Despite being the smallest country in Central America, El Salvador expects strong economic growth in 2019. The Central American country has a range of appealing national sectors and is a great trading hub which has assisted in the encouragement of FDI in recent years. 

A recent government fiscal initiative is set to further stimulate the local economy, with the modified tax legislation set to attract further investment in the region. The ‘Tax on Financial Transactions Act‘ will offer incentives for businesses looking to expanding their operations to El Salvador. In this article, we will explain what the law entails, what impact the new act will have and how the economy and both local and foreign business will benefit. 

New Fiscal Policy in El Salvador – What was the Financial Transaction Tax Law?

El Salvador, Beach, Freedom, Ocean

Despite being the smallest country in Central America, El Salvador expects strong economic growth in 2019. 

El Salvador previously had a tax for banking transactions, known as the ‘Tax on Financial Operations’ (El Impuesto a las Operaciones Financieras – IOF). This fiscal policy was created in 2014 and applied to all banking transactions and financial operations – taxing checks and electronic transfers within El Salvador.  

Companies in El Salvador, in order to adhere to all accounting & taxation requirements, had to prepare and present monthly and annual tax declarations to the national tax authority, including the IOF for all transactions. The IOF is infamous for its bureaucratic processes that slowed down all banking transactions. 

How did the IOF work?

Before the tax reform, the IOF was applied as follows: On every financial operation, electronic transfer, loan disbursements or any other kind of transaction between companies that were equal or greater than USD$1,000, a tax of 0.25% had to be paid. 

The end of tax for financial operations

El Salvador’s Ministry of Finance has declared that the IOF law will no longer apply on banking transactions after December 31st, 2018. Thanks to this adjustment by the Constitutional Chamber, companies will face fewer tax distortions when doing business in El Salvador in 2019.

What is the impact of the elimination of IOF?

With the end of the IOF, there will be several negative and positive effects on businesses in El Salvador. However, there is a general sense of confidence that the benefits will exceed its counterpart. Below, we will identify some of the major benefits of the elimination of the IOF:

  • There is greater control over transactions and assets. 
  • For individuals and companies in the private sector, the elimination of the IOF will reduce financial costs. 
  • The elimination of the IOF will encourage more financial transactions through the financial system.
  • Financial operations will no longer face long and tedious banking transactions. 

Despite lower tax collections due to the elimination of the IOF, El Salvador will experience many economic benefits. Additionally, both local and foreign businesses are expected to benefit from reduced costs (financial in addition to time costs). 

Are you interested in investing in El Salvador?

While the commercial opportunities in El Salvador continue to grow, the Salvadorian business climate can be slightly complex when it comes to legal and fiscal matters. If you do not have a sound understanding of current legislation, you may find yourself in a problematic situation with the local authorities. For this reason, it is highly recommendable to partner with a local group to ensure that your companies remain complaint. 

Biz Latin Hub has a team of local experts in a variety of areas such as corporate law, accounting and tax compliance. Contact our bi-lingual Country Coordinator, Diego via [email protected] for personalized support.