The Legislative Assembly approved a new Law to promote the Use of Renewable Energy through Legislative Decree No. 436. If enacted and entered into force, the new law would enable a series of incentives for individuals, households, and businesses. The law will promote incentives for self-consumption, both for households and businesses that decide to incorporate their own generation through renewable sources for their operations in the country. It also establishes that companies engaged in this field, which is the sale, installation, and supply of renewable energy solutions, will be eligible for tax incentives.
Although the law has already been passed, it is still in its final phase, as it is still subject to approval by the Executive Branch and subsequent publication in the Official Gazette; if published in the Official Gazette, it would come into force eight days after publication.
The activities that the law would encourage are as follows:
- Importation, sale, and marketing of systems or equipment for electricity generation using renewable or conventional sources.
- Acquisition and installation of these systems and equipment for self-consumption by end users.
- Maintenance services for the aforementioned systems and equipment.
Note: Tax rights and incentives will apply as long as they are directed at end users.
The tax incentives are divided between companies and suppliers that develop, supply, or install renewable energy systems; and end users, including households and consumers in general, i.e., companies, offices, industries, production and/or industrial plants, etc., that choose to generate their own energy by investing in renewable sources in their facilities or homes. If these benefits are applied, they would be in effect for a period of 10 years from the date the law comes into force.
A- Consumers, households, and businesses
In the case of end users, the law would seek to facilitate the adoption of renewable generation solutions in businesses and households through incentives that would reduce the tax burden by promoting investment in cleaner technologies:
- Exemption from VAT on the purchase, installation, or maintenance of renewable energy systems acquired from qualified suppliers*.
- Right to deduct expenses related to the purchase and installation of these renewable generation systems from their taxable income.
*To qualify for these benefits, end users must purchase the systems or equipment from a supplier with a valid Qualification Agreement. To verify the deduction, the corresponding tax receipt issued by the beneficiary supplier must be presented.
B- Companies engaged in the field of Renewable Solutions
As for companies engaged in the sale, installation, or supply of renewable energy generation solutions, the law would enable them to enjoy tax benefits that are focused on boosting the clean technology supply chain and strengthening the sector’s capacity to meet the growing demand for renewable energy solutions:
- Total exemption from income tax derived from incentivized activities.
- Exemption from all types of income tax withholdings related to such activities.
- Total exemption from VAT on local transfers of goods and services related to renewable energy systems.
- Total exemption from import taxes and duties, including Import Tariff Duties (DAI) and VAT, applicable to machinery, equipment, tools, materials, spare parts, and accessories essential for the activities covered by the law.
Suppliers must have a valid Qualification Agreement issued by SIGET to access these incentives.
C- Competent authority
The application and supervision of the law will be the responsibility of the General Superintendency of Electricity and Telecommunications (SIGET), which will be responsible for issuing the special regulations, qualification agreements, and technical catalog of the systems and equipment that will be eligible for the established benefits. SIGET will also draw up the tariff schedules that will define the conditions for recognizing surplus energy injected into the distribution network.
With this law, El Salvador is promoting mechanisms for a more favorable environment that encourages investment in renewable energy, generating attractive incentives for companies seeking to incorporate these systems into their operations, households in general, and suppliers that sell and install renewable energy generation solutions. The regulations could boost the market for engineering services and renewable energy installations, reduce operating costs, and strengthen compliance with corporate commitments related to sustainability.
For more information, please contact us at: gvega@consortiumlegal.com.sv