Zero tax on tech companies in El Salvador: breaking down the law

Dear fellow Hivers & LeoFinancers,

As many of you know, my country – El Salvador – is experiencing and promoting a series of game changing transformations, under the impulse of President Nayib Bukele and the appropriately named political party he’s founded some years ago, « Nuevas Ideas » (« New Ideas »). One of the latest pieces in this litteral rebirth is a legislative text proposal about the promotion of innovation and technological manufacturing, of which the key measure is the abolition for 15 years of all taxes for computer code, software & hardware companies.

At the time of writing this article, the text that has been signed today by our President for its publication in the Official Journal was still a law proposal, but it’s very probable that if changes have been performed compared to the draft version, it’d be minor ones.

A first noticeable element is this law’s text’s shortness: 11 pages. In comparison with the infamous «Restrict» law proposal in the U.S. - 55 pages -, and many economically relevant legal drafts submitted to the American Congress, made of hundreds of pages, here concision and simplicity are put at work to allow a law to become an accessible tool, easily readable and debatable by the average citizen, not mainly by attorneys being paid to process legal raw material.

The key measure of this draft legislative decree is described in its article 7: « The beneficiaries of the present law that have a Qualification Agreement in force issued by the Ministry of Economy may opt for the following tax incentives for a term of fifteen years counted from the day following the notification of the issuance of the Qualification Agreement by the Ministry of Economy:

a. Total income tax exemption with respect to the incentivized activities;
b. Exemption from all types of Income Tax withholdings with respect to the incentivized activities;
c. Total exemption from municipal taxes on the net assets declared by the beneficiaries;
d. Exemption from the payment of Capital Gains, stipulated in Articles 14 and 42 of the Income Tax Law;
e. Total exemption from the payment of Import Duties and taxes levied on the importation of goods, inputs, machinery, equipment and tools necessary for the development of the incentivized activities ».

The article 5 explicits the possible beneficiaries of that favorable tax regime : « (...) the natural or juridical persons, national or foreign ones, that develop within the national territory a new investment in innovation projects or technological manufacturing (...) ». The concept of « new investment » excludes those performed by companies alreaday established in El Salvador, or related to operations resulting from a merger, an absorption or a restructuration.

The companies or individuals wanting to enjoy this regime have to be developing commercial activities related with at least one of these processes (art. 6):

« a. Programming, management, maintenance, consultancy and analysis of computer systems or software;
b. Development and commercialization of cloud computing and data flow services; artificial intelligence, massive data analysis; distributed ledger technology; cybersecurity solutions;
c. Technologies based on the manufacture of parts, materials and equipment or facilities, assembly, including manufacturing plants for technological equipment or hardware, semiconductors, communications technology, robotics, nanotechnology, aircraft and unmanned vehicles;
d. Engineering and systems technologies necessary to integrate basic industrial technologies into global production chains ».

Most of you will have noticed that, even if the item a) is wide enough to encompass almost any computer science related endeavor or service, including 2nd or 3rd level ones (« management, maintenance, consultancy »), hence applying to anything resembling coding a blockchain, decentralized applications or cryptocurrencies, the writers of this law proposal have doubled down, to get rid of any doubt, by mentioning « distributed ledger technology » - i.e. blockchain - as one of the innovations that this law covers.

The salvadoran entity in charge with ensuring that a company qualifies to enjoy those fiscal incentives will be the Ministry of Economy, through a case by case Qualification Agreement of which the procedure is going to be described in the coming regulations. According to the art. 17, that Ministry will also perfom in 3 years an assessment of if and how these fiscal incentives are actually helping our country to fulfill the law’s objectives, among them : « f. Improve supply chain access and interconnections and expand efforts to reduce supply chain vulnerabilities for technological innovation and manufacturing ».

I hope this spotlight on the law will have brought you some data to better identify its purposes and scope, and of course I intend to follow as closely as possible the next steps of its life cycle, mainly its entry into force (30 days after its publication in the Salvadoran Official Journal), the companies it should attract to legally establish themselves here, and evaluations of the law’s efficiency.

Source of the images:

• http://investmentbusinessu.com/2022/11/22/they-are-asking-the-government-of-el-salvador-for-a-new-purchase-of-btc/

• http://investmentbusinessu.com/2022/09/14/companies-in-el-salvador-want-technology-transformation-but-few-use-bitcoin/

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