Apart from the excellent coffee bean that the nation is famous for, the Salvadoran economy is dependent on exports of sugar, gold, and textiles, while having a well-developed pharmaceutical industry thanks to an increased participation of Indian investors in the Central American country. In total, exports and imports make up 64% of the GDP and are, therefore, the most important economic driver of the country. Even though the government under president Sánchez Cerén, who will leave office in 2019, has impeded some parts of the private sector, policies that support international trade are active and still very attractive for foreign investors trying to start a business in El Salvador.
Significant to the international trade sector in El Salvador is the multilateral agreement CACM between Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua, and the Free Trade Agreements (FTA) with the European Union, México, Colombia, Taiwan, and the United States.
El Salvador is an overlooked yet attractive commercial jurisdiction that offers some valuable opportunities for international investors, keeping the annual GDP growth at 2.3% (2017). In order to provide you with an overview of the most important requirements to comply with during the company incorporation process, we have compiled an article to exemplify the key steps.
Company Formation Process
Companies in El Salvador can take on various legal entity forms, depending on their business needs and requirements. Usually, 3 types of legal entities are established in El Salvador, namely Limited Liability Companies, Corporations (S.A. de C.V.) or foreign branch offices. Nevertheless, the Sociedad Anónima de Capital Variable (S.A. de C.V.), which is a limited liability corporation with variable shares and a minimum requirement of two shareholders, is the most widely used legal entity among foreign and local investors. One great advantage of this legal entity type is that the shareholders can indicate several business activities, even though only a small number of those are ultimately executed.
During the company incorporation procedure, several questions are frequently asked by our clients, including the following:
Is foreign ownership allowed? – Yes, up to 100% foreign ownership is allowed
Can the company sponsor foreign employees? – Yes, however, at least 90% of the employees must be locals
Are there capital controls? – No
Is there a minimum share capital? – Yes, approx. USD$2000
What is the minimum number of shareholders? – There must be at least (2) shareholders
Are a fiscal address and legal representation required? – Yes
How long does the process take (including the opening of a corporate bank account? – Between 5 and 7 weeks
To keep the overview simple, we have provided the main company incorporation steps and we explain the most important additional requisites that must be met by the foreign/local investor when setting up a company in El Salvador.
- Obtain local tax ID numbers for shareholders
- Create and sign the company bylaws
- Pay 5% of the share capital
- Register the company bylaws, initial balance and obtain the license of commerce
- Obtain a local company tax ID number (NRC)
- Open a corporate bank account
- Deposit of the required minimum capital to activate the corporate bank account
- Register the company with all relevant government authorities
Required Company Information
If you have decided to establish your business in El Salvador, you will have to consider possible company names and establish the business activities that you will undertake. In addition, the following main points must be taken into consideration:
A shareholder takes the form of a natural or legal person (i.e. an individual or a company) that owns part of the company corresponding to the share contribution the person has made. Additionally, the share contribution is significant as the shareholder´s liability is limited to it. In El Salvador, the Corporate Law denotes that the S.A. de C.V. requires two or more shareholders in order to conduct the business. Local banks will request additional documentation if the company shareholder is a legal person (i.e. a company).
Company Share Capital
In order to start operating a business in El Salvador, a minimum of USD$2,000 needs to be subscribed during the company incorporation process. Apart from being the starting capital of the company, the share capital contribution plays a major role when requesting highly-graded bank loans or entering a joint venture. If desired, the share capital can be increased or decreased at any point during or after the incorporation process, but the share capital should be an amount that reflects the company’s size and business operations.
As mentioned before, the minimum share capital is USD$2,000, with 5% of the share capital being paid at the moment of the company establishment. The remaining 95% will have to be paid within the first year of the company’s operations. Please note that depending on the type of business activities the company will exercise, additional registrations with local authorities may be involved.
Company Local Director/Legal Representative
The Local Director/Legal Representative represents the company and its operations. The Local Director plays an important role in the company to ensure that the company operates in accordance with local law and regulation. Once the legal representative certificate has expired, it can be renewed for another 7 years. Furthermore, a legal substitute for the local director must be appointed.
A fiscal address registration is a necessary requirement for all legal entities to be established in El Salvador and must be recorded by the Salvadoran tax authority (Ministerio de Hacienda). In turn, the newly established company receives its unique taxpayer number (NRC), which identifies the registered address of the company, and as such, will be used for all tax purposes and other official communication.
Corporate Bank Account
The last of the main requisites is the opening of a corporate bank account with a Salvadoran bank. Depending on the local bank chosen, the minimum required capital to open a bank account is between USD$100-USD$500.
DON’T FORGET: All newly opened bank accounts have restrictions on sending and receiving money internationally for the first 3 to 6 months.
In Need of Local Support in El Salvador?
El Salvador offers numerous opportunities for investors looking to diversify their international business portfolio. If you are interested in incorporating a company in El Salvador, Biz Latin Hub can provide you with all necessary market-entry and back-office services and support. Reach out to our Bi-Lingual Country Coordinator, Diego, at [email protected] for personalized support.
Interested in Doing Business in Latin America? Watch this short video to see how we can be of assistance.