Legal market overview in Central America

The last few years have been challenging for Central America, as its small, open economies, which are particularly reliant on the tourism, agricultural and light manufacturing sectors, have been highly vulnerable to recent global crises, as well as being affected by severe storms and political instability within the region.

However, the region has continued to see economic growth as it recovers from the impact of the Covid-19 pandemic (and Guatemala, Honduras and Nicaragua in particular have also benefitted from record-high levels of remittances from the US). This trend is expected to continue - albeit at a slightly lower rate - in 2023, but high international food and energy prices and tighter financing conditions still pose problems.

Costa Rica, the most politically stable country in Central America, a global leader on the climate, and the newest member of the OECD, continues to receive the highest levels of foreign direct investment and has seen healthy activity in the financial and M&A markets, but the picture for other Central American jurisdictions has been more mixed. In Guatemala, El Salvador and, particularly, Nicaragua, the repressive political climate has created uncertainty among overseas investors, while in Honduras sweeping reforms introduced by the new left-wing government (especially to the free trade zone and energy regimes) have caused some foreign companies to pause projects in the country.

Law firms across the region have, however, remained active in the corporate and M&A sphere. Throughout Central America, there has been a significant trend towards regional expansion, leading firms to routinely advise large local groups on acquiring assets in other jurisdictions to strengthen their operations.

Another major development in the market has been the increase in ‘nearshoring’ as the deterioration of the relationship between the US and China has led more US companies to move their operations to Central America (which has the added attraction of closer geographic proximity and similar time zones). Meanwhile, Nicaragua and Honduras have recently established closer ties to China – leaving Guatemala and Belize as the only Central American countries to maintain diplomatic relations with Taiwan – in the hopes of opening up more investment opportunities.

On the finance front, fintech remains a booming industry in Central America, particularly since El Salvador became the first country in the world to recognise Bitcoin as a legal tender in September 2021 (which led us to introduce a new Fintech sub-ranking to the Banking and Finance category for El Salvador).

In the dispute resolution sphere, although firms are still predominantly active in domestic litigation (and out-of-court settlements), they are increasingly engaged in arbitration, as clients are more and more likely to include arbitration clauses in their commercial contracts, driven by significant delays in the court systems of the region, as well as concerns about corruption.

In the energy space, Central America’s wealth of natural resources has led to the development of numerous traditional and renewable energy projects; recently, there has been a notable trend towards solar and wind power projects to reduce the region’s dependence on hydropower. However, this has also resulted in significant conflicts between local indigenous and environmental activists and international mining and energy companies due to concerns about environmental damage and the failure to consult the local populations, particularly in Guatemala and Honduras; in many cases, this has led to protracted litigation.

There has also been an increase in the development of transport infrastructure projects in the region, most notably in Guatemala and El Salvador, where public-private partnerships were approved for the first time in 2021 to allow for the upgrade of Guatemala’s Escuintla-Puerto Quetzal toll highway and the expansion of the cargo terminal of El Salvador’s international airport.

In the IP sphere, firms in Costa Rica and El Salvador – both jurisdictions with more robust frameworks for the protection of IP rights – have seen an uptick in work on the registration of trade marks for digital assets, stemming from growing interest in Bitcoin from international companies, as well as an increase in matters relating to AI, NFTs and the metaverse. On the other hand, in Guatemala, Honduras and Nicaragua, slow registration processes and a lack of updated legislation means IP firms have less opportunity to handle matters in emerging areas such as sports and the internet.

There has also been increased activity in the field of labour law, as companies have restarted mergers and restructuring processes put on hold as a result of pandemic restrictions, leading to a rise in the need for advice on employee transfers and relocations, as well as dismissals where companies affected by the pandemic have resolved to downsize.

As companies have had to keep up with greater demand for flexible working post-lockdowns, firms have also advised on the introduction of new policies on hybrid and remote working. In Costa Rica, there is likely to be an increase in instructions from employers relating to newly passed laws on the right to disconnect and paternity leave, while in Honduras firms have been called upon following the repeal of the law allowing hourly employment.

Turning to tax, law firms’ workloads vary considerably depending on the approach of the tax authorities in different Central American jurisdictions. While in Guatemala, the tax administration has taken a more targeted approach in recent years, meaning an increase in advice on tax planning and compliance, in El Salvador the increasingly aggressive tax revenue collection (as a means of reducing the large national debt) has led to greater demand for representation in tax audits and administrative tax litigation.

Please note: Submissions are not required for this section; these regional rankings are determined by the research team based upon firms’ standing and performance across the region’s distinct jurisdictions.

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