El Salvador’s legal framework is derived from the Political Constitution of 1983. The Constitution is the
highest legal body, followed by international treaties, 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:

• 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 notary publics)
• Municipal councils (on matters related to municipal taxes)

• Freedom to contract
• Freedom of speech.
• Private property.
• Legal equality.
• Habeas corpus.
• The right to legal proceedings.
• Free disposal of one’s property.
• The right to resolve disputes through arbitration.

Foreign investment must be registered at the National Investment Office (Oficina Nacional de Inversiones)(ONI) to access incentives granted by the Investment Act (Decree No 732). Foreign investors must also observe provisions against money laundering.

An important development has been the recent approval of the Dominican Republic-Central America Free Trade Agreement (DR-CAFTA). This treaty not only reduces customs barriers, but introduces a complete set of trade regulations that give equal treatment to foreign investors through many areas of local regulation, such as labour, environmental, banking and public contracts.

The US dollar is legal tender. The Salvadoran Colón no longer circulates. However, it keeps a referential fixed rate of exchange of SVC8.75 per US$1.

There are no exchange controls. Banks keep accounting records in US dollars. The state has the power to
investigative suspicious transactions.

• There are several attractive incentives available to foreign investors, depending on the sector they invest in:

  Free zones. The Free Trade Zone Law exempts manufacturers in free zones from income tax, value added tax (VAT), customs tax and local taxes; as long as the goods produced are exported. Goods imported to the local market are taxed.

  International services. A new International Services Law extends income tax, VAT and customs tax benefits to:

  • call centres;
  • business process outsourcing;
  • logistics;
  • software development;
  • research and development;
  • logistical operations;
  • aircraft and vessel repair and maintenance;
  • medical services;
  • international financial services.

  Tourism projects. Tourism projects benefit from:

  • an exemption from real estate transfer tax
  • for property acquired;
  • ten years exemption from income tax, from the beginning of the project’s operations;
  • duty and VAT exemptions for merchandise, equipment, accessories, machinery, vehicles, aircraft, ships and construction materials for the project;
  • a five-year 50% reduction in municipal taxes.

  Renewable energy. Renewable energy projects (such as wind, biomass, solar, hydro-electric) can also qualify for tax benefits, provided the amount of energy generated qualifies.

  The following incentives and protections are provided to foreign investors in general (Investment Act):

  • General expediting procedures to ensure the equal treatment of local and foreign investors.
  • Freedom to make investments of any kind.
  • Facilitation of the transfer of funds abroad.
  • Foreign investors making an investment of more than 4,000 monthly minimum salaries have an automatic right to resident status, which gives them the right to remain and work in the country. This residency can be temporary or permanent and is extended to the investor’s family.
  • Access to local financing.
  • Protection for the investors’ property.

• Registration formalities (including timing).
• Minimum (and maximum) share capital.
• Whether shares can be issued for non-cash consideration, such as assets or services (and any formalities).
• Any restrictions on the rights that can attach to shares.
• Any restrictions on foreign shareholders.
• Management structure and any restrictions on foreign managers.
• Directors’ liability.
• Parent company liability.
• Reporting requirements (including filing of accounts) and cost of compliance.

The most common forms of business vehicle used are:

• A branch office.
• A local subsidiary corporation of variable capital or sociedad anónima de capital variable (SA de
  CV).
• A limited liability subsidiary company (LLC), equivalent to a partnership.

The Labour Code of 1972 regulates employment relationships between employers and employees. The Ministry of Labour has administrative jurisdiction over inspections and conciliation hearings. Labour Courts have judicial jurisdiction over labour disputes, which are further reviewed by Labour Appeal Courts and the Supreme Court of Justice, if the case merits it. The Labour Code applies to all foreign and domestic employees working in El Salvador regardless of the employer’s nationality. All labour law is mandatory and cannot be contracted out of in the employment agreement.

A written employment agreement is required (Labour Code). In the absence of an employment agreement, witnesses can be used to prove the employment relationship.

For companies with ten or more employees, an internal labour regulations document comprising disciplinary regulations and procedures must be adopted and filed with the Labour Ministry.

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

An employee can be dismissed with or without a just cause (Labour Code). If an employee is dismissed without just 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 pay based on current salary on dismissal.

Redundancies and layoffs are not just causes for dismissal (see Question 9) and therefore require severance payments to be made to the workers.

Layoffs are allowed under special situations and must follow a specific procedure (Labour Code). Layoffs do not terminate the individual employment agreement, but suspend the relationship for a period. Employees don’t lose seniority during layoffs.

Foreign employees 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 five months. The official fee is approximately US$35 (about EUR25).

Individuals are tax resident if they reside in El Salvador for more than 200 days in a year. In addition, if income earned by an individual in El Salvador is the larger part of his total income for the year, that individual is considered to be domiciled in El Salvador for tax purposes.

Tax resident employees
Tax resident employees must pay income tax at progressive rates on their El Salvador source income up to
a maximum of 25%.
In addition, employers and employees must make the following contributions:

• Health contributions. The employer must pay 7.5% and the employee must pay 3% of the employee’s gross salary. However, the total health contribution cannot exceed US$20.57 (about EUR14) per employee per month.
• Retirement (pension fund) contributions. The employer must pay 6.75% and the employee must pay 6.25% of the employee’s gross salary.

Non-tax resident employees
Non-tax resident individuals are subject to a 20% withholding tax on their Salvadorian source income and 13% from every VAT-able payment.

Employers
Employers must make certain social security contributions (see above, Tax resident employees).

Traditionally, the opening of a branch office constitutes tax residency. However, following recent tax reform, merely establishing a physical office space in El Salvador results in tax residency. Additionally, the Tax Authority has recently implemented new criteria, that state that a company owning shares of stock in a local corporation is considered tax resident.

Tax resident business entities pay income tax on Salvadorian source income at a rate of 25% on net income.

VAT at 13% applies to the transfer of movable goods and the provision of services. Dividends paid to a parent company are not taxable if the subsidiary has paid income tax in El Salvador.

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

• Dividends paid. Dividends paid to a parent company are not taxable if the subsidiary has paid income tax in El Salvador.
• Dividends received. Dividends received are taxed as income with 25% rate for companies.
  
• Interest paid. Interest paid is taxed as income with a 20% withholding rate, and 13% VAT.
• IP royalties paid. IP royalties paid are taxed as income with a 20% withholding rate and 13% VAT.

There are no thin capitalisation rules.

There are no foreign company rules, as long as the subsidiary does not distribute dividends, profits can not be imputed to parent company.

Imports are taxed at rates ranging from 0% to 20%, plus 13% VAT.

Exports of companies not subject to free zone benefits receive a 6% reimbursement of FOB (free on board) from the government.

Recent approval of the DR-CAFTA (see Question 2) has dramatically reduced or eliminated most custom duties. However, for some products, customs are to be eliminated only after an adaptation period.

El Salvador has no double tax treaties.

Competition is largely regulated under the Competition Law, the provisions of which are overseen by the Competition Superintendence. Competition law requires selective approval of mergers and acquisitions to ensure anti-trust provisions are met.

Patents

• Nature of right. For an invention to be patentable, it must be a solution to a technical problem.
  It must also be:

• useful;
• new; and
• non-obvious to a technician in that particular field.


• How protected. Protection is obtained by filing a patent application with the Registry of Intellectual Property (Registry).
• How enforced. Infringements are sanctioned criminally through the Attorney General’s office. Also, civil remedies (such as damages) can be recovered in civil and commercial judicial proceedings.
• Length of protection. Patents last for 20 years from the filing date and are non-renewable.

Trade marks

• Nature of right. Any word(s), two- and three-dimensional designs, trade dress, sounds or smells can be registered as trade marks.
• How protected. Protection is obtained by filing a trade mark application with the Registry. The application must first be published and examined by local examiners at the Registry.
• How enforced. The methods of enforcement and the remedies available are the same as for patents (see above, Patents).
• Length of protection. Protection lasts for ten years, renewable indefinitely for ten-year periods.

Registered designs

• Nature of right. To be registrable, registered designs must be two- or three-dimensional forms or shapes that, when incorporated in a product, give it a special appearance and can be used to model or manufacture it.
• How protected. Protection is obtained in the same way as for patents (see above, Patents).
• How enforced. The methods of enforcement and the remedies available are the same as for patents (see above, Patents).
• Length of protection. Protection lasts for five years and is renewable for one further five-year period.

Copyright

• Nature of right. Copyright is provided for artistic, scientific and literary works.
• How protected. Copyright subsists from the moment of creation. However, it can be deposited atthe Registry, which issues a deposit certificate.
• How enforced. The methods of enforcement and the remedies available are the same as for patents (see above, Patents).
• Length of protection. Protection lasts for the duration of the author’s life plus 50 years. If a company is the author, protection lasts for 50 years from the year after it was communicated to the public.

Confidential information

Otherwise, it lasts for the length of the duration of the agreement.

• Agency. Agency agreements are regulated in the same way as distribution agreements (see below, Distribution).
• Distribution. Agency, distribution and representation agreements are regulated and provide strong protection to the local party. These agreements can only be terminated for a fair cause set out in the Code of Commerce 1970.

If the contract is unilaterally terminated, amended or not renewed, without fair cause by the principal, the distributor is entitled to an indemnity, which is composed of, among other things:

• gross profits for the last three years;
• investment in premises;
• reimbursement for credits to third parties.
  

However, DR-CAFTA regulations allow parties to expressly agree to waive applicable indemnities.

In addition, the local distributor can seek to obtain a final decision from the courts to stop imports from the distributor of the former principal’s products until he is properly indemnified.This provision does not apply to principals who signed distribution agreements following their country of origin’s approval of DR-CAFTA, if expressly agreed in the contract.

• Franchising. Franchising is not specifically regulated and the parties can, therefore, freely negotiate most of the terms. However, many of the important aspects of a franchise agreement are regulated under other areas of law, including those on:
  
• IP rights;
• foreign investment registration;
• arbitration;
• taxes;
• non-compete issues.

E-commerce is allowed, based on the free contracting right provided by the Constitution. DR-CAFTA prohibits
custom duties on electronic products sold through the internet. SVNet, the entity responsible for domain name disputes, has adopted dispute resolution rules based on WIPO (World Intellectual Property Organisation) rules.

There are no specific data protection laws. The closest regulations are those for trade secrets, bank secrecy
and consumer rights under consumer protection legislation which guarantee accurate information. The
Constitution grants protection to a person’s honour, personal and family intimacy, and to his own image.

There are no specific product liability laws. However, consumer protection regulations apply to a consumer
and supplier relationship and give the supplier liability up to the price of the product for any defects arising out of its fabrication.

Civil law provides for the general principle that all entities are responsible for damages caused by their tortious
intent or negligence. Following case law, clauses limiting such responsibility are considered to be unconstitutional.