October 5, 2018 El Salvador's tax authorities publish a revised list of tax havens for 2019 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, 2018, El Salvador's tax authorities issued their annual guide (Resolution No. DG-002/2018) on transactions with tax havens, which sets out a revised list of countries, states or territories that are considered to be preferential tax regimes, low or no tax jurisdictions, or tax havens for Salvadoran tax purposes (Tax Havens1). This revised list will be effective for tax year 2019 (i.e., from January 1 to December 31, 2019). Tax implications Payments made from El Salvador to individuals or legal entities domiciled or located in Tax Havens are subject to an increased income tax withholding tax rate of 25%.2 List of tax havens Tax Havens in the low-tax category include 50 jurisdictions, among which are: Switzerland, Estonia, Hungary, Iceland, Poland, the Kingdom of Saudi Arabia, the Republic of Kazakhstan and the Republic of Turkey. The tax authorities added the following jurisdictions to the list: Democratic Republic of East Timor, Republic of Palau, Kyrgyz Republic, Turkmenistan, Texas (USA) and Washington (USA). Tax Havens in the no tax category include 41 jurisdictions, among which are: Aruba, the Bahamas, Bermuda, Curacao, the Cayman Islands, Cook Islands, the US and British Virgin Islands, Jersey, Monaco, South Dakota, Delaware, Florida, Nevada and Wyoming. The guide also establishes that any entity of a country, state or territory not expressly mentioned in the list will be considered a Tax Haven if: (1) exemptions of income tax or similar taxes have been granted; (2) the income tax rate over net income is less than 80% of the applicable Salvadoran income tax rate; or (3) such entities operate under a preferential tax regime of low or no taxation established in a law or administrative provision. Such entities include: holding companies, parent companies, auxiliary or mixed companies, service companies, financial subsidiary, private asset management companies, multinational companies' headquarters, international trusts, entities with whom international financial lease agreements are held, trusts, limited liability companies (LLC) and international business companies. 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 Tax Haven criteria.3 The guide also includes a definition of Tax Havens according to international organizations. Said definition includes those countries and territories that tax income generated by domiciled and non-domiciled entities differently, such as low or no taxation for non-domiciled entities. According to the guide, 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 lists the Kingdom of Spain as a jurisdiction with which El Salvador has signed a double taxation treaty. The Republics of Costa Rica, Guatemala, Honduras and Nicaragua are listed as countries that have signed the Convention on Mutual Assistance and Technical Cooperation between the tax and customs administrations in Central America. ———————————————
——————————————— 1 The Guide distinguishes 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 Organisation for Economic Co-operation and Development and the Financial Action Task Force. | |||||||||||||||||
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