By: Carlos Pineda
The diversification of trade and its globalization has given rise to the fact that many companies provide their services from their country of origin, but the recipient of such services is located in a different location. This practice is quite common, even in El Salvador, and payments made to these suppliers must comply with Salvadoran tax legislation.
In this sense, Art. 158 of the Tax Code (CT) establishes that payments for services made by an entity domiciled in El Salvador to a non-domiciled subject or entity, of amounts derived from any kind of income obtained in the country, even if they are advances of such payments, are obliged to withhold 20% of such amounts as definitive payment of Income Tax.
Notwithstanding the above, there is a classification made by the legislator, in which lower rates are applied than the one described above, with respect to this same withholding; in that sense, Art. 158, second paragraph of CT, states that withholdings with reduced rates shall be applied as final payment in the following cases and percentages:
a) Withholding at the rate of 5% on the amounts paid or credited for international transportation services. The taxpayers who make the payment or credit to the person who rendered the service, regardless of whether he contracted the service directly or acts as agent or representative of the service provider, are responsible for making the withholding.
b) Withholding at the rate of 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 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. Financing services rendered between related parties are exempted from this treatment, to which the rate of 20% will be applied.
d) Withholding at the rate of 5% on the amounts paid or credited for the transfer of intangible goods, or for the use, or concession of use, of rights of tangible and intangible goods.
e) The amounts paid or credited to taxpayers 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 3%.
On the other hand, as established in Art. 158-A CT, when payments are made to an entity domiciled in territories classified as states with low or no taxation, 25% must be withheld as final payment. According to the General Guideline to facilitate the recognition of countries, states or territories with fiscal and preferential regimes and tax treatment, issued on September 26, 2022, El Salvador recognizes 51 territories as countries, states or territories with low or no taxation, and 44 territories as countries, states or territories with no taxation.
Notwithstanding the foregoing, the following cases are exempted from the aforementioned withholding:
(a) Amounts paid or credited for acquisitions or transfers of tangible property;
b) The amounts paid or credited to subjects or entities domiciled in Central American countries that have subscribed and ratified the agreement for mutual assistance and technical cooperation between the tax and customs administrations of Central America.
c) The amounts paid or credited to subjects or entities domiciled in countries, states or territories that have subscribed, and ratified and effectively comply with agreements for the exchange of information and documentation of tax nature or agreements to avoid double taxation of Income Tax with El Salvador, which allow verifying compliance with tax obligations.
d) The amounts paid or credited for income benefited with the reduced withholding rates established in Art. 158 CT.
Finally, we must take into account that according to Art. 72 of the Income Tax Law (LISR), domiciled taxpayers who pay or credit profits to their partners, shareholders, associates, trustees, participants, investors or beneficiaries, shall be obliged to withhold a percentage of 5% of such amounts; such withholding shall constitute a definitive payment of the Income Tax payable by the subject to whom the withholding was made, whether he/she is domiciled or not.
However, the withholding shall be 25% when such amounts are paid or credited to individuals or legal entities, entities or groups of individuals or any subject, which have been incorporated, are domiciled or reside in countries, states or territories with preferential tax regimes, low or no taxation or tax havens.