El Salvador Income Tax Rates

Personal income tax rates in El Salvador are progressive, up to 25%.

Taxable Annual Income (In US Dollars)

From              to                   Tax payable

0.00               2,514.29          Exempt
2,514.29         9,142.86          $57.14      plus 10% over 2,514.29
9,142.86         22,857.14        $720         plus 20% over 9,142.86
22,857.14       over                $3,462.86 plus 30% over 22,857.14

Social Security Tax: These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the worker social security system benefits at the national level.

Pension Tax: These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the employee pension system and retirement benefits at the national level.

El Salvador Corporate Tax Rates

A tax rate of 25% is applied to the net profit. El Salvador's income tax law affects annual revenue from business activities conducted in El Salvador, when any of the causes of such revenue occur within the national territory.

The fiscal year of companies corresponds to the calendar year. A corporation is required to prepay its estimated tax liability on a monthly basis of 1.5% of gross revenue. This is deducted as credit in the annual income tax return. Corporate tax returns are due by the end of the fourth month following the end of the fiscal year. An extension of six months may be granted if requested for the payment only.

CAPITAL GAINS TAX

The tax involved is a 10% income tax on the net profit. The 10% income tax is calculated on the net profit of the transaction. Net profit is calculated by deducting the cost of the property plus any related expenses from the sales price.

Income from the sale of securities is taxable as follows: the buyer will withhold 10% of the profit and remit it to the Tax Department.

BRANCH PROFITS TAX

Branches of foreign companies are subject to the same tax rates as Salvadoran companies.

AD VALOREM / SPECIFIC TAXES

Two taxes are paid for Alcoholic beverages:
- Ad Valorem taxes of a 5% tax rate
- A specific tax on the alcoholic grade per litre ranging from 0.04 to 0.16 cents

Cigarettes pay a specific tax of $0.0225 per cigarette.

LOCAL TAXES

El Salvador's income tax law affects the whole national territory equally.

OTHER TAXES

Other taxes that are applicable in their various manifestations include:

Municipal Office Taxes: Taxes are paid according to a table and according to total assets. Different tables exist in every town of El Salvador. In San Salvador, the table varies depending if the company is industrial, commercial or other.

Annual Licence Tax: All industrial or commercial businesses are required to have a licence to operate.

Social Security Tax: These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the worker social security system benefits at the national level.

Pension Tax: These are payments that are made monthly by employers and employees on the payroll of companies for the purpose of guaranteeing the functioning of the employee pension system and retirement benefits at the national level.

DETERMINATION OF TAXABLE INCOME

The net taxable income of a corporation or partnership is determined by subtracting all allowable deductions from gross taxable income. Generally, expenditures and/or losses are deductible provided they are incurred in gaining or producing taxable income, or preserving the source of income. Special rules apply in respect of certain expenditures.

DEPRECIATION

Depreciation is normally calculated by the straight-line method over the estimated useful life of the asset.

STOCKS/INVENTORY

The Income Tax regulations permit the use of FIFO, LIFO or average-cost method according to the normal course of operations. The method used cannot be changed by the taxpayer without written notification to the Tax Department authorities.

DIVIDENDS

Dividends are free of taxes when the company has paid the income tax for the respective year.

INTEREST INCOME

Banks will withhold 10% income tax on interest income.

INTEREST EXPENSE

If a loan is made to a Salvadoran company by a foreign bank that was registered by the Central Bank of El Salvador before 2009, the interest expense is exempt of income tax. If the foreign bank becomes registered by the Central Bank in 2010, a 10% income tax will be withheld. If the loan is made by a foreign company or a bank that is not registered by the Central Bank, income tax will be withheld at the rate of 20%.

LOSSES

Losses incurred in any given year can be taken as a valid deduction only for the current year. There is no carry forward of losses.

SOURCE OF THE INCOME

Foreign sourced income is not subject to income tax. Only income earned in the territory of El Salvador is subject to El Salvador income tax. Interest income and gains on market values are the exception.

Foreign sourced income is not subject to VAT tax.

Income received by persons or companies domiciled outside El Salvador will be considered as being from an El Salvadoran source if it arises from services or actions that benefit persons or companies located in El Salvador, including fees, interests and royalties.

TAX INCENTIVES

The following incentives are available to these qualifying industries and corporations: Companies operating in a Free Zone are tax-exempt on profit derived from sales from Free Zone to foreign countries. Dividend tax is not applicable to profit derived from sales to foreign countries.

RELATED PARTY TRANSACTIONS

The government is entitled to determine differences between related party transactions, and a transaction done by independent parties. If a difference is detected, this would not be deductible for income tax purposes and a 25% tax would be paid on the difference.

WITHHOLDING TAX

Services (not in payroll) and fees paid to local individuals are subject to a 10% withholding income tax.

Services and fees paid to foreign corporations for work done in El Salvador are subject to a 20% income tax withholding rate.

Services and fees paid or accrued to non-resident individuals for work done in El Salvador are subject to income tax withholding at a 20% flat rate.

Interest, commissions, royalties or technical assistance fees paid to foreign recipients are subject to a 20% withholding tax.

El Salvador VAT - value added tax

Services and goods in El Salvador are subject to a 13% value added tax. The following items are exempt from VAT: Public health, house rentals for living, education, state titles, public water, public transportation, pension funds, and public lottery.