Income obtained outside El Salvador is now exempt by law from the payment of income tax in the country

Luis Barahona, César López, René García

March 2024 - El Salvador - The Official Gazette Number 52 was published on March 22, 2024, on the website of the National Printing Office, dated March 14, 2024, which contains the Legislative Decree Number 969, through which tax reform is made that frees all earnings obtained outside El Salvador from the payment of Income Tax.

This tax reform, which will become effective 8 days after its publication in the referred Official Gazette, takes into account the fact that until before said reform the Income Tax Law established that certain income obtained outside El Salvador was subject to the payment of Income Tax in the country, being such income the following:

• Income from securities (shares among others) and other financial instruments abroad (art.14-A sixth, seventh, and eighth paragraphs LISR), as well as the capital gain from the transfer of them.
• Interest from deposits in bank accounts abroad (art.27 second, third, and fourth paragraphs of the Income Tax Law); and,
• Interest from loans granted from El Salvador to individuals located outside of El Salvador (art.16 final paragraph LISR)

It is pertinent to express that the tax reform is not only limited to exempting from income tax payment the income mentioned above but also exempting from income tax payment all values received in any concept obtained outside El Salvador.

The foregoing implies that, as of the effective date of the referred reform, the aforementioned income, as well as the income received in any concept and obtained outside El Salvador, will not be subject to the payment of income tax in the country, with which, this reform marks the return of the Salvadoran tax legislation in matters of income tax, to a purely territorial system or of the source.

Therefore, it is important to keep in mind that the referred reform is only applicable to income generated and obtained outside El Salvador so that income generated and obtained within El Salvador continues to be subject to the corresponding payment of Income Tax.

Based on the above, and to avoid any inadequate understanding of such reform, it should not be lost sight, that the legal provisions that regulate the legal treatment applicable to the payment made to non-domiciled subjects of interest on loans, royalties for use of trademarks and services rendered from abroad and used in the country, among others, have not been object of the reform in question, therefore, they continue to be subject to the payment of income tax in the country and the respective withholdings.

To know the content of the referred tax reform, you may access the Official Gazette Number 52, Volume Number 442 dated March 14, 2024, which contains Legislative Decree Number 969 dated March 12, 2024, by accessing this link. 

The information provided by ARIAS® is presented for informational purposes only. This information is not legal advice and is not intended to create, nor does it constitute an attorney-client relationship. Readers should not act upon this information without seeking advice from professionals in the field.

Authors:

Luis Barahona - SV Socio - luis.barahona@ariaslaw.com
César López - SV Senior Counsel - cesar.lopez@ariaslaw.com
René García - SV Asociado Senior - rene.garcia@ariaslaw.com

AriasLaw.com