On April 18, 2023, the Legislative Assembly approved the new Law for the Promotion of Innovation and Technological Manufacturing, with the purpose of encouraging natural or legal persons to make, within the national territory, new investments in innovation projects or technological manufacturing, thus contributing to the economic growth and sustainable development of the country through promotion.
This new law grants multiple tax incentives specifically designed to promote investment and the development of the technological industry in the national territory. The Ministry of Economy will be in charge of its application, while the Ministry of Finance will be in charge of the surveillance and effective control of the customs and tax regime, for which it will be able to carry out inspections to verify compliance with legal obligations.
In order to summarize the contents of the new Law for the Promotion of Innovation and Technological Manufacturing, the following is a list of the main doubts that may arise with its enactment:
What are the incentivized activities?
Natural or legal persons that develop commercial activities in productive sectors related to at least one of the following areas will enjoy the tax benefits:
- Programming, management, maintenance, consulting and analysis of computer systems or software.
- Development, and commercialization of cloud computing and data flow services; artificial intelligence, massive data analysis; distributed logging technology; cybersecurity solutions.
- Technologies based on manufacturing of parts, materials and equipment or facilities, assembly, including manufacturing plants for technology equipment or hardware, semiconductors, communications technology, robotics, nanotechnology, aircraft and unmanned vehicles.
- Systems engineering and technologies needed to integrate basic industrial technologies into global production chains.
- New sources of energy generation and storage, which do not currently exist within the national energy matrix, which will be subject to the corresponding authorizations and concessions.
- Research and Development of new technologies.
Who may benefit from the new Law?
The beneficiaries of the present law will be natural or juridical persons, national or foreign, that develop, within the national territory, a new investment in innovation projects or technological manufactures included in the previous section, that comply with the following requirements:
- Be natural or juridical persons, national or foreign.
- Be registered before the Salvadoran Tax Administration.
- Prove that the activities developed correspond to the incentivized activities.
- Obtain a valid qualification agreement issued by the Ministry of Economy.
Notwithstanding, investments made prior to the entry into force of this law, as well as investments related to operations already established in the territory or those in special regime derived from the increase of the patrimony because of merger processes, absorption, or any type of operational and administrative restructuring of assets, are excluded from the benefits of the new law.
Natural or juridical persons enjoying the benefits included in other special tax regimes, such as those contemplated in the regulations governing industrial and commercialization free zones and those governing international service parks and centers, among others, are not eligible for this law either.
What tax incentives are granted?
The beneficiaries of the present law, subject to a Qualification Agreement in force issued by the Ministry of Economy, will be eligible for the following tax incentives:
- Total exemption from Income Tax with respect to the incentivized activities.
- Exemption from all types of Income Tax withholdings with respect to the incentivized activities.
- Total exemption from municipal taxes on the net assets declared by the beneficiaries.
- Exemption from the payment of Capital Gains, stipulated in Articles 14 and 42 of the Income Tax Law.
- Total exemption from the payment of Import Duties and taxes levied on the importation of goods, inputs, machinery, equipment and tools necessary for the development of the incentivized activities.
The above-mentioned fiscal incentives will be recognized for a term of fifteen years counted from the day following the notification of the issuance of the Qualification Agreement by the Ministry of Economy.
The total exemption of Import Duties and Taxes levied on the importation of the indicated goods is applicable only to the goods that are indispensable for the benefited activity, being mandatory that they are duly identified by the beneficiaries as being of exclusive use for the activity in question.
Likewise, the amount of goods to be imported must be proportional to the installed capacity of the beneficiary through which the incentivized activity will be developed. No exemption regulated in this law will be extended to the importation of firearms, ammunition, goods for the consumption of directors, partners or personnel of the company, their relatives or related companies, and goods of current assets.
What infractions and sanctions does it establish?
Among the main infractions that this new Law establishes are:
- Applying tax incentives and benefits to activities that are not those incentivized by this law, which will be considered a very serious infraction, which will be sanctioned with a fine of 15 to 20 monthly minimum wages of the commerce and services sector.
- Failure to comply with the operating permits and authorizations corresponding to the type of productive activity, commerce or services to be performed, which will be considered a serious infraction, which will be sanctioned with a fine of 6 to 15 minimum monthly salaries of the commerce and services sector.
- Refusal to appear without justified cause to the summons made by the institutions mentioned in the present law, which will be considered a less serious infraction, which will be sanctioned with a fine of 2 to 5 minimum monthly salaries of the commerce and services sector.
When will the new Law for the Promotion of Innovation and Technological Manufacturing be in force?
The referred Law was published in Official Gazette No. 81, Volume No. 439, dated May 4, 2023, and according to its final article, it will become effective thirty days after its publication in the Official Gazette, that is, as of August 4, 2023.
For any additional information, please contact Dr. Diego Martín (dmartin@consortiumlegal.com) and/or Mr. William Escobar (wescobar@consortiumlegal.com); or e-mail taxelsalvador@consortiumlegal.com.