Capital gain in El Salvador

By: Verónica Tadeo

The Income Tax Law, in its Article 14, provides us with a definition of what we should understand by Capital Gains, and it is the one obtained by a natural or legal person that is not habitually engaged in the purchase and sale, swap or other form of negotiations on movable or immovable property. That is to say, they are eventual profits, generated by operations different from the main object of the exploitation, or that by contingent circumstances alien to the management of the company.

Habituality is the differentiating element to determine whether it is a capital gain or income obtained; In this respect, Article 15 of the Income Tax Law Regulations, provides the elements that must be present for an activity to be considered habitual, indicating that it consists of acts performed by the taxpayers that constitute the corporate purpose or line of business and whose intention is to engage in legal negotiations, for the case of Article 14 of the Income Tax Law, it would be to engage in the purchase and sale, exchange or other form of negotiations on real or personal property, whether or not the subject performing the acts has the status of trader.

The doctrine has been stating that habituality is consubstantial to any person who undertakes an economic activity and develops it making it his “profession” or his “modus vivendi”, bearing in mind that what must prevail to determine the habituality is the “mercantile spirit” given to the transactions. Thus, operations that although isolated, denote “spirit of enterprise” or “mercantile spirit”.

In relation to the determination of gain or loss from the sale of real and personal property, Article 14 of the Income Tax Law establishes the parameters to determine when the sale of property generates a capital gain or loss.

The second paragraph of the mentioned legal provision establishes that in each transaction, the basic cost of the property, the amount of the improvements made to preserve its value and the expenses necessary to carry out the transaction will be determined from the value of the transaction, when the value of the transaction is greater than the deductions, there will be a capital gain.

The improvements as well as the expenses necessary for the transaction must be demonstrated with the supporting documentation and its respective accounting record, since they are deductions for the taxpayer must comply with the requirements of the tax regulations regarding their verification, as stipulated in article 206 of the Tax Code.

The tax payable on the net capital gain will be the equivalent of 10% of such gains, with the exception of those transactions carried out within the 12 months following the date of acquisition, in which case the gain must be added to the ordinary taxable net income and the tax must be calculated as ordinary income (Article 42 of the Income Tax Law).

In case there is a balance of capital loss from previous fiscal years or tax periods, which have not been applied to capital gain, it may be subtracted from the net gain originated from transactions greater than 12 months, calculated in the current fiscal year or tax period, the positive result will be subject to the referred tax.

However, the capital gain of those transfers made after 12 months following the acquisition of the asset, shall be added to the tax calculated on the ordinary taxable income and shall be paid in the same period in which the taxpayer must file the Income Tax return for the same tax year, attaching to the referred return the Form for the calculation of capital gain or loss (F-944), which must be completed with the requirements established by the General Directorate.

On the other hand, the product, gain, profit or profit obtained by a natural person in the sale of his first house and the transaction value does not exceed 723 minimum wages (based on the current salary of USD $365.00 will be the equivalent of USD $263,895.00), as long as he does not habitually engage in the purchase and sale or exchange of real estate, are excluded from the computation of the Income obtained, in accordance with Art. 4 number 12) of the Income Tax Law.

For further information, please contact Dr. Diego Martín (, Mr. William Escobar ( or e-mail (