V. MARKETING U.S. PRODUCTS AND SERVICES A. DISTRIBUTION AND SALES CHANNELS The Honduran agent/distributor law includes a provision for penalties for wrongful termination that discourages exclusive distribution agreements. Representatives and distributors tend to carry rather broad lines on a non-exclusive basis, and the number of full service local distributors that stock large inventories of parts and equipment is limited. In order to reduce costs, or because local representatives are not sufficiently aggressive, many local buyers make direct contacts with U.S. suppliers at the factory or warehouse level. Store owners often buy goods in small lots from stores, export brokers, or wholesalers in the U.S., particularly in Miami, New Orleans, and Houston, the principal gateway cities. In certain sectors such as automobiles, computers, and electric power generation equipment, U.S. companies are represented by local firms who also represent other foreign competitors. In other cases, U.S. companies are not represented locally. As a result, U.S. products are not aggressively marketed or supported by local representatives and lose opportunities in a market that is traditionally receptive to U.S. products. B. USE OF AGENTS/DISTRIBUTORS; FINDING A PARTNER While there is a law of agents, representatives and distributors of foreign firms in Honduras, foreigners exporting to Honduras are not required to sell through an agent or distributor who has been registered in the country for a specified period of time. However, exporters of pharmaceuticals, agrochemicals, and animal feeds and medicines, are required to register their products before they can be sold in the Honduran marketplace. Pharmaceutical-related products must be registered with the Ministry of Public Health and agrochemicals; and animal feeds and medicines must be registered with the Ministry of Natural Resources. Only Honduran nationals or Honduran legal entities registered with a local chamber of commerce and the Ministry of Economy and Commerce may represent foreign firms. The principal-agent relationship is governed by the civil and commercial codes. Principals may not terminate the contract without just cause unless they fairly compensate the agent for damages suffered. The U.S. Department of Commerce offers several services that are available to U.S. firms interested in finding a partner or distributor for their product or service. Commerce desk officers the U.S. and Foreign Commercial Service (US&FCS) offer free and intensive, one-on-one counseling. The US&FCS also offers low- cost, highly effective programs to help U.S. businesses establish or expand their markets. The Commercial Section of the Embassy can locate interested, qualified representatives in potential markets in Honduras through its Agent/Distributor Service (ADS). A U.S. firm may check the background and reputation of a prospective partner through the World Trader Data Report (WTDR) service. Scheduling appointments, arranging translators and making reservations are available through the Section's Gold Key Service (GKS). ADSs, WTDRs, and other valuable services are available for a nominal fee through the District Offices of the US&FCS located in 68 U.S. cities. C. FRANCHISING In recent years the number of U.S. franchises operating in Honduras has grown rapidly. The Commercial Section has received an increasing number of requests about U.S. franchises. This is an area well worth exploring by interested U.S. firms. Regional stability and the growth in investors confidence has contributed directly to the increase in the availability of U.S. franchises. On May 29, 1992, the Honduran Congress passed a new investment law that is increasingly responsive to foreign investors needs. Among other things, the new investment law provides for national treatment for most foreign investment guaranteeing the right to foreigners to freely establish, acquire, and dispose of interest in business enterprises within constitutional bounds. D. DIRECT MARKETING Telecommunications and mail delivery infrastructures are not well developed for this type of marketing. However, there is a limited amount of direct marketing by television. Direct marketing in Honduras has been developed moderately through door- to-door sales (e.g. Avon, Amway and Books). E. JOINT VENTURES/LICENSING The most promising opportunities are offered to joint venture operations. The 1992 investment law provides that, with few exceptions, there are no limits on the percentage of capital which can be owned by a foreigner. Thus, foreign invested firms may be wholly owned or joint ventures. Corporations organized under Honduran law can take the following forms: Corporation (Sociedad Anonima or Sociedad Anonima de Capital Variable). Corporations can buy back their own stock under a limited partnership (Sociedad de Responsabilidad Limitada). The Commercial Section regularly reports to the Department of Commerce Honduran firms interested in pursuing joint ventures. In recent months, there has been an increase in firms interested in joint venture partners. The licensing process usually takes place between the interested parties need for help from the Commercial Section. The use of licenses of U.S. firms is legally established in a contract signed by both parties and is governed by the Honduran Commercial Code. The constitution of Honduras requires that all foreign investment must complement and not substitute for national investment. In certain types of industries, majority Honduran ownership is required (see section VII. Investment Climate, Openness to Foreign Investment). There are also limits on the amount of land a single corporation may own. Foreigners are also barred from ownership of small businesses with a requirement of less than 150,000 lempiras (US$18,000). Licensing of foreigners to practice law, medicine, engineering and other professions is tightly regulated by national professional organizations. Except for foreign currency earned by companies operating in free-trade zones and industrial parks, Honduran law requires that all foreign exchange earnings on exports from Honduras be repatriated. However, the progressive liberalization of Honduras' foreign exchange regime now makes it easier for companies operating in the country to remit dividends and royalties, return capital overseas, and make payments on foreign debt. Foreign exchange authorizations by the Central Bank have been eliminated, and foreign debt authorizations now take less than 48 hours to obtain. Remittances of dividends and royalties must still be approved by the Central Bank, but the approval process now only takes around one month. Although foreign exchange regulations have liberalized considerably, businesses should still be aware of foreign exchange shortages as the main constraint to repatriating in-country earnings. Taxation is an important issue to consider when investing in Honduras. The corporate tax rate is 15 percent on the first LPS. 100,000 of taxable income and 35 percent on any income above that amount. Income tax on amounts between LPS 500,000 and LPS. 1 million is assessed a 10 percent surcharge while amounts over LPS. 1 million are charged a 15 percent surcharge. Except for firms operating in the industrial parks or under the Temporary Import Regime, income tax is payable on income derived from operations within Honduras. Income on profits obtained by foreign companies through operations of branches, subsidiaries, or legal representatives in Honduras is taxed at 35 percent. A 15 percent tax is assessed on corporate dividends and royalties on patents and trademarks. Capital gains are taxed as normal income while capital losses can be used only to offset capital gains in the same period. Personal income tax is applied on a progressive scale ranging from zero to 40 percent. The highest rate is applied to those earning more than LPS. 1 million. Nonresident aliens are only required to pay for income derived from within Honduras. Interest, dividends, rents, and royalties are subject to a five, 15, 30, and 35 percent tax, respectively. A tax surcharge is also levied at the same rate as the corporate income tax. There is a sales tax of seven percent on most goods, five percent for new cars, and 10 percent for alcohol, cigarettes and tobacco products. A one percent tax is applied on the FOB value of all articles exported. Honduras also collects excise, property, and municipal taxes. Exports of coffee, bananas, seafood, and beef are under a special tax structure. Apart from the Tax Information Exchange Agreement (TIEA), signed between the United States Government and the Government of Honduras in 1991, there are no tax treaties between the U.S. and Honduras. F. STEPS TO ESTABLISHING AN OFFICE The U.S. Embassy recommends that all U.S. businessmen interested in establishing an office in Honduras first contact the nearest District Office of the U.S. Department of Commerce. These offices are located in 72 cities throughout the U.S. It is also highly suggested that all U.S. businesspersons make contact with either the Commercial Section or the U.S. Department of Commerce Honduras desk officer in Washington, DC for counseling and advice. In addition to the general information provided by commercial officers and specialists, the Commercial Section at the American embassy in Tegucigalpa maintains a number of lists and directories of Honduran trade contacts and professionals, including business lawyers. Locating and securing a suitable local partner is one of the most important steps in establishing a base of operations in Honduras. When doing so, U.S. business representatives should keep in mind that contracts and agreements are binding and fall under the jurisdiction of local laws. To establish a local corporation, interested parties should secure the services of an attorney. Attorneys will guide investors through the procedures of incorporation, registration, and local taxation. In addition, there are several other notarial acts that must be carried out before establishing a business that requires the services of an attorney. In recent years the time to establish an office in Honduras has been reduced considerably. With the exception of a few strategic areas that require special permission from the government, an offie can be set up within a few days. The Honduran government has a special One-Stop-Shop in the Ministry of Economy to deal with investors. Through this deparment an office can be set up in a matter of hours. (For further information see Section VII, Openness to Foreign Investment.) G. SELLING FACTORS/TECHNIQUES When selling in Honduras U.S. exporters must take into account that, for marketing purposes, the country is divided into two regions; the North Coast, including San Pedro Sula, the country's commercial and industrial capital; and the Central region, where Tegucigalpa, the political capital, is located. Large importers and distributors in Honduras usually have offices in both cities to take advantage of market opportunities. In other instances, large international firms have granted exclusive distributor rights, i.e., one exclusive distributor in San Pedro Sula and another in Tegucigalpa. These types of arrangements are acceptable under current Honduran laws. Because of high interest rates, importers/distributors, as well as Government of Honduras agencies, often have problems in securing the funds to purchase imports. U.S. exporters that offer attractive financing terms on sales to Honduran traders have the best chances of gaining market share. This is particularly true for large-scale projects. International firms, however, must exercise due caution when granting credit to Honduran trading partners. As in most Latin American countries, a good personal relationship with prospective customers is basic to penetrating the market. While it may take a little longer than usual to consummate a business relationship, the investment in time usually pays off in long-lasting and mutually profitable alliances. Honduran businessmen seem to seriously take the local expression that "deals are consummated at the restaurant table and signed at the office." H. ADVERTISING AND TRADE PROMOTION - LISTING OF MAJOR NEWSPAPERS AND BUSINESS JOURNALS Tegucigalpa-Based Newspapers Name Language/Dist. Telephone Fax El Heraldo Spanish/Daily (504) 36-6000 36-6284 La Tribuna Spanish/Daily (504) 33-1283 33-1188 El Periodico Spanish/Daily (504) 34-3086 34-3090 Honduras This Week English/Weekly (504) 31-5821 32-2300 San Pedro Sula Based Newspapers Name Language/Dist. Telephone Fax La Prensa Spanish/Daily (504) 53-3101 53-4020 El Tiempo Spanish/Daily (504) 53-3388 53-4590 El Nuevo Dia Spanish/Daily (504) 38-0445 36-5781 I. PRICING PRODUCTS There are no price controls, except on certain basic food items and cement. The price of gasoline, diesel and liquid propane gas is also controlled and subsidized by the government. There is a seven (7) percent sales tax on most goods. J. SALES SERVICE/CUSTOMER SUPPORT Firms that sell equipment, machines or electric appliances should provide effective consumer support. The availability of adequate service and support frequently makes the difference in decisions on purchases, especially by the government. K. SELLING TO THE GOVERNMENT To participate in public tenders, foreign firms are required to act through a local agent. By law, local agency firms must be at least 51 percent Honduran owned. Unless a government procurement is classified as an emergency, all purchases by government ministries or autonomous institutions over LPS. 200,000 must be made through a public bid. The government publishes a tender in the major newspapers of Honduras and sends written notices to the embassies. Bid evaluations cover cost, delivery time, reputation of the firm, technical support, performance in previous contracts and specific aspects related to each particular bid. Interested U.S. businesses can access many of these bids through the Trade Opportunity Program (TOP) and the National Trade Data Bank (NTDB), both products of the U.S. Department of Commerce. L. PROTECTING YOUR PRODUCT FROM INTELLECTUAL PROPERTY RIGHTS (IPR) INFRINGEMENT Although Honduras was pended in the 1992 and 1993 Generalized System of Preferences (GSP) review under the IPR criteria, the Government of Honduras has taken recent actions to substantially improve the IPR climate. Traditionally, well known trademarks were routinely infringed, audio and video tape bootlegging was common, patents were difficult to enforce and the protection afforded them under local law did not approach international standards. As part of the GSP review process, Honduras has committed to implement the comprehensive IPR legislation passed in 1993. Also, the Honduran government was placed on the "Special Mention" category of the Special 301 review. To be protected under Honduran law, patents and trademarks must be registered with the Ministry of Economy and Commerce. The life of a patent ranges from 10 to 20 years depending on the importance of the invention. Trademarks are valid up to 10 years from the registration date. "Notorious marks" are protected under the Pan-American Convention (1917) of which Honduras is a party. Illegal registration of a notorious mark, however, must be contested in court if the original holder is to exercise its rights. (Also see section VII.G.) M. NEED FOR A LOCAL ATTORNEY The selection of a competent and reliable local attorney is an important first step to doing business in Honduras. The advice and counsel of a local attorney are essential to opening a business, preparing contracts and understanding the legal system. The Commercial Section maintains a list of attorneys that have experience assisting U.S. firms. The list is regularly updated and screened by several U.S. Government agencies.