Doing Business in El Salvador

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El Salvador is strategically located in the heart of Central America, which makes it a natural fit for communications and business with countries in the region; also the use of the US currency (dollar) as legal tender represents a strong appeal for foreign investment, as they do not have to contend with exchange speculation for the use of a currency that it is not internationally accepted.

However there are a number of issues which one must consider when looking to set up a business in El Salvador (Central America). This document answers some of the common questions we come across and provides practical information about the issues any potential investor needs to consider. 

What type of Business Structure should we use?

There are advantages and disadvantages to all of the business structures, and there is no one correct answer, it all depends on the specific business circumstances and needs. A brief overview of the main structures is below:

 

Establishment (a branch of your overseas business):

  • It is not a separate legal entity, but an extension of the parent company abroad;
  • Limited liability to transactions in El Salvador;
  • Through a branch (permanent establishment), the company acquires the category of "domiciled", allowing the entity to enjoy its own commercial and tax benefits as a local company;
  • Presentation of information from the Headquarters is required, inspection or supervision of the State is limited to the capital invested and the operations conducted by the branch.

 

SA:

  • Provides limited liability and the definition of the operations in the country;
  • It gives a perception of a local company with longevity;
  • The tax is based on earnings or profits;
  • The financial statements required to be audited individually, regardless of the amount of income or assets; and
  • Must appoint an auditor for opinion and tax report on compliance with formal and substantive aspects of tax crimes; provided that the income from the previous fiscal year are greater than USD 571,428 or its total assets at the end of the immediately preceding fiscal year exceeding USD 1,142,857.

 

 Limited Company:

  • Provides limited liability and the definition of operations in the country;
  • Members (partners) have limited liability to their equity;
  • It gives a perception of a local company with longevity;
  • The tax is based on earnings or profits;
  • Financial statements are required to be audited individually, regardless of the amount of income or assets; and
  • Must appoint auditor for opinion and tax reports on compliance with formal and substantive aspects of tax crimes; provided that the income of the previous fiscal year are greater than USD 571,428 or its total assets at the end of the immediately preceding fiscal year exceeding USD 1,142,857.

 

Limited Liability Partnership:

  • Members (partners) have limited liability
  • Profits are allocated to members who then pay Income Tax on these profits personally
  • The tax residence of the member, and where the profits in the LLP originated will determine in what jurisdiction and how these profits are taxed

How much Corporation Tax will the business pay?

Current Corporation Tax rates in El Salvador are:

Entities with gross income up to USD 150,000.  25%
Entities with gross income exceeding USD 150,000 30%

The percentage is calculated based on the net profit earned during the fiscal year.

(NB: rates are for the tax year to 31/12/2013)

The current government also plans to create new taxes to counteract the current fiscal deficit.

The tax rate of an "establishment" is determined by the amount of assets to which the entity operates in El Salvador.

If an entity incurs a loss, it can offset it only against future profits from the same entity; they cannot be offset against profits from the parent company.

What if we use El Salvador to set up our holding company?

El Salvador's tax law treats each integrated holding entity as an individual taxpayer, you will pay taxes based on the benefits obtained independently of other entities that make up the holding. Therefore the income received by the holding company will be comprised of dividends generated by the member companies.

Dividends received by a parent company in El Salvador, either from El Salvador or from abroad are exempt from income tax in El Salvador; provided that the company that distributes the corresponding tax has paid such in the host country, and it is greater than or equal to the rate to which he would pay in El Salvador; otherwise the company must pay the supplemental tax to match the rate which it would pay in El Salvador.

In El Salvador, a special tax on dividends is applied; this corresponds to 5% of the value distributed, to be raised through "retention" by the distributor. This tax is applicable only in the first leg of distribution, to avoid the cascading effect.

All this makes El Salvador appealing to provide investors with an advantageous structure for operation of holdings.

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