The Legislative Branch approved a reform to Article 158 of the Tax Code, through Legislative Decree No. 544, which substantially modifies the tax treatment applicable to income, returns, and transactions obtained by non-residents who invest in the Salvadoran securities market through the Stock Exchange.
The legal amendment eliminates the tax burden that previously applied to income, returns, and transactions involving securities, shares, and other investments made in the Salvadoran stock market—whether primary or secondary—by non-resident individuals, by establishing that such amounts shall not be subject to withholding or payment of the Income Tax governed by the first paragraph of Article 158 of the Tax Code.
Although the reform eliminates the substantive obligation to pay the tax, it imposes greater transparency and control requirements on brokerage firms domiciled in El Salvador, which must take the following into account:
- They must submit to the Tax Administration a detailed report on non-resident investors who trade or invest in the country’s securities market.
- The report must be submitted within the deadline for remitting withholdings, in accordance with Article 62 of the Income Tax Law, that is, within the first ten business days of the month following the month in which the transaction takes place.
- The report must be submitted using the form made available by the General Directorate of Internal Revenue for this purpose; therefore, it will be necessary to follow the instructions provided by the Tax Authority for this purpose.
Under the previous regime, the 3 % withholding constituted a final tax, and now, with the reform, returns generated in the securities market are credited in full to the foreign investor, strengthening the competitiveness of the Salvadoran financial market relative to other jurisdictions in the region.
However, the exemption is accompanied by a reporting requirement so that the Tax Administration has full visibility over the returns and their beneficial owners, raising the compliance standard in the stock market.
The reform of Article 158 of the Tax Code constitutes a direct incentive for liquidity by eliminating the tax burden on non-resident foreign investment; in this regard, market participants, particularly brokerage firms and financial intermediaries, must immediately update their operational protocols, refraining from withholding any taxes once the aforementioned reform takes effect, and ensuring strict compliance with formal reporting obligations.
The amendment will take effect 8 days after its publication in the Official Gazette; therefore, we will monitor the exact publication date to ensure its immediate implementation.
For any additional inquiries, please contact Diego Martín (dmartin@consortiumlegal.com), Verónica Tadeo (vtadeo@consortiumlegal.com), or via email at (taxelsalvador@consortiumlegal.com).