El SalvadorTax Obligations Detailed

Employers in El Salvador have various tax obligations related to payroll, social security, and other contributions.

Employer Obligations

• Social Security: Employers contribute 7.5% of an employee's monthly salary up to a maximum cap of USD 1,000. If the salary exceeds USD 1,000, the contribution remains fixed at USD 75.
• Pension Fund (AFP): Employers contribute 8.75% of the employee's total monthly salary to the Pension Fund Administrator (AFP).
• National Training and Formation Institute (INSAFORP/INCAF): Employers with more than ten employees contribute 1% of each employee's monthly salary up to USD 1,000. No contribution is required for salaries exceeding USD 1,000.
• Income Tax Withholding: Employers are responsible for withholding income tax from employee salaries based on a progressive scale ranging from 0% to 30% and remitting it to the tax authorities monthly.
• 13th-Month Salary Bonus: It is customary for employers to pay a 13th-month salary bonus, calculated based on the employee's tenure:
  • 1-3 years: 15 days of wages
  • 3-10 years: 19 days of wages
  • 10+ years: 21 days of wages
• Annual Income Tax Return: Employers must file annual income tax returns by April 30th of the following year, even if no taxes are due.
• Monthly Payroll Reporting: Payroll tax and other withheld amounts from employee salaries are paid monthly to the tax authorities by the employer. The corresponding returns are also filed monthly.

Employee Obligations

• Social Security: Employees contribute 3% of their monthly salary up to a maximum cap of USD 1,000. Contributions remain fixed at USD 30 for salaries exceeding USD 1,000.
• Pension Fund (AFP): Employees contribute 7.25% of their total monthly salary.
• Income Tax: Employees are subject to income tax, which is withheld by the employer. The tax rate ranges from 0% to 30%, calculated according to progressive rates based on their annual income:
  • Up to USD 5,664.00: 0%
  • USD 5,664.12 - USD 10,742.88: 10%
  • USD 10,743.00 - USD 24,457.20: 20%
  • Over USD 24,457.32: 30%

Additional Information

• Value Added Tax (VAT): El Salvador has a standard VAT rate of 13% on most goods and services.
• Minimum Wage: The current monthly minimum wage in El Salvador is USD 182.50.
• Currency: The official currency is the United States Dollar (USD).
• Tax Year: The tax year in El Salvador is the calendar year (January 1st to December 31st).

This information is current as of February 5, 2025, and may be subject to change.

In El Salvador, employee tax deductions encompass various areas, including income tax, social security contributions, and pension fund contributions.

Income Tax

Salaried individuals earning up to USD 9,100 annually are exempt from filing a tax return and receive a standard deduction of USD 1,600. Those earning above this threshold do not qualify for the standard deduction but can deduct medical and educational expenses up to USD 800 per item. Donations to non-profit organizations are deductible up to 20% of net income after subtracting the donation amount. Voluntary contributions to private pension funds are deductible up to 10% of the monthly income declared to the pension fund. Income tax rates are progressive, ranging from 10% to 30% based on income brackets. Non-residents are subject to withholding tax rates of 20% or 25%, or potentially lower rates for specific services. Capital gains are generally taxed at 10%.

Social Security Contributions

Both employers and employees contribute to social security. Employees contribute 3% of their monthly salary up to a cap of USD 1,000. Employers contribute 7.5% up to the same cap. For salaries exceeding USD 1,000, the employee contributes a fixed USD 30, and the employer contributes USD 75. These contributions fund health/maternity, disability, old age, and death benefits. Health disability is covered by the employer for the first three days, with social security covering 75% of the salary thereafter. Maternity leave receives 100% coverage of the monthly salary for four months. Disability benefits vary based on duration, with social security providing a percentage for up to a year and pension funds covering longer durations. Retirement age is 60 for men and 55 for women, or after 30 years of service. Death benefits are provided to the deceased's family from their pension fund savings.

Pension Fund (AFP)

Both employers and employees make mandatory contributions to a private pension fund administered by Pension Fund Administrators (AFPs). The employee contributes 7.25% of their monthly salary, and the employer contributes 8.75%. These contributions are deducted and reported monthly through the payroll process. This system is separate from the mandatory social security contributions.

Additional Considerations

• Tax Year: El Salvador's tax year is the calendar year (January 1st to December 31st).
• Tax Havens: El Salvador maintains a list of tax haven jurisdictions for tax purposes, with transactions involving entities in these jurisdictions subject to specific regulations and potentially a 25% withholding tax. As of 2025, the list includes 101 jurisdictions.
• Interest on Late Payments: As of February 1, 2023, interest on late tax payments is 6.35% for up to 60 days and 10.35% thereafter.

It is important to note that this information is based on the available data as of today, February 5, 2025, and may be subject to change due to updates in tax regulations. Consulting with a tax advisor is always recommended for personalized guidance and to remain informed about the latest updates.

In El Salvador, a 13% Value Added Tax (VAT) applies to most goods and services, with exports zero-rated.

VAT Registration

• Threshold: Businesses must register for VAT if their sales exceed US\$5,714.28 or total assets surpass US\$2,285.71 in the preceding 12 months. Those engaged in import activities must register regardless of turnover or assets. Voluntary registration is not available for non-resident entities.
• Process: Businesses must register with the tax authorities (DGII), obtain a Tax Identification Number (NIT) and a VAT registration number.

VAT Filing and Payment

• Returns: Monthly VAT returns (Form F-07) are required, even if no taxable transactions occurred. These are filed electronically through the Tax Authority's website.
• Deadline: Returns and payments are due by the 10th working day of the following month.
• E-invoicing: Mandatory for businesses, including B2C e-tickets beginning January 1, 2025.

VAT Rates and Exemptions

• Standard Rate: 13%
• Zero Rate (0%): Exports of goods and services; Transfers to Free Trade Zone and International Services Law authorized entities.
• Exempt Supplies (No Input VAT Deduction):
  • Health services by public institutions
  • Real estate rental for housing
  • Services under a labor relationship and by public/municipal employees
  • Authorized cultural public performances
  • Educational services by authorized entities
  • Interest on deposits and loans from registered financial institutions
  • Imports by diplomats, international organizations, according to customs regulations, to non-profits, municipalities for public benefit, machinery for registered taxpayers' fixed assets, and public transport vehicles (transferable after five years).

Other Considerations

• Record Keeping: Maintain invoices, credit/debit notes, import/export documentation, and records of supplied/received goods and services for at least five years.
• Tax Audits: Conducted by the Ministry of Finance. Taxpayers with assets over USD 1,142,857 and sales over USD 571,428 must file an independent audit report annually.

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Additional Information on El Salvador's Tax System

El Salvador's tax system includes various other taxes besides VAT. These include income tax, which has specific rates for resident and non-resident individuals and corporations, along with withholding tax applied to dividends, interest, and royalties. Specific sectors, such as the free trade zones and international services, may benefit from tax incentives. The country also has transfer pricing rules aligned with OECD guidelines and participates in international tax information exchange agreements.

Tax compliance is crucial. Penalties can be imposed for late filing, incorrect reporting, and non-payment. Businesses operating in or expanding into El Salvador should understand the tax obligations and seek professional advice when necessary. As tax laws are subject to changes, remaining up-to-date with regulations is essential for compliance.

El Salvador offers various tax incentives to attract investment and stimulate specific sectors.

Free Trade Zones

Companies operating within designated Free Trade Zones benefit from several incentives:

• Exemption from Corporate Income Tax (CIT).
• Exemption from Value Added Tax (VAT).
• Exemption from Municipal Taxes.
• Exemption from Real Estate Transfer Taxes for land used in productive activities.
• Exemption from import duties on machinery, raw materials, equipment, and intermediate goods used for production.

International Services

The International Services Law provides similar benefits to companies providing services linked to international trade:

• Exemption from Corporate Income Tax (CIT).
• Exemption from Value Added Tax (VAT).
• Exemption from Municipal Taxes.

Tourism Sector

Incentives are available for investments in tourism-related projects, although specific details are not readily available. Further research may be needed to determine current incentives offered.

Renewable Energy

Investments in renewable energy projects are incentivized through tax benefits. Further research may be needed to determine current incentives offered.

Skyscraper Development

New high-rise building projects (35 floors or more) initiated after October 3, 2024, are eligible for a 15-year exemption from income and capital gains taxes. This applies to construction, development, the first sale, and rental income.

Technological Manufacturing and Innovation

A bill under consideration aims to incentivize investments in technology sectors like software development, cloud computing, AI, robotics, and semiconductor manufacturing. Details of the proposed benefits are limited pending legislative approval. Further information should be sought for an update on this legislation.

Tax Havens

El Salvador maintains a list of tax havens, with a 25% withholding tax rate applied to payments to entities in these jurisdictions.

It's important to note that this information is current as of February 5, 2025, and may be subject to change due to legislative updates or adjustments in government policy. Consulting with a tax advisor is recommended for personalized guidance.