By: William Escobar
The Salvadoran Income Tax levies the income obtained in a fiscal year or period of taxation, understanding by this, all products or profits received or accrued, either in cash or in kind, from multiple sources, among them, those that come from capital, such as rents, interests, dividends or participations.
This brings us to a concept that has great importance in tax matters, that is, capital income, understood as those economic returns obtained from capital assets, which are generally assigned or exploited. These are also called passive income, because they generate income without dedicating a greater amount of time or effort, as could occur with work or commercial and industrial activity.
In this way, if we have destined part of our financial resources to acquire capital goods that later will be leased; or we decide to destine our money to deposits in savings accounts or invest them in financial instruments of participation or debt, we must take into consideration that the income obtained from these operations will be taxed with the Income Tax.
In addition, it should be noted that in many cases, the tax treatment of capital income will change depending on whether it is a natural person, a legal entity or other taxpayers (all domiciled in El Salvador), so here are some tax aspects that should be considered when investing your money:
Rentals: Lease payments are taxed as ordinary income, applying the tax regime corresponding to the type of taxpayer. For example, individuals, inheritances and trusts will liquidate the Income Tax, applying a progressive table that will be calculated on the net or taxable income of the fiscal year, whose highest rate is 30% plus a fee of USD $3,642.86, applied on the excess of USD $22,857. 15; on the other hand, legal entities, Unions of Persons (UDP), irregular and de facto partnerships, are taxed at the rate of 30% on the taxable income of the year, unless the income obtained has not exceeded USD $150,000.00, in which case the rate will be 25%.
Capital Gains from non-habitual transactions of sale, exchange or other forms of negotiation, on real or personal property: These are transactions on fixed assets, hence they are not habitual. In this case, the tax is paid separately, at the rate of 10%, calculated on the Net Capital Gain; except when the transaction occurs within twelve months of the acquisition of the property, in which case the Net Capital Gain is added to the taxable income of the year, and the tax is calculated as ordinary income, depending on whether the taxpayer is an individual, a legal entity, etc. On the other hand, the Capital Loss will be deductible against future Capital Gains, up to the following five years.
Interest on deposits in savings accounts: Individuals will be exempt from tax on this type of interest, provided that the average balance of the deposit is less than USD $25,000.00; otherwise, they must pay the tax on the interest, liquidating it in isolation, at the rate of 10%, unless the financial entity has made the corresponding withholding (definitive payment). On the other hand, other taxpayers who are not individuals will be taxed on interest on deposits, incorporating them to the ordinary income of the year and calculating the tax, as appropriate for each type of taxpayer. In the latter case, the 10% withholding made by the financial institution will not be a definitive payment, but an advance payment of the tax.
Interest and other income from Securities and other financial instruments: Here the first thing is to understand that a security is a document that contains a right to collect an obligation, such as checks, bills of exchange, debt bonds, etc.; however, we exclude shares, since dividends and other forms of distribution of profits have a special tax regime applicable. On the other hand, a financial instrument is a contract that gives rise to an asset for the holder, and a financial liability or equity instrument for the issuer, whereby one of the entities (the purchaser) will have the right to receive certain economic resources, while the other (the buyer) will have the right to receive certain economic resources, and the other (the purchaser) will have the right to receive certain economic resources, while the other (the purchaser) will have the right to receive certain economic resources.
That said, individuals must pay income tax on the income from securities, liquidating them in isolation, at the rate of 10%, unless the corresponding tax withholdings have been made. On the other hand, other taxpayers who are not individuals will be taxed by incorporating the income to the ordinary income of the year and calculating the tax, as it corresponds to each type of taxpayer. In the latter case, the tax withholdings will not be a definitive payment, but an advance payment of the tax.
According to the concepts and definitions mentioned above, the mutual contracts or money loans can be considered financial instruments; however, to date there is no pronouncement from the Salvadoran Tax Authority, which could well decide to consider such contracts as a service, as it occurs in VAT matters.
Capital Gains derived from the transfer or Assignment of Securities: The Net Capital Gain derived from this type of operations on securities will be taxed at the rate of 10%, and will be liquidated separately from other income. On the other hand, the Capital Loss will be deductible against future Capital Gains, up to the following five years.
Dividends and other distributions of profits: they are subject to income tax at the rate of 5%, and must be withheld by the person paying the referred income; otherwise, the tax must be settled by the taxpayer, calculating it separately from the other income, at the referred rate of 5%.
Each of the capital incomes mentioned herein has its own rules and particularities in tax matters, for which reason it is recommended to seek the advice of a specialist in the matter, in order to be able to assess the tax impact of the capital incomes in each operation. Likewise, it should be noted that Income Tax could be paid in El Salvador, for income from deposits and financing granted abroad, and for the yields and Net Capital Gains from securities abroad; however, due to the complexity of the subject, it will be further discussed in subsequent publications.
For further information, please contact
Dr. Diego Martín (dmartin@consortiumlegal.com),
Mr. William Escobar (wescobar@consortiumlegal.com) or e-mail (taxelsalvador@consortiumlegal.com).