Innovating in El Salvador:
The Law that Transforms Tech Businesses
The technology industry has been a cornerstone of development and economic progress globally, contributing to the GDP growth of many countries. Recognizing this trend and the need to boost innovation within its borders, El Salvador is positioning itself as an innovative and technologically advanced nation with the enactment of the Law for the Promotion of the Technology Industry.
The primary objective of this law, supported by its regulations, is to encourage national and foreign companies operating in the technology sector to grow, develop, and firmly establish themselves in the country.
With it, El Salvador aims to place itself at the level of countries such as Singapore, Ireland, Chile, Canada, Israel, Estonia or Spain, which have stood out, among other things, for being true “technological hubs” for both established global companies and “Start-ups”. From such examples, we can see why Facebook chose Ireland for its headquarters, and how projects like Start-Up Chile support entrepreneurs.
Hopefully this will lead to El Salvador being considered a “Start-up nation” similar to Israel, applying from now on the “Digital First” mentality that put Estonia as a pioneer in the digital transformation of its country, citizens and companies.
What does this law consist of?
This legislation, together with its respective regulations, establishes a series of benefits and responsibilities for national or foreign companies in technological innovation and manufacturing industries that wish to establish themselves or already operate in El Salvador. These benefits include tax exemptions (total tax free), facilities in the importation of equipment, among others, in exchange for a commitment to investment in research, development and innovation.
Main benefits.
- Qualifying companies will not pay income tax, capital gains tax, any type of municipal tax or dividend distribution tax, nor will they be subject to any type of withholding for up to a period of 15 years.
- Import of equipment. Qualifying companies will be able to import duty-free machinery, equipment and tools. However, these assets cannot be transferred to third parties before certain established deadlines, unless it is made to another beneficiary with a similar agreement.
- Incentive to innovation. The regulation proposes that part of the benefit granted can be invested in innovation projects, both internally and in collaboration with startups or academic institutions.
- Electronic registration. To simplify procedures, the Ministry of Economy (MINEC) will keep an electronic register of beneficiaries, which will be available for consultation and will be constantly updated.
Obligations for Beneficiaries
In return for these benefits, companies have a number of responsibilities.
- Quarterly reports. Companies must submit detailed electronic reports on investments, projects, imports, employment, sales, among others.
- Allow inspections. MINEC and the Ministry of Finance are authorized to carry out inspections and verifications, so companies must guarantee access to their facilities and provide all necessary documentation.
- Invest in R + D.One of the fundamental purposes of the law is to promote research and development in the country. Therefore, companies must allocate a part of their budget to these areas and report in detail on it. (Israel spends about 4% of its GDP on this)
What do these benefits translate into?
If you are an entrepreneur in the technological field, this law gives you the opportunity to:
- Reduce Costs: Tax exemptions and tariffs on imports can represent significant savings, especially if you are in the expansion or technological renewal phase.
- Enhance Innovation: The facilities to invest in research and development allow you to be at the forefront, create innovative solutions and be competitive in the global market.
- Simplify processes: Electronic registration and standardized reporting format reduce administrative burden and facilitate interaction with government.
Steps to follow to opt for benefits
- Evaluation and advice.
- Determine if your technology company performs or is about to carry out incentivized activities according to the criteria of the law.
- Consult with legal and accounting experts to understand how this law can be applied to your business.
- Verification of requirements.
- Ensure that your company complies with all the requirements stipulated in the law. Since there are requirements for both foreign and local companies.
- It is essential to have an electronic inventory register and an online system available to the Ministry and the DGA, usually a good ERP already solves this issue.
- Request for Qualification Agreement.
- It is submitted to MINEC, which must follow a validation process with the Ministry of Finance.
- 5 business days. For the MINEC to analyze the request, admit it or carry out preventions.
- 10 business days. That from the moment the application is admitted, the Treasury has to verify that the applicant, partners or shareholders are solvent, as well as to give an opinion, if applicable, of the tariff headings on which incentives are requested.
- It is submitted to MINEC, which must follow a validation process with the Ministry of Finance.
- 10 business days. After accepting the application, MINEC will make a technical opinion on the project.
- 5 business days. After the expiration of the previous deadlines, the MINEC must resolve by issuing the Qualification Agreement that grants or denies the benefits.
- 3 business days. After issuing the agreement, the MINEC will have to inform the Treasury.
- Registration with MINEC
- With the Qualification Agreement in hand, your company will be automatically registered, eliminating additional paperwork.
But what about tech entrepreneurs operating since before this law?
The Law stipulates that these incentives will apply to “new projects.” This might raise concerns or feelings of competitive disadvantage among tech entrepreneurs who are ineligible for these incentives.
The implementation of new laws that offer specific incentives to “new projects” or start-ups in a given sector can raise concerns among established companies that cannot access those same benefits. In the case of this specific law aimed at technological entrepreneurs and the promotion of innovation in El Salvador, there are several considerations to take into account:
- Objective of the Law. The law appears to be designed to attract new investment and encourage innovation and technological development in El Salvador. If it achieves this goal, it could result in a more vibrant and competitive business environment, which could benefit all businesses in the long run.
- Existing companies vs. new companies. It is true that established companies might feel that they are at a disadvantage because they cannot access the same tax and customs incentives as “new projects”. However, existing businesses already have an advantage in terms of brand recognition, established customer base, and ongoing operations.
- Opportunity for modernization and expansion. According to the text, it appears that, if an already established company initiates a “new project” involving a significant expansion or modernization, they could qualify for some of the benefits. This could incentivize existing companies to invest more in innovation.
- Effect on the business ecosystem. If the law is effective in attracting and promoting more innovation and tech startups, there could be indirect benefits for existing businesses, such as greater availability of specialized talent, more opportunities for collaboration, and a more robust local economy.
- Potential challenges. Established companies will have to compete with startups that could have lower operating costs due to tax incentives. In addition, there could be concerns about whether the law creates a level playing field.
Conclusion
The Development Law is a clear example of El Salvador’s commitment to innovation and technological development. By providing a favorable framework for companies in the sector, the country aims not only to attract investment but also to establish a robust and competitive technological ecosystem.
For companies, this represents a golden opportunity to expand, innovate and consolidate in the Salvadoran market, leveraging the numerous benefits and provisions the legislation offers. Without a doubt, now is the time to explore how your tech company can maximize the advantages of El Salvador´s the Development Law.
Existing companies may need to adapt their strategies, consider new investments in innovation or explore how they themselves can benefit from the provisions of the law. It is essential that existing businesses stay informed and proactive in this changing legislative environment.
As a technology entrepreneur in El Salvador, you now have a legal framework that supports and encourages the growth and development of your business. Make sure you understand each step and deadline to get the most out of this law and position your company at the forefront of the Salvadoran technology industry.
