Employers in El Salvador have significant tax responsibilities, particularly in relation to the Salvadoran Social Security Institute (ISSS) and the private pension fund system (Administradoras de Fondos de Pensiones - AFP).

Social Security Contributions

Employers are required to contribute 7.75% of an employee's gross salary to the ISSS. This contribution covers a range of benefits, including pensions, healthcare, and disability insurance.

AFP Contributions

In addition to social security contributions, employers also contribute 7.25% of an employee's gross salary to the AFP.

Contribution Caps and Reporting

It's important to note that social security and AFP contributions are generally capped at a maximum monthly salary. Employers are responsible for withholding employee contributions, adding their own, and remitting payments to the ISSS and AFPs on a regular basis, typically monthly.

In El Salvador, a progressive income tax system is used. The income tax brackets and rates are subject to change, so it's crucial to stay updated with the latest information.

Employee's ISSS Contribution

Employees contribute 3% of their gross salary to the Salvadoran Social Security Institute (ISSS). This contribution covers pensions, healthcare, and disability insurance.

AFP Contribution

Employees are also required to contribute 7.25% of their gross salary to their chosen private pension fund (Administradoras de Fondos de Pensiones - AFP).

Contribution Caps and Withholding

It's important to note that social security and AFP contributions are capped at a maximum monthly salary. Employers are responsible for deducting income tax, social security contributions, and AFP contributions from their employees' salaries.

The standard VAT rate (Impuesto a la Transferencia de Bienes Muebles y a la Prestación de Servicios - IVA) in El Salvador is 13%.

VAT Liability for Services

Determining if you need to charge VAT on your services in El Salvador involves a few crucial factors:

• Place of Supply: The place of supply rules establish where a service is deemed to be performed for VAT purposes. General rules apply depending on the type of service, whether the customer is a business (B2B) or an individual (B2C), and the location of both parties.
• Reverse Charge Mechanism: The reverse charge mechanism might apply in certain B2B service transactions. In these cases, the Salvadoran business receiving the service becomes responsible for reporting and paying the VAT.

Important Categories of Services

• Electronically Supplied Services: If you provide digital services (software downloads, subscriptions, etc.) to customers in El Salvador, you might be liable for Salvadoran VAT, even if your business is located outside El Salvador.
• Services Related to Immovable Property: Services with a significant connection to a property located in El Salvador (e.g., construction work, real estate services) usually fall under Salvadoran VAT rules.
• Professional Services: Consulting, accounting, and legal services, when the place of supply is determined to be El Salvador, are generally subject to VAT.

VAT Registration and Reporting

• Registration Threshold: Businesses exceeding a specific revenue threshold within El Salvador may be required to register for VAT. Consult the Ministry of Finance of El Salvador for the latest figures.
• Filing and Payment: Registered businesses must file periodic VAT returns and make corresponding payments to the tax authorities in El Salvador.

Companies operating within designated Free Trade Zones (FTZs) enjoy several tax benefits. These include income tax exemptions, where businesses in FTZs may be fully exempt from income tax for a certain period and benefit from reduced rates afterward. They also include exemptions on imports and local purchase of goods and services used within the zone, and exemption from import duties on raw materials, equipment, and machinery.

Specific Sector Incentives

There are also specific sector incentives. For instance, the Tourism Law provides incentives such as income tax exemptions and import duty exemptions for businesses investing in eligible tourism projects. Tax benefits and incentives might be available for businesses investing in renewable energy projects.

Other Potential Incentives

Other potential incentives include export incentives, where exporters may be eligible for tax breaks related to export activities. Reinvestment incentives are also available, where businesses reinvesting a portion of their profits may qualify for income tax deductions.

Important Considerations

It's important to note that specific eligibility requirements and conditions apply to different incentives. Ensure your business and proposed activities fall within the qualifying criteria. Also, tax incentives usually involve formal applications and approval processes through relevant government agencies such as the Ministry of Economy (MINEC).