Taxes in El Salvador

Here is an overview of the tax structure of El Salvador:

Currency: US dollar (USD); Bitcoin (BTC)
Foreign exchange control: There are no foreign exchange controls.
Accounting principles/financial statements: IFRS applies. Financial statements must be filed annually.
Principal business entities: These are the stock corporation, limited liability company, and branch of a foreign entity.

Corporate taxation = 30% (standard rate)/25%
Branch tax rate = 30%
Capital gains tax rate = 10%

Residence: A corporation is resident in El Salvador if it is incorporated in the country.

Basis: El Salvador operates a territorial tax system, under which income tax generally is levied only on Salvadoran-source income. Branches are taxed in the same way as subsidiaries.

Taxable income: Corporate income tax is levied on Salvadoran-source profits derived by companies from their profit-making activities. Taxable income is determined by deducting from gross income all necessary costs and expenses, and other specific deductions established by the law. Certain income is exempt.

Rate: The standard corporate income tax rate is 30%. A 25% rate applies to taxpayers that have taxable income less than or equal to USD 150,000.

Surtax: There is no surtax.

Alternative minimum tax: There is no alternative minimum tax.

Taxation of dividends: Dividends are included in taxable income.

Losses: Ordinary losses may not be carried forward or back. Capital losses may be carried forward for five years to offset capital gains.

Foreign tax relief: There is no foreign tax relief; El Salvador operates a territorial tax system, under which income tax is levied only on Salvadoran-source income, with some exceptions, (e.g., income from foreign securities).

Participation exemption: There is no participation exemption.

Holding company regime: There is no holding company regime.

Incentives: Incentives and exemptions are available under the International Services Law and for companies operating in free trade zones.

Compliance for corporations

Tax year: The tax year is the calendar year.

Consolidated returns: Consolidated returns are not permitted; each company must file its own return.

Filing and payment: The annual income tax return must be filed by 30 April of the year following the tax year.

Penalties: Penalties are imposed for late filing, failure to file, under-reporting, or tax avoidance/evasion.

Rulings: A taxpayer may request a binding ruling on the tax consequences of a transaction in which it has a direct interest.

Individual taxation

Rates
USD 0.01 to USD 4,064 0%

USD 4,064.01 to USD 9,142.86 10% of taxable income above USD 4,064 + a fixed amount of USD 212.12

USD 9,142.87 to USD 22,857.14 20% of taxable income above USD 9,142.86 + a fixed amount of USD 720

Over USD 22,857.14 30% of taxable income above USD 22,857.14 + a fixed amount of USD 3,462.86

Capital gains tax rate 10%

Residence: Individuals are considered resident in El Salvador if they remain in the country for an uninterrupted period of at least 200 days within a year or are legal residents.

Basis: Resident individuals are subject to income tax on their Salvadoran-source income.

Nonresident individuals generally are subject to withholding tax on Salvadoran-source income.

Taxable income: Tax generally is imposed on all income arising from Salvadoran sources, including income derived from employment, capital, goods, and services.

Deductions and allowances: Resident individuals may deduct social security contributions and certain school and medical expenses. A personal allowance is granted to certain individuals.

Compliance for individuals

Tax year: The tax year is the calendar year.

Filing status: Each taxpayer is required to file a return; joint returns are not permitted.

Filing and payment: The tax return must be filed online by 30 April of the year following the tax year. Tax on employment income is withheld at source by the employer.

Penalties: Penalties are imposed for late filing, failure to file, under-reporting, or tax avoidance/evasion. Penalties for noncompliance with formal requirements also are imposed.

Rulings: Taxpayers may request a binding ruling on the tax consequences of a transaction in which they have a direct interest.

Withholding tax and misc rates

Dividends: Dividends paid to a resident company or individual are subject to a 5% withholding tax.

Dividends paid to a nonresident company or individual generally are subject to a 5% withholding tax, in addition to the tax applicable to the distributed profits at the corporate level.

The rate may increase to 25% if the recipient is located in a tax haven or a jurisdiction with a preferential tax regime (i.e., a low or no-tax regime). The El Salvador tax authorities
issue an annual guide to help taxpayers determine if a territory/country has a preferential tax regime.

Interest: A 10% income tax withholding applies to interest received by resident and nonresident individuals and companies on bank deposits. Interest paid between resident companies is not subject to withholding tax.

Interest paid to a nonresident company or individual (other than interest on bank deposits) generally is subject to a 20% withholding tax. The rate may be increased to 25% if the recipient is located in a tax haven or benefits from a preferential tax regime. Withholding tax at a reduced rate of 10% applies if the recipient of the interest is a financial institution supervised in its country of origin and registered with the Central Reserve Bank of El Salvador.

Royalties: Royalties paid to a resident company are not subject to withholding tax. A 10% withholding tax applies to royalties paid to a resident individual.

Royalties paid to a nonresident generally are subject to a 20% withholding tax. The rate may be increased to 25% if the recipient is located in a tax haven or benefits from a preferential tax regime. A 5% rate is applicable for payments to nonresidents for transfers of intangible assets or for the use of, or the right to use, rights over tangible and intangible assets related to cinematographic movies, videotapes, phonographic discs, radio serials, television serials, serials and strips reproduced by any means, video and track records, and television programs transmitted by cable, satellite, or other similar media.

Fees for technical services: Fees for technical services paid to a resident company are not subject to withholding tax. A 10% withholding tax applies to fees for technical services paid to a resident individual. Fees for technical services paid to a nonresident are subject to a 20% withholding tax. The rate may be increased to 25% if the recipient is located in a tax haven or benefits from a preferential tax regime.

Branch remittance tax: There is no branch remittance tax.

Anti-avoidance rules

Transfer pricing: The transfer pricing rules require that prices in transactions between Salvadoran taxpayers and related parties or persons resident in tax havens or jurisdictions with preferential tax regimes be equal to the market price in similar transactions with third parties. The tax authorities are entitled to adjust the price of such transactions if they are not carried out on arm’s length terms.

Transfer pricing documentation is required. Taxpayers must submit, by 31 March of each year, a report listing transactions carried out with related parties or persons resident in tax havens or jurisdictions with a preferential tax regime.

Interest deduction limitations: Intercompany debt cannot exceed three times the accounting capital of a domestic taxpayer.

Controlled foreign companies: There are no CFC rules.

Hybrids: There are no anti-hybrid rules.

Economic substance requirements: In general, for an expense to be deductible for income tax purposes, corporate taxpayers must document the following:
• That the expense is useful and necessary for the operation of the company;
• That any services for which a deduction is claimed actually were provided;
• That there are contracts and invoices to support the transaction (as applicable);
• That the transaction is recorded in the company’s accounting books;
• That any necessary withholding has been properly carried out; and
• Where the transaction is carried out between related parties, that it was carried out at fair market value.

Disclosure requirements: Documentation is required for transfer pricing purposes (see “Transfer pricing,” above).

Exit tax: There are no exit tax rules.

General anti-avoidance rule: There is no general anti-avoidance rule.

Value added tax

Taxable transactions: VAT applies to the transfer of movable goods, the provision of services, and imports.
Rates: The standard VAT rate is 13%.
Registration: Registration for VAT purposes generally is required upon incorporation.
Filing and payment: Entities are required to file monthly returns within the first 10 business days after the end of each tax period.

Other taxes on corporations and individuals:

Unless otherwise stated, the taxes in this section apply to both companies and individuals and are imposed at the national level.

Social security contributions: The employer must contribute to social security at a rate of 7.5% of the total monthly remuneration. The employer also contributes to the private pension funds of its employees at a rate of 7.75% of the employee’s monthly compensation.

Employees contribute to social security at a rate of 3% of their total monthly remuneration. They also contribute to their private pension funds at a rate of 7.25% of their monthly compensation.

Payroll tax: There is no payroll tax.

Capital duty: There is no capital duty.

Real property tax: There is no real property tax.

Transfer tax: The transfer of real estate is subject to a tax of 3% on the value of the real property, to the extent that the value exceeds approximately USD 28,571.

Stamp duty: There is no stamp duty.

Net wealth/worth tax: There is no net wealth or net worth tax.

Inheritance/estate tax: There is no inheritance or estate tax.

Other: A municipal tax is levied on the assets located in each municipality, with the rate varying by jurisdiction.

Tax treaties: El Salvador has one tax treaty, with Spain

From Deloitte