Transactions with multinational companies incorporated, domiciled or located in tax havens need to comply with the arm's-length principle. Payments or amounts credited to multinational companies located in tax havens from entities domiciled in El Salvador are generally subject to an increased withholding tax rate of 25%.

On September 28, 2016, El Salvador's tax authorities issued Resolution No. DG-001/2016, which is an annual guide (the Guide) on transactions with tax havens that sets out a revised list of countries, states or territories that are considered to be preferential tax regimes, low or nil-tax jurisdictions, and tax havens for Salvadoran tax purposes (Tax Havens¹).

This revised list will be effective for tax year 2017 (i.e., from January 1 to December 31, 2017).

Tax implications

Payments made from El Salvador to individuals or legal entities domiciled or located in Tax Havens are subject to an increased withholding tax rate of 25%.²

List of Tax Havens

Tax Havens in the low-tax category include 44 jurisdictions, such as Estonia, Hungary, Iceland, Poland, the Kingdom of Saudi Arabia, the Republic of Kazakhstan and the Republic of Turkey. Switzerland is also included for certain types of companies.

Tax Havens in the nil-tax category include 41 jurisdictions, such as Aruba, the Bahamas, Bermuda, Curacao, the Cayman Islands, Cook Islands, the US and British Virgin Islands, Jersey, Monaco, Delaware, Florida, Nevada and Wyoming. South Dakota (USA) and Nauru have been included in this category this year.

Even though Luxembourg is not included in the list, private asset management companies (a.k.a. SPF or Société de Gestion de Patrimoine Familial) operating in Luxembourg will continue to be deemed as being in the nil-tax category.

Tax Havens in the nil-tax category also include:

— Entities operating in Panama under the Multinational Companies Headquarters regime (In Spanish: el Régimen de Sede de Empresas Multinacionales or SEM) under Law No. 41 of August 24, 2007

— Panamanian trusts that are exempt from income tax under Section 35 of Law No. 1 of 1984

— Entities referenced in Section 30 subsection (a) of Law No. 7 of 1990, with which international financial lease agreements (In Spanish: Contratos de Arrendamiento Financiero) are held

Additionally, the Guide states that the list of Tax Havens is not comprehensive and refers to Section 62-A of the Salvadoran Tax Code, which sets forth the criteria³ of a Tax Haven.

The Guide establishes that a jurisdiction meeting the statutory definition of a Tax Haven, but not included in the list, will be treated as a Tax Haven. Conversely, a taxpayer has the right to submit any relevant documents evidencing that a jurisdiction listed in this Guide as a Tax Haven does not meet the statutory definition.

List of countries that have signed tax agreements or tax treaties with El Salvador

The Guide also lists the Kingdom of Spain as the only jurisdiction with which El Salvador has signed a Double Taxation Treaty. The Republics of Costa Rica, Guatemala, Honduras and Nicaragua are included in the list of countries that have signed the Convention on Mutual Assistance and Technical Cooperation between the tax and customs administrations in Central America.

———————————————

———————————————
ENDNOTES

¹ The Guide makes a distinction between preferential tax regimes, low or nil-tax jurisdictions, and tax havens, but the tax implications are the same.

² Exceptions apply for the acquisition / transfer of certain tangible assets, international transportation services, insurance and related services, or interest payments.

³ According to Section 62-A of the Salvadoran Tax Code, Tax Havens are those jurisdictions in any of the following situations: (i) jurisdictions where there is no income tax or where the income tax rate over net income is less than 80% of the applicable Salvadoran income tax rate (i.e., currently 30%), and (ii) jurisdictions classified as such by the Organization for Economic Cooperation and Development and the Financial Action Task Force.