Considerations on the annual fiscal year-end closing in El Salvador

In El Salvador, the obtaining of income by the taxpayers in the fiscal year or tax period in question generates the obligation to pay Income Tax. The corresponding tax must be settled by means of a Sworn Statement (F-11), contained in a form prepared by the Directorate General of Internal Taxes, which must be filed within 4 months following the expiration of the fiscal year or tax period in question.

The Income Tax Return is available online[1] for individuals and legal entities, and the deadline for filing it for the 2022 tax year is May 2, 2023. They must have the audited financial statements and annexes at hand, in order to declare the values contained in the referred financial statements.

The net or taxable income resulting after subtracting from the income obtained the expenses and deductible costs and other legal deductions, will be taxed, in the case of legal entities, at a rate of 25% if the gross income received in the fiscal year is less than USD$150,000.00 or 30% if it is higher.

Those costs and expenses necessary for the production of the income and for the preservation of its source, as determined by the Income Tax Law (LISR), will be deductible from the referred tax. Pursuant to the Income Tax Law, such expenses and costs or depreciation may only be deducted in accordance with the limitations established by the Law, including the Tax Code (TC). The above is regulated in Articles 28 to 33 of the Income Tax Law.

It is important to point out that taxpayers of this tax must advance 1.75% on a monthly basis as a monthly payment on account, calculated on gross income (without deductions of any kind). The payment on account is credited at the time of calculating the final tax resulting from the fiscal year, if any. If the tax is not applied (due to losses in the fiscal year), or because the anticipated tax (payment on account and withholdings) exceeds the amount to be paid, the payment on account paid in advance serves as a “tax credit” for future monthly payments on account, of the following fiscal year; or it can be advanced against other firm, liquid and enforceable taxes; or even a refund can be requested after examination.

Pursuant to Art. 62- A CT, taxpayers that enter into operations or transactions with related parties[2], shall be obliged to determine the prices and amounts of the considerations, considering, for such operations, the market prices used in transfers of goods or rendering of services of the same kind, between independent parties; as well as in the operations or transactions entered into with parties domiciled, incorporated or located in countries, states or territories with preferential tax regimes, of low or zero taxation or tax havens.

However, said study must be safeguarded against possible tax audits, but its content will be reported to the Tax Administration in the Report of Operations with Related Parties (F-982) when these operations, either individually or jointly, are equal to or greater than USD$571,429.00. This report must be filed within the first three months following the end of the fiscal year at the latest (Art. 124-A CT), which shall be filed online[3].

In case the income has been partially obtained in El Salvador, as established in Art. 127 LISR, as long as the corresponding International Treaties have not been subscribed, the proportion of the income shall be determined, using the following method:

The gross income obtained directly in El Salvador in each activity shall be divided by the total gross income obtained by the taxpayer for that activity.
The quotient thus obtained shall be applied to the total expenses verified by the taxpayer in each activity. The result constitutes the amount of expenses deductible from the gross income received directly in the country.
The difference between the gross income directly received in El Salvador and the deductible expenses in accordance with the previous numeral, shall be the net income considered as received in the country from activities partially carried out in the country.
The net income thus determined shall be added, if applicable, to the net income obtained entirely in the country.
In El Salvador there is no Capital Gains Tax specifically, but within the Income Tax there is a differentiated rate for capital gains, which is similar and is applied in the following cases:

I- Real estate and furniture[4]: The gain obtained by a natural or juridical person not habitually engaged in the purchase and sale, exchange or other form of negotiations on goods, movable or immovable, constitutes capital gain and shall be taxed in accordance with the following rules:

In each transaction the capital gain or loss shall be determined by deducting from the value of the transaction, the basic cost of the property, the amount of the improvements[5] made to preserve its value and that of the expenses necessary to carry out the transaction. When the value of the transaction is greater than the deductions, there will be capital gain. If the deductions are greater than the value of the transaction, there will be a capital loss.
The capital loss from the transactions will be deductible from the capital gain. If the gain exceeds the loss, the excess, i.e. the net capital gain, will be taxed with the tax equivalent to 10% of such gains, except when the property is realized within the 12 months following the date of its acquisition, in which case the net capital gain must be added to the ordinary taxable net income and the tax will be calculated as ordinary income, being attached to the referred tax return.
In case the loss exceeds the gain, the balance may be used within the following 5 years against future capital gains, provided that it is declared in the form provided for such purpose by the Tax Administration[6]. In no case shall capital losses arising from operations other than those regulated in said provision be deductible from the capital gain.
The liquidation of extraordinary assets referred to in the Banking Law must be taxed as ordinary income in the same tax year of its realization. The same treatment will have the assets realized by Insurance Companies, Official Credit Institutions and Non-Banking Financial Intermediaries.
The basic cost of real estate and personal property will be determined in the event that it is acquired for valuable consideration, deducting from the acquisition cost the depreciations that have been made and admitted in accordance with the Law.
The basic cost of assets acquired by donation or inheritance will be the basic cost of the donor or causer.

II – Income from Salvadoran securities and financial instruments[7]: Profits, dividends, prizes, interests, yields, net capital gains or any other benefit obtained by a domiciled natural person, in investments of securities and other financial instruments, shall be taxed with the Income Tax at a rate of 10%, which shall be settled separately from the other incomes. If the respective withholdings have been made from such income, they shall not be declared, and the withholding made shall constitute definitive payment of the tax.

Regarding the above, the securities referred to are those different from shares, since they are taxed at 5%, in accordance with the provisions of Art. 72 LISR. In the other cases, individuals are taxed at the rate of 10%, which as we said, is liquidated in a separate form, and the definitive withholding referred to is regulated in Art. 159 CT[8], being the withholding agents the issuers of securities.

On the other hand, profits, dividends and income obtained by companies domiciled in investments in securities and other financial instruments, must be added to the income obtained for the year and shall be taxed at the corporate rate of 25% or 30% as appropriate, hence Art. 159 CT states in its final paragraph that only withholdings made to individuals shall constitute definitive payment of income tax, since withholdings on companies shall be paid as an advance payment on account of the tax paid annually at the ordinary corporate rate.

The above does not apply to income from the transfer or assignment of one or several securities, since both individuals and corporations shall be subject to the following rules:

The value of the transaction will be the price agreed by the parties, which may not be lower than the price quoted on the Stock Exchange on the date of the disposal, or the book value of the issuer of the security if there is no quoted price on the stock exchange.
The amounts to be deducted from the transaction value shall be the acquisition cost of the security plus the expenses necessary to carry out the transaction. If several securities are held, the acquisition cost will be determined on the basis of weighted averages, dividing the sum of the acquisition costs of the securities by the total number of securities acquired, even if only a portion of them is disposed of. The average will be applied for securities of the same kind.
If the result is positive, it will constitute capital gain, and if it is negative, it will constitute capital loss, which may only be offset against capital gains from securities or other assets, obtained in the tax year or period in which the losses occurred or in the five years immediately following, provided that the loss has been declared and recorded.

III- Income from securities and financial instruments abroad[9]: When the income comes from securities and other financial instruments abroad and is nominally obtained by Salvadoran subjects or entities domiciled in the country, it shall be taxed with the tax, and in such case the same rules established in the following point (income from deposits abroad) must be observed.

IV- Income from deposits abroad[10]: Salvadoran taxpayers other than individuals must declare income in the Republic of El Salvador, which they obtain from deposits in financial institutions abroad, even if they had paid Income Tax or other tax of the same nature in the country, state or territory in which they obtained them. The following procedure shall be followed:

If the rate applicable abroad to income from deposits is lower than the ordinary rate regulated in the Republic of El Salvador, such income shall be included in the calculation of Income Tax, and the total or proportional tax, corresponding exclusively to the same, which would have been paid, shall be deducted, in order to pay the tax for the difference in the rate.

If the income from deposits obtained abroad is not subject, exempt or not taxed, the net income resulting therefrom must be added to the net or taxable income obtained in the territory of the Republic of El Salvador and pay the respective tax.

If the rate regulated abroad is equal or higher than the rate applicable in the Republic of El Salvador, the income from deposits referred to in this subsection shall not be included for the calculation of the Income Tax; in such case, the income shall only be declared within the legal term as non-taxable income.

The Salvadoran taxpayer in order to prove the amount of the payment of the tax abroad shall be obliged to submit to the Tax Administration the document issued in accordance with the legislation of the foreign country where the payment was made.

In El Salvador there is no tax on occasional gains other than the Income Tax regulated by the law of the same name. Neither may dividends or profits be advanced during the year in which they are generated. In this sense, any advance of dividends during the year of its fiscal year, will be subject to withholding of 5% and taken as a loan to the shareholder[11], without prejudice that a withholding of another 5% on dividends will be assessed again when they are declared in the following fiscal year.

[9] Art. 14-A Income Tax Law.

[10] Art. 27 LISR

[11] Art. 74-A Income Tax Law (LISR)

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