By: Carlos Pineda
Recently, the Legislative Assembly, through Legislative Decree No. 357, dated April 19, 2022, published in the Official Gazette No. 73, Volume No. 435 of the same date, approved the Special Law for the Construction of Penitentiary Centers, hereinafter referred to as the SLCPC.
The aforementioned legislation establishes, among other things, a series of fiscal benefits applicable to the Ministry of Public Works and Transportation (MOPT) and those taxpayers involved in the planning, design, and construction of the Penitentiary Centers.
These benefits are further elaborated in the Guidance Document for the Application of the Fiscal Aspects Contained in the Special Law for the Construction of Penitentiary Centers, and they are as follows:
Income Tax Exemption.
This benefit will apply to the income obtained exclusively from the planning, design, and construction of penitentiary centers by companies. To qualify for this benefit, companies must maintain separate records that fully identify such income, distinguish it from income derived from other sources, and facilitate the verification of the commencement and termination of the benefit.
The deductibility rules stipulated by the Tax Code and the Income Tax Law for this purpose shall apply in any case. Income obtained within the framework of the SLCPC must be incorporated into the specific section of the tax return designated for this purpose and must be submitted within the corresponding legal deadline.
Furthermore, beneficiary companies are not required to make advance payments on income tax in accordance with Articles 151 and 152 of the Tax Code, Article 92 of its Implementing Regulations, and Article 4, numeral 1) of the Income Tax Law. However, there remains a formal obligation to declare the aforementioned income by including it in the special boxes provided for this purpose in the corresponding tax return.
Beneficiaries are required to make any applicable tax withholdings based on the assumptions provided by tax regulations for the amounts paid or credited. These withholdings include withholding income tax on profit distribution.
The provision of services by companies within the scope of activities indicated by the SLCPC (services related to the planning, design, and construction of Penitentiary Centers) shall be exempt from the payment of the Value Added Tax (VAT).
Likewise, local acquisitions of goods or services that are essential for providing the services related to the planning, design, and construction of Penitentiary Centers shall be exempt from the payment of VAT. Therefore, in both cases, companies must issue and deliver invoices in which the prices of these transactions must be included in the column related to exempt sales, making reference to Legislative Decree No. 357.
Finally, it should be mentioned that beneficiary companies are not subject to VAT withholding for operations carried out under the SLCPC. However, they must comply with other formal and substantive obligations as taxpayers of the VAT.
Customs Duties Exemption
On the other hand, permanent imports of goods from abroad that are essential for providing the services related to the planning, design, and construction of Penitentiary Centers shall be exempt from the payment of any taxes that apply upon their entry into the Salvadoran customs territory, including Import Duties and VAT on imports. To apply for this exemption, the taxpayer must attach the purchase order or the contract signed by the MOPT.
Other Tax Aspects
All taxpayers who voluntarily transfer real estate properties to the MOPT, which will be used for the construction of Penitentiary Centers under the SLCPC, must settle and pay the corresponding Income Tax on the income obtained, observing the rules regarding capital gains stipulated in Articles 14 and 42 of the Income Tax Law. However, if the transfer corresponds to a habitual or ordinary operation, the tax shall be calculated as ordinary income.
On the other hand, when an individual transfers their primary residence to the MOPT and the conditions established in Article 4, numeral 12) of the Income Tax Law are met, the income obtained shall be considered non-taxable income, and therefore, the obligation to pay the aforementioned tax shall exist.
Finally, it should be clarified that none of the exemptions extend to goods for consumption or for the personal use of executives, partners, or employees of the companies, their relatives, related companies, or current assets.
For any additional inquiries, please contact Dr. Diego Martín (email@example.com), Attorney Carlos Pineda (firstname.lastname@example.org), or the email address (email@example.com).