Business law in El Salvador

07 Mar 2025 --
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Business Law in El Salvador is governed by a mixture of civil law, commercial law, and labor regulations, designed to create a conducive environment for both domestic and foreign businesses. El Salvador has modernized its legal framework in recent years to encourage investment, simplify business processes, and ensure fair business practices. The business legal system is primarily based on the Civil Code, the Commercial Code, the Constitution of El Salvador, and other specific laws governing taxes, labor relations, and intellectual property.

1. Legal Framework

The legal system of El Salvador is based on civil law principles, which influences business regulations and operations. Key sources of business law in El Salvador include:

The Constitution of El Salvador (1983): Provides fundamental rights for both individuals and businesses, including the right to freely engage in business and property ownership.
The Civil Code (1964): Governs general contracts, property law, and civil transactions.
The Commercial Code (1998): Regulates business activities, including the formation of companies, commercial transactions, and bankruptcy proceedings.
The Investment Law (1999): Encourages foreign direct investment (FDI) by offering guarantees and protection for foreign investors.
Labor Code: Governs labor relations, including employment contracts, working conditions, and dispute resolution.
Tax Laws: Includes Corporate Tax, Value Added Tax (VAT), Personal Income Tax, and other taxes that govern businesses.

2. Types of Business Entities

El Salvador allows several types of business entities to suit different types of businesses, ranging from small ventures to larger enterprises.

a. Sole Proprietorship (Persona Natural)

Liability: The business owner is personally liable for all debts and obligations of the business.
Capital: No minimum capital is required to establish a sole proprietorship.
Registration: The business must be registered with the Ministry of Finance for tax purposes, and the owner must obtain a Tax Identification Number (NIT).

b. Limited Liability Company (Sociedad de Responsabilidad Limitada – SRL)

Liability: Shareholders have limited liability, meaning their liability is limited to their capital contributions.
Capital: The minimum capital requirement for an SRL is USD 1; however, it is customary to have a higher capital based on business needs.
Shareholders: The company can have 2 to 25 shareholders.
Management: Managed by one or more managers appointed by the shareholders.
Registration: The company must be registered with the Commercial Registry and the Ministry of Finance for tax and VAT purposes.

c. Corporation (Sociedad Anónima – SA)

Liability: Shareholders have limited liability.
Capital: The minimum capital for a corporation is USD 4,000.
Shareholders: A corporation can have at least two shareholders, and shares can be publicly traded if listed.
Management: Managed by a board of directors, which is elected by the shareholders.
Registration: Corporations must register with the Commercial Registry and Ministry of Finance for tax obligations.

d. Branch of a Foreign Company

Liability: The foreign company is fully liable for its branch’s activities in El Salvador.
Registration: The foreign company must register with the Commercial Registry and comply with local tax regulations.

e. Joint Ventures

Liability: A joint venture involves two or more companies coming together for a specific business purpose. Liability depends on the terms of the agreement between the partners.
Capital: There is no fixed minimum capital requirement, but the terms are negotiated between the parties.
Registration: Joint ventures must register with the Commercial Registry and comply with other legal requirements as outlined in their partnership agreements.

3. Business Registration and Licensing

To establish a business in El Salvador, entrepreneurs must complete the following steps:

Choose a Business Name: Ensure that the company name is unique and not already in use by another entity. This can be verified through the Commercial Registry.
Prepare Articles of Incorporation: For companies like SRLs or SAs, a formal deed of incorporation is required.
Register with the Commercial Registry: All businesses must be registered with the Commercial Registry of El Salvador.
Obtain a Tax Identification Number (NIT): Businesses must register with the Ministry of Finance to obtain an NIT for tax reporting purposes.
Register with the Social Security Institute (ISSS): Employers must register with the Instituto Salvadoreño del Seguro Social (ISSS) for social security contributions.
Municipal License: A local business license is required, and registration may vary depending on the municipality where the business operates.
Obtain Permits and Licenses: Depending on the nature of the business (e.g., food, healthcare, transportation), additional industry-specific licenses or environmental permits may be required.

4. Taxation in El Salvador

The tax system in El Salvador is designed to ensure that businesses contribute to the national economy while keeping the process relatively simple. The main taxes applicable to businesses are:

a. Corporate Income Tax

The corporate income tax rate is 30% for most companies.
Special Tax Regimes: Some industries and small businesses may be eligible for special tax regimes or incentives.

b. Value Added Tax (VAT)

The standard VAT rate is 13% on most goods and services, though some basic goods and services may be exempt or subject to a reduced rate.

c. Withholding Tax

A 25% withholding tax applies to certain payments made to foreign entities, including dividends, royalties, and interest payments. Double taxation treaties with certain countries may reduce this rate.

d. Personal Income Tax

Personal income tax in El Salvador is progressive, with rates ranging from 10% to 30%, depending on income levels. Companies are required to withhold employee income tax at source.

e. Social Security Contributions

Employers must contribute to Social Security (ISS) for their employees, which is typically around 7.5% of the employee’s salary. Employees contribute 3%.

f. Municipal Taxes

Local municipalities may impose business taxes depending on the type of business, location, and income generated.

5. Labor Law in El Salvador

The Labor Code of El Salvador (1992) governs employment relationships and provides protections for employees. Key provisions of the law include:

a. Employment Contracts

Employment contracts are required, and they can be either fixed-term or indefinite-term.
The contract must outline the terms of employment, including salary, working hours, and job responsibilities.

b. Working Hours

The standard working week is 44 hours, typically divided into 6 days. Overtime pay is required for hours worked beyond the regular schedule.

c. Leave Entitlements

Annual Leave: Employees are entitled to 15 days of paid annual leave after one year of service.
Sick Leave: Employees can take paid sick leave, which is subject to medical certification.
Maternity Leave: Female employees are entitled to 16 weeks of paid maternity leave.

d. Termination of Employment

Notice Period: Employers must provide a notice period for terminating employees, or pay severance in lieu of notice.
Severance Pay: Employees who are dismissed without just cause are entitled to severance pay, which is calculated based on their length of service and salary.

6. Intellectual Property (IP) Law

El Salvador provides legal protection for intellectual property under both national law and international agreements. This includes protection for trademarks, patents, copyrights, and industrial designs.

a. Trademarks

Trademarks must be registered with the National Center for the Registration of Intellectual Property (CNRPI). Protection lasts for 10 years, and trademarks can be renewed indefinitely.

b. Patents

Patents are granted for new inventions and are protected for 20 years. Registration must be done through the CNRPI.

c. Copyright

7. Foreign Investment and Incentives

El Salvador actively encourages foreign direct investment (FDI), particularly in areas like manufacturing, tourism, technology, and renewable energy. Some of the incentives include:

Investment Law (1999): This law guarantees equal treatment for foreign and local investors, including the right to repatriate profits and capital.
Free Zones: Certain areas are designated as free zones, offering tax exemptions, including exemptions from VAT and import duties, to businesses that invest in these areas.
Tax Incentives: Companies in specific sectors, such as export-oriented manufacturing or technology innovation, can benefit from tax exemptions or reductions in corporate tax rates.

8. Dispute Resolution

Disputes in El Salvador are generally resolved through the judicial system, but alternative dispute resolution (ADR) mechanisms like arbitration and mediation are increasingly being used.

Judicial System: Commercial disputes are handled by commercial courts, and cases can be appealed through the general court system.
Arbitration: El Salvador is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, allowing businesses to resolve disputes through arbitration under international standards.
Mediation: Mediation is encouraged as a means of resolving disputes without resorting to litigation.

Conclusion

El Salvador offers a favorable environment for both domestic and foreign businesses with its relatively simple business formation processes, a modern tax regime, and attractive incentives for foreign investment. The legal system is designed to ensure protection for business owners, employees, and investors. However, businesses should ensure compliance with labor, tax, and regulatory obligations and remain aware of the evolving legal landscape in the country.

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