El Salvador is globally known amongst surfers for its incredible coastlines and is well-located in Central America, bordering Guatemala, Honduras, and Nicaragua. Recently, more entrepreneurs are venturing into the exciting markets that El Salvador has to offer. GDP rebounded strongly from the pandemic to 11.2 percent growth in 2021. The economy grew 2.6 percent in 2022. The IMF forecasts real GDP will grow 2.4 percent in 2023. This is just one statistic that confirms the great business opportunities that El Salvador provides savvy investors and foreign companies and also why you should learn about the Corporate Requirements of a Corporation in El Salvador.
Incorporating a company in El Salvador can be challenging without the right knowledge and support, for this reason, it is key to have a local partner. This article will define the key corporate requirements for a corporation and the steps for you to successfully operate in El Salvador.
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Corporate Requirements – Why Should You Register a Corporation in El Salvador?
The nation’s open economy and focus on trade have led to the development of an attractive business environment for foreign companies looking to engage in commercial activities. Recently, through a revision and subsequent modification of legislation, El Salvador now offers foreign companies operating in El Salvador with fiscal benefits such as exemption of tariff duties and reduced income and municipal taxes.
The country´s strategic location in Central America and heavy investment in infrastructure have greatly contributed to the increase of exportation to both North and South America. The Free Trade Zones, located in special industrial sites grant export-focused manufacturing companies with attractive fiscal benefits and tax-free imports of raw materials. With a raft of trade agreements with nations and regions such as the Americas, Europe, and Asia, El Salvador has put itself on the map as a global trading power.
The S.A. de C.V.
El Salvador has a range of different legal structures, however, the S.A. de C.V. is the most popular legal entity that El Salvador has to offer, partly because it is the easiest legal entity to incorporate. Some characteristics of the S.A. de C.V. include:
- 100% foreign ownership is allowed.
- The legal entity must have at least (2) shareholders.
- Shareholders and their corporate capital are based on stocks.
- The financial liability of the shareholders is limited to their capital contribution.
- The sponsorship of visas for foreign employees is permitted.
Additionally, this business structure offers great growth and expansion opportunities due to possibility of raising capital in the stock market.
Before you decide to establish an S.A. de C.V., you will need to meet some corporate requirements:
- Legal Representation – The company must be represented by either a Board of Directors or a Sole Administration. The Board of Directors should be constituted by a minimum of two persons and one substitute. The Unique Administration, or Single Administration, should be formed by one person and a respective substitute. Smaller companies will most likely opt for the latter, whereas larger companies will need a Board of Directors.
- Company Name – There are several requirements for the company’s name. The name is not allowed to be similar to other existing companies – this can be confirmed at the Commercial Registry. Furthermore, companies are obliged to include the words ‘Sociedad Anónima de Capital Variable’ in their title. A minimum of three optional names should be provided during the company registration process.
- Shareholders – Commercial Law in El Salvador requires that all companies must have at least 2 shareholders, who can either be individuals (natural persons) or companies (legal persons). The shareholders may reside in El Salvador or abroad. The number of shares doesn’t have to be equally divided between the company shareholders.
- Company Capital – A minimum company share capital of USD $ 2,000 is required in order to incorporate this type of company. At least 5%, of this capital, must be paid at the moment of registration, and the remaining should be paid within the following year of operations.
- Corporate Purpose – All companies need to have a corporate purpose directly related to the company’s principal commercial activities. For example, if you are a marketing company, your corporate purpose must align with your specific marketing activities.
- Public Notary – In order to incorporate the company, the shareholders must appear before a public notary in order to sign the Incorporation Deed. However, it is possible to grant Power of Attorney (POA) to another individual to appear before the public notary in their name. The Incorporation Deed contains all the information of the company, such as the shareholders, corporate purpose, and the name.
Registering the Company
After the company has been officially legalized through the signing of the Incorporation Deed, either the public notary or one or more of the shareholders must register with a number of governmental entities. The first registration is with the Registry of Commerce, followed by the Ministry of Finance in order to obtain a company’s local tax ID. The last registration is with the Municipality Hall.
IMPORTANT: Depending on the size of the business, the company may have to register before the Ministry of Labor. Businesses that contract local employees should also register before the Institute of Social Security of El Salvador and the Pension Fund Administration.
Once duly incorporated, all legal entities in El Salvador must meet some minimum statutory requirements to ensure corporate compliance. These are not very complex nor difficult to adhere to granted you have a comprehensive understanding of how the requirements function. However, it is important that all companies meet these requirements while engaging in commercial activities in El Salvador.
Registered Address in El Salvador
To establish a legal entity in El Salvador, it is essential to register a local address. This registered address serves as the official tax domicile for the company and is utilized for all official communications and correspondence. The Salvadoran tax authorities mandate this requirement, and compliance is crucial. During the incorporation process of a company in El Salvador, the registered address must be declared in the company’s bylaws as a prerequisite for legal registration.
Tax Compliance in El Salvador
In El Salvador, similar to other Latin American countries, companies are obligated to file regular tax declarations with the national tax authorities. Salvadoran tax regulations encompass specific requirements that companies must adhere to, including:
- Income Tax Obligations: Annually, companies must complete their income tax filings and submit payments. This is typically due within the first five months following the conclusion of the fiscal year.
Value-Added Tax (VAT) Compliance: In El Salvador, VAT, currently set at a standard rate of 13%, is imposed on the sale of goods and services, as well as on imports. This tax is incorporated into the price at each stage of the supply chain. Businesses are tasked with the collection of VAT and its subsequent monthly reporting and payment to the tax authorities.
Renewal of the Commercial License
In El Salvador, annually renewing a commercial license is essential for businesses to sustain their lawful operational status. As dictated by Salvadoran commercial laws, this process entails the submission of required documents to the Registry of Commerce to demonstrate ongoing compliance with local business legislation. Generally, the renewal procedure includes providing the most recent financial statements and affidavits. This is typically carried out on the anniversary of the company’s establishment.
Annual Shareholders Meeting
In El Salvador, the Annual Shareholders’ Meeting holds significant importance in the realm of corporate governance. Legally required to take place annually, this gathering is a key forum for shareholders to deliberate and resolve crucial organizational issues. Prominent items on the meeting’s agenda often encompass endorsing the yearly financial statements, selecting board members, and making determinations regarding the distribution of dividends. As per legal stipulations, this meeting is to be convened within the first five months of each calendar year, ensuring timely and effective decision-making in alignment with the company’s strategic and financial goals.
Depositing Annual Financial Statements
In El Salvador, corporations are statutorily required to annually submit their financial statements, a task that is principally managed by the company’s finance team. This essential process involves formally presenting a comprehensive set of financial documents, including the balance sheet, income statement, cash flow statement, and auditor’s report, to the Registry of Commerce. These documents must provide a true and fair view of the company’s financial standing and performance throughout the previous fiscal year, ensuring adherence to the mandated financial reporting standards.
Appointment of External Auditor
This critical step in corporate governance involves selecting a qualified and independent auditing firm to review and verify the accuracy of the company’s financial statements. The role of the external auditor is to provide an objective assessment of the company’s financial reporting, ensuring that it adheres to accounting standards and accurately represents the company’s financial position. Companies must appoint and register their External Auditor each year to the Registry of Commerce.
AML Compliance Officer:
In El Salvador, the designation of an Anti-Money Laundering (AML) Compliance Officer is a crucial requirement for businesses. This role is central to the company’s efforts in identifying, preventing, and reporting any instances of money laundering and associated financial misconduct.
Common FAQs for Entity Legal Compliance in El Salvador
Based on our extensive experience these are the common questions and doubts of our clients when looking to operate within the country
The following are the most common statutory appointments for Salvadorian legal entities:
– An appointed Legal Representative who will be personally liable, both legally and financially for the good operation and standing of the company. This should be a local national or a foreigner with the right to live/work in the country.
– An appointed Compliance Officer, whose responsibility is to ensure compliance with AML policies and procedures, conducting risk assessments, monitoring transactions, and reporting all required transactions to the fiscal authorities. For such, the appointee must possess a degree in finance, law, or accounting, in-depth knowledge of El Salvador’s AML laws and international AML standards, and obligatory possession of AML certifications.
Yes, a Registered Office Address or Fiscal Address is required for all entities in El Salvador for the receipt of legal correspondence and Governmental visits.
Biz Latin Hub can help you with annual entity compliance in El Salvador
It is important to obtain a deep understanding of the requirements and processes involved in registering a corporation in El Salvador. This understanding, combined with the support of a local partner will ensure your commercial success in the region. For those familiar with the local processes in El Salvador, establishing an S.A de C.V is a straightforward and painless procedure.
To learn more about the Salvadoran economy, the business opportunities to form a company in Salvador, and how you might take advantage of these political shifts, please contact us today.
El Salvador offers foreign companies with an unexploited market with unique commercial opportunities. Check out our video below to learn more…
The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.