El Salvador

In El Salvador, income is considered taxable if it is obtained from goods located in the country, activities undertaken within the national territory, or services rendered or utilised in the country.

Inventory valuation

For tax purposes, taxpayers are authorised to use any one of the following inventory methods, provided they are technically appropriate for the particular business, consistently applied, and easily audited:

• Purchase or manufacturing costs.
• Last purchase costs.
• Direct average allocation costs.
• Average costs.
• First in first out (FIFO).
• Specific methods for fruits and farm products.
• Specific method for cattle.

Other than the methods enumerated above, taxpayers are not permitted to use other methods for valuing their inventories except with prior authorisation of the tax office, provided that in the latter’s judgement the method in question contains clear determination and bona fide elements available to the office. Once an inventory valuation method is adopted, the taxpayer may not change it without the tax office’s prior authorisation.

Capital gains

Capital gains are subject to capital gains tax, except when gains are realised within 12 months following the purchase date, in which case they are taxed as ordinary income. Capital gains for securities are also subject to capitals gains tax; however, the 12-months rule described above does not apply for securities. See Capital gains tax in the Other taxes section for more information.

Dividend income

Cash profits or dividends remitted or credited to shareholders are subject to a 5% WHT (25% if paid to a tax haven as considered by the Salvadoran tax administration).

Interest income

Interest income is taxable in El Salvador when the entity paying the interest is resident in El Salvador, when the capital is invested in the country, and when the risk is assumed in El Salvador.

Partnership income

Partnership income is taxable if it is Salvadorian-source income; nevertheless, no specific provisions exist in El Salvador regarding partnership income.

Rent/royalties income

Rent and royalties income is taxable if it is Salvadorian-source income; nevertheless, no specific provisions exist in El Salvador regarding rent and royalties income.

Condoned debts

Condoned debts are considered taxable income and must be included as part of the income generated in that fiscal period.

Foreign income

Under the territoriality source of income principle, extraterritorial income is not taxable in El Salvador, with the exception of income and other benefits from securities and other financing operations. In this case, interest arising from loans granted to a resident of El Salvador is considered as taxable income, and the person or entity making the payment should withhold 10% of the interest. If financial services are rendered between related parties, the withholding must be at 20%.