El Salvador recently amended its Tax Code so that income generated from securities traded in the Salvadoran market, when received by non-domiciled individuals or legal entities, will no longer be subject to withholding or Income Tax (ISR).
Key aspects of the amendment
- The 3% withholding tax applicable to income from securities for non-domiciled investors is eliminated.
- A full Income Tax (ISR) exemption is established for such income in El Salvador.
- The measure applies to transactions in both the primary and secondary securities markets.
- Brokerage firms remain obligated to report information regarding non-domiciled investors.
What makes this amendment relevant?
- Greater attractiveness for foreign investment: The tax cost of investing in Salvadoran financial instruments is reduced.
- Different treatment compared to local investors: The amendment reates a more favorable tax regime for non-domiciled investors.
- Stronger compliance focus: Although withholding tax is eliminated, reporting obligations are reinforced, increasing transaction traceability.
Key points to consider
- Evaluate the impact of the amendment on existing investment structures.
- Assess potential audit and enforcement risks arising from the new reporting obligations.
- Consider implications in the investor’s country of residence, particularly regarding double taxation matters.
Recommendations
- Review investment vehicles and cross-border structures to optimize tax treatment.
- Verify compliance with reporting obligations by financial intermediaries.
