What are the incentives for the technology industry in El Salvador?

This past April, El Salvador passed legislation that promises to give tax incentives for 15 years to new investments in programming, software, computer services, and drone parts, among other related industries.

Incentives for the technology industry in El Salvador are outlined in a recently passed law

The draft Law for the Promotion of Innovation and Technology Manufacturing was studied by the Economic Commission of the Legislative Assembly and was passed. It offers:

• Total exemption from Income Tax (ISR) regarding incentivized activities.
• Exemption of ISR withholdings.
• Full exemption from municipal taxes on the declared net assets.
• Exemption from the payment of capital gains and total exemption from the payment of Import Tariff Duties (DAI) for goods of the benefited activity.

However, the following are excluded from the law’s benefits:

• Investments before the law’s entry into force, those related to already established operations, or those derived from mergers or restructuring.
• People or companies benefiting from other special tax regimes such as industrial and commercialization free zones and international service centers.

Incentives for the technology industry in El Salvador will be granted to people or companies, domestic or foreign, that make new investments in innovation or technological manufacturing, such as the following:

1. Programming, management, maintenance, consulting, and analysis of computer systems or software.
2. Development and commercialization of cloud computing and data flow services, artificial intelligence, big data analysis, distributed ledger technology, and cybersecurity solutions.
3. Technologies based on manufacturing parts, materials, equipment or facilities, and assembly (manufacturing plants for technological equipment or hardware, semiconductors, communications technology, robotics, nanotechnology, aircraft, and unmanned vehicles).
4. Engineering and systems technologies necessary to integrate basic industrial technologies into global production chains.

The beneficiaries of the incentives for the technology industry in El Salvador will be required to obtain a Qualification Agreement issued by El Salvador’s Ministry of Economy. The new regulations will define the conditions for obtaining this document. Investors must keep separate accounting records to reliably demonstrate and verify the amount of income subject to tax incentives.

The Ministry of Economy may impose sanctions if investors apply the incentives granted in unrelated activities. In addition, companies and investors may also be cited if they use the declared assets differently than originally proposed or provide false information. The sanctions range from 2 to 20 minimum wages in the commercial sector and up to $7,300 in the  services sector,

The law that grants incentives for the technology industry in El Salvador assumes the existence of an Authority that will regulate its application, issue qualification agreements, carry out inspections, promote agility in supply chains, and create a National Registry of Technological Innovation and Manufacturing Industries Companies. It also allows bilateral agreements with other countries and multinational companies to “make joint investments in research and industrial development” in innovation and technology manufacturing.

Technology investment in El Salvador can help the country to develop

The development of technology has the potential to benefit the economy of El Salvador in several ways significantly:

Increased productivity: Technology can automate manual tasks, streamline processes, and improve efficiency, leading to increased productivity. This can result in higher output levels and economic growth. For example, adopting advanced manufacturing technologies can enhance the production capabilities of El Salvador’s industries, such as textiles, electronics, and food processing.

Innovation and entrepreneurship: Technological advancements foster innovation and entrepreneurship by providing new business opportunities. The emergence of digital platforms and e-commerce opens up avenues for Salvadoran entrepreneurs to start online businesses and reach global markets. This can spur job creation, attract investments, and contribute to economic development.

Enhanced connectivity: Technology enables better connectivity, both domestically and internationally. Improved internet infrastructure and access to high-speed internet can connect Salvadorans to global knowledge networks, online marketplaces, and educational resources. This connectivity can empower individuals, facilitate knowledge-sharing, and create opportunities for remote work and digital services.

Digital financial services: The expansion of technology allows for the development of digital financial services, such as mobile banking and digital payment systems. These innovations can increase financial inclusion by providing access to banking services for previously unbanked populations, and in El Salvador, adopting cryptocurrencies, such as Bitcoin, as legal tender can also foster financial innovation and attract investments in the technology sector.

Tourism and marketing: Technology can play a vital role in promoting El Salvador as a tourist destination. Digital marketing strategies, social media platforms, and online booking systems can effectively reach potential tourists and showcase the country’s natural beauty, cultural heritage, and attractions. This can boost the tourism industry, generate revenue, and create employment opportunities.

Skill development and education: Technological advancements require a skilled workforce. By investing in education and training programs focused on technology and digital skills, El Salvador can develop a competent workforce capable of leveraging technology for economic growth. Additionally, online learning platforms can provide accessible and affordable education opportunities to Salvadorans, equipping them with the necessary skills for the digital economy.

It’s important to note that successfully integrating technology into the Salvadoran economy will require supportive policies, infrastructure development, and investment in research and development. These factors, combined with the potential benefits outlined above, can contribute to the overall economic development of El Salvador.