Decreto No. 957: Reforms to the Law of Income Tax PDF

# DECRETO No. 957 ## REFORMS TO THE LAW OF INCOME TAX **LA ASAMBLEA LEGISLATIVA DE LA REPÚBLICA DE EL SALVADOR**, **CONSIDERING:** 1. That by means of Legislative Decree No. 134, dated December 18, 1991, published in the Official Journal No. 242, Volume No. 313, of December 21 of the same year, t...

# DECRETO No. 957 ## REFORMS TO THE LAW OF INCOME TAX **LA ASAMBLEA LEGISLATIVA DE LA REPÚBLICA DE EL SALVADOR**, **CONSIDERING:** 1. That by means of Legislative Decree No. 134, dated December 18, 1991, published in the Official Journal No. 242, Volume No. 313, of December 21 of the same year, the Law of Income Tax was issued. 2. That currently the income tax for natural persons who are exclusively salaried through the withholding mechanism causes delays and administrative costs for salaried taxpayers and the Tax Administration, due to the processing and verification of over four hundred thousand refunds. 3. That to reduce the administrative inconveniences mentioned in the previous consideration, it is necessary to introduce reforms that allow for the simplification of the income tax withholding mechanism and that the amount to be withheld approximates the income tax that corresponds to be paid. 4. That the structure of the Income Tax has generated a distortion in the taxation of those subject to its payment; consequently, it is necessary to update the tax rates. 5. That in light of the foregoing, it is necessary to reform the current regulatory framework of the Income Tax, in such a way that it allows economic agents to pay taxes and contribute to the financing of public spending, in accordance with the requirement of the same and in an equitable manner. **THEREFORE,** using its constitutional powers and at the initiative of the President of the Republic, through the Minister of Finance and the Deputies Norma Fidelia Guevara de Ramirios, Lorena Guadalupe Peña Mendoza, Orestes Fredesman Ortez Andrade, Inmar Rolando Reyes and Gilberto Rivera, **DECREES** the following: ## REFORMS TO THE INCOME TAX LAW **Article 1.** The numeral 7) of Article 29 is reformed as follows: "Deduction for salaried persons who settle or do not settle the tax. 7) Natural persons whose income is derived exclusively from salaries and whose amount is equal to or less than US$9,100.00, will not be required to submit a tax return and will be entitled to a fixed deduction of US$1,600.00, which will not be subject to verification. The fixed deduction and social security contributions will be included in the withholding quota to which they are subject. Natural persons who are salaried, with incomes greater than US$9,100.00, will be entitled to the deductions established in Articles 32 and 33 of this Law, which will be subject to verification." **Article 2.** The literal b), third paragraph of Article 33 is reformed as follows: "Likewise, those salaried who earn income exceeding US$9,100.00 will be entitled to these deductions." **Article 3.** The Article 37 and its heading are replaced by the following: "Calculation of the tax for natural persons, estates and trusts. Art. 37. The Income Tax for natural persons, estates and trusts domiciled in the country will be calculated in accordance with the following table, for the cases specifically provided for in this Law, as follows:" | NET OR TAXABLE INCOME | % TO APPLY | ON THE EXCESS OF: | MAXIMUM FIXED FEE | |---|---|---|---| | $0.01 $ 4,064.00 | Exempt | | $212.12 | | $ 4,064.01 $ 9,142.86 | 10% | $ 4,064.00 | $720.00 | | $ 9,142.87 $ 22,857.14 | 20% | $ 9,142.86 | $3,462.86 | | $ 22,857.15 onwards | 30% | $ 22,857.14 | | "Natural persons, estates or trusts not domiciled in the country will calculate their tax by applying thirty percent (30%) on their net or taxable income. Exclusions from the calculation of the tax are those incomes that have been subject to a final withholding of Income Tax at the legal percentages set out in the regulations." **Article 4.** The Article 38 is replaced by the following: "Art. 38. Natural persons domiciled in the country whose income is exclusively derived from salaries, wages and other remuneration and which have been subject to withholding for the payment of this tax, are not required to submit a tax return; except for those who earn income greater than US$60,000.00 per year, as well as those who have not been withheld or whose withholdings do not correspond to the tax that would result from applying the provisions set out in the table referred to in Article 37 of this Law, in which case they must submit the corresponding tax return settling the tax or may request a refund. Consequently, those persons who are not required to submit a tax return, their tax will be equal to the sum of the withholdings made in accordance with the provisions set out in Article 155 of the Tax Code in relation to the withholding tables. Those salaried who do not benefit from fixed deductions for hospital, medical, professional, tuition or school services, as referred to in this Law, may exercise their right to declare, for the purpose of requesting a refund. At the request of the Tax Administration, both the Salvadoran Social Security Institute and the Superintendent of the Financial System and the Pension Fund Administrators are obliged to share information to monitor the payment of withholdings by withholding agents." **Article 5.** The Article 41, is replaced by the following: "Art. 41. Legal persons, partnerships, unincorporated associations or de facto entities, domiciled or not, will calculate their tax by applying thirty percent (30%) to their taxable income; those taxpayers that have earned income less than or equal to one hundred and fifty thousand dollars (US$150,000) are exempt and will apply the twenty-five percent (25%) rate. Exclusions from the calculation of the tax are those incomes that have been subject to a final withholding of Income Tax at the legal percentages set out in the regulations. The profits of the domiciled taxpayers referred to in this article will be subject to a complementary tax when distributed in accordance with the provisions set out in this Law." **Article 6.** Three new paragraphs are added to Article 65, as follows: "The withholding agents, for the purpose of faithfully complying with the application of the withholdings established in the Decree that contains the income tax withholding tables, must comply with the obligations regulated by said Decree, which consist of: a) Applying the withholding tables contained in the corresponding Executive Decree; b) Subtracting the total of remuneration for the period the amount of non-taxable income; c) Carrying out a recalculation to determine the withholding for the months of June and December. Withholding subjects must comply with the obligations established in the Decree that contains the withholding tables, which consist of: 1) Informing each employer or employer of the existence of more than one job and the amounts of their respective incomes; 2) Informing their employer which income is subject to withholding, in the case that the income earned from the different jobs is equal; 3) Requesting their previous employer to issue and deliver a withholding certificate, in accordance with the provisions set out in Article 145 of the Tax Code, for delivery to their new employer. Failure to comply with the obligations set out above, which must be included in the corresponding Executive Decree, will be penalized with a fine of two monthly minimum wages." **Article 7.** A Chapter III is added in Title VII, entitled "INCOME TAX ON THE DISTRIBUTION OF PROFITS”, with the following content: "CHAPTER III **INCOME TAX ON THE DISTRIBUTION OF PROFITS** **Article 72.** Domiciled taxpayers who pay or credit profits to their partners, shareholders, associates, trustees, participants, investors or beneficiaries, will be required to withhold five percent (5%) of such amounts. Such withholding will constitute the final payment of Income Tax on behalf of the party to whom the withholding was made, whether or not they are domiciled. If the referred profits have not been subject to the corresponding withholdings in accordance with the provisions set out in this Chapter, they must be declared separately from other income earned in the fiscal year or period and the tax must be paid at the rate of five percent (5%). For the purposes of this article, profits will mean the remainder resulting from the sum of the taxable, exempt and non-taxable income received or earned by the taxpayer in the fiscal year or period, less costs, expenses, deductions, and the taxes regulated in Articles 37 and 41 of this Law. Profits will be understood to have been paid or credited when they are actually received by the taxpayer, whether in cash; securities, in kind; by the offsetting of debts, application to losses; or by means of accounting operations that generate availability, regardless of their name, such as dividends, partnerships, surpluses, reserves, profits or income. The withholding established in this Chapter, due to its special nature, will prevail over any rule to the contrary; except as regulated in Article 158-A of the Tax Code. ## **Withholding in special cases** **Article 73.** Representatives of head offices, branches, subsidiaries, agencies, and other permanent establishments who pay or credit profits to subjects not domiciled in El Salvador must withhold five percent (5%) on account of Income Tax in accordance with the provisions set out in the previous article. If the corresponding withholdings are not made in accordance with the provisions set out in this Chapter, those subjects not domiciled will be required to comply with the provisions set out in Article 53, second clause of this Law. ## **Withholding for capital reduction** **Article 74.** Domiciled taxpayers in El Salvador must withhold income tax at the rate of five percent (5%) on the amounts paid or credited for capital reductions or equity, in the part corresponding to capitalizations or reinvestments of profits. For these purposes, it will be understood that the amounts paid or credited for the reduction of capital or equity correspond to capitalizations previously made until the amount is exhausted. ## **Withholding for loans** **Article 74-A.** Legal persons or entities without legal personality domiciled in El Salvador must withhold five percent (5%) in respect of Income Tax on sums of money or goods in kind that they provide in respect of loans, advances or any other form of financing to: a) Their partners, shareholders, associates, participants, trustees or beneficiaries and those related parties as set out in Article 25, final clause of this Law. b) Persons or entities established, located or domiciled abroad in countries, states or territories with low or nil taxation or tax havens. c) Their head office located or domiciled abroad or, where applicable, a branch, agency or other establishment located or domiciled abroad related to their head office. The withholding set out above and the provision set out in Article 25, final clause of this Law, will not apply when the loan, advance, or other form of financing is granted under any of the following conditions: 1. The interest rate has been agreed upon at a market rate or a higher rate. 2. The agreement has been made between financial institutions regulated by the Superintendent of the Financial System. 3. The agreement has been made by public or private entities that habitually grant credits. 4. The agreement has been made by the persons referred to in Clauses 2 and 3 above mentioned. 5. The borrower is the State, municipality, autonomous institution, fund, or trust established or owned by the State, as well as when it is a corporation or public utility foundation However, notwithstanding the provisions in the previous paragraph, with respect to Clause 1, if the borrower defaults on the payment of more than six installments or the deadline for the payment of one or more installments is greater than one year, this will be considered, for the borrower, that the total amount of the agreed-upon installments is taxable income, and the interest accrued will not be deductible as a cost or expense for the purposes of determining Income Tax. ## **Exemption cases** **Article 74-B.** It will not be necessary to withhold or pay the tax referred to in the previous articles when: a) The profits have been subject to withholding and the payment of the tax set out in this Chapter in previous distributions; b) The profits are capitalized in nominative shares or participations in the equity of the same company that pays them; c) The profits are reinvested by entities without legal personality; d) The party receiving the profits is the State and its authorities, municipalities or other public law entities, federations and associations, cooperatives, as well as corporations or public utility foundations that are exempt under Article 6 of this Law. The Official Autonomous Institutions, including the Lempa River Hydroelectric Executive Commission, will be subject to the payment of the tax, despite the fact that the laws under which they are governed may have exempted them from any tax. Exemption established in this Article shall be proven by the liable party before the Tax Administration. ## **Profit control Register** **Article 74-C.** Taxpayers must keep a profit control register for the fiscal year or period, containing a determination of the amount, the profits paid or credited, the capitalization or reinvestment and the reductions of capital or equity, which will allow for the identification of the amounts for the previous concepts, for each partner, shareholder, associate, participant, trustee, or beneficiary, which will correspond with the accounting. The Tax Administration will issue the corresponding administrative regulations, taking into account the nature of the operations register. Failure to comply with this obligation will be penalized in accordance with the provisions set out in Article 242, letters b) and c), numbered 1) of the Tax Code". **Article 8.** A Chapter V is added in Title VII, entitled "MINIMUM INCOME TAX PAYMENT" and whose content is as follows: "CHAPTER V **MINIMUM INCOME TAX PAYMENT** ## **Taxpayers and taxable event** **Article 76.** The annual income tax will have a minimum final payment, the taxable event of which is constituted by obtaining taxable or gross income during the fiscal year or period. Those subject to this material obligation are those regulated in Article 5 of this Law." ## **Tax base, tax rate and exclusions** **Article 77.** The minimum income tax payment will be calculated on the amount of the taxable or gross income, at the rate of one percent (1%). The following will not be included in the income tax base: those incomes subject to final withholdings, untaxed or exempt incomes, incomes from salaries and wages, and incomes from activities subject to controlled or regulated prices, and those that come from agricultural and livestock activities. For the purposes of the previous paragraph, agricultural and livestock activities will be understood to include those related to animal and land exploitation, provided that such exploitation does not involve an agro-industrial process. ## **Exempt entities for minimum payment** **Article 78.** The following are exempt from income tax payment: a) Natural persons who earn income exclusively from wages and salaries. b) Users of industrial or commercial free trade zones, for the improvement of assets; those covered in the General Law on Cooperatives; those offering international services and those covered in Article 6 of this Law. c) Entities and trusts financed by the State of El Salvador, international organizations or foreign governments. d) Persons exempt from Income Tax by law. e) Persons referred to in Article 76 of this Law, for the first three years of their operations, provided that the activity has been established by means of new investments, excluding those cases in which the acquisitions of assets or rights are pre-existing. The period will be counted from their registration in the Special Taxpayer Registration and Control. f) Persons who have incurred tax losses during a fiscal year. They will not be eligible for the exemption if the persons have incurred tax losses after two consecutive fiscal years. g) Taxpayers in a specific economic sector that have been affected in their operations due to exceptional circumstances, with a state of emergency declared by, where applicable, the Legislative Assembly, a State of Emergency decreed, where applicable, by the President of the Republic, in accordance with the respective legislation, or due to force majeure. h) Taxpayers whose gross profit margin for the fiscal year or period is less than twice the income tax rate set out in this Chapter. For the purposes of applying this provision, gross profit will be understood to mean the difference between taxable income and the cost of sales or services, and gross profit margin will be understood to mean the percentage of gross profit in relation to the taxpayer's taxable income. Taxpayers will cease to enjoy the exemption if their gross profit margin for the fiscal year exceed the gross profit margin set out in this provision. i) Taxpayers whose taxable income up to one hundred and fifty thousand dollars (US$150,000) in the fiscal year or period. In order to apply the previous exemptions, taxpayers must submit an affidavit through the form determined by the Tax Administration; for the cases of exceptional economic conditions, force majeure, taxpayers must include evidence that corroborates such extreme circumstances. The Tax Administration may exercise its powers to verify the content of such declarations. ## **Settlement and Declaration of Minimum Payment** **Article 79.** The liable party will settle and declare the minimum income tax payment in the same income tax return for the fiscal year or period. ## **Determination of income tax payment** **Article 80.** Domiciled taxpayers in El Salvador will pay income tax according to the application of whichever of the following formulas produces the largest amount: a) According to the provisions set out in Articles 37 and 41 of this Law; or b) According to the provisions set out in Article 77 of this Law. ## **Crediting and refund** **Article 81.** The income tax payable determined in accordance with the previous article will be credited with the amounts of advance payments and withholdings to which the liable party is entitled. If the settlement results in a payable income tax in favor of the State, this shall be paid within the legal deadline established in this Law; if there is a balance in favor of the taxpayer, the provisions set out in the Tax Code will apply. **Article 9.** The Article 92, second paragraph, Clause 1) and Clause 3 are reformed as follows: "1) Those natural persons domiciled with taxable income greater than the exempt base contained in Article 37 of this Law within a fiscal year or period." "Exclusions from the provisions set out in the previous clauses, those natural persons who are salaried, as regulated in Article 38 of this Law." ## **Repeals** **Article 10.** As of the entry into force of this Law, the following provisions are repealed: a) Articles 4, Clause 13); 26 and the second clause of Articles 34, 35 and 36 of this Law. ## **Application of the Law in time** **Article 11.** The provisions of this Decree will govern in accordance with the following rules: a) The provisions of this Decree will govern as of the fiscal year or period 2012. b) The profits that are paid or credited from the date of this Decree, generated in fiscal years or periods prior to 2011, will be exempt from the income tax on the distribution of profits, as set out in Title VII, Chapter III of the Income Tax Law. c) Exemptions established in laws enacted prior to the entry into force of this Decree will not be applicable to Income Tax on the Distribution of Profits. In laws enacted after the entry into force of this Decree, only those exemptions that specifically mention this tax will be admissible. However, those exemptions that have been granted by a competent authority to profits distributable in favor of the partner or shareholder for a specific deadline will have effect against the tax until the deadline expires. ## **Entry into force** **Article 12.** This Decree will enter into force on January 1, 2012, after publication in the Official Journal. **GIVEN** in the BLUE HALL OF THE LEGISLATIVE PALACE. San Salvador, on the fourteenth day of December of the year two thousand and eleven. **OTHON SIGFRIDO REYES MORALES** PRESIDENT **CIRO CRUZ ZEPEDA PEÑA** FIRST VICE PRESIDENT **GUILLERMO ANTONIO GALLEGOS NAVARRETE** SECOND VICE PRESIDENT **JOSÉ FRANCISCO MERINO LÓPEZ** THIRD VICE PRESIDENT **ALBERTO ARMANDO ROMERO RODRÍGUEZ** FOURTH VICE PRESIDENT **FRANCISCO ROBERTO LORENZANA DURÁN** FIFTH VICE PRESIDENT **LORENA GUADALUPE PEÑA MENDOZA** FIRST SECRETARY **CÉSAR HUMBERTO GARCÍA AGUILERA** SECOND SECRETARY **ELIZARDO GONZÁLEZ LOVO** THIRD SECRETARY **ROBERTO JOSÉ D'AUBUISSON MUNGUÍA** FOURTH SECRETARY **QUINTA SECRETARIA** **IRMA LOURDES VALAGOS VÁSQUEZ** SIXTH SECRETARY **MARIO ALBERTO TENORIO GUERRERO** SEVENTH SECRETARY **SA PRESIDENTIAL:** San Salvador, on the fifteenth day of December of the year two thousand and eleven. **PUBLIQUE** **CARLOS MAURICIO FUNES CARTAGENA** President of the Republic **JUAN RAMÓN CARLOS ENRIQUE CÁCERES CHÁVEZ** Minister of Finance **Constancia No. 3089** The undersigned, Head of the Official Journal, hereby certifies: that the present Legislative Decree No. 957, which contains: Reforms to the Income Tax Law, will be published in the Official Journal No. 235, Volume No. 393, corresponding to December 15, 2011. Unless unforeseen circumstances arise. And at the request of Ms. Carmen Maria Hernandez de Mancia, Head of the Tax Registration and Assistance Division, General Tax Administration, This Certificate is issued in the OFFICE OF THE OFFICIAL JOURNAL; San Salvador, October 12, 2011. **DINA EVELIN VANEGAS HERNÁNDEZ** Head of the Official Journal