Although Legislative Decree Nos. 762, 763 and 764 have been declared unconstitutional, they will remain in effect through the end of 2018. During this time, the Salvadoran Congress may take action to correct the formal violations of the lawmaking process that resulted in the Legislative Decrees' unconstitutionality.

The Constitutional Chamber of the Supreme Court of Justice in El Salvador has declared unconstitutional Legislative Decree Nos. 762, 763 and 764 (together, the Legislative Decrees), through which El Salvador reformed its Income Tax Law and Tax Code and enacted a financial transactions tax.

Background

El Salvador enacted the changes contained in the Legislative Decrees in 2014. Those changes include the following:

— Repealing income tax exemptions established in the Printing Press Law

— Aligning El Salvador's transfer pricing rules with the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development

— Identifying when the statute of limitations on tax collections and the period for conducting audits and assessments are suspended

— Enacting a 0.25% financial transactions tax, which applies to certain financial transactions that exceed US $1,000, and a 0.25% withholding tax on withdrawals, deposits and payments that exceed US $5,000

For further discussion of the Legislative Decrees, see Tax Alerts 2014-1403, 2014-1405 and 2014-1436.

Constitutionality decision

The Constitutional Chamber of the Supreme Court declared the Legislative Decrees unconstitutional based on its determination that the Salvadoran Congress violated Section 135 of the Salvadoran Constitution by failing to carry out a parliamentary deliberation and discussion before approving the Legislative Decrees. Because the financial transactions tax was enacted as part of the Legislative Decrees, it was also declared unconstitutional. The Constitutional Chamber, however, focused on violations of the lawmaking process, not on whether the tax itself was unconstitutional.

To prevent a national budget deficit, the Constitutional Chamber deferred the effects of its decision through December 31, 2018; consequently, the Legislative Decrees will be in force through that date.

The Constitutional Chamber also held that the Salvadoran Congress has through December 31, 2018, to amend the formal violations (i.e., lack of deliberation and discussion) and approve the Legislative Decrees. If the Salvadoran Congress fails to do so by the end of 2018, the decrees will definitively be invalidated.

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