The electronic submission of documents for the qualification process of institutions domiciled abroad has been enabled

This year saw the enforcement of modifications to the Instruction for qualifying institutions domiciled abroad, within the framework of the Income Tax Law, the Law on the Tax on the Transfer of Movable Property and the Provision of Services, and the Tax Code. This instruction is jointly developed and reviewed by the Central Reserve Bank and the General Directorate of Internal Revenue.

The purpose of the instruction is to regulate the procedure and requirements that entities domiciled abroad must meet to be qualified by the Central Reserve Bank of El Salvador, hereinafter referred to as “BCR,” to comply with provisions establishing the following tax benefits:

  • Exemptions from Income Tax on interest from financing granted by institutions domiciled abroad.

Art. 4, number 11), of the Income Tax Law establishes that certain incomes, including interest income from credits granted abroad by:

    1. International organizations, agencies, or development institutions of foreign governments, foreign governments, and non-profit corporations or foundations domiciled abroad, the latter duly legalized by competent authorities in their country of origin, whose non-profit nature is verified in their articles of incorporation and qualified by the BCR.
    2. Investment funds, administrators of private funds, public or private specialized funds domiciled abroad, duly legalized by competent authorities in their country of origin and qualified by the BCR, intended for cooperative savings and credit associations, corporations, and foundations of public law and public utility, dedicated to granting financing to micro and small businesses.
  • Reduced withholding rates for financing provided by financial institutions domiciled abroad.

Art. 158, third paragraph, letter c) of the Tax Code states that taxpayers domiciled in the country, paying or accrediting income for financing services provided by financial institutions domiciled abroad, supervised by a financial regulation entity, or authorized or registered by a competent authority in their countries of origin and previously qualified by the BCR, will apply a reduced withholding rate of 10%, as a definitive payment of the tax. This treatment does not apply to financing services provided between related parties, to which a 20% rate applies.

Related to the above, Art. 158-A, final paragraph, letter d) of the Tax Code states that the application of reduced rates is an exception to the 25% withholding rate as a definitive payment of the tax when income is paid or credited to individuals or legal entities, entities, or groups of people or any subject that have been established, are domiciled, or reside in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens.

  • VAT exemption on interest from financing provided by financial institutions domiciled abroad.

Art. 46, letter f) of the Law on the Tax on the Transfer of Movable Property and the Provision of Services (VAT) states that operations such as deposits, other forms of collection, and loans of money concerning the payment or accrual of interest will be exempt from VAT. This includes operations carried out by financial institutions domiciled abroad performing these activities authorized by the competent authority in their countries of origin and previously qualified by the BCR, as well as corporations and foundations of Public Law or public utility, exempt from paying Income Tax by the Internal Revenue Directorate, according to art. 6 of the law regulating said tax, and engaged in granting financing.

Which entities must request qualification from the BCR to access tax benefits?

The instruction defines its scope, stating that entities domiciled abroad wishing to be qualified or already qualified by the BCR include:

    1. Non-profit corporations or foundations domiciled abroad. International organizations, agencies, or development institutions of foreign governments, and foreign governments do not require qualification from the BCR (art. 4, number 11, letter a of the Income Tax Law).
    2. Investment funds, administrators of private funds, public or private specialized funds domiciled abroad (art. 4, number 11, letter b of the Income Tax Law).
    3. Financial institutions domiciled abroad, supervised by a financial regulation entity, or authorized or registered by a competent authority in their countries of origin, providing financing services (art. 158, third paragraph, letter c of the Tax Code).
    4. Financial institutions domiciled abroad, supervised by a financial regulation entity, or authorized or registered by a competent authority in their countries of origin, providing financing services, established, domiciled, or residing in countries, states, or territories with preferential tax regimes, low or no taxation, or tax havens (art. 158, final paragraph, letter d of the Tax Code).
    5. Financial institutions domiciled abroad conducting deposit operations, other forms of collection, and loan of money, authorized by the competent authority in their countries of origin, wishing to be qualified or already qualified (art. 46, letter f of the VAT Law).
    6. International organizations, agencies, or development institutions of foreign governments, and foreign governments wishing to be qualified or already qualified (art. 46, letter f of the VAT Law).

The instruction now allows the electronic submission of documents.

The instruction we have been discussing is constantly under review by competent authorities to improve the qualification procedures, always seeking to simplify processes for foreign institutions and reduce risks in the evaluation process. In this case, the modifications aim to modernize the service offered to Institutions Domiciled Abroad requesting qualification under the mentioned tax laws. This involves allowing the electronic submission of administrative file and documentation, eliminating the use of physical copies, and promoting the use of electronic signatures.

Thus, the instruction allows the electronic submission of documents through the BCR’s online system. These documents must adhere to the integrity and structure of the forms established by applicable regulations. Administrative files may be electronic and formed by the orderly grouping of documents, evidence, reports, and other elements required by law.

The Public Administration will maintain an updated electronic backup of these files, accessible for consultation as established by the Administrative Procedures Law. This backup will also serve in case of replacement due to loss or damage to the original, following the implementation plans of new technologies within the Public Administration. The submission of electronic documentation must comply with the verification, evaluation, and consultation process detailed in the instruction at number 5.10.

After the documentation review, if everything is correct, the system will notify the institution, which must send an email to infocalificaciones@bcr.gov.sv to request the official review of the electronic documentation.

This has been a brief overview of the instruction for qualifying institutions domiciled abroad, in the context of accessing the tax benefits. For further insight on the topic or any inquiries, please contact the email taxelsalvador@consortiumlegal.com.