El Salvador Individual Tax Guide

El Salvador

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Please direct all inquiries regarding El Salvador to the persons listed below in the San José, Costa Rica, office and the San Salvador, El Salvador, office of EY. All engagements are coordinated by the San José office with the support of the San Salvador office.

San Salvador GMT -6

EY

Torre Futura

World Trade Center 11-05 San Salvador El Salvador

Executive and immigration contacts

Lisa María Gattulli +506 2208-9861 (resident in San José, Costa Rica) Fax: +506 2208-9999 Email: lisa.gattulli@cr.ey.com

Rafael Sayagués +506 2208-9880 (resident in San José, Costa Rica) Fax: +506 2208-9999 Email: rafael.sayagues@cr.ey.com

Héctor Mancía +503 2248-7001 Fax: +503 2248-7070 Email: hector.mancia@cr.ey.com

Immigration contacts

Fernando Vargas +506 2208-9800 (resident in San José, Fax: +506 2208-9999 Costa Rica) Email: fernando.vargas.winiker@cr.ey.com Monica Machuca +503 2248-7001 Fax: +503 2248-7070 Email: monica.machuca@sv.ey.com

A. Income tax

Who is liable. Resident individuals are subject to tax on El Salvador-source income as well as foreign-source investment income (interest from cash deposits in financial institutions abroad, and gains on the sale of foreign securities, financial instruments and derivative contracts). Income tax paid abroad with respect to foreign-source income may be credited against the Salvadoran tax liability for such income according to specific rules.

Nonresident individuals, regardless of their nationality, are taxed only on their El Salvador-source income, which includes income derived from the following:

• Assets located in El Salvador

• Activities carried out or capital invested in El Salvador

• Services rendered or used in El Salvador, even if received or paid for outside El Salvador

Individuals are considered tax resident if they stay in El Salvador for more than 200 consecutive days during a tax year. An indi vidual staying 200 consecutive days or less within a tax year is considered a nonresident for tax purposes. Individuals that have been deemed residents for more than one calendar year may

remain outside the country for up to 165 days without losing their resident status. In addition, individuals whose principal place of trade or business is in El Salvador are also considered residents.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Tax is imposed on salary, remuneration, fees and other compensation received for services rendered or used in El Salvador.

Self-employment and business income. Income derived from selfemployment services rendered or used in El Salvador or from a trade or business is subject to tax in El Salvador.

Investment income. Individuals are subject to tax on interest income, premiums and other yields, derived from savings and time deposits with banks and financial institutions domiciled in El Salvador. Tax is imposed at a flat rate of 10% if the monthly average deposits equal or exceed USD25,000.

Income derived from deposits in financial institutions abroad that is earned by individuals domiciled in El Salvador is subject to a flat tax rate of 10% if the income was not subject to tax in the country of origin. If the tax rate or the tax paid in the country of origin is less than the Salvadoran tax rate, the taxpayer is required to pay the difference between the tax rate or tax paid abroad and the Salvadoran tax rate or tax due.

Resident legal entities that pay or register dividends or profits with respect to resident or nonresident individuals must withhold income tax at a flat 5% rate, which is considered as a definitive and final tax. Taxation occurs on actual or constructive receipt of the dividend.

If the company distributing the dividends does not withhold the 5% tax, the individual must report the income and pay the cor responding tax through the filing of an annual income tax return.

If the nonresident individual is domiciled or resident in a taxhaven jurisdiction for Salvadoran tax purposes, the applicable dividend withholding tax rate is 25%.

Loans granted by resident legal entities to their partners, share holders, associates, trustees, beneficiaries, and spouses or family within the fourth consanguinity degree and second affinity degree of the abovementioned individuals is subject to the flat 5% withholding tax on the total amount loaned (that is the prin cipal amount), unless the agreed interest rate is in accordance with or above market rates. In addition, if the term of the loan exceeds one year and if the repayment is in arrears for more than six quotas, a taxable cancellation of debt to the borrower is deemed to occur.

Dividends, interest, capital gains or any other benefits derived from investments in or sales of securities, financial instruments and derivative contracts by Salvadoran individuals domiciled in El Salvador are subject to tax at a flat rate of 10% if any of the following conditions are met:

• The issuing entity is a national entity or it is domiciled in El Salvador.

• The capital is invested or employed in El Salvador.

• The risk of the underlying asset is placed or located in El Salvador.

The above conditions are deemed to have been met if the tax payer is domiciled in El Salvador or is a domiciled establishment or branch for Salvadoran tax purposes.

Directors’ fees. Directors’ fees paid to resident and nonresident individuals who are not employees of the company are subject to withholding tax at a rate of 10% for resident individuals and 20% for nonresident individuals. This tax is a final tax for nonresident individuals. However, if the director is an employee, the fee is subject to progressive rates (see Rates).

Special rules for payments to tax-haven jurisdictions. A 25% final withholding tax is imposed on amounts paid to or through non-domiciled individuals or legal entities resident or domiciled in tax-haven jurisdictions if the payment has a tax effect in El Salvador (for example, it is regarded as a deductible expense for the payer). Exemptions apply in the following circumstances:

• The payments are made for the acquisition or transfer of tan gible assets.

• The tax-haven jurisdiction is a Central American country that has entered into a cooperation agreement with the Salvadoran tax and customs authorities.

• The tax-haven jurisdiction has entered into an information exchange agreement or double tax treaty with El Salvador.

• Reduced withholding tax rates apply in El Salvador to the pay ment (that is, for payments for international transportation ser vices, insurance and similar services, interest from loans and specific intangible assets and rights). Also, see Rates.

Capital gains. In general, capital gains are subject to a tax at a flat rate of 10%.

Deductions

Personal deductions and allowances. A deduction of USD1,600 is allowed for each employed individual with annual income that does not exceed USD9,100. Individuals with income exceeding USD9,100 may deduct up to USD800 for medical expenses and up to USD800 for education expenses, subject to confirmation by the tax authorities.

Business deductions. All costs and expenses that are necessary to generate taxable income or maintain its source are deductible if the following conditions are satisfied:

• They are not excessive or unreasonable.

• They pertain to the same fiscal year as the taxable income.

• They are supported by the required corresponding documentation.

• Applicable withholding taxes, if any, have been imposed.

Expenses related to the acquisition of movable goods and the ren dering of services in an amount equal to or exceeding USD7,604.25 are deductible for income tax purposes only if the payment is made by check, bank wire transfer, credit or debit card or if the transfer or the service is documented by a written contract or other documents regulated by civil or commercial law.

Payments for services rendered by nonresident individuals to resident individuals and domiciled entities are subject to withholding taxes that are imposed in the month of payment or in the month in which the payment is credited. If by 31 December, the payment for services rendered or used in El Salvador has not been made, the payer must remit the corresponding tax that would have been withheld from the payments in order to deduct the payments when calculating its annual taxable income.

Rates. Employment and self-employment income for resident individuals is taxable at the following rates.

Annual taxable income Tax rate

Up to USD4,064

Exempt

From USD4,064.01 to 10% on the excess over USD9,142.86 USD4,064 + USD212.12

From USD9,142.87 to 20% on the excess over USD22,857.14 USD9,142.86 + USD720

Over USD22,857.14 30% on the excess over USD22,857.14 + USD3,462.86

Nonresident individuals are subject to income tax from Salvadoran sources at a flat 30% rate.

Withholding tax is imposed on nonresidents at a rate of 20% on remuneration, pensions, commissions, directors’ fees and other similar items of compensation that are classified as El Salvadorsource income. In practice, this may be considered a definitive withholding tax.

If an individual receiving a payment is resident or domiciled in a tax-haven jurisdiction or if a payment is paid or credited through individuals or legal entities resident, domiciled or incorporated in tax-haven jurisdictions, a 25% withholding tax applies, subject to certain exemptions (see Payments to tax-haven jurisdictions).

Relief for losses. Losses may not be carried forward or back. However, capital losses derived from the sale of movable or immovable assets may be offset against future capital gains for up to five years, provided such losses have been reported to the tax authorities. Capital losses derived from the sale of securities or financial instruments issued abroad may be offset against future capital gains from the same assets for up to five years.

B. Estate and gift taxes

El Salvador does not impose separate estate or gift taxes. How ever, estates may be taxed as ordinary taxpayers if they derive income before the assets are distributed to the beneficiaries.

C. Social security

Social security contributions are levied monthly on salaries at a rate of 7.5% for employers and 3% for resident and nonresident employees, with a monthly salary ceiling of USD1,000. Death and pension funds are covered by private institutions, which are funded through monthly contributions levied on salaries at a monthly rate of 7.75% for employers and 7.25% for employees, with a monthly salary ceiling of USD6,523.20. The Pension Fund

Administration considers any compensation for services provided in El Salvador under an existing employment relationship to be taxable, regardless of the migratory status of the individual. For foreign individuals, the Pension Fund Administration has established a refund mechanism for such contributions, and a refund may be requested after the foreign individual leaves El Salvador. In principle, salary-in-kind is not subject to Pension Fund contributions because the Pension Fund Law states that only compensation received in cash by the employee for ordinary services rendered to the employer is subject to Pension Fund contributions.

In addition, employers with 10 or more employees are required to withhold a 1% contribution for the Salvadoran Institution for Professional Education (in Spanish, INSAFORP).

D. Tax filing and payment procedures

The normal tax year is the calendar year. Returns must be filed and any tax liabilities due must be paid within the first four months of the following tax year. Extensions are not available.

Employers are responsible for withholding income tax and social security contributions from employees’ salaries on a monthly basis. Employees must file annual income tax returns, which report their employment compensation and corresponding taxes withheld. However, employees are not required to file annual income tax returns if their annual earnings are less than USD60,000. However, they must file annual income tax returns if the income was not subject to withholding or if the withholding was not in accordance with the tax due based on the progressive tax rate table.

In June and December of each year, a half-year and end-of-year withholding recalculation is required. To determine withholding as of June and December, the employer must recalculate based on accumulated taxable wages at the end of each period.

In principle, nonresidents are required to file tax returns. However, if all El Salvador-source income was subject to with holding at source, the withholding tax is considered a final tax and the filing of a tax return is not required.

Individuals who are taxpayers in El Salvador are required to file a Personal Real Estate Statement, which is filed together with the annual income tax return. Taxpayers who satisfy any of the fol lowing conditions are exempt from the filing of a Personal Real Estate Statement:

• They have annual income equal to or less than 362 minimum monthly salaries (USD132,130) in a tax year.

• They own real estate in El Salvador with a fair market value equal to or less than 1,446 minimum monthly salaries (USD527,790).

• They do not own real estate in El Salvador.

E. Foreign tax relief and double tax treaties

In general, Salvadoran law does not provide relief for foreign taxes paid, except in case of taxes on foreign dividends, interest, capital gains or any other benefits derived from investments in or sales of securities, financial instruments and derivative

contracts, and interest from cash deposits in financial institu tions abroad (see Section A). El Salvador has entered into a tax treaty with Spain to avoid double taxation and prevent evasion of income tax and net worth tax.

F. Temporary visas

Depending on their country of citizenship, individuals may be required to apply for and obtain an entry visa before traveling to El Salvador. A Salvadoran consulate overseas grants the visa. Because the rules indicating the countries of citizenship of individuals who are required to obtain an entry visa before entering El Salvador and requirements for obtaining a visa often vary, it is necessary to check the entry visa requirements on a case-by-case basis.

G. Work permits

Foreigners must apply for a work permit to work in El Salvador, regardless of where the compensation is paid. The government of El Salvador grants work authorization to foreign employees, under the option of temporary resident. This is subject to certain rules that have to be checked on a case-by-case basis because these rules vary among employees and by country of citizenship. The application must be filed once the foreigner arrives in El Salvador.

The approximate time for obtaining a work permit after all docu ments are filed with the immigration authorities ranges from three months to four months. Work permits are valid for one year and are renewable for similar periods of time.

H. Residence permits

The government of El Salvador may grant residencies to foreign nationals who are interested in residing in El Salvador as foreign workers as well as to the dependents of foreign workers. Dependents must prove that they receive income from the foreign worker or that the foreign worker covers their living expenses. However, immigration requirements generally are amended fre quently in El Salvador, and applicable requirements may vary among workers. As a result, the rules should be checked on a case-by-case basis.

Foreigners may apply for local residency with the General Direc tion of Immigration and Foreigner Issues (Dirección General de Migración y Extranjería) if certain requirements are met. Resi dency is granted for a renewable one- to two-year period.

I. Family and personal considerations

Family members. El Salvador law does not grant an automatic work authorization to family members of a foreign worker. Fam ily members wanting to work must apply independently to obtain a work authorization.

Children of expatriates must have student visas or dependent visas to attend schools and/or universities in El Salvador. The rules should be checked on a case-by-case basis. After the chil dren become adults (turn 18 years old), they must apply sepa rately for a residency in El Salvador.

Marital property regime. If the two spouses do not establish one of the three patrimonial regimes contemplated in the Family Code of the Republic of El Salvador (Separation of Assets, Profit Sharing and Deferred Compensation), the regime of De ferred Compensation is automatically applied. Such regime is applied as the supplementary regime under which all assets ob tained by any means, except by donation, after the commence ment of the marriage are considered to be marital property.

Forced heirship. If an individual dies without leaving a will, the beneficiaries of his or her assets and patrimony according to the law are in the following order:

1: Descendants, parents and spouse

2: Grandparents and other ascendants and grandchildren

3: Brothers

4: Nephews

5: Uncles

6: Cousins

7: University of El Salvador and national hospitals

Amounts for the following are deducted, paid and/or removed from the mortuary estate before the estate is distributed to the beneficiaries:

Mortuary procedures

Debts

• Taxes

• Maintenance obligations of the deceased Driver’s permits. Foreigners entering El Salvador are authorized to drive vehicles with a current driver’s permit from their country, subject to the following:

• Reciprocity principle and provisions of international conven tions and treaties ratified by El Salvador

• The validity of the authorization under which the visitor remains in El Salvador

• Validation of the foreign driver’s permit issued by the country of origin

After the entrance visa has elapsed, driver’s permits can be ac quired from a private entity authorized by the government to issue the permits. When a foreigner obtains a migratory status that allows him or her to reside in El Salvador, he or she is re quired to obtain a local driver’s permit. This applies only if the temporary residency granted to the foreigner is for a term longer than four months.