El Salvador is not a country to overlook as a business
jurisdiction. A country of just 6.5 million people has a
positive business relationship with the United States, hosting
giant companies such as FedEx and General Motors. The two countries
have an impressive exchange of nearly USD 6 billion in
goods.
It is also an easy destination to conduct business, facilitated
by a dollarized economy and a growing and thriving service-based
industry. This article will walk you through the different types of
accounting in El Salvador and the tax declaration obligations
facing you there.
What is the business tax in El Salvador?
Operating a business in El
Salvador requires diligent tax management. The type of taxes
your business will encounter depends on its legal structure and the
nature of its activities. Here’s an overview of the primary
taxes applicable to businesses in El Salvador:
- Value Added Tax (VAT): This is a 13% tax on the purchase of
goods and services. - Corporate Income Tax: Companies are taxed on earnings from 25%
to 30%. - Tax on Dividends: Profits distributed as dividends are subject
to a 10% tax. - Tax for Limited Liability Companies (LLCs): LLCs face a tax
rate that varies between 25% and 35%. - Tax Rate for Branch Offices: Branches of foreign companies
operating in El Salvador are taxed at 25% to 30%.
DON’T FORGET: Companies must
register before the Treasury Department to receive their Tributary
ID Number (NIT) and its Unique Registration and Contributor Number
(NRC).
How do taxes work in El Salvador?
The above-mentioned tax
requirements apply to nearly every corporation operating in El
Salvador. However, the following information may only apply to some
investors:
- Shareholders or Partners of the company must be registered with
the treasury as individuals and obtain their Tax ID (NIT.) - Sharing Company Capital: When you set up a company, you must
declare how the company’s total capital is divided. This
includes the number and value of shares each partner or shareholder
has. You do this when you register the company with the Treasury.
Remember, if there’s a change in shareholders or the value of
the shares changes, you need to update this information with the
Treasury. - Real Estate Transfer Tax: Buying or selling property? If the
property is worth more than $28,571.43, a 3% tax applies to the
transaction. - Bank Transaction Tax: For some financial operations, like
certain bank transactions over $1000, there’s a small tax of
0.25%. The bank will handle this tax, but it does not apply to all
transactions, and many are exempt from this tax. - Income Tax on Salaries (Tiered System): In El Salvador, income
tax for employees is calculated using a tiered or bracket system.
This means the amount of tax an employer needs to withhold from an
employee’s salary depends on how much they earn. Employees with
higher net monthly incomes are taxed at a higher rate. For those
earning a net monthly salary of $500 or more, the tax rate varies
between 10% and 30%. Essentially, the more an employee earns, the
higher the percentage of their salary will be withheld for income
tax. This system is designed to ensure a fairer distribution of tax
responsibilities, where those with higher incomes contribute more
in taxes. - Importation Tax: Planning to import goods into El Salvador?
There’s an import tax ranging from 5% to 40%, depending on what
you’re importing.
TOP ACCOUNTING TIP: Although the
El Salvador legal system allows a company
legal representative to carry out legal, accounting,
and administrative responsibility in addition to their legal role,
we advise that you employ two people to carry out the separate
roles as it can prove to be a very cumbersome and stressful role
for just one legal representative, and they may lack the necessary
expertise.
How is Accounting in El Salvador evolving?
Business Sectors
- IT sector
- Agriculture
- Renewable energy
IT sector (with legal incentives): El
Salvador’s IT sector is burgeoning, emphasizing software
development and business process outsourcing (BPO). To further
stimulate growth in this area, the government offers legal
incentives, making it an even more attractive market for IT
businesses. These incentives support innovation, attract foreign
investment, and encourage the development of a skilled tech
workforce.
Agriculture: This sector has long been a staple
of the Salvadoran economy, with commodities like coffee, sugarcane,
and corn. There is an increasing shift towards sustainable farming
practices and export-quality goods, indicating a move towards more
environmentally friendly agriculture and global market
competitiveness.
Renewable energy: Aligned with global energy
trends, El Salvador is investing in renewable energy sources,
especially solar and hydroelectric power. This sector is drawing
attention and investment domestically and internationally,
signifying a significant transition towards sustainable energy
solutions in the country’s energy sector.
Recent Legal Changes
- Private-public partnerships
- Tax reforms and transfer pricing regulations
- Incentives for the technology sector
- Tax incentives
- Simplified regulatory approvals
- Intellectual property rights protection
El Salvador has been actively working to improve its business
environment, particularly by introducing regulatory reforms that
enhance the ease of doing business. These efforts have focused on
several key areas:
Public-private partnerships: The legal
framework governing public-private partnerships was overhauled,
making the country more inviting for foreign investors. This change
aims at fostering collaboration between the government and private
entities, thereby accelerating economic growth and infrastructure
development.
Tax reforms and transfer pricing regulations:
The government has implemented tax reforms, including new rules
around transfer pricing. These reforms should create a more
transparent and efficient tax environment, making it easier for
businesses to comply with tax regulations and plan their
investments.
Incentives for the technology sector:
Recognizing the critical role of technology in economic
advancement, El Salvador has introduced legal changes to attract
tech-based businesses. These incentives include:
Tax incentives: Tech companies in El Salvador
may benefit from various tax incentives. These can include
reductions in income tax, exemptions from import duties on
technological equipment, and tax credits for research and
development (R&D) expenditures.
Simplified regulatory approvals: For
technology-based startups, the government is streamlining the
process for obtaining business licenses and approvals. This
initiative aims to reduce bureaucratic hurdles, making it faster
and easier for new tech companies to establish and grow.
Intellectual property rights protection:
Enhancements in intellectual property laws provide better
protection for tech companies’ innovations. This creates a more
secure environment for investment and encourages the development of
new technologies.
Social contributions
In El Salvador, employers are required to make social security
contributions on behalf of their employees. These contributions go
toward health care, pensions, and other social welfare benefits.
The rates and specific requirements can differ depending on factors
like the sector and size of the company. For legal compliance and
cost planning, this is a crucial factor.
Online platforms
Digitalization is accelerating globally, and El Salvador is no
exception. E-commerce is on the rise, and there are regulatory
considerations for online businesses. These may include data
protection laws, electronic transaction regulations, and consumer
rights applicable to online shopping.
Anti-corruption measures
Addressing corruption is a critical aspect of business
operations, particularly in emerging markets like El Salvador. To
combat this, El Salvador has implemented stringent anti-corruption
laws that businesses must comply with. The key elements of these
measures include:
- Strict Anti-Corruption Laws: El Salvadoran
businesses must adhere to national anti-corruption regulations.
Failure to comply with these laws can lead to severe consequences,
including substantial fines and possible imprisonment for those in
violation. - Mandatory Corporate Compliance Programs:
Companies are required to establish comprehensive compliance
programs. These programs ensure that all business operations are
conducted by legal and ethical standards. They play a crucial role
in preventing corrupt practices within organizations. - Internal Audits: Regular internal audits are a
necessity for businesses in El Salvador. These audits help identify
any potential areas of non-compliance or unethical conduct within
the company. They are a proactive measure to safeguard against
corrupt activities and ensure adherence to internal policies and
external legal requirements. - Transparency Measures: Transparency in
business operations is not just encouraged but mandated. This
includes clear documentation of transactions, open communication
channels, and accountability in decision-making processes. Such
transparency is vital for maintaining integrity and trust, and it
helps detect and prevent corruption.
Accounting in El Salvador: Requirements and duties for
companies
Accounting requirements are crucial to the incorporation process
of a company in any country, and El Salvador is no different.
Normally, it is best to employ an authorized public accountant who
is responsible for all company accounts. Some of the primary
accounting administrative tasks to consider are:
- Management of Auditing: This includes keeping
documentation of all the different corporate transactions that flow
through the company. - Tax Management: You must ensure that all
operations of the company are properly filed and all tax payments
are completed on time. - Fiscal Auditing: You must verify that your
company’s activity verifies with tributary requirements.
Depending on the size and income of the company, you may need to
hire a fiscal auditor. - IFRS: All accounting registers and
requirements must be submitted by the IFRS (International Financial
Reporting Standards)
REMEMBER: The above requirements
apply to nearly every type of society in El Salvador, except for a
few cases whereby some regulations may be added or removed. A local
agent can help you understand if you qualify for
exemptions.
Common Questions when understanding accounting and taxation in
El Salvador
Based on our extensive experience, these are our clients’
common questions and doubts when looking to understand accounting
and taxation in El Salvador.
1. What is the corporate tax rate in El
Salvador?
The corporate tax rate in El Salvador is
30%.
2. How are businesses taxed in El Salvador?
Businesses in El Salvador are taxed primarily through
corporate income tax and Value Added Tax (VAT). The corporate
income tax is levied on their taxable income, which is determined
by subtracting allowable deductions from total revenue. The current
corporate tax rate is 30%.
– Value Added Tax (VAT) on goods and services sales is
currently 13%. Businesses are required to collect VAT from their
customers and remit it to the government. Input VAT (VAT paid on
business expenses) can be credited against output VAT (VAT
collected from customers).
– Income Tax Withholdings: Businesses are also responsible
for withholding income tax on certain payments, such as salaries,
professional fees, and payments to foreign entities. These withheld
amounts must be remitted to the tax authorities.
– Pago a Cuenta: This is a provisional monthly payment that
businesses have to make, based on a percentage of their gross
income. It serves as an advance payment of the annual income tax
liability. These payments are later credited against the total tax
liability for the year.
3. What is the Internal Revenue Service (IRS) Called in
El Salvador?
The equivalent to the IRS in El Salvador is the Ministerio de
Hacienda, specifically the Dirección General de Impuestos
Internos (DGII) or in English, the General Directorate of Internal
Taxes. It is responsible for tax collection and implementing tax
policy in El Salvador.
4. What is the accounting standard in El
Salvador?
In El Salvador, companies must prepare their financial
statements according to International Financial Reporting Standards
(IFRS), which are accepted as accounting standards. Spanish should
be used to prepare the financial statements.
5. What is the CPA equivalent in El
Salvador?
The equivalent of a Certified Public Accountant (CPA) in El
Salvador is a Contador Público Autorizado (CPA), certified
by the Consejo de Vigilancia de la Profesión de
Contaduría Pública (CVCPC) or the Oversight Council
for the Public Accounting Profession.
6. Does El Salvador report in IFRS?
Yes, El Salvador has adopted IFRS as its accounting standard.
Companies, including financial institutions and insurance
companies, are required to prepare their financial statements
according to IFRS.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
