detriment of the taxpayer.

When contracted insurance exists or the loss is indemnified, what is received for this item shall be considered income, while the loss suffered shall constitute deductible expense.

In the case of damage due to force majeure or fortuitous event, to accept the deduction, the taxpayer must document the same, by means of opinion of experts, notarial records and other documents in which the fact is stated. In the case of crimes against property, to accept the deductibility of the expense, the taxpayer must have reported, offered and submitted evidence of the fact before the competent authority. In all cases, they must be recorded in the accounting on the date the event occurred.

18.Maintenance expenses and repair expenses that keep property in good working condition, provided they do not constitute permanent improvements, do not increase its useful life or its production capacity.

19.Depreciations and amortizations that comply with the provisions of this Title.

20.Uncollectible accounts, for which such classification is justified, originating exclusively from operations of the ordinary course of business and solely from operations carried out with its clients, not including tax credits or loans to officers and employees. The status of uncollectible accounts, when applicable, must be demonstrated by means of submission of the documents or records generated by the administrative collection management system, evidencing the collection demands made, or in accordance with judicially established procedures, before the limitation period of the debt operates or the same is classified as uncollectible. For credits or accounts receivable that have mortgage or pledge security, only the residual amounts pending collection, after liquidation of the security, shall be considered deductible expenses.

In the event that subsequently an uncollectible account that had been deducted from gross income is recovered in whole or in part, its amount must be included as taxable income in the settlement period in which the recovery occurs.

Taxpayers that do not apply the provisions of the first paragraph of this numeral may opt to deduct the provision for the formation of a valuation reserve, to charge to it the uncollectible accounts recorded in the corresponding settlement period. Said reserve may not exceed three percent (3%) of the debit balances of accounts and documents receivable, excluding those with mortgage or pledge security, at the close of each annual settlement period; and provided said debit balances originate from the ordinary course of business; and solely from operations with its clients, not including tax credits or loans to officers and employees or to third parties. Charges to the reserve must be justified and documented with the administrative collection demands made, or in accordance with judicially established procedures.

When the reserve exceeds three percent (3%) of the indicated debit balances, the excess must be included as gross income of the settlement period in which the same occurs.

Exempt from this limitation are excesses over the three percent (3%) indicated above, established as a consequence of the rules issued by the Monetary Board for entities subject to oversight and inspection by the Superintendency of Banks, solely with respect to capital accumulated and included in the uncollectible accounts of the taxpayer.

21.Allocations to form the computable technical reserves established by law, as provision for risks derived from ordinary operations of insurance and bonding companies, savings, capitalization, savings and loan companies.

22.Donations that can be reliably proven, granted in favor of the State, universities, cultural or scientific entities.

Donations to nonprofit associations and foundations, for assistance or social service, to churches, to religious entities and associations and to political parties, all of which must be legally constituted, authorized and registered in accordance with the law, provided they hold tax clearance for the period to which the expense corresponds, issued by the Tax Administration, the maximum deduction allowed to those who donate to the entities indicated in this paragraph may not exceed five percent (5%) of gross income, nor a maximum amount of five hundred thousand quetzales (Q.500,000.00) annually, in each annual final settlement period.

In case of donation in kind, in addition to the percentage and amount indicated, the deduction for this item may not exceed the acquisition, production or construction cost, unamortized or undepreciated, of the donated property, as applicable on the date of its donation.

Donations must be recorded in all cases both in the accounting of the donor and in that of the donee.

23.Fees, commissions or payments of deductible expenses for professional services, technical, financial or other advice provided in the country or from abroad; advice means any opinion, counsel or recommendation of a technical or scientific nature, presented in writing and resulting from detailed study of available facts or data, of a situation or problems raised, to guide action or conduct in a given direction.

The total deduction for said items, if provided from abroad, must not exceed five percent (5%) of gross income.

24.Verifiable per diems granted to cover expenses incurred within or outside the country, assigned or paid to sole owners of enterprises, partners, members of boards of directors, councils or other governing bodies and to officers or employees of the taxpayer. Likewise, transportation expenses of the same persons, as well as those incurred by hiring technicians to work in the country, or by sending employees of the taxpayer to specialize abroad. In all cases, provided such expenses are indispensable to obtain taxable income.

For deduction of expenses covered with per diems within the country to be admissible, they must be proven with the corresponding invoices issued in accordance with national legislation. In the case of expenses incurred outside the country, for deduction to be admissible the exit from and entry to Guatemala must be demonstrated and documented, the activity in which participation occurred and the tickets of the means of transportation used.

The total amount of these deductions must not exceed three percent (3%) of gross income.

25.Royalties for the items established in Article 4, numeral 3, literal c, of Title I of this Book, recorded in the registers, when applicable. Said deduction in no case must exceed five percent (5%) of gross income and the royalty right must be proven by means of a contract establishing the amount and payment conditions to the beneficiary.

26.Expenses for promotion, advertising and propaganda incurred in mass media such as billboards, radio, written press and television, duly proven.

27.Organizational expenses duly proven, which are amortized through five (5) annual, successive and equal installments, from the first settlement period in which sales or services are invoiced.

28.Exchange losses originated by purchase and sale of foreign currency carried out with institutions subject to oversight and inspection by the Superintendency of Banks, for operations intended to generate taxable income. Exchange losses resulting from revaluations, restatements or remeasurements of accounts payable or accounts receivable expressed in foreign currency, originated from operations intended to generate taxable income, shall also be deductible, provided the deduction has not been used in the purchase and sale of foreign currency and the origin thereof is documented, using in the remeasurement the reference exchange rate published by the Bank of Guatemala; the taxpayer being required to monthly record in accounting an exchange loss account and an exchange product or gain account, to reflect this accounting operation, establishing the net effect of these operations at the end of each month and at the end of the annual final settlement period.

29.General and sales expenses. These expenses must be different from those established in the other numerals of this article.

The limits on deductible expenses established in this article are not valuation rules.

Taxpayers that carry out cargo and passenger transport activities, in both cases by air between Guatemala and other countries and regardless of the place where the freight charges or tickets are issued or paid, and where such taxpayers are organized abroad and their income-generating operations are carried out through branches, agencies and other permanent establishments in the Republic of Guatemala, shall determine deductible costs and expenses in accordance with Article 21 of this Law and shall add thereto a proportion of the global costs and expenses reported by the home office, in accordance with the following formula:

Where the fiscal year of such companies resident abroad does not coincide with the Guatemalan fiscal period, they shall make the aforementioned deduction considering the last completed fiscal year of the home office.

The proportion of costs and expenses determined under the foregoing formula does not constitute income inasmuch as it is a reimbursement by apportionment of the expenses incurred by the home office, provided that such expenses are useful, necessary, relevant or indispensable to produce or generate income subject to tax by the branch or permanent establishment within Guatemalan territory.

This determination must be contained in the sworn settlement return that the Tax Administration makes available to taxpayers.

Where taxpayers do not have the information for the determination of deductible costs and expenses as indicated above, they shall opt for the determination of a presumed income equivalent to fifteen percent (15%) of their gross income and shall be relieved from applying the provisions of Article 22 of this Law.

The tax rate established in Article 36 of this Law shall apply to the taxable income determined in accordance with the preceding paragraph.

For purposes of compliance with the provisions of Article 21 Bis of the law, the results obtained by the head office must be documented as the basis for the calculation for the application of the formula in the determination of the proportional amount of deductible costs and expenses corresponding to the branch in Guatemala, using as a basis the audited financial statements, in accordance with international accounting standards, duly apostilled and translated into the Spanish language.

In order for the costs and expenses detailed in the preceding article to be deductible, they must meet the following requirements:

1.That they are useful, necessary, relevant or essential to produce or generate the income taxed by this Title or to preserve its producing source and, for those required to keep complete accounting, they must be duly recorded in the accounts.

2.That the holder of the deduction has complied with the obligation to withhold and pay the tax established in this Book, when applicable.

3.In the case of salaries and wages, when those who receive them are listed on the social security contributions payroll submitted to the Guatemalan Social Security Institute, where applicable.

4.To have the documents and supporting means, understood as such:

a.Invoices or small-taxpayer invoices authorized by the Tax Administration, in the case of purchases from taxpayers.

b.Invoices or vouchers authorized by the Tax Administration, in the case of services provided by taxpayers.

c.Invoices or documents issued abroad.

d.Certified copy of public deeds authorized by a Notary, or the protocolized private contract.

e.Cash receipts or debit notes, in the case of expenses charged by entities supervised and inspected by the Superintendency of Banks.

f.Payrolls submitted to the Guatemalan Social Security Institute and the receipts issued by it, wage books, payrolls, in the cases of salaries, wages or labor benefits, as applicable.

g.Import customs declarations with the authorized proof of payment, in the case of imports.

h.Special invoices authorized by the Tax Administration.

i.Others authorized by the Tax Administration.

The persons, entities and estates to which this Law refers may not deduct from their gross income the following costs and expenses:

a)Those that did not originate in the business, activity or operation generating taxable income.

Taxpayers are obligated to register the costs and expenses of taxable income and of exempt income in separate accounts, in order to deduct only those referring to taxable operations. In the event the taxpayer has not kept this separate accounting register, the Tax Administration shall determine on its own initiative the non-deductible costs and expenses, calculating the costs and expenses in a manner directly proportional to the total direct expenses relative to the total taxable, exempt and unaffected income.

b)Financial expenses incurred in financial investments for housing promotion activities, through mortgage bonds or treasury bonds of the Republic of Guatemala or other securities or credit instruments issued by the State, whenever the interest generated by such credit instruments is exempt from taxes by legal mandate.

Investors are obligated to register these costs and expenses in separate accounts. In the event taxpayers have not kept a separate accounting register, the determination on its own initiative established in subparagraph a) of this article shall apply.

c)Those for which the holder of the deduction has not complied with the obligation to withhold and pay the Income Tax, when applicable. They shall be deductible once the withholding has been remitted.

d)Those not supported by the corresponding legal documentation. Legal documentation means that required by this Law, the Value Added Tax Law, the Stamp Tax and Special Stamped Paper for Protocols Law and other tax and customs legal provisions, for purposes of proving the acts subject to such taxes. The foregoing, except when by legal provision the deduction may be evidenced by means of an accounting entry.

e)Those that do not correspond to the annual tax period being settled, except for the special regimes permitted by this Law.

f)Salaries, wages and employment benefits that are not evidenced with a copy of the payroll of contributions to social security submitted to the Guatemalan Institute of Social Security, when applicable.

g)Those supported with an invoice issued abroad in the importation of property that are not substantiated with duly settled import customs declarations with the authorized proof of payment; except for services which must be supported with proof of payment abroad.

h)Those consisting of bonuses based on profits or profit-sharing granted to members of boards or councils of administration, managers or executives of legal persons.

i)Disbursements representing compensation for contributed corporate capital or estate. In particular, any sum delivered for equity interests, dividends, paid or credited in cash or in kind to partners or shareholders; sums paid or credited in cash or in kind by fiduciaries to trust beneficiaries; as well as sums credited or paid by communities of property or of estates to their members, as withdrawals, dividends on account of profits or return of capital.

j)Sums withdrawn in cash and the value of the property used or consumed for any reason by the owner, his family members, partners and administrators, nor credits credited to accounts or remitted to the head offices by their branches, agencies or subsidiaries.

k)Interest and other accrued financial expenses included in uncollectible accounts, in the case of taxpayers who operate their records under the accounting method of amounts received.

l)Those derived from acquisition or maintenance of investments of a personal recreation nature. When such investments are included in assets, together with those of other activities generating taxable income, separate accounts shall be kept for purposes of determining the results of one and the other class of investments.

m)The value of permanent improvements made to fixed-asset property, and, in general, all those disbursements for capitalizable improvements that prolong the useful life of such property or increase its production capacity.

n)Exchange losses originating in the acquisition of foreign currency for operations abroad, carried out by branches, subsidiaries or agencies with their head office or vice versa.

o)Exchange losses resulting from revaluations, restatements or remeasurements of accounts payable or accounts receivable expressed in foreign currency, that do not comply with the provisions of numeral 28. of article 21 of this Law.

p)Premiums for endowment insurance or for any other type of insurance that generates reimbursement, surrender value or refund of any nature to the beneficiary or to the person contracting the insurance;

q)Expenses incurred and depreciation of property used indistinctly in the practice of the profession and for private use, only the proportion corresponding to the earning of taxable income may be deducted. When the proportion of such deduction cannot be proven, only fifty percent (50%) of the total of such expenses and depreciation shall be considered deductible, unless evidence to the contrary.

r)The amount of depreciation on immovable property whose base value exceeds that recorded in the Tax Registry or in the Municipal Cadastre. This restriction shall not be applicable to taxpayers who make permanent improvements or constructions to immovable property that is not their property, nor to owners of immovable property who make improvements that do not constitute constructions, provided that such improvements do not require, in accordance with current regulations, a municipal construction license and the investment made is effectively proven documentarily and in accounting records.

s)The amount of donations made to non-profit associations and foundations, for assistance or social service, to churches, to entities and associations of a religious nature and to political parties that are not legally constituted, authorized and registered in accordance with the law, or that do not have the fiscal solvency for the period to which the expense corresponds, issued by the Tax Administration.

* Unconstitutionality of subparagraph o) denied, per File Number 293-2013 on 24-08-2015.

Without prejudice to other rules regarding the deduction of interest, the deductible amount for such item shall not exceed the value obtained by multiplying the interest rate referred to in the following paragraphs by an amount of three times the average total net assets reported by the taxpayer in his sworn annual return.

The interest rate on credits or loans in quetzales may not exceed the maximum annual simple rate determined by the Monetary Board for tax purposes within the first fifteen (15) days of the months of January and July of each year for the respective semester, taking as a basis the weighted bank rate for active operations of the preceding semester.

For loans abroad, the contracts must be with banking or financial entities, registered and supervised by the state banking supervision and inspection body, and authorized for intermediation activity in the country of granting. In this case, the interest rate on loans in foreign currency shall not exceed the maximum annual simple rate determined by the Monetary Board described in the preceding paragraph minus the value of the year-over-year variation of the exchange rate of the Quetzal with respect to the currency in which the loan contract is expressed, during the period to which the sworn annual Income Tax return corresponds.

For purposes of this article, average total net assets means the sum of the total net assets at the close of the prior year and that of the total net assets at the close of the current year, both values reported in the sworn annual Income Tax return for each definitive settlement period, divided by two. Total net assets corresponds to the book value of all property actually owned by the taxpayer.

The limitation provided for in this article shall not apply to banking entities and financial companies subject to the supervision and inspection of the Superintendency of Banks and to legally authorized cooperatives.

The depreciation and amortization whose deduction is allowed under this Book are those to be effected on fixed-asset and intangible property owned by the taxpayer and used in the profit-making activities that generate taxable income.

When for any reason the depreciation or amortization installment for an item of property is not deducted in an annual settlement period, or is deducted for a lower amount than the applicable amount, the taxpayer has no right to deduct such installment in subsequent tax periods.

The value on which depreciation is calculated is the acquisition or production or revaluation cost of the property, and, where applicable, that of improvements incorporated on a permanent basis. The cost value includes expenses incurred in connection with the purchase, installation and assembly of the property and other similar ones, until placing them in condition to be used.

To determine depreciation of immovable property, the most recent value recorded in the fiscal registry or in the municipal cadastre shall be used, whichever is greater. In no case shall depreciation be allowed on the value of land. Where the value of the building and improvements is not specified, it is presumed, save evidence to the contrary, that it is equivalent to seventy percent (70%) of the total value of the immovable property, including the land.

Where improvements are made to depreciable property, the limit for depreciation to be recorded shall be the non-depreciated balance of the property plus the value of the improvements, which shall constitute the new initial value to be depreciated, in accordance with its useful life.

In general, the calculation of depreciation shall be made using the straight-line method, which consists of applying to the acquisition, installation and assembly, production or revaluation value of the property to be depreciated, a fixed and constant annual percentage in accordance with the rules of this article and the following.

At the request of the taxpayers, when they demonstrate with documentary evidence that the straight-line method is not appropriate, due to the characteristics, intensity of use and other special conditions of the depreciable property used in the activity, the Tax Administration may authorize other methods.

Once a depreciation method has been adopted or authorized for a specific category or group of property, it governs for the future and may not be changed without prior authorization from the Tax Administration.

The following maximum annual depreciation percentages are established for the straight-line method:

1.Buildings, constructions and installations attached to immovable property and improvements thereto, five percent (5%).

2.Trees, shrubs, fruit trees and plant species that produce fruits or products that generate taxable income, including capitalizable expenses to establish the plantations, fifteen percent (15%).

3.Installations not attached to immovable property, furniture and office equipment, tanker vessels, ships and railway, maritime, river or lake material, twenty percent (20%).

4.Livestock used as pack or work animals, machinery, vehicles in general, cranes, airplanes, trailers, semi-trailers, containers and rolling stock of all kinds, excluding railway stock, twenty percent (20%).

5.Computer equipment, thirty-three point thirty-three percent (33.33%).

6.Tools, porcelain, glassware, table linen, cutlery and similar items, twenty-five percent (25%).

7.Purebred breeding animals, male and female, depreciation is calculated on the cost value of such animals less their value as common livestock, twenty-five percent (25%).

8.For movable property not indicated in the preceding subparagraphs, ten percent (10%).

To carry out the revaluations and apply depreciation on the revalued assets established in the title related to capital gains, the following rules shall be observed:

1.Revaluations shall be accounted for by crediting a capital surplus account for revaluation that allows quantification of its amount.

2.The value of the revaluation of immovable property is that established in the appraisal made by an authorized appraiser as of the date on which the revaluation is made and for the revaluation to be effective, the reappraisal must be recorded in the fiscal registry of the Directorate of Cadastre and Appraisal of Immovable Property or of the municipality that administers the Single Tax on Immovable Property.

3.The annual depreciation of the fixed assets that were subject to revaluation, where applicable, shall be carried out in accordance with the depreciation percentages referred to in this title and the depreciation percentage for the assets, as applicable, shall be applied to the revalued value.

4.Only depreciation and amortization on the increase in values of depreciable fixed assets for which, upon revaluation, the corresponding tax has been paid shall be allowed, in accordance with the provisions of the title corresponding to capital gains.

In the case of transfer of property under any title, including by merger of legal persons or incorporation of property increasing the capital of individual persons or contributions to legal persons to be formed or already formed, the amount of the transfer is made on the basis of the book value.

If such transfer is made for a value greater than the book value, the excess is subject to the tax as capital income from revaluation of assets, and for depreciation or amortization to be applicable on the new value, payment of said tax must be evidenced.

In the merger of legal persons, the limit for depreciation or amortization is the undepreciated balance of the property.

To determine the annual amortization quota in cases of forestry exploitations, the following shall be considered:

1.The unit cost determined on the basis of the total estimated production.

For such purpose, the total cost incurred in the exploitation, except for the value of the land and the other property of the depreciable fixed assets, plus the amount paid for the concession or assignment, as applicable, is divided by the number of units technically calculated to be extracted.

2.In each annual taxable assessment period, the unit cost determined pursuant to numeral 1 above is multiplied by the total units actually obtained from the exploitation. The resulting amount constitutes the annual amortization quota, which may be deducted as of the first fiscal year in which extraction begins.

For purposes of the register and accounting control of amortizations, taxpayers shall maintain a separate current account for each exploitation area. Such separate register and accounting control must allow amortizations to be deducted from the income generated by each exploitation cycle of each area.

Exploration expenses in mining activities are deductible in five (5) annual, successive and equal installments, starting from the annual settlement period in which exploitation begins.

The acquisition cost of intangible assets actually incurred, such as copyright and related rights, trademarks, advertising expressions or signs, trade names, emblems, geographical indications and appellations of origin, patents, industrial designs, drawings or utility models, plans, supplies of secret formulas or processes, privileges or franchises, rights in computer programs and their licenses, information relating to industrial, commercial or scientific knowledge or experience, personal rights susceptible to assignment, such as image rights, names, nicknames and artistic names, and other similar intangible assets, shall be deducted by the straight-line amortization method, over a period of not less than five (5) years.

The cost of goodwill actually incurred shall be amortized by the straight-line method over a minimum period of ten (10) years, in annual, successive and equal installments.

Taxpayers who carry out construction activities or work on immovable property, whether their own or that of third parties, or similar activities, whose income-generating operations comprise more than one tax period, must establish their taxable income for the corresponding period, during the construction phase, by applying any of the following methods:

1.Allocate as gross income for the period, the total value of the sale documented through contracts for promise of sale or deeds of sale in the case of immovable property, or the invoice in the case of civil works or constructions. From such gross income, the amount of costs and expenses actually incurred in the period must be deducted, determined as follows:

a)Costs shall be determined as follows during the development phase, when the work is on owned immovable property:

i.Acquisition cost of the immovable property, including the amount of the revaluation when the corresponding tax has been paid.

ii. The total value of costs and expenses for construction according to the work schedule, such value is incorporated into the acquisition cost of the immovable property.

iii. The total value of the integrated immovable property pursuant to the preceding numeral is divided by the number of square meters of construction or units.

iv. The resulting quotient from the preceding numeral constitutes the cost of sale per square meter sold or per unit.

b)Costs shall be determined as follows during the development phase when the work is on immovable property owned by third parties:

i.The total value of estimated costs and expenses for construction.

ii. The total value pursuant to the preceding numeral is divided by the number of square meters of construction or units.

iii. The resulting quotient from the preceding numeral constitutes the cost of sale per square meter sold or per unit.

2.Allocate as gross income the total amount received in the period (actually collected). From such income the cost must be deducted as determined in subparagraphs (a) and (b) of numeral 1, as applicable, applying the proportional part to the percentage of gross income corresponding to the amount received, and the expenses actually incurred.

In any method chosen, upon completion of construction of the work, the taxpayer must make the pertinent adjustment, with respect to the true result of sales and the final cost of construction and therefore, shall retain the supporting documentation, from this period, during the limitation period.

For cases in which the builder is the owner of the immovable property, the taxable income for the tax periods following that of completion of construction shall be determined as follows:

a)The total costs and expenses incurred in construction are added.

b)Such total is incorporated into the value of the immovable property, including that of the revaluation when the respective tax has been paid.

c)The total value of the integrated immovable property pursuant to the preceding numeral is divided by the number of square meters of construction.

d)The resulting quotient from the preceding numeral constitutes the cost of sale per square meter sold.

In the case of works performed in two (2) tax periods, but whose total duration does not exceed twelve (12) months, the result may be declared in the tax period in which the work is completed.

The chosen method must be applied to all works and jobs performed by the taxpayer, including the construction of civil works and public works in general and may only be changed with prior authorization from the Tax Administration and shall be effective for the tax period immediately following that in which the change is authorized.

In any method chosen by the taxpayer, in addition to the supporting documentation established in Article 40, the taxpayer shall send, through the means established by the Tax Administration, together with the annual return, the work schedule at the start of a project. In the final tax period of such project, the taxpayer shall send, through the means established by the Tax Administration, together with the corresponding annual return, the final integration of the project costs and expenses.

The profit obtained from the sale of subdivided land, with or without development, is considered income from lucrative activities and not capital gain. Profit is constituted by the difference between the sale value of the land and its cost. Said cost is formed by the acquisition cost under any title of the land, plus the improvements or works added up to the date of completion of the subdivision or development.

Income from subdivisions must be declared under the cash-basis method.

Costs are determined as follows during the development phase:

1.The total costs and expenses in the subdivision or development are added together in accordance with the project schedule.

2.Said total is added to the acquisition value of the real property, including that of the revaluation when the respective tax has been paid.

3.The total value of the integrated real property pursuant to the preceding paragraph is divided by the number of square meters of total saleable area of the land.

4.The quotient resulting from the preceding paragraph constitutes the cost of sale per square meter sold.

The profit for settlement periods subsequent to that of completion of the development or subdivision is determined by the difference between the sale value of the land and its final cost, which is established as follows:

a)The total costs and expenses incurred in the subdivision or development are added together.

b)Said total is added to the acquisition value of the real property including that of the revaluation when the respective tax has been paid.

c)The total value of the integrated real property pursuant to the preceding paragraph is divided by the number of square meters of total saleable area of the land.

d)The quotient resulting from the preceding paragraph constitutes the cost of sale per square meter sold.

Upon completion of the development or subdivision, the taxpayer must make the pertinent adjustment with respect to the true result of the sales and of the final cost of the development or subdivision and, therefore, shall retain the supporting documentation, from this period, during the limitation period.

The value of areas conveyed free of charge, intended for streets, parks, school areas, sports areas, green areas, recreation centers and forest reserves, is considered incorporated into the cost of the saleable area and, consequently, its deduction may not be made separately for such reason, even if said areas have been transferred to the corresponding municipality or to another state entity.

In any method chosen by the taxpayer, in addition to the supporting documentation established in Article 40, the taxpayer shall submit, through the means established by the Tax Administration, together with the annual return, the work schedule upon starting a project. In the final settlement period of said project, the taxpayer shall submit, through the means established by the Tax Administration, together with the corresponding annual return, the final integration of the costs and expenses of the project.

Developers of multiple-unit real estate projects established under co-ownership, condominium or other similar regimes may establish civil or commercial entities, with or without shares, that provide services to the owners, such as maintenance, water or conservation of common areas, among others. The amount of the subscription, allocation or transfer of the shares or participations of such entities to the final purchasers of the immovable properties of the real estate project, whether carried out by the developer or a third party, may not exceed thirty percent (30%) of the total income of the real estate project, which shall be established in the start-up phase of the real estate project by the developer with the work schedule upon initiating the real estate project, in which the initial income projection is included, which must be sent or filed together with the corresponding annual sworn declaration.

The definitive determination of said percentage shall be made in the liquidation phase of the project, with the developer having to make the pertinent adjustment as to the total amount of income derived from the total sales of the immovable properties of the project and from the total amount represented by the shares or participations transferred to the final purchasers in such sales.

When in the final liquidation it is determined that the income from the allocation or transfer of shares or participations to the final purchasers of the project exceeds the related percentage, such excess shall be considered and declared as taxable income by the developer of the real estate project in the corresponding annual definitive liquidation period.

In the cases provided for in this article, the amount of cost and expense deductions may not exceed the value resulting from applying to the total thereof the percentage represented by the income from the sales of units within the total income of the project, in both cases in accordance with the accumulated integration of income and expenses that must be filed attached to the annual sworn declaration of the tax in each annual tax period, by the means that the Tax Administration makes available to him.

In this sense, the total income of the project is constituted by the sum of the income from the sales of the immovable properties thereof and the amount represented by the shares or participations transferred to the final purchasers of said immovable properties.

The transfer of such shares to the final purchasers of the units of the real estate project shall in no case be subject to the Income Tax on Capital Gains nor to the Income Tax on Lucrative Activities established in this Book, as applicable. However, the excess resulting from subtracting the amount representing 30% of the total income of the project, as established in this article, from the total amount represented by the shares or participations allocated or transferred to the final purchasers of the units of the real estate project must be declared by the developer of the project as taxable income of the annual period in which the final liquidation of the project is carried out.

Taxpayers registered under this regime shall apply to the determined tax base the tax rate of twenty-five percent (25%).

The annual definitive settlement period under this regime begins on the first (1) of January and ends on the thirty-first (31) of December of each year and must coincide with the taxpayer's accounting year.

The Tax Administration, at their request, may authorize special annual definitive settlement periods, which begin and conclude on the dates on which the commencement and the cessation of the activity occur, respectively.

Taxpayers subject to the Income Tax on Profits from Lucrative Activities must make quarterly payments. To determine the amount of the quarterly payment, the taxpayer may opt for one of the following formulas:

1.To carry out partial accounting closings or a preliminary settlement of their activities upon expiry of each quarter, to determine the taxable income; or,

2.On the basis of an estimated taxable income of eight percent (8%) of the total gross income obtained from activities taxed under this regime in the respective quarter, excluding exempt income. Taxpayers described in the fifth paragraph of Article 21 bis are excluded from this provision and shall apply fifteen percent (15%) as presumed income.

Once any of the options established in the preceding numerals has been selected, it must be used in the corresponding annual final settlement period. A change of option must be notified to the Tax Administration in the month of December and shall take effect as from the first quarterly payment corresponding to the immediately following annual period.

Payment of the quarterly tax is made by means of sworn declaration and shall be remitted within the month following the end of the corresponding quarter. Payments made quarterly shall be credited against the Income Tax under this regime in said annual settlement period. Taxpayers subject to quarterly payments who use the partial accounting closings option must retain the financial statements corresponding to each quarter for purposes of audit of each quarter separately.

Payment of the tax corresponding to the fourth quarter shall be made together with the annual final settlement declaration.

*There is no basis for the provisional suspension of Article 38, contained in File Number 293-2013 of 17-04-2013

Taxpayers who obtain income in any amount must file with the Tax Administration, within the first three (3) months of the calendar year, the determination of the income obtained during the previous year, by means of an annual sworn declaration.

Taxpayers who obtain partially or totally exempt income are also obligated to file the sworn declaration, or when exceptionally they have not carried out lucrative activities during the annual final settlement period.

The final settlement of the tax shall be carried out with the filing of the annual sworn declaration.

Taxpayers must have the following available to the Tax Administration:

1.Those obligated to keep complete accounting, the balance sheet, income statement, cash flow statement and production cost statement, when applicable.

2.Taxpayers qualified by law as withholding agents for the Value Added Tax and special taxpayers, must submit to the Tax Administration, by the means it provides, attached to the annual sworn declaration, the financial statements duly audited by an independent Public Accountant and Auditor, with their respective opinion and report, signed and sealed by the professional who issued it.

3.Taxpayers not obligated to keep complete accounting, shall provide detailed information on their income, costs and deductible expenses during the settlement period.

4.In all cases, the proofs of payment of the tax.

The valuation of the stock of goods at the close of the annual settlement period must be established consistently with one of the following methods:

1.Cost of production.

2.First in, first out (FIFO).

3.Weighted average.

4.Historical price of the good.

For livestock activity, the methods indicated above may be used and, in addition, the estimated cost or fixed price method.

Taxpayers may request the Tax Administration to authorize another valuation method different from the foregoing, when they demonstrate that none of the indicated methods is suitable for them.

Upon adopting one of these valuation methods, it may not be varied without prior authorization from the Tax Administration and in this case the pertinent adjustments must be made, in accordance with the procedures provided by the regulation, pursuant to the technical accounting standards.

To address price fluctuations, market contingencies or contingencies of any other kind, the use of general reserves is not permitted.

Taxpayers shall comply with the following:

1.Include in the invoices they issue for their taxed activities the phrase "subject to quarterly payments".

2.Make the applicable withholdings in accordance with the provisions of the other titles of this book.

3.Prepare inventories as of December thirty-one (31) of each year and record them in the corresponding book, reporting to the Tax Administration through the means it makes available, in the months of January and July of each year, the inventory on hand as of June thirty (30) and December thirty-one (31) of each year.

4.Maintain complete accounting in accordance with the Commercial Code, where applicable, and this book.

Taxpayers who register under the Optional Simplified Regime on Income from Lucrative Activities must determine their taxable income by deducting exempt income from their gross income.

The tax rates of this regime applicable to the taxable income calculated in accordance with the preceding article shall be the following:

Range of monthly taxable income Fixed amount Tax rate

Q.0.01 to Q.30,000.00 Q.0.00 5% on the taxable income

Q.30,000.01 onwards Q.1,500.00 7% on the excess over Q.30,000.00

Under this regime, the settlement period is monthly.

Taxpayers registered under this regime assess and pay the tax by means of withholdings made by those who make the payment or credit to account for the acquisition of goods or services.

Taxpayers registered under this regime who wish to make all payments directly to the Tax Administration shall request the respective authorization from the Superintendency of Tax Administration, which shall be decided within a time limit of not more than fifteen (15) days. The Superintendency of Tax Administration may authorize those cases of taxpayers who, as of the date of their request, are current in compliance with their formal tax obligations, have no coercive economic proceedings initiated by the Tax Administration, and meet the criteria established by the Board of Directors of the Tax Administration.

Taxpayers authorized by the Tax Administration to make payments directly shall indicate on the invoice that they pay the tax directly to the Tax Administration, identifying the respective authorization; in such case no withholding shall be made.

A taxpayer carrying out profit-making activities with persons who do not keep accounting records or who, due to the amount or for another reason, have not made withholding from such taxpayer, or who, even having made withholdings, such withholdings were less than what legally corresponds, shall file the return and make direct payment for the balance not withheld, determining the tax in accordance with Article 44 of this Law, subtracting the withholdings made.

The following shall act as withholding agents for the income taxed under this section:

1.Persons who keep complete accounting in accordance with the provisions of this Book, the Commercial Code and other laws.

2.State bodies and their decentralized, autonomous entities, the municipalities and their enterprises.

3.Associations, foundations, political parties, trade unions, churches, schools, universities, cooperatives, professional colleges and other entities.

4.Trusts, contracts in participation, co-ownerships, communities of property, irregular companies, de facto companies, fiduciary commissions, management of business affairs, undivided hereditary estates, branches, agencies or permanent establishments of foreign enterprises or persons operating in the country and the other productive or economic units that hold patrimony and generate income subject to tax.

Withholding agents must withhold as Income Tax the corresponding amount based on the invoiced amount excluding the Value Added Tax, as follows: five percent (5%) on the amount of up to thirty thousand quetzales (Q.30,000.00) and seven percent (7%) on the amount exceeding thirty thousand quetzales (Q.30,000.00). The withholding agent shall issue the respective withholding certificate bearing the date of the invoice and shall deliver it to the taxpayer no later than within the first five (05) days of the immediately following month.

When services are provided to them or they purchase goods for a value of less than two thousand five hundred quetzales (Q.2,500.00), excluding the Value Added Tax, withholding agents are not obligated to make the withholding, even though the invoice issued to them indicates that it is subject to withholding. Nor shall they make withholdings with respect to taxpayers authorized by the Tax Administration to make payments directly and those who are under the regime on profits from lucrative activities.

The withholdings that withholding agents must make from the taxpayers referred to in this Title must be remitted to the Tax Administration within the time limit of the first ten (10) days of the month following the month in which the withholding certificate was issued, by means of the sworn declaration form made available for such purpose by the Tax Administration, together with an annex indicating the full first and last names of each of the taxpayers resident in the country or with a permanent establishment, Tax Identification Number, the value of what was actually credited or paid and the amount of the withholding.

Taxpayers registered under this regime shall file a monthly sworn declaration in which they shall describe the total amount of income obtained during the immediately preceding month, the amount of exempt income, the amount of withholdings applied to them and the tax payable derived from the latter, within the time limit of the first ten (10) days of the month following that in which they issued the respective invoices. For these purposes, the taxpayer shall use the form and means established by the Tax Administration.

Taxpayers registered under this regime shall state on their sales invoices or invoices for the provision of services whether they are subject to withholding or whether they pay directly to the Tax Administration; in the latter case, they shall identify the respective authorization.

In the first three (03) months of each year, taxpayers registered under this regime must file an annual informative sworn declaration corresponding to the income obtained in the immediately preceding calendar year.

To register for one of the regimes established in this title on income from lucrative activities, taxpayers must indicate to the Tax Administration the regime they will apply; otherwise the Tax Administration will register them under the Regime on Profits from Lucrative Activities.

Taxpayers may change regime upon prior notice to the Tax Administration, provided that they submit it during the month prior to the start of the validity of the new annual settlement period. The change of regime applies as of the first (1) of January of the following year. Whoever fails to comply with said notice shall be subject to the corresponding sanction under the Tax Code.

Taxpayers who are required to keep complete accounting in accordance with the Commercial Code and this Book shall attribute the results obtained in each settlement period in accordance with the accrual accounting system, both for income and for costs and expenses, except in special cases authorized by the Tax Administration. The other taxpayers may choose between the aforementioned accounting system and the cash-basis system, but once one of them has been selected, it may only be changed with the express prior authorization of the Tax Administration.

Accrual accounting system means the accounting system consisting of recording income or costs and expenses at the moment when they arise as rights or obligations and not when they become effective.

Legal persons whose supervision and inspection are under the charge of the Superintendency of Banks shall attribute the results obtained in each settlement period in accordance with the provisions on the accounting system issued by the monetary authorities.

Taxpayers required to keep accounting in accordance with the Commercial Code must comply with the obligations contained in said Code, with respect to keeping books, records and financial statements.

Taxpayers must prepare and have available to the Tax Administration the balance sheet, the income statement, the cash flow statement and the production cost statement, the latter when cost accounting is kept; all as of the closing date of each annual definitive settlement period. Such financial statements must be duly audited when applicable.

The investors described in Article 2 of the Foreign Capital Investment Promotion Law shall maintain the constituted legal position and shall retain the rights protected under the decision issued by the Ministry of Economy for such purpose and for the time limits established therein, which may not exceed ten (10) years for each project.

The investments covered under the decision of the Ministry of Economy shall be made in property, plant and equipment, which are productive or have the potential to be so and during a time limit in accordance with Article 5 of the Foreign Capital Investment Promotion Law, computable from the notification of the decision approving the project by the Ministry of Economy and to be initiated during the first year of notification thereof.

The interested party shall submit the decision to the Superintendency of Tax Administration, together with the documents supporting the investment, for the corresponding annotation. The requirements and forms of the investments addressed in this article shall be established by means of a specific regulation.

The Ministry of Economy, within the scope of its powers, shall guarantee the progress of the project, of the investment and of compliance with obligations.

Failure to timely carry out the investment planned to be carried out in the first year scheduled for execution of the investment project, or non-compliance with substantial or formal tax obligations, as well as with project progress, shall give rise to early termination of the treatment, without liability of the State and the taxpayer shall be subject to the regulations in force as of the suspension of its affiliation.

The passive subjects described in accordance with Article 2 of the Foreign Capital Investment Promotion Law may not enjoy the treatment established in this article.

For tax purposes, the principle of free competition is understood to mean the price or amount for a particular transaction that independent parties would have agreed upon under free-competition conditions in transactions comparable to those carried out.

The Tax Administration may verify whether transactions carried out between related parties have been valued in accordance with the provisions of the preceding article and make the corresponding adjustments when the valuation agreed between the parties results in lower taxation in the country or a deferral of taxation; regarding the adjustments made, it shall grant a hearing to the obligor within the procedure for determination of the tax obligation by the Administration, established in the Tax Code.

A. For purposes of this Book, two persons are considered related parties, as between a person resident in Guatemala and a person resident abroad, when any of the following cases occur:

1.When one of them directs or controls the other, or holds, directly or indirectly, at least twenty-five percent (25%) of its capital stock or voting rights, whether in the domestic entity or in the foreign entity.

2.When five or fewer persons direct or control both related parties, or hold in the aggregate, directly or indirectly, at least twenty-five percent (25%) participation in the capital stock or voting rights of both persons.

3.When dealing with legal persons, whether the one resident in Guatemala or the foreign one, which belong to the same business group. In particular, for these purposes two companies are considered to form part of the same business group if one of them is a partner or participant in the other and is in relation to the latter in any of the following situations:

a.It holds the majority of the voting rights.

b.It has the power to appoint or remove the members of the management body or, through its legal representative, decisively intervenes in the other entity.

c.It can dispose, by virtue of agreements entered into with other partners, of the majority of the voting rights.

d.It has appointed, exclusively with its votes, the majority of the members of the management body.

e.The majority of the members of the management body of the dominated legal person are representatives, managers or members of the management body of the dominant company or of another company dominated by the latter.

When two companies each form part of a business group with respect to a third company in accordance with the provisions of this numeral, all such companies comprise a business group.

For purposes of paragraph A., a natural person is also considered to hold a participation in the capital stock or voting rights when ownership of the participation or shares, directly or indirectly, corresponds to the spouse or person joined by kinship relationship, by consanguinity up to the fourth degree or by affinity up to the second degree.

The term person in this section refers to natural persons, legal persons and other organizations with or without legal personality.

B. The following are also considered related parties:

1.A person resident in Guatemala and an exclusive distributor or agent thereof resident abroad.

2.An exclusive distributor or agent resident in Guatemala of an entity resident abroad and the latter.

3.A person resident in Guatemala and its permanent establishments abroad.

4.A permanent establishment located in Guatemala and its head office resident abroad, another permanent establishment thereof or a person related thereto.

The scope of application of the valuation rules for transactions between related parties extends to any transaction carried out between a person resident in Guatemala and a person resident abroad, and that has effects on the determination of the tax base for the period in which the transaction is carried out and in subsequent periods.

For the analysis of comparable operations, the following procedure shall be followed:

1.For purposes of determining the price or amount that independent parties would have agreed in comparable operations, under free competition conditions, referred to in this chapter, the conditions of the operations between related persons shall be compared with other comparable operations carried out between independent parties.

2.Two or more operations are comparable when there are no significant economic differences between them affecting the price of the property or service or the profit margin of the operation or, where such differences exist, they can be eliminated through reasonable adjustments.

3.To determine whether two or more operations are comparable, the following factors shall be taken into account to the extent they are economically relevant:

a.The specific characteristics of the property or services that are the subject of the operation.

b.The functions assumed by the parties in relation to the operations subject to analysis, identifying the risks assumed and weighing, where applicable, the assets used.

c.The contractual terms from which, where applicable, the operations derive, taking into account the responsibilities, risks and benefits assumed by each contracting party.

d.The characteristics of the markets or other economic factors that may affect the operations.

e.The business strategies, such as penetration, permanence or market expansion policies, as well as any other circumstance that may be relevant in each case.

4.The analysis of comparable operations as so determined and the information on the comparable operations constitute the factors that, in accordance with the provisions of this article, determine the most appropriate method in each case.

5.If the taxpayer carries out several operations of an identical nature and under the same circumstances, the taxpayer may group them to perform the analysis of comparable operations provided that such grouping respects the principle of free competition. Two or more different operations may also be grouped when they are so closely linked to each other or are so continuous that they cannot be adequately valued independently.

1.For the determination of the value of transactions under arm's length conditions, any of the following methods shall apply:

a.Comparable uncontrolled price method: consists of valuing the price of the good or service in a transaction between related persons by reference to the price of the identical good or service or of one with similar characteristics in a transaction between independent persons under comparable circumstances, making, if necessary, the necessary adjustments to obtain equivalence, considering the particularities of the transaction.

b.Cost plus method: consists of increasing the acquisition value or production cost of a good or service by the customary margin obtained by the taxpayer in similar transactions with independent persons or entities or, failing that, by the margin that independent persons or entities apply to comparable transactions, making, if necessary, the necessary adjustments to obtain equivalence considering the particularities of the transaction. The customary margin shall be deemed to be the percentage represented by gross profit relative to cost of sales.

c.Resale price method: consists of subtracting from the sale price of a good or service the margin applied by the reseller itself in similar transactions with independent persons or entities or, failing that, the margin that independent persons or entities apply to comparable transactions, making, if necessary, the necessary adjustments to obtain equivalence considering the particularities of the transaction. The customary margin shall be deemed to be the percentage represented by gross profit relative to net sales.

2.When, due to the complexity of the transactions or the lack of information, any of the methods indicated in the subparagraphs of numeral 1 cannot be adequately applied, any of the methods described below shall apply:

a.Profit split method: consists of allocating, to each related party jointly carrying out one or more transactions, the share of the common result derived from such transaction or transactions. This allocation shall be made on the basis of a criterion that adequately reflects the conditions that independent persons or entities would have agreed under similar circumstances. For the selection of the most appropriate criterion, assets, sales, expenses, specific costs or any other variable that adequately reflects the provisions of this paragraph may be considered.

Where it is possible to allocate, in accordance with any of the foregoing methods, a minimum profit to each party based on the functions performed, the profit split method shall apply on the basis of the joint residual profit resulting once this first allocation has been made. The residual profit shall be allocated having regard to a criterion that adequately reflects the conditions that independent persons would have agreed under similar circumstances, taking into account the provisions of the preceding paragraph.

b.Transactional net margin method: consists of attributing to the transactions carried out with a related person the net margin that the taxpayer or, failing that, third parties would have obtained in identical or similar transactions carried out between independent parties, making, where necessary, the necessary adjustments to obtain equivalence and to consider the particularities of the transactions. The net margin shall be calculated on costs, sales or whichever variable proves most appropriate based on the characteristics of the transactions. The most appropriate method that respects the arm's length principle shall apply, in accordance with the provisions of this article and the specific circumstances of the case.

In the cases indicated below, transactions between related parties are valued as follows:

In the case of imports, the price of the goods may not be higher than its price based on international parameter as of the date of purchase at the place of origin.

In the case of exports, the price of the exported goods is calculated in accordance with the investigation of international prices, according to the contracting modality chosen by the parties as of the date of the last day of shipment, except for evidence that the transaction was closed on another date. For these purposes, the only admitted date is that of the contract, but only if it has been reported to the Tax Administration within the time limit of three (3) days after its signing.

When in an export transaction between related parties an intermediary intervenes who has no real and effective presence in his country of residence or does not engage principally in this intermediation activity, it is considered that he is related to the exporter within the meaning of the article, definition of related parties of this Book.

The prices of these transactions are expressed in quetzales at the exchange rate in effect on the day of the settlement of the foreign currency in a bank of the system; otherwise it shall be determined at the reference exchange rate in effect on the day or date of shipment or of the contract.

The Tax Administration is empowered to recharacterize the transaction in accordance with its true nature, in accordance with the procedures of the Tax Code, if the economic reality of the transaction differs from its legal form, or the arrangements relating to a transaction, assessed as a whole, differ substantially from those that independent persons would have adopted and the structure of that transaction, as presented, prevents the Tax Administration from determining the appropriate transfer price.

1.Expenses for services received from a related person, such as management, legal or accounting, financial, technical or any other services, are valued in accordance with the criteria established in this Book. The deduction of such expenses is conditioned upon compliance with the requirements established in this Book.

2.When services are rendered jointly in favor of several related persons and provided that individualization of the service received or quantification of the elements determining its remuneration is possible, the charge is allocated directly to the recipient. If individualization of the service received or quantification of the elements determining its remuneration were not possible, the total consideration is distributed among the beneficiaries in accordance with allocation rules that satisfy reasonableness criteria. This criterion is deemed satisfied when the allocation method is based on a variable that takes into account the nature of the service, the circumstances in which it is rendered as well as the benefits obtained or capable of being obtained by the recipients.

1.Taxpayers may request the Tax Administration to determine the valuation of transactions between related persons prior to the carrying out thereof. Such request shall be accompanied by a proposal of the taxpayer based on the value that independent parties would have agreed in similar transactions.

2.The Tax Administration shall have the power to conduct and decide this procedure.

3.The Tax Administration may approve the proposal, deny it or modify it with the acceptance of the taxpayer.

4.This agreement takes effect with respect to transactions carried out after the date on which it is approved and is valid during the tax periods specified in the agreement itself, which may not exceed the four (4) periods following that of the date on which it is approved. Likewise, it may be determined that its effects extend to transactions of the current period.

5.The proposal referred to in this article may be deemed denied once the time limit of thirty (30) days has elapsed from the request, without prejudice to the obligation to decide the procedure in accordance with numeral 3.

When the International Information Exchange Accords or agreements so permit and upon prior decision of the Tax Administrations with interest in the case, verifications of tax bases within the scope of this legislation may be carried out simultaneously and in a coordinated manner, but each administration maintaining due independence in its jurisdiction over related parties having commercial or financial ties between them.

The following are general principles of information and documentation:

1.Taxpayers must have, at the time of filing the sworn declaration of the Income Tax, the information and sufficient analysis to demonstrate and justify the correct determination of prices, amounts of consideration or profit margins in their transactions with related parties, in accordance with the provisions of this book.

2.The taxpayer must provide the documentation required from him by the Tax Administration, within the time limit of twenty (20) days from receipt of the requirement. Such obligation is established without prejudice to the power of the Tax Administration to request such additional information as it considers necessary for the exercise of its functions.

3.The information or documentation referred to in the following two articles of this book must include the information that the taxpayer has used to determine the valuation of transactions between related parties and shall be composed of:

a.That relating to the taxpayer.

b.That relating to the business group to which the taxpayer belongs.

The information and documentation relating to the group referred to in numeral 3 of the preceding article is required in all cases in which the related parties carry out economic activities among themselves and comprises:

1.General description of the organizational, legal and operational structure of the group, as well as any relevant change therein, including the identification of the persons who, within the group, carry out transactions affecting those of the taxpayer.

2.General description of the nature and amount of the transactions between the companies of the group, insofar as they affect the transactions in which the taxpayer participates.

3.General description of the functions and risks of the companies of the group, insofar as they are affected by the transactions carried out by the taxpayer, including any change with respect to the previous period.

4.A list of the ownership of patents, trademarks, trade names and other intangible assets insofar as they affect the taxpayer and its related transactions, as well as the detail of the amount of the consideration derived from their use.

5.A description of the group's transfer pricing policy if there is one or, failing that, the description of the method or methods used in the different transactions.

6.List of the contracts for the provision of services between related parties and any others to which the taxpayer is a party or, not being a party, directly affect it.

7.List of advance pricing agreements affecting the members of the group in relation to the transactions described.

8.Group report or equivalent annual report.

The specific documentation of the taxpayer is required in all cases referred to in the article "Definition of Related Parties" of this Book and comprises:

1.Complete identification of the taxpayer and of the different related parties thereof.

2.Detailed description of the nature, characteristics and amount of its transactions with related parties, indicating the valuation method or methods used. In the case of services, a description thereof shall be included with identification of the different services, their nature, the benefit or profit they may produce for the taxpayer, the agreed valuation method and its quantification, as well as, where applicable, the form of apportionment among the parties.

3.Detailed analysis of comparable transactions in accordance with the article "Analysis of Comparable Transactions" of this Book.

4.Reasons for the choice of the method or methods as well as its procedure for application and the specification of the value or range of values that the taxpayer has used to determine the price or amount of its transactions.

5.The documentation referred to in this article may be submitted jointly for all related parties, in accordance with the provisions of the preceding article, provided that the degree of detail required by this article is observed. *Its force was suspended and it regained it on 1 January 2015, by Article 27 of Decree of the Congress Number 19-2013 of 21-12-2013