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El Salvador’s Tax Authority publishes list of tax havens for 2023 — Orbitax Tax News & Alerts

  • Transactions with individuals or entities incorporated, domiciled or located in tax havens need to comply with the arm's-length principle.

  • Payments or amounts credited to individuals or entities located in tax havens from taxpayers domiciled in El Salvador are generally subject to an increased withholding tax rate of 25%.

El Salvador’s Tax Authority issued its annual guide (Resolution No. MH.UVI.DGII 006.006/2022) on transactions with tax havens, which sets out a list of countries, states or territories that are considered to be preferential tax regimes, low or no tax jurisdictions, or tax havens for Salvadoran tax purposes (Tax Havens1).

This list will be effective for tax year 2023 (i.e., from 1 January to 31 December 2023).

Tax implications

Payments or credits made from El Salvador to individuals or legal entities domiciled or located in Tax Havens are subject to an increased income tax withholding rate of 25%.2

List of tax havens

Tax Havens in the low-tax category include 51 jurisdictions, among which are: Andorra, Hong Kong, Iceland, Ireland, Jamaica, Luxembourg, Netherlands, Paraguay, Poland, Qatar, Saudi Arabia, Singapore, Switzerland, Taiwan, and Turkiye.

Tax Havens in the no tax category include 44 jurisdictions, among which are: Aruba, Bahamas, Barbados, Belize, Bermuda, Curaçao, Cayman Islands, Islands of Man, Monaco, US Virgin Islands, and the US states of Delaware, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming.

The guide also establishes that any entity of a country, state or territory not expressly mentioned in the list will be considered a Tax Haven if: (1) exemptions of income tax or similar taxes have been granted; (2) the income tax rate over net income is less than 80% of the applicable Salvadoran income tax rate; or (3) such entities operate under a preferential tax regime of low or no taxation established in a law or administrative provision.

Such entities include: holding companies, parent companies, auxiliary or mixed companies, service companies, financial subsidiaries or financial powers, private asset management companies, multinational companies’ headquarters, international trusts, entities with whom international financial lease agreements are held, trusts, limited liability companies (LLC), Private Interest Foundations and international business companies.

Additionally, the guide states that the list of Tax Havens is not comprehensive and refers to Section 62-A of the Salvadoran Tax Code, which sets forth the Tax Haven criteria.3

According to the guide, a jurisdiction meeting the statutory definition of a Tax Haven, but not included in the list, will be treated as a Tax Haven. Conversely, a taxpayer has the right to submit any relevant documents evidencing that a jurisdiction listed in this guide as a Tax Haven does not meet the statutory definition.

List of countries that have signed tax agreements or tax treaties with El Salvador

The guide lists Spain as a jurisdiction with which El Salvador has signed a double taxation treaty. Costa Rica, Guatemala, Honduras and Nicaragua are listed as countries that have signed the Convention on Mutual Assistance and Technical Cooperation between the tax and customs administrations in Central America.

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For additional information with respect to this Alert, please contact the following:

Ernst & Young El Salvador

  • Rafael Sayagués | rafael.sayagues@ey.com
  • Héctor Mancía | hector.mancia@ey.com
  • Carlos E Gaitan Cortez | carlos.gaitan@sv.ey.com

Ernst & Young LLP (United States), Latin American Business Center, New York

  • Ana Mingramm | ana.mingramm@ey.com
  • Lucas Moreno | lucas.moreno1@Ian.ey.com
  • Pablo Wejcman | pablo.wejcman@ey.com
  • Enrique Perez Grovas | enrique.perezgrovas@ey.com

Ernst & Young LLP (United Kingdom), Latin American Business Center, London

  • Lourdes Libreros | lourdes.libreros@uk.ey.com

Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific

  • Raul Moreno, Tokyo | raul.moreno@jp.ey.com
  • Luis Coronado, Singapore | luis.coronado@sg.ey.com

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Endnotes

  1. The Guide makes a distinction between preferential tax regimes, low or nil-tax jurisdictions, and tax havens, but the tax implications are the same.

  2. Exceptions apply for the acquisition/transfer of certain tangible assets, international transportation services, insurance and related services, interest payments or income derived from capital invested or transactions related to securities, participations and other investment in a Salvadoran primary or secondary stock market, through the Salvadoran Stock Exchange.

  3. According to Section 62-A of the Salvadoran Tax Code, Tax Havens are those jurisdictions in any of the following situations: (i) jurisdictions where there is no income tax or where the income tax rate over net income is less than 80% of the applicable Salvadoran income tax rate (i.e., currently 30%), and (ii) jurisdictions classified as such by the Organisation for Economic Co-operation and Development and the Financial Action Task Force.