Complete Guide to Setting Up a Subsidiary Company in El Salvador

El Salvador is a small but heavily populated nation in Central America. The nation has had consistent growth for more than ten years, and this year has seen strong government and foreign investor investment fuel the nation’s growth, increasing employment levels and producing a GDP that is higher than average.

Although El Salvador is known for its legendary sugar and coffee production, its GDP mainly comprises services (almost 60%), followed by manufacturing (about 26%). Clothing is one of El Salvador’s most significant exports of other manufactured items like electrical equipment and medicines. 

It is a great time to start working or set up a subsidiary in El Salvador. One may legally work in the nation through a corporation subsidiary, and after properly registering, one may start operations there. This article will help you learn the basics of establishing a subsidiary business in El Salvador.

What are the Types of Subsidiaries in El Salvador?

The Salvadoran market is focusing on MSMEs, realizing their significance to the country’s entrepreneurial fabric as vendors and traders of products and services to big businesses and the general public as the greatest producers of employment generation in the nation, for their addition to the gross domestic product, and their influence on the economy.

Following are the types of subsidiary company formations in El Salvador, including:

Limited Liability Company

• According to the subsidiary business in El Salvador, this organization’s capital investment is based on social participation. 
• Only the management has the authority to create the Regimen of Administration, and the management selects the partner(s) and manager(s) who will act as the company’s legal representatives. 
• Partners may act as the company’s legal representative if they do not choose a manager or if it has been too long since they last served.
• Private firms and situations in which associates or a third-party want to get involved in the company establishment most frequently choose this subsidiary company formation in El Salvador. 
• The designation or name of the firm must include “Sociedad de Responsabilidad Limitada” for registration reasons once the partners have decided on the selection procedure.

Public Limited Company  

• Shareholders are a part of this system, and stocks are the foundation for corporate capital. 
• A committee of directors or Unique Administration is in charge of representing this firm structure in legal matters. 
• Naming rights must be upheld; the words “Sociedad Anónima” must be in the title of any company in this category.
• The degree of investors engaging in administrative functions is likewise unrestricted in this corporation.

How to Set Up Subsidiary in El Salvador 

The registration procedure for setting up a subsidiary in El Salvador is as follows- 

1. Start the company registration process by deciding the business entity you wish to establish. 
2. Applicants should visit the Commercial Registry’s online portal to check the company name availability and registration.
3. Go to the Registry of Commerce for the granting of powers of a solicitor.
4. The next step is to submit the minimum required capital to the Registry of Commerce.
5. Register your company at the Commercial Registry by uploading all the documents (including the receipt of capital payment) online. It is also mandatory to submit the same documents at the physical office of the Commercial Registry to get the final registration document. 
6. Upon successful company registration, companies should not register at Municipality.
7. Become a member of the Salvadoran Social Security Institute.

Benefits of Setting Up an El Salvador Subsidiary

Some benefits of a subsidiary company in El Salvador include the following- 

Fast-growing economy

After emerging from a decade-long civil war in the early 1990s, El Salvador has seen tremendous economic diversification and achieved strong growth rates. The country has developed free trade zones (FTZs) where a large portion of the nation’s manufacturing industry is headquartered.

Low taxes

El Salvador’s cheap tax structure makes starting a business there all the more appealing. Value-added tax (VAT) is typically fixed at 13%, while dividend taxes are only 10%. Also, various tax benefits are provided to foreign investors coming to the nation for incorporation of foreign subsidiaries in El Salvador.

Lower entry barriers

El Salvador has one of Latin America’s most straightforward business establishment procedures. One can launch a subsidiary business in El Salvador in a few weeks if they have the necessary paperwork and cash. 

Substantial trade prospects

Opening a subsidiary in El Salvador presents considerable trade potential due to its involvement in several FTAs and the privileged access that locally based enterprises have to some of the most significant economies worldwide.

Documents to Prepare When Opening a Subsidiary in El Salvador

To set up a subsidiary in El Salvador, one needs to arrange the following document first- 

1. Articles of incorporation attesting to the company’s legal registration under the laws of its home nation.
2. Probationary paperwork that certifies the incorporation of a subsidiary of a foreign company in El Salvador has been duly acknowledged in line with its articles.
3. Grant of a Power of Attorney specifying the powers given to the individual who will administer the incorporation of a foreign subsidiary in El Salvador. Before forming the subsidiary, POA must be adequately segmented and filed within the Registry of Commerce.
4. The subsidiary’s starting budget to be Included must be registered at the Registry of Commerce before the Registration of the Subsidiary. This must be appropriately verified by an El Salvadoran CPA and internationally audited, declaring the stock capital.
5. Describe the overseas subsidiary’s economic activities in detail, including the kind, size, source, and location of the investment and the date it was made.
6. Transfer receipts or inbound wire transfer forms in both the original and a duplicate must include the date of entry, the name of the foreign investor, the destination, and the exchange rate.

What Business Forms Can El Salvador Subsidiaries Take?

There are two major legal entities that companies usually take the form of – Limited Liability Companies (Sociedad de Responsabilidad Limitada) and Public Limited Companies (Sociedad Anonima). 

While opting for the suitable business form, consider the following factors – 

LLC

• The issued share capital must be at least US$2,000.
• Must have at least two shareholders and one director.

PLC

• A minimum capital requirement of US$11,450.
• A minimum of two stockholders and one director should be chosen.

El Salvador Subsidiary Laws

For setting up a subsidiary in El Salvador, one needs to adhere to these rules-

• With a least two individual partners, the name and activity are specified, together with each partner’s identity document (or residency card or passport in the event of a foreign partner) and El Salvador’s Tax Identification Number.
• The business owners must sign the firm’s incorporation document, and the commercial board must register the company. Also required is the creation and registration of a document with the Salvadoran Commercial Board that contains the company’s articles of formation.
• Further obligatory steps must be completed once the firm is incorporated before it may start a subsidiary in El Salvador. The following rules apply while doing this step:

1. 1. Acquiring the Value Added Tax ID and Tax Identification Number
   2. Registration with the local government where the business is incorporated
   3. Joining the National Department of Statistics and Census
   4. Enrollment in the El Salvador Trade Register

• After setting up a subsidiary company in El Salvador and when there are employees, additional procedures must be followed:

1. 1. Registering new employees with the Salvadoran Institute of Social Security.
   2. The company’s employees are registered with the Pension Funds Administration.

• The company’s accounting system must also be established and approved by a public accountant legally designated by Salvadoran Accounting Council.

Post Incorporation Compliance

The following are the post-incorporation compliance for foreign subsidiaries in El Salvador:

• Establish local operational processes: This involves employing locals, locating an appropriate office or facility, and installing the required infrastructure and equipment.
• Establish a regional bank account: Managing local finances and paying local vendors and staff can be more straightforward with a local bank account.
• Have an auditor certify the company’s books: According to Article 40 of the Code of Commerce, the independent auditor or the Registry of Commerce may legitimize the books.
• Register the business with the municipality to pay local taxes: Applicants must register with the Municipality and deposit a municipal tax of around $10 per to register a corporation in El Salvador.
• Create a business seal: A corporation seal must be obtained from a seal manufacturer and is mandated by law for setting up a subsidiary in El Salvador.

Taxes on Subsidiaries in El Salvador

The entire business’s revenues are subject to a 30% corporate income tax (CIT) rate. Businesses that generate taxable income of 150,000 USD or less throughout the fiscal year are subject to a lower CIT rate of 25%.

Because CIT is founded on territoriality, taxes are typically paid on assets situated, operations carried out, and overall investment in El Salvador in addition to services provided or used there. While there is a unique regulation for investments and financial instruments, the income is deemed earned if the issuing firm has its subsidiary business in El Salvador.

VAT is assessed at a rate of 13% on the taxable amount. The price or compensation that the parties have agreed upon is often the taxable amount. The customs value is the amount that is taxed for imports.

Tax Incentives for Businesses Setting Up a Subsidiary in El Salvador

El Salvador provides a variety of incentives to draw in outside capital and spur future business and economic growth. Foreign ownership, mergers, acquisitions, and joint ventures are likewise not subject to any limitations.

The following benefits of a subsidiary company in El Salvador are provided to businesses by Industrial and Commercial Free Zone Law No. 405, which was passed on September 3, 1998:

1. Exempt from CIT
2. GST exclusion
3. Exemption from local taxes
4. Real estate transfer taxes are exempt when land is designated for constructive use.
5. Duty-free imports of production-related equipment, raw materials, machinery, and intermediate items
6. A choice to sell products or services related to international commerce made in the free zone on the Salvadoran market, provided the appropriate import duties, CIT, VAT, and local taxes are charged on the finished products or services.

When specific conditions are satisfied, the Renewable Energy Incentives Law exempts imports of machinery, equipment, and supplies from customs charges for up to 10 years, grants an income tax break for five to ten years, and completely exempts the money generated by the sale of Certified Emission Reductions from taxation.

Other Important Considerations

Make sure to follow the checklist for incorporation of foreign subsidiaries in El Salvador-

• Choose a reputable legal representative: You must choose a legal representative for setting up a subsidiary in El Salvador who will represent the business. They are responsible for signing any legal paperwork on the business’s behalf. This individual must be at least 18 years old, have a valid government-issued identity document (a DUI), a valid tax identification number (NIT), and legally reside in the nation. They are responsible for signing any legal paperwork on the business’s behalf.
• Safeguard your intellectual property: For incorporation of a foreign subsidiary in El Salvador, you must either register a trademark or patent a name or logo to safeguard your intellectual property. Again, your legal counsel needs to be knowledgeable about these issues and capable of managing your defense.

How Multiplier’s Employer of Record Can Help You Hire & Expand in El Salvador

You can get assistance from a third-party service provider, like Multiplier EOR, establishing a subsidiary business in El Salvador. The process of establishing offshore firms might take a long time. Yet, with Multiplier, you can take advantage of global talent, get employment contracts that comply with local laws, and manage your foreign employees’ onboarding without starting a subsidiary. Trust us to handle the headaches while you concentrate on expanding your business. To discover more, speak to our specialists.