El Salvador’s Income Tax Law Revisions: Introduction
On March 12, 2024, the Legislative Assembly of El Salvador passed an amendment to the Income Tax Law (LISR).
This law significantly impacts the taxation of income earned abroad.
Here’s a breakdown of the key changes and their potential effects:
Overview
The amendment adds a new provision (IV) to Article 3 of the LISR, specifying that income obtained abroad in any form, including capital movement, remuneration, or emoluments, is not taxable under the law.
Additionally, the amendment exempts income covered under this new provision from the requirement to apply proportionality in determining costs and expenses, as outlined in Article 28 of the LISR.
The reform repeals several existing provisions that currently tax income earned by individuals and entities domiciled in El Salvador from overseas deposits, securities, financial instruments, and derivative contracts.
Implications
Overseas profits and returns that were previously taxable will now be considered non-taxable income for taxpayers in El Salvador.
This change is expected to encourage increased capital investment within El Salvador, as investors will no longer face taxation on income generated abroad.
Specifically, the following types of income will be exempt from taxation:
- Receipt of dividends and profits from investments in foreign entities or financial instruments.
- Interest payments on loans extended to individuals or entities abroad.
- Interest payments on deposits or deposit certificates held in foreign banks.
El Salvador’s Income Tax Law – Conclusion
The amendment to El Salvador’s Income Tax Law represents a significant shift in the taxation of income earned abroad by individuals and entities domiciled in the country.
By exempting such income from taxation, the government aims to attract more capital investment into El Salvador.
However, taxpayers should consult with legal and financial advisors to understand the full implications of these changes for their specific circumstances.
Final thoughts
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