Nearshore Americas

Breakdown: Understanding El Salvador’s New Tax Incentive Scheme

As part of his plan to turn El Salvador into Central America’s next hot destination for tech, President Nayib Bukele promulgated a law which provides handsome tax exemptions for new IT investments. 

The new law has made a lot of noise in the region, to a degree that has blurred its true nature and reach. What follows is a breakdown of what El Salvador’s Innovation and Technology Manufacturing Incentives Act (ITMIA, for short) actually allows, as well as the hopes and concerns that surround it. 

Which activities are covered?: The term “tech investment” can be quite ambiguous. Nonetheless, ITMIA establishes the following as activities that could grant potential tax exemptions:

  • Software and computer related services (programing, management of computer systems, tech consulting services and analysis)
  • Development and commercialization of any of the following: AI, cloud computing services, massive data analysis, cybersecurity services, distributed log tech
  • Manufacturing and assembly of tech equipment, which includes tech hardware, semiconductors, robotics, nanotech, aircrafts, unmanned vehicles and communications 
  • Technology and systems for the integration of basic industrial tech into the global supply and production chains 
  • Development of new energy sources
  • Research and development of new technologies

Which are the benefits?: Beneficiaries of ITMIA can be granted any of the following incentives for 15 years:

  • Income tax exemption, as long as they are related to the activities covered by ITMIA
  • Income withholdings tax exemption (with respect to covered activities)
  • Exemption on municipal taxes on declared net assets
  • Exemption on capital gains tax (as established in articles 14 and 42 of El Salvador’s Income Tax Law) 
  • Exemption on custom duties and taxes for imported goods, inputs and machinery, as well as tools and equipment required to perform the covered activities 

These benefits will be granted a day after federal authorities (in this case, the Ministry of Economy) issue a Qualification Agreement for the company seeking them. 

Who can apply?: Any national or foreign company can apply for the benefits as long as the investments they make are new, done in El Salvador and fall within any of the activities incentivized by ITMIA. 

Who can’t apply?: ITMIA tax benefits will not be granted to investments which were made before the law was issued; that is, before May 4, 2023. 

  • They won’t apply to operations which already existed in El Salvador before the law was issued.
  • Neither to companies or individuals who already enjoy the benefits from another special tax regime, including the Industrial and Commercialization Free Zones Law and the International Services Law. 

Already working?: Only one major tech investment in the country has been made public since ITMIA was passed.

  • StartupBootcamp landed in El Salvador, promising a US$3.5million fund for local startups. 
  • StartupBootcamp’s Investment Director Joey Moreau cited ITMIA and other tech-related programs in El Salvador as major factors in the decision to invest in the country.

Local concerns: The hype around ITMIA hasn’t stopped Salvadoran analysts and tech players from expressing their skepticism.  

  • “Tax incentives are an importante component,” commented José Giammattei, Founding Partner of Applaudo Studios. “But the reinformcent in the alignment between universities and market demand should be addressed in tandem by the public and private sectors”.
    • Giammattei recognized that, though El Salvador isn’t the only country enduring tech talent shortages, there is a “lack of strategic plannning for the sector’s develompent” and that “universities still hold onto traditional formation programs, producing a negative balance for the tech industry”.
  • “This [tax incentives] are not the most relevant factor for a tech company,” Ricardo Castañeda, economist at the Central American Institute for Fiscal Studies, told DPL News. “Tax exemptions are not important when they have no access to a skilled labor force or when there’s no respect for the separation of powers and Rule of Law in a country”.
  • Economist Rafael Lemus fears that ITMIA could attract mostly “unwanted” investors, a label in which he included “people from the crypto world, which is plagued with fraudsters in search of shelter”. 
    • As of late August 2023, there were 95 companies which provided bitcoin-related services in El Salvador, according to the registry kept by the country’s central bank.

NSAM’s Take: We agree with Mr. Castañeda. Though IMTIA’s tax incentives are indeed handsome, companies who land in El Salvador might find it difficult to operate if the tech ecosystem itself isn’t rich enough in terms of talent, skill levels and familiarity with the global market. 

We’ve seen that Salvadoran engineers are unquestionably capable, but there is little information available which points to an ecosystem that could sustain a wave of new foreign tech investment. El Salvador’s investment promotion agency speaks of 41,300 people directly employed in the ITC industry, though the number includes BPO and call center workers. Also, the IPA’s page dedicated to Salvadoran ITC investment has a strong focus on bitcoin and digital wallets. 

The signs point to El Salvador lacking a wide enough tech workforce. That, plus the government’s (and the President’s) strong bet on crypto, might put the effectiveness of ITMIA in jeopardy, given the reputation garnered by virtual assets lately. It won’t fall flat on its face, but it risks not living up to the hype.

Cesar Cantu

Cesar is the Managing Editor of Nearshore Americas. He's a journalist based in Mexico City, with experience covering foreign trade policy, agribusiness and the food industry in Mexico and Latin America.

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