Company in El Salvador: formation and registration

Critical to the domain of international commerce are the collective CACM pacts, alongside the FTAs with the EU, Mexico, Colombia, Taiwan, and the United States. This publication delineates the principal components and statutory requirements for corporate establishment in this Central American nation.

Benefits of establishing a company in El Salvador:

• El Salvador’s economic freedom rating stands at 61.0, positioning its economy 94th in the freedom index of 2021.
• Advanced infrastructural framework.
• Unrestricted commercial operations for both domestic and foreign entrepreneurs.
• The primary commercial allay is the US, which receives nearly half of the region’s exports.
• Government initiatives to diversify the economic landscape have catalyzed growth across various sectors, notably manufacturing.
• Foreign entities can establish operations within El Salvador’s free zones, benefiting from exemptions on income tax and VAT for overseas sales.
• The Republic imposes no limitations on international trade activities.
• The US dollar serves as the official currency.
• Numerous FTAs, which abolishes customs duties on trade among member states for locally produced goods and services.

Establishing a cryptocurrency enterprise in El Salvador could be advantageous, as the nation recently enacted legislation recognizing BTC as legal tender, becoming the first sovereign state to do so alongside the US dollar.

This comprehensive overview should assist entrepreneurs in understanding the significant benefits and regulatory landscape for setting up a business in El Salvador.

Establishing a business in Salvador: selecting organizational legal forms

Formation of an LLC or SRL in El Salvador

This structure is commonly preferred by entrepreneurs for initiating SMEs. A minimum of two shareholders and one director is necessary, with at least one director required to be a resident. The initial share capital must be at least USD 2K, with a min. of 5% paid upon formation and the balance to be paid within the subsequent year. All incorporated SRLs must designate an auditor and submit audited financial statements on an annual basis. Only income generated within the jurisdiction is taxable, with a tax rate of 30%.

Incorporation of a JSC or SA in El Salvador

This corporate form demands a min. investment capital of USD 11,450, with 25% of this amount required to be deposited into a corporate bank account before registration. The remaining 75% may be deposited over a period of up to five years post-incorporation. At least two shareholders and one director are required.

Establishment of a Branch or Representative Office

A branch operates as an extension of the parent company, which assumes liability for all obligations of the branch. A legal representative, who must be a citizen of El Salvador, should be appointed for such entities.

While a representative office can be entirely foreign-owned, it is restricted from conducting commercial transactions within the country. Its activities are limited to conducting market research and promoting the parent company’s business interests.

The registration process typically spans approximately 5 working days, with all necessary paperwork facilitated by legal professionals based on a power of attorney and acting on behalf of the company owners. Remote company registration in El Salvador is permitted.

Services and associated costs (in US dollars):

• Registration of a legal entity: $3,300
• Payment of state duties: $784
• Provision of a legal address: $170 per month
• Legal consultancy: starting at $150
• Establishment of a bank account: $1,695
• Accounting services: starting at $150 per month

This detailed overview provides a structured guide for entrepreneurs interested in establishing a business entity in El Salvador, covering various legal forms and associated administrative costs.

Main conditions

There are several primary prerequisites mandated by the National Center of Registers for company registration in El Salvador:

1. Throughout the incorporation phase, all relevant documents must be authenticated by a notary public.
2. Company’s license requires annual renewal, which must be executed by a legal representative or an authorized third party.
3. The role of the local director or legal representative is pivotal in representing the company and its operations and ensuring compliance with local legislation and regulations. The validity of the legal representative’s certificate is extendable after its expiration for an additional seven years. Moreover, the appointment of a deputy local director is obligatory.
4. Additionally, the registration of a fiscal address with the tax authority is essential for all legal entities.
5. Companies are obligated to submit annual audited financial statements.
6. Company’s name verification can be conducted via the Commercial Register.
7. All corporations are required to have at least two shareholders, who can be either individuals or corporate entities and may be either residents or non-residents.
8. These shareholders are required to provide notarized documentation, including identity verification, a charter confirming the legal existence of the company, and proof of legal representation.

Upon satisfying all stipulated requirements, the enterprise will be eligible to receive a TIN. With the TIN acquired, the company is authorized to commence its business operations. The governance of the company should be managed either by a board of directors consisting of at least two individuals and one deputy or by a single administrator.

Regulatory landscape of gambling in El Salvador

In El Salvador, gambling activities are predominantly illegal, with the sole exception of the national lottery. However, ambiguities due to antiquated language and limited legislative scope have historically created enforcement challenges. The genesis of these ambiguities is the 1983 Constitution, which endowed local municipalities with augmented autonomy in managing "economic and technical matters". This autonomy has historically enabled the issuance of a limited number of gambling licenses, despite the national prohibition, with only four such licenses being granted to date.

Moreover, legislative independence of municipalities and specifically addressed gambling—a contentious issue by then. The prohibition of gambling was more rigorously enforced following the enactment of Law 35-2002 in 2002, which led to the closure of all gambling establishments. Presently, many legal online gambling platforms, licensed in foreign jurisdictions, are accessible in El Salvador.

Cryptocurrency ventures in El Salvador as of 2024

In 2021, El Salvador distinguished itself as the first nation globally to recognize BTC as a national currency, alongside the US dollar. Consequently, commercial entities in El Salvador are mandated by law to accept Bitcoin for everyday transactions.

El Salvador is among a select group of non-EU nations where Bitcoin is designated as legal tender. For international investors, this status facilitates:

• Unrestricted use of BTC for purchasing goods and services and making investments within El Salvador.
• Legal trading and profiting from Bitcoin operations.
• Government efforts to attract Bitcoin investment, offering incentives such as tax-free real estate purchases using Bitcoin and a zero percent capital gains tax on Bitcoin sales.

However, the regulatory framework governing cryptocurrencies remains underdeveloped. Prospective investors are advised to seek expert consultation prior to establishing a cryptocurrency-based enterprise in El Salvador.

Permanent Residence Visa for Bitcoin investors

El Salvador is in the process of legislating a new policy that will enable foreign investors to secure residency through investments in Bitcoin, subsequent to its pioneering adoption of the digital currency as legal tender. The proposed legislation aims to offer permanent residency to foreign investors and expatriates who invest a min. of approximately US$100K, either in real estate or other forms of investment within the nation. Permanent residency will be granted post a thorough due diligence review, assessing the applicants' intentions and financial capabilities, among other criteria.

Tax obligations

• CIT: 30%.
• VAT: 13%.
• Withholding tax: 25% on dividends, 20% on interest and royalties.

Accounting and audit mandates

Organizations are mandated to designate an external auditor. Annual audited financial statements are required to be filed with the Trade Register. Additionally, entities may be subject to an annual tax audit contingent upon their revenue levels.

Conclusion

El Salvador, while less known, emerges as an appealing business environment, offering considerable prospects for global investors. The nation is witnessing notable economic advancement and is rapidly garnering attention as a viable destination for international capital. Initiating a business venture in El Salvador is deemed strategic due to the availability of an extensive English-speaking workforce, the utilization of a globally recognized currency, and the diverse investment opportunities across various sectors.

For detailed insights into the specific features and prerequisites for company registration in El Salvador, potential investors are encouraged to engage with TK Deal specialists for specialized consultations and assistance with the company registration process.