Complex structures and aggressive tax planning behind the Nicaragua Canal

Added 18 Nov 2016
A study – available only in Spanish – titled “Aggressive Tax Planning or Option Economy?: the case of the Hong Kong Nicaragua Canal Development Group,” analyses the ‘international tax rationale’ behind this megaproject that involves the creation of a structure with 16 companies located in jurisdictions such as Hong Kong, the Netherlands and the Cayman Islands. The conclusion is that the use of this multi-layered-structure seeks to avoid taxes.

After being put on hold for decades, in 2013 the Nicaraguan government approved the Law 840 that awarded the licence for the construction of the canal, a free trade zone, two harbours and an airport to the Hong Kong Nicaragua Canal Development Investment Co. Limited – linked to the Cayman Island based group HKND Group

The Law 840, and its Licence Framework Agreement, provide different tax exemptions on gains (dividends, royalties, etc.), funding (indistinct of whether it is through debt, equity or shares) and intangibles. It implies that both inflows to Nicaragua and outflows from Nicaragua to offshore Holdings are going to be tax exempt. This is why the author refers to the Interoceanic Canal as a tax haven. 

Beyond the tax exemptions that the Nicaraguan government is giving to the HKND Group through its Nicaraguan subsidiary, the interesting part of this study is the analysis of the rest of the group’s tax structure in order to understand whether its creation is due to a tax avoidance strategy or other reasons. 

In order to understand the structure and before going into more detail, the author provides a useful general overview (Orange=Nicaragua; Blue= Netherlands; Green= Cayman Islands; Purple= Hong Kong; Red= China):

In the case of Nicaragua, the company in the structure – Empresa Desarrolladora de Grandes Infraestructuras SA – is affected by the tax exemptions mentioned above.

In the Netherlands, seven companies have been created (in blue) and all of them are holdings, either in the form of Besloten Vennootschap or Cooperarief. From the structure it is apparent that the HKND Group seems to be using the mechanism famously known as the ‘Dutch sandwich’, which is used in order to reduce companies’ tax base. In this case between Nicaragua (low tax regime), Netherlands (holding) and the Cayman Islands (a ‘zero corporate tax’ regime).

In the Cayman Islands, HKND Group Holdings Limited is the company that will receive benefits of the canal through the Dutch holding. 

Hong Kong hosts the main company of the structure HK Nicaragua Canal Development Investment Co. Limited. Hong Kong has an autonomous tax system from China and applies the territoriality principle and therefore it does not tax dividends and capital gains from abroad.

Finally there is a company in China, Beijing Dayan New River Investment Management Ltd., whose owner is Mr. Wang Jing – a Chinese billionaire. It could seem that taxes would be paid in China, but the reality is that all the previous layers in the structure can prevent this from happening.

After the analysis of the whole structure, the author concludes:

  • The evidence could indicate that the HKND Group’s structure uses aggressive tax planning mechanisms.
  • If the income ended up in Beijing, it would be taxed in that jurisdiction and not in Nicaragua. However, if benefits are kept in Hong Kong they will benefit from the territoriality system and thus they will not be taxed.
  • Except for tax avoidance, there doesn’t seems to be any obvious explanation for the use of this structure and the jurisdictions where companies are located.

The report it shows how companies are structuring themselves not only through the Cayman Islands but also from special regimes that, in this case, an EU country is offering. In parallel, the report provides an example of the phenomenon known as the ‘race to the bottom’, in this case with Nicaragua offering different tax exemptions in order to attract investment. Finally, the example of the Interoceanic Canal demonstrates the importance of deep analysis of company structures and their tax implications.

tags: tax justice,