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Tax incentives contained in the new law to promote innovation and technology manufacturing in El Salvador

by | Oct 21, 2023

On April 18, 2023, the Legislative Assembly approved the new Law for the Promotion of Technological Innovation and Manufacturing in El Salvador, intending to incentivize natural or legal persons that make, within the national territory, new investments and foreign direct investment in innovation projects or technological manufactures; thus, contributing to the economic growth and sustainable development of the country.

This new law grants multiple tax incentives and is specifically designed to encourage investment and development of the technology industry in El Salvador’s national territory. Regarding its application, it will correspond to the Ministry of Economy. In contrast, the effective surveillance and control of the customs and tax regime will correspond to the Ministry of Finance, which may conduct inspections to verify compliance with legal obligations.

Below, we have included a summary of the significant points touched upon by the new law for the Promotion of Technological Innovation and Manufacturing in El Salvador.

What are the incentivized activities?

Natural or legal persons who carry out commercial activities in productive sectors related to at least one of the following items will enjoy tax benefits:

  • Programming, management, maintenance, consulting, and analysis of computer systems or software.
  • Development and commercialization of cloud computing and data flow services; artificial intelligence, massive data analysis; distributed ledger technology; cybersecurity solutions.
  • Technologies based on the manufacturing in El Salvador of parts, materials and equipment or installations, assembly, including manufacturing plants for technological equipment or hardware, semiconductors, communications technology, robotics, nanotechnology, aircraft, and unmanned vehicles.
  • Systems engineering and technologies necessary to integrate basic industrial technologies into global production chains.
  • New energy generation and storage sources, which do not currently exist within the national energy matrix, will be subject to the corresponding authorizations and concessions, as the case may be.
  • Research and development of new technologies.

Who can benefit from the new law?

The beneficiaries of this law will be natural or legal persons, national or foreign, who develop, within the national territory, a new investment in innovation projects or technological manufacturing in El Salvador included in the previous section, which meets the following requirements:

  • Be natural or legal persons, national or foreign.
  • Be registered with the Salvadoran Tax Administration.
  • Prove that the activities developed correspond to the incentivized activities.
  • Obtain a current qualification agreement issued by the Ministry of Economy.

However, investments made before the entry into force of this law, as well as investments related to operations already established in the territory or those under a special regime derived from the increase in assets as a result of merger, absorption, or any other processes, operational and administrative restructuring of assets, are excluded from the benefits of the new law.

Nor will natural or legal persons who enjoy the benefits included in other special tax regimes, such as those contemplated in the regulations that regulate industrial and marketing free zones and those that control parks and service centers, be eligible for this law.

What tax incentives does it provide?

The beneficiaries of this law, subject to a current Qualification Agreement issued by the Ministry of Economy, will be eligible for the following tax incentives:

  • Total exemption from Income Tax regarding incentivized activities.
  • Exemption from all types of Income Tax withholdings regarding incentivized activities.
  • Full exemption from municipal taxes on the net assets declared by the beneficiaries.
  • Exemption from the payment of Capital Gains, stipulated in articles 14 and 42 of the Income Tax Law;
  • Total exemption from the payment of Import Tariff Duties and taxes levied on the importation of goods, inputs, machinery, equipment, and tools necessary to develop the incentivized activities.

The above tax incentives will be recognized for fifteen years from the day following notification of the issuance of the Qualification Agreement by the Ministry of Economy.

The total exemption from Import Tariff Duties and Taxes levied on the importation of goods indicated applies only to goods that are essential for the benefited activity, and they must be duly identified by the beneficiaries as being exclusively used for the activity in question.

Likewise, the quantity of goods to be imported must be proportional to the installed capacity of the beneficiary through which the incentivized activity will be developed. No exemption regulated in that law will be extended to the import of firearms, ammunition, goods for consumption by directors, partners, or staff of the company, their family members or related companies, and current assets.

What violations and sanctions does it establish?

Among the main infractions that this new law establishes are:

  • Applying tax incentives and benefits to activities not encouraged by this law will be considered a severe infraction, which will be punished with a fine of 15 to 20 minimum monthly salaries in the commerce and services sector.
  • Failure to comply with the operating permits and authorizations corresponding to the type of productive activity, commerce, or services to be carried out will be considered a serious infraction, which will be punished with a fine of 6 to 15 minimum monthly salaries in the commerce and services sector.
  • Refusing to appear without justified cause to the legal calls made to them by the institutions mentioned in this law will be considered a less severe infraction, which will be punished with a fine of 2 to 5 minimum monthly salaries in the commerce and trade sector.

When did the new Law for the Promotion of Technological Innovation and Manufacturing in El Salvador enter into force?

The law, as mentioned above, was published in Official Gazette No. 81, Volume No. 439, dated May 4, 2023, and according to its final article, it entered into effect thirty days after its publication in the Official Gazette, that is, from August 4, 2023.

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