Tax Guide for US Expats Living and Working in El Salvador
Who Is Liable For Income Taxes in El Salvador
Resident individuals are subject to tax on El Salvador-source income as well as foreign-source investment income (interest from cash deposits in financial institutions abroad, and gains on the sale of foreign securities, financial instruments and derivative contracts). Income tax paid abroad with respect to foreign-source income may be credited against the Salvadorian tax liability for such income according to specific rules.
Nonresident individuals, regardless of their nationality, are taxed only on their El Salvador-source income, which includes income derived from the following:
- Assets located in El Salvador
- Activities carried out or capital invested in El Salvador
- Services rendered or used in El Salvador, even if received or paid for outside El Salvador
Individuals are considered tax resident if they stay in El Salvador for more than 200 consecutive days during a tax year. An individual staying 200 consecutive days or less within a tax year is considered a nonresident for tax purposes. Individuals that have been deemed residents for more than one calendar year may remain outside the country for up to 165 days without losing their resident status. In addition, individuals whose principal place of trade or business is in El Salvador are also considered residents.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Tax is imposed on salary, remuneration, fees and other compensation received for services rendered or used in El Salvador.
Self-employment and business income. Income derived from self-employment services rendered or used in El Salvador or from a trade or business is subject to tax in El Salvador.
Investment income. Individuals are subject to tax on interest income, premiums and other yields, derived from savings and time deposits with banks and financial institutions domiciled in El Salvador. Tax is imposed at a flat rate of 10% if the monthly average deposits equal or exceed US$25,000.
Income derived from deposits in financial institutions abroad that is earned by individuals domiciled in El Salvador is subject to a flat tax rate of 10% if the income was not subject to tax in the country of origin. If the tax rate or the tax paid in the country of origin is less than the Salvadorian tax rate, the taxpayer is required to pay the difference between the tax rate or tax paid abroad and the Salvadorian tax rate or tax due.
Resident and nonresident individuals are not subject to tax on dividends received if the company distributing the dividends has already paid the corresponding income tax at the corporate level.
Dividends, interest, capital gains or any other benefits derived from investments in or sales of shares (or any other securities, financial instruments and derivative contracts) derived by Salvadorian individuals domiciled in El Salvador are subject to tax at a flat rate of 10% if any of the following conditions are met:
- The issuing entity is a national entity or it is domiciled in El Salvador.
- The capital is invested or employed in El Salvador.
- The risk of the underlying asset is placed or located in El Salvador.
The above conditions are deemed to have been met if the taxpayer is domiciled in El Salvador or is a domiciled establishment or branch for Salvadorian tax purposes.
Directors’ fees. Directors’ fees paid to resident and nonresident individuals are subject to withholding tax at a rate of 10% for resident individuals and 20% for nonresident individuals. This tax is a final tax for nonresident individuals.
Special rules for payments to tax-haven jurisdictions. A 25% final withholding tax is imposed on amounts paid to or through non-domiciled individuals or legal entities resident or domiciled in tax-haven jurisdictions if the payment has a tax effect in El Salvador (for example, it is regarded as a deductible expense for the payer). Exemptions apply in the following circumstances:
- The payments are made for the acquisition or transfer of tangible assets.
- The tax-haven jurisdiction is a Central American country that has entered into a cooperation agreement with the Salvadorian tax and customs authorities.
- The tax-haven jurisdiction has entered into an information exchange agreement or double tax treaty with El Salvador.
- Reduced withholding tax rates apply in El Salvador to the payment (that is, for payments for international transportation services, insurance and similar services, interest from loans and specific intangible assets and rights).
Capital gains. In general, capital gains are subject to a tax at a flat rate of 10%. However, if the gain is derived in the course of the taxpayer’s ordinary trade or business or if the gain is derived within 12 months after the date of acquisition of the relevant asset, the gain is considered ordinary income that is subject to income tax at a rate of 25%.
Deductions
Personal deductions and allowances. A deduction of US$1,371.43 is allowed for each employed individual with annual income that does not exceed US$5,714.29. Individuals with income exceeding US$5,714.29 may deduct up to US$800 for medical expenses and up to US$800 for education expenses.
Business deductions. All costs and expenses that are necessary to generate taxable income or maintain its source are deductible if the following conditions are satisfied:
- They are not excessive or unreasonable.
- They pertain to the same fiscal year as the taxable income.
- They are supported by the required corresponding documentation.
- Applicable withholding taxes, if any, have been imposed.
Expenses related to the acquisition of movable goods and the rendering of services in an amount equal to or exceeding US$5,605.25 are deductible for income tax purposes only if the payment is made by check, bank wire transfer, credit or debit card or if the transfer or the service is documented by a written contract or other documents regulated by civil or commercial law.
Payments for services rendered by nonresident individuals to resident individuals and domiciled entities are subject to withholding taxes that are imposed in the month of payment or in the month in which the payment is credited. If by 31 December, the payment for services rendered or used in El Salvador has not been made, the payer must remit the corresponding tax that would have been withheld from the payments in order to deduct the payments when calculating its annual taxable income.
Relief for losses. Losses may not be carried forward or back. However, capital losses derived from the sale of movable or immovable assets may be offset against future capital gains for up to five years, provided such losses have been reported to the tax authorities. Capital losses derived from the sale of securities or financial instruments issued abroad may be offset against future capital gains from the same assets for up to five years.
B. Estate and gift taxes
El Salvador does not impose separate estate or gift taxes. However, estates may be taxed as ordinary taxpayers if they derive income before the assets are distributed to the beneficiaries.
C. Social security
Social security contributions are levied monthly on salaries at a rate of 8.5% for employers and 3% for resident and nonresident employees, with a monthly salary ceiling of US$685.71. Death and pension funds are covered by private institutions (AFPs), which are funded through monthly contributions levied on salaries at a monthly rate of 6.75% for employers and 6.25% for employees, with a monthly salary ceiling of US$5,274.52. The Pension Fund Administration considers any compensation for services provided in El Salvador under an existing employment relationship to be taxable, regardless of the migratory status of the individual. For foreign individuals, the Pension Fund Administration has established a refund mechanism for such contributions, and a refund may be requested after the foreign individual leaves El Salvador. In principle, salary-in-kind is not subject to Pension Fund contributions because the Pension Fund Law states that only compensation received in cash by the employee for ordinary services rendered to the employer is subject to Pension Fund contributions.
To learn more about the history, culture, economy and other information about El Salvador
We have been preparing US income tax returns for US Citizens and permanent residents living in El Salvador for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in El Salvador and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the El Salvador tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your El Salvador Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in El Salvador, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in El Salvador.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email