El Salvador's Legislative Assembly approves reform to Income Tax Law, exempting foreign-source income

Executive summary

On 12 March 2024, the Legislative Assembly approved an initiative to reform the Income Tax Law that excludes from the concept of income any passive income that entities and individuals in El Salvador receive from foreign sources. The change in the law means that dividends, capital gains and interest, among other income, from securities and financial instruments abroad would not be subject to Income Tax in El Salvador.

A summary of the changes introduced follows.

Details

Exclusion of foreign source income

Section 3 of the Income Tax Law (IT Law) is amended, adding a new section (Section 4) that excludes from the concept of income all values that are received in any form, obtained abroad, or any capital movement, remuneration or emolument, in cash or kind obtained or received by individuals, legal entities or entities without legal personality, domiciled or not in the country, coming from any kind of source abroad.

Taxpayers who obtain taxable income and foreign-source income that is excluded from tax under the new Section 4 are excluded from the application of the mechanism for determining the proportion of costs and expenses established in the final subsection of Section 28 of the IT Law.

Repeal of IT Law provisions

The following provisions of the IT Law are repealed:

• Section 14-A (specifically, the sixth, seventh and eighth subsections), regarding income obtained from securities and other financial instruments abroad
• Portions of Section 16 (specifically, (c) of the fourth subsection, and fifth and seventh subsections) concerning the returns or results from securities, financial instruments and derivative contracts when the assumed risk is located in Salvadoran territory, and regarding nontaxable, exempt or "not subject" income that Salvadoran taxpayers domiciled in El Salvador obtained in another country for credits or financing granted to individuals or entities located abroad
• Portions of Section 27 (specifically, the second, third and fourth subsections) concerning income that taxpayers domiciled in El Salvador obtain from deposits in foreign financial institutions

Next steps

The legal reform is effective as of 22 March 2024 (i.e., eight days after its publication in the Official Gazette).

For additional information concerning this Alert, please contact:

Ernst & Young, El Salvador

• Rafael Sayagués

• Héctor Mancia Flores

• Daniela Vargas Gutiérrez

• Gabriela Silis 

• Carlos E Gaitan Cortez 

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.