The recent amendments to the International Services Act (LSI) and the Industrial and Commercial Free Trade Zones Act (LZFIC) aim to promote economic and social development by strengthening production and optimizing the rational use of resources. To this end, modifications have been introduced to expand and facilitate access to tax incentives, as well as to establish provisions regarding the distribution of green areas within projects benefiting from the regime.
In particular, the reforms to the LSI are aimed at individuals interested in accessing its benefits, as well as developers and direct users of service parks and service centers. For their part, the reforms to the LZFIC are aimed at developers, free zone users, and companies classified as Active Improvement Depots (DPA). In both cases, the amendments are intended to promote new investments, consolidate existing ones, and strengthen the country’s competitiveness and productivity. Below, we report on the main changes:
I- International Services Law
The legislative changes to the LSI begin with the reform of Article 5, which extends the opportunity to both national and foreign individuals or legal entities requesting the benefits of the law, as well as to previously authorized beneficiaries, to carry out one or more incentivized or benefited activities, provided that they comply with the most demanding investment and employment requirements among the requested activities. The above is without prejudice to compliance with the other specific requirements for each of the activities.
The distribution of green areas in Service Parks is established through the amendment of Article 13, paragraph 3, letter b) and the incorporation of Article 13-B, indicating that 30% of this area may be structured as 10% within the Service Park or in an adjacent area, and the other 20% inside or outside. If established outside, the area must comply with a compensation percentage equivalent to 20% of the total construction area and may be located at the site of impact, in surrounding areas, or in areas more conducive to its replacement or recovery, for which the relevant authorizations must be obtained.
Articles 23 and 24-A make the compliance regime more flexible for national or foreign individuals and/or legal entities that apply to be classified as direct users of Service Parks and Service Centers, respectively, reducing the risks of non-compliance and providing greater leeway to operate during the initial phase of the investment.
In particular, Article 23 establishes that, for Service Parks, investment in assets:
- For an amount of not less than USD 150,000.00 for business process services.
- USD 1,000,000.00 for medical and hospital services.
- USD 250,000.00 for elderly and convalescent care services, must be made within the first six months of operations.
It also stipulates that a minimum of ten permanent jobs must be created within the first year of operations.
For its part, Article 24-A provides that, for Service Centers, whose investments in assets must amount to at least USD 250,000.00 for business process services, information technology, and filmmaking; USD 2,000,000.00 for medical and hospital services; and USD 500,000.00 for services for the elderly and convalescents, as well as specialized services for aircraft, must be made from the first six months of operations in the first case, and from the first year of operations for the other services. Likewise, in terms of employability, the provision allows the minimum number of permanent hires to be made from the first year of operations.
II- Industrial and Commercial Free Trade Zones Act
With regard to the reforms of the LZFIC, the additional period for enjoying tax exemptions is extended, granting developers, free zone users, and DPAs the right to request, once the total exemption period has expired, an additional exemption period of 10 years. This modification represents an extension of 5 years with respect to the previous wording of the law.
To this end, the amendment to Article 11 establishes that, in the case of developers, if during the period of total exemption or their respective additional period, they have invested in an expansion of the free trade zone whose total area is at least equal to or greater than that existing at the time of applying for the exemption, the additional period may be requested on more than one occasion, provided that compliance with the requirements is again demonstrated. It should be clarified that, with regard to the exemption from income tax, the benefit will be enjoyed both for the income derived from the new investment (in the percentage that it represents) and for that corresponding to the total initial investment.
Similarly, in the case of free trade zone users and owners of establishments declared as DPAs, Articles 17(f) and 19(f) are amended, respectively. These provisions establish that, once the total exemption period has expired, they will be entitled to request an additional exemption period of 10 years, provided that they can prove that, during the total exemption period or their respective additional period, they have increased their investment by 100% compared to the initial investment.
Such investment must meet the requirements set forth in Article 17-A for free trade zone users and in Article 19-A for establishments declared as DPAs.
In the case of free trade zone users and DPAs that have opted to comply with the employability requirement, they must prove an investment equivalent to the initial investment, the amount of which may not be less than $500,000.00 for free trade zone users and $800,000.00 for DPAs, as well as prove an increase in the number of jobs equivalent to 100% of the average number of active jobs over the last three years. This additional period may be requested on more than one occasion, provided that the corresponding requirements are met.
These benefits will be applicable in proportion to the investment, both for the Free Trade Zone User or DPA owner company, and for the partners or shareholders individually considered, with respect to the profits or dividends derived from the incentivized activity.
By virtue of the reforms, it is established that the agreements by which the Ministry of Economy grants authorization as a developer, free trade zone user, or DPA will expressly include the incentivized economic activity (or activities, in the case of users and DPAs). Likewise, for the latter, the assets that are not necessary for the execution of the authorized activity will be detailed.
In line with the incentives, a grace period of two years is established, starting from the expiration of the term established in the respective Agreement, during which they will continue to enjoy the benefits in order to make the necessary adjustments and investments. However, if at the end of that period the investment has not been made, the applicable duties and taxes that have been generated during that period must be paid.
On the other hand, relevant reforms are introduced in terms of obligations, modifying Article 28, paragraph a) in the sense that, prior to making any modification, free trade zone users and DPAs must request authorization from the Ministry of Economy. In the case of Free Trade Zone Users, they must also notify the Free Trade Zone Administrators. Likewise, paragraph e) of the same article, which established the obligation to inform the Ministry of Economy and the DGA of any change of address or closure of operations, is repealed.
Article 44 is amended to include the possibility for a free trade zone user to change to the beneficiary type as a DPA, or vice versa, upon request to the Ministry of Economy and compliance with the corresponding requirements.
With regard to the green areas required to obtain authorization as a developer and DPA, through the amendments to Articles 10, paragraph b), numeral 3, and 18, numeral 5), paragraph d), as well as the provisions of the LSI, the distribution of the total green area percentage is established.
For developers, it is established that 30% of the green area may be distributed as follows: 10% within the free trade zone or in an adjacent area, and the remaining 20% within or outside the free trade zone. If established outside, the provisions of Article 46-A of the law shall apply. For DPAs, 20% of the green area must be distributed as follows: 10% within the DPA or in an adjacent area, and the remaining 10% within or outside the DPA, also subject to Article 46-A. The same percentage shall apply to extensions, reductions, or relocation of DPA facilities.
Article 46-A, incorporated by the reforms, establishes that, for new applications in which the green area is to be located outside the free zone or the DPA, the area must comply with a compensation percentage equivalent to 20% of the total construction area for developers and 10% for DPAs.
Likewise, through the addition of the new Article 54-I, free zone users are allowed to set up in service parks, with such location being considered, for legal purposes, as if they were located in a free zone.
This provision introduces a balance in the treatment of benefits between the two regimes, replicating the possibility provided for in Article 66 of the LSI for direct users, who could set up in free trade zones and be considered, for legal purposes, as if they were located in a service park.
However, in practice, this reform is not currently applicable, as there are no service parks in operation in El Salvador. For any additional questions, please contact our team at taxelsalvador@consortiumlegal.com.