El Salvador Taxes for Individuals and Businesses

El Salvador’s tax system is based on a territorial principle, meaning tax obligations are determined by where income is generated. Income earned from activities within El Salvador is subject to tax, while income from foreign sources is not. This framework applies to both individuals and business entities operating within the country. The system features a progressive Personal Income Tax and a standard Corporate Income Tax.

Determining Tax Residency in El Salvador

An individual’s tax residency status in El Salvador is a key factor in how their tax obligations are administered. The primary determinant for residency is physical presence, and an individual is considered a tax resident if they are present in the country for more than 200 consecutive days during a calendar year. A person may also be considered a tax resident if their main source of income is generated in El Salvador or if the country serves as their principal place of business.

The distinction between a resident and a non-resident is significant for tax purposes, as residents are subject to income tax on their Salvadoran-source income. Non-resident individuals are subject to a withholding tax on income derived from sources within El Salvador.

Primary Taxes for Individuals

The main tax for individuals in El Salvador is the Personal Income Tax, known as Impuesto sobre la Renta. This tax is applied progressively to income from Salvadoran sources, such as salaries and wages, with tax brackets reaching a 30% rate. Taxable income can be reduced through certain allowable deductions. Individuals can deduct their mandatory social security contributions from their gross income, along with a specified amount for medical and educational expenses.

Individuals are also subject to a Capital Gains Tax on profits realized from the sale of assets, such as real estate or securities. This is taxed at a flat rate of 10%. Capital losses can be carried forward for up to five years to offset future capital gains, but not ordinary income.

Mandatory social security contributions are another financial obligation for employed individuals. These payments fund the pension system, administered by private fund administrators (AFP), and the public health and social security system (ISSS). Both the employee and the employer contribute a percentage of the employee’s salary to these funds.

Primary Taxes for Businesses

Corporate entities operating in El Salvador are subject to a Corporate Income Tax on their net income. For companies with annual taxable income greater than $150,000, the tax rate is 30%. A lower rate of 25% applies to businesses earning taxable income up to $150,000.

A Value Added Tax (IVA), or Impuesto a la Transferencia de Bienes Muebles y a la Prestación de Servicios, is the primary consumption tax in the country. The general rate is 13% and is applied to the sale of most goods and the provision of services. Businesses are responsible for collecting this tax from their customers on behalf of the government. The IVA system allows companies to claim a credit for the IVA they have paid on their business inputs against the IVA they have collected from their sales, remitting only the difference to the tax authorities.

Withholding taxes are also required on certain transactions, such as payments made to non-residents for services rendered in El Salvador or distributions of dividends. The rates for these withholdings can vary depending on the nature of the payment and the residency status of the recipient.

Special Tax Regimes and Incentives

El Salvador offers several special tax regimes and incentives to attract investment. One of the most notable is related to the country’s adoption of Bitcoin as legal tender. The Bitcoin Law provides a specific tax exemption for profits derived from fluctuations in the value of Bitcoin, meaning individuals and businesses are not subject to capital gains tax on these profits.

The government also provides tax benefits through its Tourism Law. Approved tourism projects can receive incentives such as a full or partial exemption from income tax for a specified period. These projects may also benefit from a waiver of customs duties on the importation of goods for the business.

Companies operating within designated Free Trade Zones (FTZs) are eligible for a comprehensive package of tax benefits. This regime is designed to promote export-oriented manufacturing and services. Businesses in an FTZ receive a complete exemption from corporate income tax, municipal taxes, and duties on imported machinery and raw materials.

Tax Administration and Compliance

To comply with tax obligations in El Salvador, all individuals and businesses must obtain a Tax Identification Number, known as a Número de Identificación Tributaria (NIT). This number is required for all tax-related filings and official procedures with the tax authority, the Ministerio de Hacienda. The NIT serves as the primary identifier for taxpayers.

The standard tax year in El Salvador aligns with the calendar year, from January 1 to December 31. The deadline for filing the annual income tax return is April 30 of the following year, while Value Added Tax (IVA) declarations must be filed on a monthly basis.

The process for filing tax returns and making payments is handled electronically. Taxpayers submit their declarations through the online portal provided by the Ministry of Finance. After the return is filed, any corresponding tax payments can be made at authorized banks.