Approved: Income tax on international capital in El Salvador will be exempted
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Deputies approve reform to El Salvador’s Income Tax Law to encourage investment from abroad. They assert that returns on investments must always be declared as income but will be exempt from income tax on international capital in El Salvador. The approval of the measure occurred after it was approved earlier this year.
Deputies of the Finance Commission of El Salvador’s Legislative Assembly approved a favorable opinion on a reform to the Income Tax Law on March 11, 2024, that would seek to encourage national and foreign investment in the financial sector, exempting all movements of income tax on international capital in El Salvador entered into the country from the tax.
The measure is aimed at incentivizing investment
The Deputy Minister of Finance, Luis Sánchez Castro, explained in his request that “there are international capital movements” to recipients “located in the country” and that the tax and administrative burdens imply “a disincentive for national and foreign investment.”
The favorable opinion was approved with 318 votes from the Nuevas Ideas political party and was approved by the legislative plenary session, which took place on Tuesday, March 12, 2024.
The reform incorporates into the income exclusions regulated in Article 3 of Income Tax Law, which defines “capital income” as “all values received in any concept, obtained abroad or any movement of capital, remuneration or emolument, in money or species, generated or not by the investment of national or foreign capital.”
Income tax on international capital in El Salvador will enjoy exemptions
The exemption will benefit natural persons and legal entities domiciled or not in El Salvador that obtain income abroad from:
- Custodial funds.
- Repatriation of capital for deposits in foreign financial institutions.
- Repatriation of capital invested abroad.
- Income from the investment of securities and other instruments.
- Income from credits or financing.
- Family remittances.
- Funds for working capital.
- Funds to invest in instruments placed in the country.
- Other income of money to the country
Marvin Sorto, general director of Internal Taxes of the Ministry of Finance, explained during a meeting of the Finance Commission that they are asking to exclude from the payment of Income Tax “the entry of that money into the country” but warned that “once it begins to be injected” into the country, “that value chain will at some point be taxed.” He added that “this negates the idea that El Salvador is “becoming a country of zero taxation.”
Sorto gave an example of how the new measure can benefit a Salvadoran abroad who received money from the sale of his home abroad: “Although abroad I can have this operation well documented and where I got the money from the sale of a house when I came to the country, I was uncertain as to whether or not I would declare it in the Income Tax… I didn’t know how to justify it to a third party.
He pointed out that, for example, the tax on said funds would be 30%, that is, $120,000 of $400,000. “With the reform, what is sought is for this to be declared but excluded from income tax on international capital in El Salvador,” he indicated.
Deputy Guevara assured that, with this, money laundering would be combated. Sorto responded that prevention mechanisms regarding laundering are maintained.
Deputy Edgardo Mulato from Nuevas Ideas asked if these funds could be used for “consumption and even productive activities.” The director of El Salvador’s Internal Revenue responded that the reform is “a holistic scheme in which that money will be able to be injected either into consumption or investment for working capital.” According to the official, this will generate greater activity for the country’s economy.
The measure provides legal clarity
The regulations clarify that taxable income will be the values from assets abroad obtained by a multinational group that is not a qualified entity with adequate economic participation in Salvadoran territory during the tax year.
In conclusion, the approval of the reform to exempt income tax on international capital in El Salvador marks a significant step towards fostering national and foreign investment in the country’s financial sector. With unanimous support from the Finance Commission and subsequent legislative approval, the reform aims to alleviate tax burdens on capital movements entering the country, encouraging economic growth and development. The broad scope of exemptions, ranging from credits to repatriation of capital, demonstrates a commitment to creating a favorable investment environment. While ensuring compliance with anti-money laundering measures, the reform also clarifies the taxation of assets obtained by multinational groups operating within Salvadoran territory. By incentivizing income declaration while excluding it from taxation, the reform seeks to enhance transparency and accountability while stimulating economic activity. Overall, this reform reflects El Salvador’s proactive approach to attracting investment and promoting a dynamic and thriving economy.
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