Deciding to incorporate a company in El Salvador is not an easy task. Many entrepreneurs who have taken this step in their businesses and commercial activities have sought prior legal and financial advice on the process, timeline, costs, and requirements. Establishing a company in El Salvador involves more than just two or more individuals (or legal entities) becoming shareholders, drafting the incorporation deed before a Salvadoran Notary Public, preparing the company’s initial balance sheet, paying the necessary fees, and submitting the documentation to the Commercial Registry to obtain the company’s registration. This is just the beginning of a company’s legal existence.
Once the company is registered and legally established in El Salvador, a series of accounting, legal, and tax obligations arise under local legislation. This article outlines some of the most important obligations every company in El Salvador must fulfill, as established in Book II of the Salvadoran Commercial Code.
What Are the Corporate Obligations for Businesses in El Salvador?
First and foremost, every incorporated and registered company in El Salvador is required to maintain an organized accounting system under an accepted accounting framework, supported by authorized Public Accountants and Auditors. We recommend that a Licensed Public Accountant, accredited in El Salvador, prepare and approve your accounting system. This includes:
- System Description
- Accounting Policies
- Chart of Accounts
- Account Application Manual (based on IFRS for SMEs)
Additionally, companies must maintain ten legally required accounting and corporate books, including:
- General Ledger and Journal
- Financial Statements Book
- Shareholders’ Register
- General Shareholders’ Meeting Minutes
- Board of Directors’ Meeting Minutes
- Sole Administrator’s Resolutions Book
- Capital Increase and Reduction Book
- Sales Register for Taxpayers
- Sales Register for Consumers
- Purchases Register
In What Language Should Accounting Records Be Kept in El Salvador?
All accounting records must be maintained in Spanish and in U.S. dollars, which is the official currency. Additionally, they must be kept within the country.
Other Corporate Obligations
Companies must annually register their Balance Sheet, Income Statement, and Statement of Changes in Equity with the Commercial Registry. These documents must be certified by an authorized Public Accountant. This registration is crucial as it allows businesses to demonstrate their financial standing at the end of each fiscal year. Moreover, all companies must appoint an External Auditor and undergo an annual audit.
Companies are also required to register their commercial business and physical establishments with the Commercial Registry. This registration defines the company’s legal address. Upon incorporation, companies receive their initial business and establishment registration, which must be renewed annually. The renewal fee is based on the company’s assets, and failure to renew within the established period results in fines in addition to the renewal costs.
What Are the Tax Obligations for Companies in El Salvador?
According to Article 91 of the Salvadoran Tax Code, every individual or corporate merchant, including companies, must register as a taxpayer and file monthly and annual tax returns. The main taxes in El Salvador include:
- Value-Added Tax (VAT): 13% on all goods and services, payable monthly within the first 10 business days of the following month.
- Income Tax Advance Payment: Known as the ‘account payment,’ equivalent to 1.75% of gross income, paid monthly within the first 10 business days.
- Corporate Income Tax: An annual tax ranging between 25% and 30% on company profits, due by April 30 each year.
There are also additional taxes depending on the nature of the business.
What Are the Labor and Social Security Obligations for Companies in El Salvador?
Once a company hires its first employee, labor and social security obligations come into effect. Employers must register with:
- Salvadoran Social Security Institute (ISSS)
- Ministry of Labor and Social Welfare
- Selected Pension Fund Administrator (AFP)
Additionally, companies must maintain an administrative payroll for employees, including salary calculations, commissions, overtime, vacation pay, bonuses, and other legally mandated benefits.
What Are the Municipal Obligations for Companies in El Salvador?
Municipal obligations vary depending on the company’s commercial activities. Companies must register with the local municipal government where they operate to comply with municipal tax requirements. Businesses such as restaurants and bars may require additional municipal permits, including:
- Business operation licenses
- Alcohol sales permits (if applicable)
- Music performance permits
- Construction and environmental permits (if applicable)
Companies that intend to use billboards or commercial signs must obtain authorization from the local municipality.
Other Legal Obligations for Companies in El Salvador
A crucial regulatory aspect in El Salvador is compliance with the Anti-Money Laundering Law, its regulations, and guidelines issued by the Financial Investigation Unit (UIF) of the Attorney General’s Office. Key obligations include:
- Reporting suspicious financial transactions exceeding the legally defined threshold
- Appointing a Compliance Officer
- Submitting suspicious transaction reports to the UIF
- Establishing due diligence policies to identify clients and business partners
- Archiving financial operation documentation
- Conducting internal staff training on compliance policies
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Why Is It Important to Comply with All These Obligations?
Compliance ensures that the company remains legally active and operational, avoiding penalties imposed by Salvadoran authorities. While regulatory compliance may seem overwhelming, it should not discourage entrepreneurs or business owners from incorporating a company in El Salvador. Seeking professional guidance from Salvadoran Lawyers, Certified Public Accountants, and Business Administration Experts can help businesses navigate these legal and financial requirements efficiently.
By fulfilling these obligations, companies can operate smoothly and successfully in El Salvador’s business landscape.