Country report El Salvador

Economic overview

The country emerged from a very complicated year, with a drop in GDP between 7.2% (World Bank) and 8.6% (Eclac | Cepal), the loss of at least 40,000 formal jobs and 135 thousand informal due to the closure of about 19 thousand micro-enterprises.

Just over 30,000 workers have no longer been able to pay contributions to Pension Funds (Afp), sales for thousands of people working on the street have collapsed and there has also been a significant loss of jobs in the sector agricultural ”, explains economist César Villalona.

Although the main cause of this situation is the impact caused by the Covid-19 pandemic and natural catastrophic phenomena, the government has done everything to make things worse.

Instead of proposing a partial closure of the economy, focusing on the municipalities most affected by the pandemic, Bukele insisted on declaring a state of emergency and imposing an absolute quarantine at the national level.

A third element that exacerbated the crisis was the decision not to involve small national producers in the supply of food products for programs to support the most affected sections of the population.

Instead of buying from micro and small national producers struggling in the midst of economic difficulties and the crisis, the government has preferred to use public funds to enrich large importers and economic groups linked to the president.

Main sectors of industry

The fertile and well-irrigated volcanic lands are the main resource of this small country, which bases its economy on agriculture, even with all the negative implications of depending, in practice, on a single product, coffee.

Agriculture. Agriculture, which covers almost 27% of the territorial surface, is largely conducted with archaic techniques and therefore not very profitable. The most profitable sector concerns some commercial crops, firstly coffee, grown in the highlands, then sugar cane, cotton, tobacco and sesame. These products generally come from modernly equipped plantations which, unlike what occurs in other Central American countries, are locally owned, not by foreign companies.

Mineral resources and industries. Mineral resources are practically nil (there is only a gold and silver mine) and electricity derives mainly from water plants, of which the largest is the one built on the Río Lempa, and from geothermal power plants. Industries essentially concern the processing of local products; the main one is the textile one (cotton mills), to which are added coffee processing plants, breweries, oil mills, sugar factories, tobacco factories, then shoe factories, cement factories. There are also small chemical (especially for the production of fertilizers) and petrochemical plants.

Communications and commerce. The communication routes are sufficient, but 40% of the roads are practicable only during the dry season so the traffic is based on the railway line that crosses the entire national territory connecting the main centers, on the Salvadoran section of the Carretera Panamericana and on the roads paved roads (approx. 2,000 km) that connect the major centers of the interior with the port centers, especially with that of Acajutla.

Taxation for businesses in El Salvador

Taxable persons domiciled in the country are required to pay taxes only on income earned in the national territory, whether the activities are carried out internally or abroad. The general criterion for determining the taxpayer’s residence consists in identifying the place of effective management and administration of the economic activity exercised. Failing that, one of the following criteria applies alternatively:

  • have resided in the country for more than 200 consecutive days in a calendar year;
  • to have the principal place of business in the State, that is, the place where the greatest income is produced;
  • having established a legal person or trustee in the country or having opened a succession in the country;
  • be a company domiciled abroad that is registered in the commercial register of the Republic of El Salvador with the presence of agencies, branches and permanent establishments in the country.

The income tax of legal persons

The rate established for domiciled and non-domiciled subjects is 30%. Regarding the determination of taxable income, shop expenses, staff remuneration, travel expenses, rents, insurance premiums, social security contributions, raw materials, maintenance costs, interest are deductible. the costs of the products sold, agricultural expenses and unspecified expenses as long as they are indispensable for the production of income. The depreciation rates of the assets intended by the taxpayer for the production of income are also deductible.

Investing in El Salvador

Perhaps not everyone knows that El Salvador has an open, export-oriented economy that is positioned in the heart of America: by signing trade agreements with 43 countries in America, Europe and Asia, the country enjoys a potential market of over 1,200 millions of consumers. The Financial Times investment magazine “The Intelligence” has classified El Salvador as the most cost-effective country in Central America: it is no coincidence that it was selected by the United States government, the only country in the western hemisphere and one of the four nations around the world, in the program against barriers to economic growth. On two occasions it has received funds from the Millennium Challenge Corporation for its good governance, investment in human capital and economic freedom.

The best investment sector – as evidenced by the shipping industry and import companies – has recorded significant growth in recent years, generating 13 million dollars for the country, but could double precisely due to the new investment conditions proposed by the Government: El Salvador Emprende plan – recently opened to countries such as the United Arab Emirates and Japan – offers entrepreneurs services specialized in development and growth, which concern in particular labor and tax exemption processes.

El Salvador offre tariffe di elettricità competitive per il settore industriale e di commercio, come anche possiede il minor tasso totale di imposte della regione e al contempo offre importanti esenzioni fiscali per gli investitori. L’economía convertita in dollari, dal 2001, offre maggiori certezze agli investitori come risultato dell’eliminazione del rischio cambiario: è infatti l’unico paese della regione centroamericana con il dollaro come moneta di corso legale. L’eliminazione del rischio cambiario ha ridotto i tassi di interesse reale e fornisce maggiori certezze agli investitori, in modo tale che le compagnie che hanno investito in El Salvador beneficiano di costi di transazione e costi finanziari inferiori. Il Decreto che verrà presentato possiede una stabilità giuridica in rapporto agli investimenti e prevede un rimborso legge dei dazi doganali sulle importazioni, facilitazioni sui progetti di costruzione e sulle partnership tra pubblici e privati.