Personal taxation in San Salvador
Effective personal income tax rate
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Resident and nonresident individuals are subject to income tax on their Salvadoran-source income (the latter individuals, however, generally are subject to a final withholding tax on the gross amount of their income).
An individual is considered resident in El Salvador if he/she remains in the country for an uninterrupted period of 200 days within a year.
Each taxpayer is required to file a return; joint returns are not permitted.
Income tax rates are progressive ranging from 10% to 30%. Nonresident individuals are taxed via withholding at rates of 20% or 25%, or reduced rates for Salvadoran-source income obtained for certain types of services.
Deductions and allowances
Resident individuals may deduct social security contributions and certain school and medical expenses. A personal allowance is granted to certain individuals.
Tax generally is imposed on all income arising from Salvadoran sources, including income derived from employment, capital, goods and services.
Capital gains are taxed at a rate of 10%.
Other taxes on individuals
An employee must contribute to social security at a rate of 3% of his/her total monthly remuneration, and to his/her private pension funds at a rate of 6.25% on the monthly remuneration.
A financial transaction tax is levied on the issuance of checks and wire transfers at a rate of 0.25% on transactions exceeding USD 1,000. There is a withholding tax on cash deposits/withdrawals, under which banks must withhold a 0.25% tax on each deposit/withdrawal or withhold on a monthly basis if the aggregate amount exceeds USD 5,000.
Compliance for individuals
Penalties are imposed for late filing, failure to file, underreporting or tax avoidance/evasion. Penalties also are imposed for noncompliance with formal requirements.
Filing and payment
The tax return must be filed by 30 April of the year following the tax year. Tax on employment income is withheld at source by the employer.
Corporate taxation in San Salvador
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A corporation is resident in El Salvador if it is incorporated there.
Corporate income tax is levied on Salvadoran- source profits derived by companies from their profit-making activities. Taxable income is determined by deducting from gross income all necessary costs and expenses, and other specific deductions established by the law. Certain income is exempt.
Ordinary losses may not be carried forward or back. Capital losses may be carried forward for five years to offset capital gains.
Incentives and exemptions are available under the International Services Law and for companies operating in free trade zones.
El Salvador operates a territorial tax system under which income tax is levied only on Salvadoran-source income.
Other taxes on corporations
The employer must contribute to social security at a rate of 7.5% of the total monthly remuneration. The employer also contributes to the private pension funds of its employees at a rate of 6.75% on the employee’s monthly compensation.
A financial transaction tax is levied on the issuance of checks and wire transfers at a rate of 0.25% on transactions exceeding USD 1,000. There also is a withholding tax on cash deposits/withdrawals, under which banks must withhold a 0.25% tax on each deposit/withdrawal or withhold on a monthly basis if the aggregate amount exceeds USD 5,000.
The transfer of real estate is subject to a tax of 3% on the value of real property with respect to the amount that exceeds approximately USD 28,571.
Compliance for corporations
Penalties are imposed for late filing, failure to file, underreporting or tax avoidance/evasion.
A taxpayer may request a binding ruling on the tax consequences of a transaction in which it has a direct interest.
The annual income tax return must be filed by 30 April of the year following the tax year.
Other taxation in San Salvador
Value added tax
Filing and payment
Entities are required to file monthly returns.
The standard VAT rate is 13%. Exports of goods or services are zero-rated.
VAT applies to the transfer of movable goods, the provision of services and imports.
Registration for VAT purposes generally is required at the time of incorporation.
The transfer pricing rules require that prices in transactions between Salvadoran taxpayers and related parties or persons resident in tax havens or jurisdictions with preferential tax regimes be equal to the market price in similar transactions with third parties. The tax authorities are entitled to adjust the price of such transactions if they are not carried out on arm’s length terms.
Intercompany debt cannot exceed three times the accounting capital of the domestic taxpayer.
Accounting principles/financial statements
IFRS must be used. Financial statements must be filed annually.
Principal business entities
These are the stock corporation, limited liability company and branch of a foreign entity.
Dividends paid to a nonresident company are subject to a 5% withholding in addition to the tax applicable to the distributed profits at the corporate level. The rate may increase to 25% if the recipient is located in a tax haven or a jurisdiction with a preferential tax regime (i.e. a low or no-tax regime).
Technical service fees
Technical service fees paid to a nonresident are subject to a 20% withholding tax. The rate may be increased to 25% if the recipient is located in a tax haven or benefits from a preferential tax regime.
A 10% withholding tax applies to interest received by individuals and companies on bank deposits. Interest paid between resident companies is not subject to withholding tax. Interest paid to a nonresident is subject to a 20% withholding tax. The rate may be
Royalties paid to a nonresident are subject to a 20% withholding tax. The rate may be increased to 25% if the recipient is located in a tax haven or benefits from a preferential tax regime. A 5% rate applies to payments made to nonresidents for the transfer of intangible assets or for the use or the right to use rights to certain tangible and intangible assets.
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