El Salvador's legal framework is derived from the Political Constitution of 1983. The Constitution
is ranked as the highest legal authority, followed by international treaties ratified by El Salvador, laws and implementing regulations. The legal system was originally based on the French civil code system. The Legislative Assembly enacts laws, on the initiative of the following:

· Legislators
· The President (through his Ministers)
· The Supreme Court of Justice (on matters related to the judicial branch, jurisdiction and        
  competition of the courts, and the exercise of Notary Publics)
· Municipal Councils (on matters related to municipal taxes).

The Peace Accords signed in 1992 introduced important amendments to the Political Constitution, focusing on the stabilization of democracy and respect for human rights.

Are there any restrictions on foreign investment (including authorizations required by central or local government)?

There are few restrictions on foreign investment. Foreign investment must be registered at the National Investment Office (known as the NOI) to access incentives granted by the Investment Act. Foreign investors must observe provisions against money laundering.

Are there any exchange control or currency regulations?

The US dollar is the legal tender. The Salvadoran colon, which no longer circulates, will always be converted to US dollars at a legally fixed rate of C8.75 per US$1. There are no exchange controls.

Are any grants or incentives available to foreign investors?

Incentives available under the Investment Act are:

· General expediting procedures
· Brief and simple steps to establish and develop investment and to facilitate repatriation.
· Equal treatment of local and foreign investors
· Freedom to make investments
· Any individual or entity, national or foreign, can make investments of any kind in El Salvador,
  within the limits of the law.
· Facilitating the transfer of funds abroad
· Access to local financing
· Protection and safety of property
· Resident status to investors

Foreign investors making an investment of more than 4000 monthly minimum salaries, have an automatic right to resident status, which grants the right to remain and work in the country. This residency can be temporary or permanent, and is extended to the family group of the foreign investor.

The Constitution recognizes and guarantees:
 
· Specific legal rights for national and foreign investors;
· Protection of investors' property; and
· The right to the free disposition of investors' assets.

What are the most common types of business entities used by foreign investors to conduct business in your jurisdiction?

The most common types of business entities used are:

· A branch office
· Incorporating a local corporation: an anonymous company of variable capital (Anonymous
  Company)
· A limited liability company (LLC), equivalent to a partnership

What is the most common form of corporate vehicle established by foreign companies in El Salvador?

The most common form of corporate vehicle established by a foreign companies is an
Anonymous Company.

What registration formalities must be observed?

Registration must be granted before a notary public through a public Deed, which comprises the company's articles of incorporation and by-laws. Registration takes from three to five days at the Registry of Commerce.

What is the required minimum (and maximum) share capital?

A minimum of two shareholders (persons or companies) is required. The minimum capital stock is C100,000 (about US$11,429). At the time of incorporation, at least 25% of the subscribed capital stock must be paid. The outstanding 75% must be fully paid within a reasonable period of time (usually between one and five years) following incorporation. The minimum value of each share of the capital stock is C10 (about US$1.14). There is no maximum share capital.

Can shares be issued for non-cash consideration?

Shares can be issued for non-cash consideration, once the minimum capital is paid (see above).

Are there any restrictions on the rights attaching to shares?

There are usually no restrictions on attached rights. However, shareholders can adopt "preferred shares", which have limited voting rights but preferential rights to profits. In addition, the incorporation documents can provide higher quorum requirements for decision-making at the
shareholders' assembly level, which is the final decision instance (that is, the highest decision
making authority).
 

Are there any restrictions on foreign shareholders?

There are no restrictions on foreign shareholders.
 

What rules exist regarding management structure and foreign managers?

The shareholders elect either a board of directors (at least two directors and their corresponding alternates) or a sole administrator (and his alternate) to manage the company. The board of directors can appoint managers for different areas. Foreigners can act as shareholders, directors or managers.
 

What is a director's liability?

A director's powers are personal and cannot be delegated. A director is liable for decisions taken at board level, unless he votes against a particular decision and gives his reasons, and this is reflected in the board's minutes book. The president and the secretary of the board, acting jointly or separately, are the legal representatives of the corporation, unless otherwise provided in the corporation's by-laws. Another option is to grant a power of attorney to a person residing in El Salvador, giving him/her the legal capacity to sign documents and petitions on behalf of the corporation and act as its representative. The legal representatives are responsible for the company's compliance with all its legal obligations.

What is the parent company’s liability?

A parent company is only liable if it is a shareholder.

What are the reporting requirements?

A company must file:
· A general balance and financial statements of the company at the Registry of Commerce, every
  year
· A monthly VAT declaration, paying the difference arising from the VAT collected from its
· Sales minus the VAT paid to third parties
· A monthly income tax declaration, paying 1.5% of its gross income in advance of its annual
  income tax
· A monthly declaration of income tax retained from employees and individual service providers
· Monthly health contributions and monthly pension fund contributions

What is the jurisdictional scope of the regulatory environment for employment issues?

The Labor Code (enacted in 1972) regulates the labor relationships between employers and employees. The Ministry of Labor has administrative jurisdiction over inspections and conciliation hearings. Labor courts have judicial jurisdiction over labor disputes, which are further reviewed by Labor Appeal Courts and the Supreme Court of Justice, if the case merits.

Is a written contract of employment required and what, if any, other terms are likely to govern the employment relationship?

The Labor Code requires a written employment agreement. In the absence of an employment agreement, witnesses can be used to prove the employment relationship. For companies with 25 or more employees, Internal Labor Regulations comprising disciplinary methods and procedures must be adopted and filed with the Labor Ministry.

Are employees entitled to management representation and/or to be consulted in relation to corporate transactions (such as redundancies and disposals)?

Employees are not entitled to management representation or to be consulted in relation to corporate transactions.

What statutory rights do workers have against dismissal in your jurisdiction?

An employee can be dismissed with or without cause. If an employee is dismissed without cause, he is entitled to a severance payment of one month's salary per year of work, plus proportional vacation and year-end bonus payments. This is limited to a maximum of four times the statutory minimum salary multiplied by the number of years at work, unless the company's custom is to compute severance based on current salary on dismissal.

How are redundancies regulated?

Redundancies imply the payment of severance.

What is the cost of employment for employers and employees (such as mandatory taxes and social security contributions)?

Employers and employees must make the following contributions:

· Health contributions
The employer pays 7.5% and the employee pays 3% of the employee's salary. The health contribution cannot exceed US$72 (about EUR58) per employee.

· Retirement (pension fund) contributions
The employer pays 6.75% and the employee pays 6.25% of the employee's salary.

How are employees of foreign companies who are seconded to El Salvador from abroad taxed?

Employees of foreign companies pay income tax on their net income obtained in El Salvador. They must file an income tax return during the first four months of the year if they will earn more than US$5,714.28 (about EUR 4,595) during that year. For individuals domiciled in El Salvador, the amount of tax varies according to the level of income. For individuals not domiciled, a fixed rate of 25% on net income is paid. A person is considered to be domiciled if he has been in El Salvador for more than 200 consecutive days during the previous year. In addition, if the income earned by a person in El Salvador is the greater part of his total income for the year, that individual is considered to be domiciled in El Salvador.

Do foreign workers require work permits? If so, how long does it take to get a permit and how much does it cost?

Foreign workers require a work permit (a temporary residence visa), which can be obtained from the Salvadoran Consulate in their country of origin. However, the most common way to obtain it is to enter the country as a tourist and then apply for temporary residence. The process takes about three to four months. The official fee is approximately US$35 (about EUR28).

What is the basis of taxation of companies that are incorporated and/or tax resident in El Salvador?

Income tax is paid on net income (that is, the difference between revenues and expenses) earned by the taxpayer during the tax year. Under the principle of territoriality, only income received by taxpayers from assets or investments located in El Salvador and from work performed or used in El Salvador (even when that work is performed or paid overseas) is taxable. Value added tax (VAT) applies to the transfer of movable goods and the provision of services.

How are the activities of non-tax resident companies in El Salvador taxed?

Non-resident companies obtaining income in El Salvador are subject to withholding taxes of:

· 20% on all taxable income and 13% on all VAT taxable payments.

· VAT is affected by the concept of "introduction of services", which means that if a service is performed overseas, for an entity domiciled in El Salvador, and it uses the service in El Salvador, that service is taxable.

What are the main taxes that potentially apply to companies (including rates)?

Companies must pay income tax at 25% and VAT at 13%.

How are each of the following taxed:

· Dividends paid to foreign corporate shareholders.
· Dividends received from foreign companies.
· Interest paid to foreign corporate shareholders.
· Intellectual property (IP) royalties paid to foreign corporate shareholders.

· Dividends paid to foreign corporate shareholders
These are not taxed, provided the company has paid income tax on its income.

· Dividends received from foreign companies
These are not taxed.

· Interest paid to foreign corporate shareholders
This is not taxed.

· IP royalties
These are subject to VAT at 13% as they are considered as originating from services provided in El Salvador. If the owner of the IP right is a non-domiciled entity, he is also subject to a 20% withholding rate for income tax.

Does El Salvador have thin capitalization rules (restrictions on loans from foreign affiliates)?

There are no thin capitalization rules.

Can the profits of a foreign subsidiary be imputed to a parent company that is tax resident in El Salvador (controlled foreign company rules)?

Profits of a foreign subsidiary cannot be imputed to a resident parent company.

Does El Salvador have transfer-pricing rules?

Although there are no specific transfer pricing regulations, a transfer between related companies, at a price clearly different from normal market prices, can be deemed as a tax fraud.

How are imports and exports taxed?

Imports are taxed according to duties ranging from 0% to 20%, plus 13% VAT. Exports are exempt from income tax. In addition, the Export Reactivation Law provides that the government will reimburse to exporters 6% of the added value amount of national origin, originated from assembling or in-bond (maquila) operation. Those companies operating under the free zone regime waive this incentive, as they receive other incentives from the government, such as:

· Exemption from import duties
· Income tax and VAT exemption, except for the part of the product that enters the local market
· Municipal tax exemption

Does El Salvador have a wide network of double tax treaties?

There are no double tax treaties.

Are restrictive agreements and practices regulated by anti-trust law in El Salvador? If so, please give brief details.

Traditionally, El Salvador's competition rules were derived from many different sources. However, a new anti-trust law was recently passed by the Legislative Assembly and, although it is still too early to properly assess its influence, it will clearly affect how El Salvador deals with restrictive agreements and practices in the future.

Are marketing agreements regulated in El Salvador? If so, please give brief details in respect of the following arrangements:

· Agency
Agency, distribution and representation agreements are regulated and provide strong protection to the local party. These agreements can only be terminated under fair causes provided by the Code of Commerce (enacted in 1970). In the case of unilateral termination, refusal to renew a contract or unilateral amendments, beyond fair causes, the local party is entitled to be indemnified. Indemnity can take the form of, among other things:
Gross profits for the last three years;
Reimbursement for investment in premises;
Repurchase of inventory, under a provided formula; and
Reimbursement for credits to third parties.

When an exclusive relationship is unfairly terminated, not renewed or unilaterally amended, the
local party can judicially seek a preliminary injunction to stop imports (by a new distributor) of
the former principal's products until they are properly indemnified.

· Distribution
Distribution agreements are regulated in the same way as agency agreements.

· Franchising
Franchising is not specifically regulated and the parties can, therefore, freely negotiate most of the terms. However, many of the important institutions of a franchise agreement are regulated elsewhere, including:
IP rights
Foreign investment registration
Arbitration
Taxes
Non-compete issues
Execution of foreign court decisions or arbitration awards

Are there any laws or codes of practice relating specifically to e-commerce (such as electronic signatures and distance selling)?

There are no specific e-commerce laws. However, ecommerce is allowed, based on the free contracting right provided by the Constitution.

Does your jurisdiction have data protection laws? If so, please give brief details.

There are no specific protection laws. The closest regulations are those for trade secrets. The Constitution grants protection to a person's honor, personal and family intimacy, and to his own image.
Does your jurisdiction have product liability laws? If so, please give brief details.
There are no specific product liability laws. However, consumer protection regulations apply to a consumer and supplier relationship.