El Salvador Corporate Tax Guide

El Salvador

San Salvador GMT -6

EY

Torre Futura

Complejo World Trade Center

87 Av. Norte y Calle El Mirador Nivel 11-5

San Salvador El Salvador

Principal Tax Contact

 Rafael Sayagués

+503 2248-7000

Fax: +503 2248-7070

+506 2208-9880 (resident in San José, New York: +1 (212) 773-4761 Costa Rica)

Costa Rica Mobile: +506 8830-5043

US Mobile: +1 (646) 283-3979

Efax: +1 (866) 366-7167

Email: rafael.sayagues@cr.ey.com

Business Tax Services

Lisa María Gattulli +506 2208-9861 (resident in San José, Mobile: +506 8844-6778 Costa Rica)

Email: lisa.gattulli@cr.ey.com

International Tax and Transaction Services – International Corporate Tax Advisory

Juan Carlos Chavarría +506 2208-9844 (resident in San José, Mobile: +506 8913-6686 Costa Rica)

International Mobile: +1 (239) 961-5947

Email: juan-carlos.chavarria@cr.ey.com Héctor Mancía +503 2248-7006

Mobile: +503 7797-8282

Email: hector.mancia@cr.ey.com

International Tax and Transaction Services – Transfer Pricing

Luis Eduardo Ocando B. +507 208-0144 (resident in Panama)

Panama Mobile: +507 6747-1221

US Mobile: +1 (305) 924-2115

Fax: +507 214-4300

Email: luis.ocando@pa.ey.com

Paul de Haan (resident in +506 2208-9800 San José, Costa Rica) Email: paul.dehaan@cr.ey.com

Business Tax Advisory

Juan Carlos Chavarría +506 2208-9844 (resident in San José, Mobile: +506 8913-6686 Costa Rica) International Mobile: +1 (239) 961-5947 Email: juan-carlos.chavarria@cr.ey.com

Tax Policy and Controversy

Rafael Sayagués

+506 2208-9880 (resident in San José, New York: +1 (212) 773-4761 Costa Rica)

Costa Rica Mobile: +506 8830-5043

US Mobile: +1 (646) 283-3979

Efax: +1 (866) 366-7167

Email: rafael.sayagues@cr.ey.com

Global Compliance and Reporting

Lisa María Gattulli

+506 2208-9861 (resident in San José, Mobile: +506 8844-6778 Costa Rica)

Email: lisa.gattulli@cr.ey.com

International Tax and Transaction Services – Transaction Tax Advisory

Antonio Ruiz

+506 2208-9822 (resident in San José, Mobile: +506 8890-9391 Costa Rica)

International Mobile: +1 (239) 298-6372

Email: antonio.ruiz@cr.ey.com

Rafael Sayagués

+506 2208-9880 (resident in San José, New York: +1 (212) 773-4761 Costa Rica)

Costa Rica Mobile: +506 8830-5043

US Mobile: +1 (646) 283-3979

Efax: +1 (866) 366-7167

Email: rafael.sayagues@cr.ey.com

People Advisory Services

Lisa María Gattulli

+506 2208-9861 (resident in San José, Mobile: +506 8844-6778 Costa Rica)

Email: lisa.gattulli@cr.ey.com

A. At a glance

Corporate Income Tax Rate (%) 25/30 (a)

Capital Gains Tax Rate (%) 10/30 (a)

Branch Tax Rate (%) 25/30 (a)

Withholding Tax (%)

Dividends 5/25 (b)

Interest Paid to Domiciled Companies 10 (c) Paid to Non-domiciled Companies and Individuals 10/20/25 (d)

Royalties from Know-how and Technical Services 20/25 (e) Video, Films and Similar Items 5 (f)

International Transportation Services 5 (g) Insurance Services 5 (h)

Income from Salvadoran Security Market Investments 3 (i)

Lottery Prizes and Other Prize Winnings Paid to Domiciled Companies and Individuals 15 Paid to Non-domiciled Companies and Individuals 25 Loans 5 (b)

Equity or capital decreases 5 (j)

Other Payments Made to Nonresidents 20/25 (d)

Net Operating Losses (Years)

Carryback 0

Carryforward 0 (k)

(a) For further details regarding the corporate income tax, see Section B. (b) For details, see Section B. (c) The withholding tax applies to interest received by individuals and companies on bank deposits. Interest paid between domiciled companies is not subject to withholding tax. (d) Withholding tax at a reduced 10% rate 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. If an interest payment is made to a non-domiciled entity that is not registered with the Central Reserve Bank of El Salvador and not domiciled in a tax-haven jurisdiction, a 20% withhold ing tax applies. If an interest payment is made to a non-domiciled entity that is not registered with the Central Reserve Bank of El Salvador and domiciled in a tax-haven jurisdiction, a 25% withholding tax applies. Amounts paid or credited to non-domiciled legal entities or individuals who are resident, domiciled or incorporated in tax-haven jurisdictions (or paid through legal entities resident, domiciled or incorporated in such jurisdictions) are subject to a 25% withholding tax. Exceptions apply to the following types of pay ments:

• Payments for acquisitions or transfers of tangible assets

• Payments to taxpayers in tax-haven jurisdictions located in Central America that have signed cooperation agreements with Salvadoran tax and customs authorities

• Payments to taxpayers in tax-haven jurisdictions that have signed with El Salvador information exchange agreements or double tax treaties

• Payments under circumstances in which reduced withholding tax rates apply If the recipient does not file an annual income tax return, the withholding tax is presumed to be a payment in full of the income tax on the interest income.

(e) The withholding tax is imposed on payments to foreign companies and indi viduals for services rendered or used in El Salvador, as well as on payments for the transfer of intangible assets. If the recipient does not file an annual income tax return, the withholding tax is presumed to be a final tax. Amounts paid or credited to non-domiciled legal entities or individuals who are resi dent, domiciled or incorporated in tax-haven jurisdictions (or paid through legal entities resident, domiciled or incorporated in such jurisdictions) are subject to a 25% withholding tax. Exceptions apply to the following types of payments:

• Payments for acquisitions or transfers of tangible assets

• Payments to taxpayers in tax-haven jurisdictions located in Central America that have signed cooperation agreements with Salvadoran tax and customs authorities

• Payments to taxpayers in tax-haven jurisdictions that have signed with El Salvador information exchange agreements or double tax treaties

• Payments under circumstances in which reduced withholding tax rates apply

The 20% rate applies to royalties from know-how and technical services paid to non-domiciled entities that are not domiciled in tax-haven jurisdictions.

(f) The withholding tax is imposed on payments to non-domiciled persons or entities for transfers of intangible assets or for the use, or grant of use, of rights over tangible and intangible assets related to cinematographic movies, video tapes, 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. If the recipient does not file an annual income tax return, the withholding tax is presumed to be a final tax.

(g) The withholding tax is imposed on payments to foreign companies and indi viduals for international transportation services. If the recipient does not file an annual income tax return, the withholding tax is presumed to be a final tax.

(h) The withholding tax is imposed on payments to non-domiciled insurance and reinsurance companies and reinsurance brokers, authorized by the Superintendent of the Financial System. If the recipient does not file an annual income tax return, the withholding tax is presumed to be a final tax.

(i) A withholding tax rate of 3% applies to income derived from capital invested in securities, or transactions in securities, shares and other investments in the Salvadoran securities market (primary or secondary).

(j) A withholding tax rate of 5% applies to amounts paid or credited in capital or equity reductions, in the portion corresponding to capitalization or reinvest ment of profits. For this purpose, the amounts paid or credited by the de crease of equity or capital corresponds to previously capitalized amounts.

(k) Capital losses can be carried forward to offset capital gains for a period of five years, provided that the losses have been reported in previously filed tax returns.

B. Taxes on corporate income and gains

Corporate income tax. Resident corporations are subject to tax on Salvadoran-source income and on certain types of foreign in vestment income. Nonresident corporations are subject to tax on Salvadoran-source income only. As a result, resident and non resident taxpayers are subject to income tax on income derived from the following:

• Movable and immovable property in El Salvador

• Activities carried out in El Salvador

• Services rendered by domiciled and non-domiciled entities that are used in El Salvador

Taxable foreign investment income derived by resident corpora tions includes income, capital gains, profits, or interest derived

from securities, financial instruments, and derivative contracts if any of the following conditions are met:

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

• The capital is invested or employed in El Salvador.

• The risk assumed is placed or located in El Salvador.

Foreign investment income earned by a legal entity that is domiciled in El Salvador or that is considered a domiciled establish ment or branch for Salvadoran tax purposes is taxable.

Income derived from interest, premiums and other earnings from deposits abroad paid by non-domiciled financial institutions to domiciled legal entities must always be declared to the Salvadoran tax authorities even if they have been subject to income tax or other similar taxes abroad. Taxes paid abroad can be credited according to the rules provided by Salvadoran law.

Corporate income tax rate. The standard rate of income tax is 30% for Salvadoran companies, foreign companies with a permanent establishment in El Salvador and non-domiciled companies. However, companies that have sales equal to or less than USD150,000 are subject to a 25% income tax rate.

Capital gains. Capital gains derived from the sale of movable and immovable property are subject to income tax at a rate of 10%. However, if the asset is sold within 12 months after acquisition, the capital gain is subject to tax at a rate of 25% or 30% of net income.

Companies may carry forward capital losses for a five-year period to offset future capital gains only.

The capital gain or loss on a transaction is computed by deduct ing from the sales price the following:

• Cost of the asset, which equals the purchase price less allowable depreciation claimed under the income tax law

• Improvements made to the asset

• All selling expenses necessary to complete the transaction

Administration. The statutory tax year runs from 1 January through 31 December. Companies must file annual income tax returns and pay any tax due within four months after the end of the tax year.

Companies with total assets of SVC10 million (approximately USD1,142,857) or more, or with gross income of more than 4,817 minimum wages (USD1,758,205), must file an annual tax certification of their tax obligations. This certificate is issued by an external certified public accountant (CPA) who is authorized by the CPA Surveillance Council.

Dividends. Domiciled entities in El Salvador that pay to, or regis ter profits for, domiciled or non-domiciled entities or individuals must withhold income tax at a 5% rate. This serves as a definite income tax payment. Payment or registration of profits can be made in various forms, including, among others, payments in cash or securities and in-kind payments, regardless of whether they are considered dividends, quotas, excess payments, legal reserves, profits or earnings.

The above obligation also applies to representatives of parent companies, affiliates, branches, agencies and other permanent

establishments that pay or credit profits to domiciled entities or individuals abroad.

Notwithstanding the above, if payments are made to an entity or individual domiciled or resident in a tax-haven jurisdiction, a 25% withholding tax rate applies.

Withholding tax on loans. Legal entities or entities without legal capacity domiciled in El Salvador that remit cash or in-kind assets as loans or advance remittances or engage in other types of loan operations must withhold tax at a rate of 5% of such amounts if the amounts are remitted to any of the following:

• Partners, shareholders, associates, beneficiaries, and other re lated parties according to Section 25 of the Income Tax Law (for example, spouses and relatives in the fourth degree of consan guinity or second degree of kinship)

• Entities or individuals domiciled or resident in a tax-haven jurisdiction

• Parent companies or branches domiciled abroad

Certain exceptions apply, such as to loans with a market value interest rate or a one-year term and to supervised financial insti tutions.

Foreign tax relief. In general, relief is granted in El Salvador for foreign taxes paid with respect to certain types of investment in come earned abroad. Also, see Section F.

C. Determination of trading income

General. Taxable income is computed in accordance with adopted Financial Information Standards in El Salvador (International Financial Reporting Standards), subject to adjust ments required by the Salvadoran income tax law. The Salvadoran income tax law requires the use of the accrual method of account ing.

Taxable income includes all income derived from the following:

• Assets located in El Salvador

• Activities or transactions carried out in El Salvador

• Capital invested in El Salvador

• Services rendered in El Salvador and services rendered outside El Salvador that are used in El Salvador

• Certain types of investment income (see Section B)

In general, all costs and expenses necessary to produce and pre serve taxable income are deductible for income tax purposes, provided all legal deductibility requirements are met.

Imputed income. The Salvadoran income tax law does not contain rates and formulas for calculating imputed income. However, the tax authorities may determine taxable income based on certain information, including the following:

• Investments made during the tax year

• Equity fluctuations

• Transactions and profits recorded in previous tax years

• Purchases and sales

• Value of imported goods

of

of

General expenses

businesses

Inventories. Salvadoran income tax regulations provide that inven tories may be valued at acquisition cost. The cost may be calculated using certain methods, such as first-in, first-out (FIFO), last purchase cost and average cost, as well as special methods estab lished for agricultural products and cattle. The income tax law provides that inventories can be valued by other methods if autho rization from the tax authorities is obtained before the method is implemented.

Provisions. Provisions for contingent liabilities, such as sever ance payments and labor costs, are not deductible expenses. However, payments of such liabilities are deductible expenses. Amounts for doubtful accounts may be deducted if certain legal requirements are satisfied.

Tax depreciation and amortization

Depreciation. The acquisition cost of products with a useful life of 12 months or less may be fully deducted from taxable income in the year of acquisition. Property with a useful life of more than 12 months may be depreciated using the following straight-line rates.

Asset Rate (%) Buildings 5 Machinery 20 Vehicles 25

Other movable property 50

Only a portion of the acquisition cost of used machinery and mov able property may be deducted for tax purposes. The deductible percentages, which are based on the asset’s life, are shown in the following table.

Asset’s useful life Deductible Years percentage (%)

1 but less than 2 80 2 but less than 3 60 3 but less than 4 40 4 or more 20

The useful life of a used asset is determined when the asset is purchased. The depreciable portion of the acquisition cost is cal culated according to the normal depreciation rules.

Tax amortization. The acquisition cost or development cost of software programs used to produce and preserve taxable income may be amortized at an annual rate of up to 25% of the cost of development or acquisition. The deductible percentages applica ble to used machinery (see above) also apply to used software programs.

Relief for losses. Net operating losses may not be carried forward or back to offset taxable income.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax; transfers of incorporeal assets or of fixed assets that have been used for four years or more are not subject to transfer taxes

Real property transfer tax; tax imposed on value of real property with respect to the amount that exceeds SVC250,000 (approximately USD28,571)

Customs duties

Social contributions; paid by employer Prevention system (this system provides pensions and certain other benefits); on salaries up to SVC56,875 (USD6,500)

Social security; on salaries up to SVC8,750 (USD1,000) Maternity, sickness and professional risks

Professional training

E. Foreign-exchange controls

The currencies in El Salvador are the colon (SVC) and the US dollar. Since 2001, all transactions and operations in El Salvador can be carried out and denominated in colons or US dollars. The permanent exchange rate in El Salvador is SVC8.75 = USD1. No restrictions are imposed on foreign-trade operations or foreigncurrency transactions.

F. Tax treaties

El Salvador’s only tax treaty in force is with Spain. The treaty is based on the Organisation for Economic Co-operation and Development model, with some minor differences.

In Spain, the treaty applies to income tax on individuals, income tax on corporations, income tax for nonresidents, net worth tax, and local income tax and net worth tax. In El Salvador, the treaty applies to income tax.

For dividends, interest and royalties paid by companies domiciled in one signatory country to residents of the other signatory coun try, the treaty provides for maximum tax rates in the source coun try of 12% for dividends and 10% for interest and royalties. If certain conditions are met, the tax rate for dividends may be re duced to 0%. The treaty also provides for a maximum rate of 10% in the source country for services, unless the individual or com pany that accounts for the income has a permanent establishment in the country in which the services are rendered.