Businesses in El Salvador generally adopt a corporate form. Regardless of the corporate form adopted by the business, each entity is taxed as a separate legal entity from its members, partners or shareholders. The Salvadoran Commercial Code regulates five basic types of corporate entity:

• general partnership (Sociedad Colectiva);
• limited liability company or LLC (Sociedad de Responsabilidad Limitada);
• limited partnership (Sociedad en Comandita Simple);
• stock corporation (Sociedad Anónima); and
• limited partnership with share capital (Sociedad Comandita por Acciones).

Foreign corporations may organise branches.

The most commonly used corporate form is the stock corporation (Sociedad Anónima or SA). American corporations often adopt the corporate form of a limited liability company (Sociedad de Responsabilidad Limitada or SRL) for their subsidiaries in order to achieve look-through tax treatment.

As mentioned above, the corporate entity is taxed separately and must obtain a separate taxpayer number.

As from 16 February 2024 a new “simplified corporation by stocks” has been available, with minimum capital requirements and no formalities (in comparison to the traditional corporate forms). It can be organised as a “one-person company”.

Under local law, there are no transparent entities for tax purposes. However, the Salvadoran LLC is commonly used by US corporations in order to achieve transparency before the US tax authorities.

El Salvador has a double taxation treaty (DTT) with Spain currently in force. Under this treaty, the general rule is that residence is determined on the basis of the criteria under the law of each state (indicated below) that make a person liable to pay taxes there. If under those criteria any person may be considered a resident of both states, then the following criteria determine the answer:

• in which state they have a permanent home available to them;
• if in both states, then in which state is their centre of vital interest;
• if the centre of vital interest cannot be determined, the state in which they have a habitual abode; or
• if they have an abode in both states or in a third one, then the competent authorities of the contracting states will settle the question by mutual agreement. 

Besides this DTT, Salvadoran Tax Law sets certain standards regarding residence. A corporation is considered a “resident” for tax purposes if:

• it has been organised under Salvadoran law;
• the corporation is managed in/from El Salvador;
• the corporation has a tax or corporate seat in El Salvador;
• the corporation’s centre of economic interests is located in El Salvador; and
• the corporation has a permanent establishment in El Salvador which is subject to taxation in El Salvador (not the foreign corporation). 

The Salvadoran income tax system differentiates between certain kinds of income. However, corporate and individually owned businesses are taxed at the same rate of: i) 25% on net income up to USD150,000 annual income; or ii) 30% on net income above USD150,000 (the first USD150,000 are taxed at 25%)

As a rule, profits are taxed based on the accounting profits subject to some adjustments; the most common tax adjustments are certain limits to deductible expenses. Profits are taxed on an accrual basis.

Computer programming, software development, cybersecurity, and generative AI, among others qualified as technology investments by the Ministry of the Economy, are eligible for:

• income tax exemption for 15 years;
• import duties on the equipment and hardware required for the development of the eligible activities; and
• VAT on purchases and sales.

Currently, there are tax incentives in the following industries:

• renewable energy-based power generation projects – eligible for an exemption from income tax for a period of five to ten years depending on the project’s output measured in megawatts, and a total exemption from import duties on machinery, equipment, raw materials, and supplies for the construction of the power plant for the first ten years;
• manufacturing for exportation to foreign markets within free trade zones, as qualified by the Ministry of the Economy – eligible for an exemption from income tax for a period of ten to 15 years, from municipal taxes for a period of ten to 15 years, from real estate transfer tax on properties used for the eligible activity, and from VAT on purchases of local and/or foreign goods required for the eligible activity;

• provision of telecommunications services (including call centres and BPO) – eligible for an exemption from income tax for a period of 15 years, from municipal taxes for ten years, from real estate transfer tax on properties used for the eligible activity, and from VAT on purchases of local and/or foreign goods required for the eligible activity; and

• a National Tourism Industry Interest Project, as qualified by the Salvadoran Tourism Institute, requiring an investment equal to or greater than USD25,000 – eligible for an exemption from income tax for ten years, from import duties, and from real estate transfer tax on the acquisition of properties intended for the project.

Losses incurred during a fiscal year can only be offset against profits for the same period. Therefore, no carry forward or carry back is allowed. However, in the case of capital losses, a five-year carry forward is allowed.

Interest is deductible if paid in order to generate taxable income. Interest can only be deducted up to the rate determined by the Central Reserve Bank.

Group consolidation is not permitted for tax purposes. Each entity is considered a separate taxpayer.

Capital gains are taxed at a rate of 10%. The taxable gain is determined by the difference between the book value or purchase value (as applicable) and the selling price. In conclusion, the capital gain will be the income minus the cost and improvements, taxed at 10%.

Transactions are subject to VAT depending on their nature. In general, goods, services and merchandise transacted on commercial markets are subject to VAT at a rate of 13%.

Real estate transactions are subject to a real estate transfer tax of 3% on the transaction price if this is higher than approximately USD29,000.       

Generally, transactions with securities are exempt from VAT.

There are no further notable taxes.

Most closely held local businesses operate in a corporate form.

Corporate rates are lower than individual professional tax rates from an annual net income of approximately USD23,000 up to approximately USD150,000. If the annual net income is higher than this, the rates are the same.

There are no rules to prevent individual professionals from earning income at corporate rates.

There are no rules preventing closely held corporations from accumulating earnings for investment purposes. It is mandatory to create a 5% reserve on net earnings every year, but when this surpasses one sixth of the corporation’s capital, it can be capitalised. Thereafter, the obligation to make a 5% reserve on earnings continues.

Dividends are taxed at a final 5% withholding tax, independent of where the beneficiary resides, except if the beneficiary resides in a tax haven or low-tax jurisdiction, in which case the withholding tax is 25%. Gains on the sale of shares are taxed at 10%. The taxable gain is determined by the difference between the book value or purchase value (as applicable) and the price at which the shares are sold.

There are no differences between closely or publicly held corporations.

Withholding taxes applicable to non-residents without a permanent establishment are as follows:

• dividends and profit distributions – 5%;
• interest – 10% (foreign fully licensed banking and financial institutions are exempt); and
• royalties – 15%.

It is important to note that the notions of “interest” and “royalties” under the law are wider than usually understood.

No reliefs are available.

El Salvador has only one bilateral tax treaty with Spain.

El Salvador has no other tax treaties in force.

Transfer pricing rules have been in force in El Salvador since 2009. There are no particular issues specifically affecting inbound investors.

Limited-risk distribution arrangements have not yet surfaced as a focus for the tax administration. However, any related-party arrangement that does not comply with transfer pricing rules could be challenged by the tax authorities. 

Transfer pricing in El Salvador generally follows the methods established by the OECD.

There do not appear to be any precedents where the treaty between El Salvador and Spain has been used for mutual agreement procedures (MAPs) to resolve international transfer pricing disputes.

Within the proceedings leading to a transfer pricing-related claim, the tax administration and the taxpayer can voluntarily review the matter and settle the disagreement. Where the settlement calls for compensating adjustments, tax administration officials have reported that the taxpayer proceeds with the compensating adjustments.

Local branches of non-local corporations and local subsidiaries of non-local corporations are taxed in the same way.

The Income Tax Act does not tax indirect disposals of Salvadoran companies. However, their direct disposal is subject to capital gains tax.

There are no change of control provisions that trigger any tax or duty. 

No formulas are used to determine the income of foreign-owned local affiliates.

Local affiliates are allowed a deduction for payments for management and administrative expenses by a non-local affiliate on condition that:

• the payment is duly supported;
• the expense is necessary to generate taxable income;
• where applicable, the withholding tax has been charged to the non-local affiliate; and
• the applicable international financial reporting standards allow the expense to be recognised as such by the taxpayer.

Besides transfer pricing rules, as well as a 10% withholding tax, interest paid to a non-local affiliate is not deductible, unless the beneficiary is a fully licensed financial institution. It is necessary that the agreed-upon interest is within the limits established by the Central Reserve Bank.

The foreign income of local corporations is exempt from corporate tax. The Salvadoran system is fundamentally one of domestic-sourced income.

Intangibles developed by local corporations can be used by non-local subsidiaries in their business at prices complying with transfer pricing rules. The price paid to the local corporation will be taxed at 20%.

Dividends from foreign subsidiaries of local corporations are not taxed.

Under transfer pricing regulations, intangibles developed by a local company (as its main source of business) cannot be used by non-resident related parties without incurring local corporate tax.

Local corporations are not taxed on the income of their non-local subsidiaries or non-local branches under CFC-type rules. There are no CFC-type rules.

There are no substance-related rules applicable to non-local affiliates.

Provided the sale takes place in a jurisdiction other than El Salvador, the capital gain on the sale of shares in non-local affiliates will not be taxed.

El Salvador does not have general anti-avoidance rules, other than those related to the tax adjustments for determining the taxable base.

El Salvador does not have a regular routine audit cycle.

El Salvador is not a member of the OECD. Therefore, it has not yet strictly implemented BEPS. However, the new Income Tax Act (issued in 2012) includes some provisions that partly reflect BEPS guidelines, such as transfer pricing regulations heavily influenced by Action 13.

The government seeks to comply with most OECD guidelines, including BEPS. However, there is no strict policy for this purpose. 

Since the Salvadoran taxation system follows the territorial principle, international taxation does not have a high profile in the jurisdiction.

El Salvador’s tax policy is not highly influenced by BEPS. 

The most important key features of the Salvadoran tax system are its basis on the territorial principle and its simplicity. These features do not conflict with BEPS.

Since El Salvador has not yet implemented BEPS, the proposals for dealing with hybrid instruments do not appear to be a relevant issue in the near future.

El Salvador has a territorial tax regime. Interest is deductible regardless of whether or not the beneficiary is a resident, but only up to the interest rates published by the Central Bank. The only condition is that the interest is connected to the generation of taxable income. It is not likely that interest deductibility proposals will affect people investing in and from El Salvador.

El Salvador follows a strict territorial tax principle and therefore, foreign-sourced income is not relevant to the local authorities. Since El Salvador does not have CFC rules, the general drift of CFC proposals should not greatly affect current practice.       

Salvadoran tax law does not grant any DTC limitation to outbound investors. If other jurisdictions were to create limitations on any DTC allowed to inbound investors, however, this would likely have some impact on direct foreign investments into El Salvador.

Transfer pricing changes introduced by BEPS after the TP rules came into force in El Salvador (2009) are not having a radical effect on the Salvadoran regime. The taxation of profit from intellectual property is not a particular source of controversy in El Salvador.

Salvadoran law includes some rules related to transparency. However, country-by-country reporting is not yet in force in El Salvador.   

At this time, there are no specific proposals in this jurisdiction in relation to the taxation of transactions effected or profits generated by digital economy businesses operating from outside El Salvador.

El Salvador has not taken any position in relation to digital taxation, and no proposals have so far been brought forward.

Payments to non-residents for intellectual property deployed in El Salvador are taxed at 20% withholding tax if the non-resident is not in a tax haven, and at 25% if the non-resident is in a tax haven.