In a globalized world, cross-border traffic of labor and specialized professionals is increasingly common, so it should not be surprising that many foreigners travel to El Salvador, either temporarily or permanently, to carry out their activities as employees in companies or in the free exercise of their profession.
El Salvador uses the Principle of Territoriality to establish when an income is considered as obtained in El Salvador, for income tax purposes. In the specific case of income from services, it is considered Salvadoran income – under the source criterion – when the services are rendered or used in the national territory.
In the case of foreigners, the most common is that they are taxed by means of tax withholdings, for the percentage of 20% calculated on the amount paid, which are considered definitive payment of the tax. This as long as the foreigner does not have a tax domicile in El Salvador.
It should be noted that having Salvadoran nationality is not the same as having “Salvadoran tax domicile”, since the first of these categories refers to the status that recognizes that a person is part of the Salvadoran State, which entitles him/her to a series of political and social Rights and Duties; on the other hand, the tax domicile has a connotation eminently aimed at establishing the legal tax relationship (payment and formal obligations).
Then, in a somewhat brief sense, we can say that by having a Salvadoran tax domicile, one has the condition to become a taxpayer before the State, in the full meaning of the word, to the extent that taxpayers are obliged to pay taxes and to comply with formal obligations, as well as to pay fines and interest, if any.
On the contrary, a “non-domiciled person” -in principle- would only be obliged to pay the tax through the withholding tax as a definitive payment, but not with respect to the accumulation of formal obligations associated with being a taxpayer, such as the obligation to register in the Taxpayers’ Registry, the updating of the data in said registry, the filing of reports and tax returns, among others.
Therefore, the question is when does a foreigner acquire tax domicile in El Salvador?
It is the same tax regulation that establishes the rules to understand that a person has a Salvadoran tax domicile. It should be noted that these rules are applicable to both Salvadorians and foreigners; but we start from the idea that most Salvadorians have their tax domicile in this country, so the tax situation of foreigners represents a more recurrent question. There are two criteria to establish the Salvadoran tax domicile, applicable to individuals, as explained below:
The first of the legal criteria, takes as a reference the time of permanence in the country of a natural person. Thus, Art. 53 letter a) of the Tax Code states the following:
“Natural persons who reside temporarily or definitively in the country for more than two hundred consecutive days during a calendar year. Persons who have been considered as domiciled for more than one calendar year, may be absent from the country for up to 165 days without losing their domiciled status”.
The rule of 200 days must be computed since entering the country; and their permanence in the Salvadoran territory must be proved with the migratory documents, such as the Passport. To this effect, the General Directorate of Internal Taxes, in one of its Binding Tax Consultations, indicates what should be understood by calendar year, as follows:
“To define what is constituted as the calendar year, we will make use of the Dictionary of the Spanish Language, which defines “Calendar” as “Almanac”, record of a year in days, weeks and months; and “year” as a period of twelve months, which indicates us that calendar year is a period of time composed of 365 days grouped in twelve months that begins in the month of January and ends in the month of December; Consequently, a calendar year begins in January and ends in December of the same number of months; therefore, the two hundred consecutive days mentioned in the provision must belong to the same calendar year.
The above is confirmed by the second paragraph of Article 46 of the Civil Code which states that “the term of a year may be 365 or 366 days”, as the case may be, and in our system the calendar year is composed of twelve months from January 1 to December 31 of the same year. The above is in accordance with the definition of the Business Year provided by article 2 numeral 12) of the Regulations for the Application of the Tax Code, as well as the Principle of Independence of Business Years that governs the Income Tax and that is materialized in article 13 literals a) and d) of the Income Tax Law, since the income obtained from each taxpayer is computed for periods of twelve months called “tax years”, a tax year goes from January 1 to December 31.
Therefore, the period of 200 consecutive days referred to in paragraph a) of article 53 of the Tax Code corresponds to the same year”.
Taking into account this criterion, the computation of the 200 days must be consecutive and correspond to the same year. Therefore, we must understand that the foreigner must remain in the country for almost seven months of the same year.
However, the Tax Authorities do not perform an immigration police work, which will be counting with strict rigor, the number of days that a person stays in the country, so we could say that from the point of view of Tax Control, this criterion is not entirely effective.
The other criterion applicable to natural persons, is that they will have tax domicile in the country, when they have in El Salvador the main seat of their business. This must be understood as the place where the person mainly develops its economic activity.
Thus, if a foreigner moves to the country to work for a Salvadoran company – such as the Manager of a multinational company in El Salvador – it is clear that he will acquire Salvadoran tax domicile, because his economic activity (his work) will be carried out at least mainly in the country. The same happens with a professional who establishes his office in the national territory, he will clearly have the main seat of his business in El Salvador, and therefore acquires Salvadoran tax domicile.
As this criterion depends on the will of the individuals, it also allows the search for tax efficiencies, since it allows the foreigner to decide whether in the specific case, it is more fiscally efficient to pay the definitive withholding tax of 20%, calculated on the amount paid (income); Or to acquire a domicile and pay tax according to a progressive table that in the highest bracket, has a rate of 30% plus a fixed fee, but calculated on the net income (net profit) of the year, which allows deducting costs and expenses necessary to generate the income, and certain deductions typical of natural persons.
As it can be appreciated, there are many aspects to consider before acquiring tax domicile in El Salvador, so it is recommended that before making any decision, foreigners seek advice from professionals specialized in tax matters, in order to choose the tax status that best suits their needs and interests.
For any additional consultation, please contact Dr. Diego Martín (dmartin@consortiumlegal.com) and/or Mr. William Escobar (wescobar@consortiumlegal.com); or e-mail taxelsalvador@vconsortiumlegal.com