Territoriality of services in the Salvadoran Tax System

One of the main questions that any foreign businessman who is considering providing services to persons or companies based in El Salvador asks himself is – first – if he is obliged to pay taxes in this country, and if so, how much would such payment amount to, and how it should be made.

To answer these questions, it is first necessary to know how the Salvadoran Tax System is configured. In this case, we will pose this question with respect to Income Tax, and in particular on the territorial scope of application of the tax regulation.

The jurisprudence establishes – based on the doctrine – that the criteria of tax subjection are based on the Principle of Personality or World Income, by virtue of which, the State in the exercise of its taxing power, demands from a subject the tax for the income he/she obtains, regardless of the place where this income is generated; and the Principle of Territoriality, by which the State taxes the wealth or income that is generated or received in its territory.

The Salvadoran Tax System follows the Principle of Territoriality, which requires the existence of an economic belonging of the patrimony or obtaining of the income with the territory or the economy of a country. The latter is also called source criterion.

Particularly on the subject of services, Art. 16 of the Income Tax Law establishes that income obtained in El Salvador is considered to be income obtained in El Salvador, which comes from activities carried out, and from services rendered or used in the national territory, even if they are received or paid outside the Republic. In addition, the mentioned provision adds that the income from services used in the country shall constitute income obtained in El Salvador for the service provider, regardless of the activity that originates it is carried out abroad.

On the above, the Income Tax Law does not define in which case a service is considered to be rendered in the national territory; however, the Contentious Administrative Chamber has established in its jurisprudence, that by virtue of the Principle of Unity of the Legal System, and in systematic interpretation with the VAT Law, it is understood that the service is performed in the country, when the economic activity of the company is carried out in the country.

We consider that it should also be understood that the service is rendered in El Salvador, when the individual travels to the country to perform the contracted service, which includes employees of foreign companies.

On the other hand, in order to establish that a service is used in El Salvador, the Court of Appeals of Internal Taxes and Customs has adopted the criterion of economic use of the service, which in its core establishes the following:

“In relation to the above, it is important to point out that our Income Tax Law is governed by the source principle, as a criterion for the attribution of the taxing power.


According to the doctrine, the source criterion is of economic belonging, and taxes according to the place where the wealth is generated, located, placed, or economically used. It takes into account the source producing wealth, regardless of the nationality, domicile or residence of the taxpayers and the place where the contracts are entered into (Catalina García Vizcaíno, Derecho Tributario, Volume I, Ediciones Depalma, 1996, page 204).


Likewise, the authors argue that the income of the non-resident follows localization links according to the activity that has legal effect or origin within the territory, such as, income from economic activities or exploitations without the mediation of a permanent establishment that are carried out in the territory, or income from the rendering of services used in the territory. (Tulio Rosembuj, Derecho Fiscal Internacional, El Fisco, Barcelona, 2001, page 64) (…)


As previously stated, the use of a service claims servitude to an economic activity carried out in the territory, in that sense, it cannot be stated that the advertising service is economically used in the territory of the above mentioned [foreign] countries since the economic benefit for the advertising services is received by the appellant company in the national territory, being by virtue of this that the appellant company assumes the expense of such service, with the purpose of increasing the sales rank by advertising its brand abroad (…).


The use of the mentioned services has occurred within the national territory, since it is here where the social appellant takes advantage of them for the performance of its economic activity; reason for which, the amounts paid by the taxpayer to its non-domiciled clients on account of the advertising services, constitute income obtained in El Salvador for Income Tax purposes, situation that makes the social appellant the obligation to make the withholding contemplated in article 158 of the Tax Code (…)”[1] (emphasis added).

Pursuant to the above, a foreign individual or company shall be deemed to pay Income Tax in the following cases:

a) The service is rendered in the country: this is when the economic activity of the company is performed in the country; or when the person moves to El Salvador to execute the contracted service.

b) The service is used in the country: This is when the service is used in El Salvador, for the realization of the economic activity of the acquirer, although it is rendered abroad. In other words, the economic benefit of the service is generated in the country.


Once we are clear about the assumptions for which an income is considered of Salvadoran source, and therefore, that there is an obligation to pay Income Tax, it is necessary to identify how much is the amount to be paid, and how to make such payment.

In this respect, Art. 158 of the Tax Code establishes for Salvadoran taxpayers, the obligation to make withholdings to subjects not domiciled in the country, when the payment or crediting of such income is made. These withholdings constitute definitive payment of Income Tax.

The aforementioned withholdings are made at the rate of 20%, except when the service providers are domiciled in Low or No Taxation Territories or Tax Havens, in which case the withholding will be made at the rate of 25%. In addition, there are reduced withholding tax rates for certain services, as explained below:

a) Withholding at the rate of five percent (5%) on amounts paid or credited for international transportation services.

b) Withholding at the rate of five percent (5%) on amounts paid or credited for services rendered by non-domiciled insurance companies, reinsurance companies, surety companies, reinsurance companies and reinsurance brokers authorized by the Superintendency of the Financial System.

c) Withholding at the rate of ten percent (10%) on amounts paid or credited for financing services rendered by financial institutions domiciled abroad, supervised by a financial regulatory entity or authorized or registered by a competent authority in their countries of origin and previously qualified by the Central Reserve Bank of El Salvador, to taxpayers domiciled in the country.

d) Withholding at the rate of five percent (5%) on the amounts paid or credited for the transfer in any title of intangible goods, or for the use, or concession of use, of rights of tangible and intangible goods related to: cinematographic films, video tapes, phonograph records, radio soap operas, soap operas, novels and cartoons by any means of reproduction, recording of videos or tracks; transmission of television programs by cable, satellite or other similar systems.

e) Withholding at the rate of three percent (3%), for the amounts paid or credited that come from income and yields of capital invested in securities, or transactions on securities, participations and other investments made in the Salvadoran securities market, whether primary or secondary, through the stock exchange, shall be subject to the withholding regulated in the first paragraph of this article, at a percentage of three percent (3%).

These reduced withholding rates will be applied regardless of whether the service provider is domiciled in a tax haven, or a low or zero tax territory.

Another aspect to be highlighted is that in the event that no withholdings have been made, the foreign service providers must file the Income Tax return, liquidating such income and the respective tax.

On the other hand, non-domiciled individuals or entities that have an agent or representative in the country, may file the Income Tax return, liquidating their income and the respective tax, having the right to be credited with the tax withholdings made, and in case they have a surplus or balance in their favor, they may request the corresponding refund.

In accordance with the above, individuals and companies not domiciled in El Salvador that render services to Salvadoran taxpayers, will be obliged to pay Income Tax, to the extent that the services are rendered or used in El Salvador. On the other hand, the amount of the tax will depend on the withholding tax rate, which may vary to the extent that the provider of the services is domiciled in a territory of low or null taxation or tax haven; or when they render services that have reduced withholding tax rates.

[1] Judgment of the Court of Appeals for Internal Revenue and Customs (TAIIA), of eleven o’clock on June 28, 2017, with reference R1604045T.

For any additional inquiries, please contact Dr. Diego Martín (dmartin@consortiumlegal.com), Mr. William Escobar (wescobar@consortiumlegal.com) or email (taxelsalvador@consortiumlegal.com).