By means of Legislative Decree issued on July 31, 2014 (the Decree), the Congress of El Salvador approved the Financial Transactions Tax Law (FTTL), which establishes a 0.25% tax on certain financial transactions and a 0.25% withholding tax on cash deposits, payments and withdrawals over US$5,000.

The Decree first has to be signed by the Executive Branch before it gets published and becomes effective.

0.25% tax on certain financial transactions

The FTTL creates a 0.25% tax that will apply to the following taxable transactions:

• Payments of goods and services by check and debit card for which the transaction value exceeds US$1,000.00
• Payments via wire transfers for which the transaction value exceeds US$1,000.00
• Transfers in favor of third parties, in any form or by any technological means, for which the transaction value exceeds US$1,000.00
• Loan or financing disbursements of any kind
• Transactions between entities of the Financial System (i.e., banks) for their own purposes or in accordance with a customer's instructions

Several types of transactions are exempt from the tax, including the following:

• Cash withdrawals from checking accounts out of automated teller machines or made in branches of Financial System entities
• Payments made with credit cards
• Social security payments
• Payments of employment income, including related indemnifications made by wire transfer or check
• Payments and transfers made by users of free trade zones, users of the inward processing regime and shared services centers
• Payments of loans (interest and principal) by customers of Financial System entities. Note: The exemption does not apply when the loan used in El Salvador originated abroad
• Loan disbursements¹ used for the working capital of very small businesses, for the purchase of homes, or for agriculture or cattle, provided the disbursements are in aggregate equal to or less than US$50,000 and
• Transfers between an account holder's checking accounts

0.25% withholding on cash deposits, payments and withdrawals over US$5,000

The FTTL also establishes a 0.25% withholding tax on deposits, payments and cash withdrawals exceeding US$5,000 per transaction or in aggregate on a monthly basis. The taxes withheld are creditable against any tax administered by the tax authorities within a two-year period as of the withholding date.

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ENDNOTES

¹ For personal loans or consumer loans, the exemption will apply only when the disbursement amount is equal to or less than $10,000.00