An Overview of Taxes in El Salvador
A practical guide to El Salvador's tax framework, clarifying how residency and income source determine obligations for individuals and businesses.
El Salvador’s tax system is structured around the principle of territoriality. This means that tax obligations are determined by the location where income is generated, not by the residency or citizenship of the individual or business. Income earned from activities within El Salvador is subject to tax, while income from foreign sources is generally not. This approach shapes the tax landscape for both local and foreign individuals and entities operating within the country’s borders.
Determining Tax Residency in El Salvador
In El Salvador, an individual is considered a tax resident for a calendar year if they are in the country for more than 200 consecutive days. Alternatively, a person can be deemed a resident if their main source of income is located in El Salvador, regardless of the number of days spent in the country. This “center of vital interests” test considers where an individual has their primary economic and personal ties.
The distinction between a resident and a non-resident is important for tax liability. The key difference lies in the administrative processes and potential withholding tax rates applied to payments made to non-residents.
Primary Taxes for Individuals
The main tax for individuals in El Salvador is the Personal Income Tax. This tax is applied progressively to income earned from Salvadoran sources. The tax law establishes brackets with increasing rates, and income is taxed at different percentages as it surpasses certain thresholds, with the highest bracket reaching a 30% rate.
Deductions are permitted to reduce an individual’s taxable income. These include social security contributions and a certain amount for medical expenses.
Individuals are also subject to a Capital Gains Tax on profits from the sale of assets. This is a flat 10% tax. It applies to gains from selling assets such as real estate or shares in a company. The taxable gain is calculated as the difference between the selling price and the original purchase price or book value of the asset.
A Real Estate Transfer Tax is levied on the sale of property. This tax is set at a rate of 3% and applies to the value of the transaction. It is payable whenever ownership of a property is transferred, provided the value exceeds approximately $28,571. This tax is separate from any capital gains tax that might be due on the profit from the sale.
Primary Taxes for Businesses
Corporate entities operating in El Salvador are subject to a Corporate Income Tax. The rate is 30% on net income for companies with annual income above $150,000. For businesses earning up to $150,000, a lower rate of 25% applies.
A Value Added Tax (IVA) of 13% is applied to the sale of most goods and the provision of services. Businesses are responsible for collecting this tax from their customers at the point of sale.
The IVA system operates on a credit mechanism. Businesses charge IVA on their sales and pay IVA on their own purchases of goods and services. When they remit the tax to the government, they can deduct the amount of IVA they have paid on their inputs from the amount of IVA they have collected from their customers. This ensures that the tax is ultimately borne by the final consumer.
Companies are also required to make monthly advance payments of their income tax, known as pago a cuenta. This payment is calculated as 1.75% of their gross monthly income and is credited against their final annual income tax liability.
Special Tax Considerations
El Salvador has introduced unique tax provisions, most notably concerning the use of Bitcoin. Under the Bitcoin Law, which made the cryptocurrency legal tender, there is a tax incentive. Profits or capital gains that an individual or business realizes from the exchange of Bitcoin into U.S. dollars are not subject to capital gains tax. This exemption applies to all market participants, from individual investors to large corporations.
This tax treatment is designed to encourage the adoption and use of Bitcoin within the Salvadoran economy. By removing the tax burden on gains, the government aims to stimulate economic activity and attract investment in financial technology.
In addition to the Bitcoin-related incentives, El Salvador offers other tax benefits aimed at attracting foreign investment. Laws such as the International Services Law and the Tourism Law provide tax exemptions and reductions for companies operating in specific sectors. These incentives are intended to promote growth in areas like technology, business process outsourcing, and tourism development.
The Tax Filing and Payment Process
The tax year in El Salvador aligns with the calendar year, running from January 1 to December 31. Individuals and businesses are required to report their income and pay any corresponding taxes based on this annual cycle.
Taxpayers must complete and submit form F-11 to report their income, deductions, and final tax liability. The deadline for filing the annual income tax return is April 30.
Filing and payment are handled through the online portal of the Ministry of Finance. Payments can be made through authorized banks. Before operating, businesses must register with the Treasury Department to obtain a Taxpayer Identification Number (NIT) and a Unique Contributor Registration Number (NRC).