Country Name: El Salvador
Currency: United States Dollar (USD)
Primary Tax Authority: Dirección General de Impuestos Internos (DGII) – General Directorate of Internal Taxes
Key Legislation:
- Income Tax Law (Ley de Impuesto sobre la Renta)
- Value Added Tax Law (Ley del Impuesto a la Transferencia de Bienes Muebles y a la Prestación de Servicios – IVA)
- Corporate Tax Law
- Tax Code (Código Tributario)
Fiscal Authority Allocation
Centralized Fiscal System:
El Salvador operates a centralized tax system, with the General Directorate of Internal Taxes (DGII) responsible for administering and collecting taxes, including corporate income tax (CIT), personal income tax (PIT), and value-added tax (VAT). Local governments collect property taxes and minor municipal fees, but most tax revenues are collected centrally.
Corporate Income Tax (CIT)
Standard Rate: 30%
El Salvador levies a flat corporate income tax rate of 30% on the net taxable income of resident companies. Non-resident companies are taxed on their El Salvador-sourced income only.
Corporate Forms and Taxation:
- Corporation (Sociedad Anónima – SA): The most common corporate form for larger businesses, subject to the 30% CIT rate.
- Limited Liability Company (Sociedad de Responsabilidad Limitada – SRL): Commonly used by smaller businesses, subject to the same 30% CIT rate.
- Branches of Foreign Companies: Taxed at the same 30% CIT rate on El Salvador-sourced income.
Exemptions and Incentives:
- Free Trade Zones (Zonas Francas): Companies operating in free trade zones are exempt from CIT, VAT, and import duties, designed to promote exports and foreign investment.
- Tourism and Renewable Energy Incentives: Businesses in the tourism and renewable energy sectors can qualify for tax exemptions or reductions.
Goods and Services Tax (GST) / Value-Added Tax (VAT)
Standard Rate: 13%
El Salvador applies a VAT rate of 13% on most goods and services, including imports. VAT is levied on the sale of goods, the provision of services, and the importation of goods into the country.
Exemptions:
Basic food items, educational services, healthcare services, and certain financial services are exempt from VAT. Exports are zero-rated, allowing businesses to recover VAT on inputs related to their export activities.
Personal Income Tax (PIT)
Progressive Rates:
El Salvador applies progressive personal income tax rates to both residents and non-residents earning El Salvador-sourced income:
- Up to USD 4,064: 0%
- USD 4,065 to USD 9,142: 10%
- USD 9,143 to USD 22,857: 20%
- Above USD 22,858: 30%
Dividends:
Dividends paid to residents and non-residents are subject to a 5% withholding tax.
Additional Mandatory Contributions
Social Security Contributions:
Employers and employees must contribute to El Salvador’s social security system, which provides pensions, healthcare, and unemployment benefits.
- Employer Contribution: 7.5% of gross salary.
- Employee Contribution: 3% of gross salary.
Withholding Taxes
- Dividends: 5%
- Interest: 10%
- Royalties: 20%
Withholding tax rates may be reduced under El Salvador’s double taxation agreements (DTAs).
Transfer Pricing Rules
El Salvador follows OECD transfer pricing guidelines. Related-party transactions must adhere to the arm’s-length principle, and companies must maintain documentation to support the pricing of cross-border related-party transactions.
Special Tax Regimes
- Free Trade Zones (Zonas Francas): Companies operating in free trade zones benefit from exemptions on CIT, VAT, and import/export duties for a specified period. These zones aim to promote export-oriented businesses and foreign investment.
- Tourism Incentives: Companies in the tourism sector can benefit from tax holidays and other tax incentives, including exemptions from VAT and import duties on tourism-related goods and services.
- Renewable Energy: El Salvador offers tax exemptions for companies investing in renewable energy projects, including wind, solar, and hydroelectric power.
Other Taxes
- Real Estate Tax: Property taxes are collected by local governments and generally range from 0.15% to 0.35% of the property’s assessed value.
- Capital Gains Tax: Capital gains are taxed at a flat rate of 10%, except for gains from the sale of shares in publicly traded companies, which are exempt.
- Excise Duties: Excise taxes apply to specific products, such as alcohol, tobacco, and fuel.
Double Taxation Agreements (DTAs)
El Salvador has signed double taxation agreements with countries such as Spain and Colombia. These treaties help reduce withholding taxes on dividends, interest, and royalties and prevent double taxation on cross-border income.
Local Taxes
Local governments in El Salvador collect property taxes and certain municipal fees. However, income tax, VAT, and other major taxes are administered by the General Directorate of Internal Taxes (DGII).
Compliance and Reporting
Annual Filing:
Corporate tax returns must be filed by April 30th of the following year. Personal income tax returns are due by the same date. The tax year in El Salvador follows the calendar year.
Penalties for Late Filing:
Penalties for non-compliance or late filing include interest and fines. Interest on unpaid taxes is generally charged at 1.5% per month, with additional penalties depending on the severity of the delay.
Recent Developments
Tax Reform:
El Salvador has implemented various tax reforms to increase tax compliance and streamline tax administration. Recent reforms include enhanced digital tax filing systems and increased efforts to combat tax evasion.
Digital Services Tax:
El Salvador is considering implementing a digital services tax, which would apply to foreign digital service providers, such as streaming platforms and e-commerce businesses, offering services to Salvadoran consumers.
Bitcoin Legalization:
El Salvador became the first country in the world to adopt Bitcoin as legal tender in 2021. Businesses are required to accept Bitcoin as a form of payment, and the government has introduced a Bitcoin trust to manage the conversion of Bitcoin to USD for businesses. This move has introduced a unique aspect to the country’s tax and financial systems, with questions about how Bitcoin transactions are to be taxed and regulated.
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