El Salvador has become a new destination for those investors who are looking for new opportunities in countries with unexplored yet booming economies. One of the major reasons is that El Salvador has been able to maintain a stable economy for over a decade. Even though El Salvador has a somewhat complicated political and social environment, its economy was able to navigate through these complications and, consequently, has maintained great stability.
One of the most significant contributors to growth in El Salvador is through Foreign Direct Investment (FDI); with a flow of USD$347 million in 2016. In 2017, FDI experienced a substantial rise, having more than doubled to reach a value of USD$792 million. The sector that obtained most of the FDI was the textile industry, whereas other sectors, such as the telecommunications, tourism and the production of electricity also contributed an important part. According to World Bank statistics, El Salvador has taken the spot 85 of overall 190 countries with regards to ease of doing business.
Even though El Salvador has to deal with several economic and political instabilities, the country offers a great number of fiscal benefits for companies who want to invest and do business in the region. Additionally, a strong qualified workforce to hire, and a strategic geographic location constitute other important advantages for companies seeking to do business in El Salvador.
Commercial and Trade Relations between El Salvador and India
The economic relations between both countries have been growing over the last five years and will continue growing as they reinforce their commercial ties. El Salvador offers attractive tax incentives for foreign companies in certain sectors, we will outline the most important ones below:
- Tourism projects: are exempt from the payment of importation taxes if goods related to the development of the projects are purchased. The investment must be at least USD$50,000.
- Several types of exportations: depending on the good, some exportations are exempt from the payment of taxes.
- Investment in renewable energies: investments related to the development of renewable energy for electricity generation, more specifically to the use of hydraulics, geothermic, wind and solar, fomenting investigation and exploration activities are exempt from taxes.
Due to the favourable conditions previously outlined, Indian companies can only gain by investing in El Salvador, whereas El Salvador will benefit from an augmented FDI flow into its country; a win-win situation for both countries.
Investment Opportunities for Indian Companies
El Salvador has a great political and legal system with respect to FDI, and therefore, is able to attract foreign investment into the region. Additionally, the El Salvadorian Law of International Services (Ley de Servicios Internacionales) grants fiscal benefits to the companies dedicated to the provision of services to their clients in foreign countries.
The principal benefits that foreign companies receive in El Salvador are the following:
- Importation tax exemption for goods that are necessary for the development of certain commercial activities.
- Total exemption of income taxes applied to the earnings that derive from the incentivized activity. This exemption applies only to the term in which the company undertakes its activities in the country.
- Total exemption of municipal taxes on the earnings of the company for the time that they operate in the country.
The companies that want to obtain the benefits of the Law of International Services must establish their business in Services Parks (Parques de Servicios) or Services Centres (Centros de Servicios). Services Parks are specific areas used for the establishment and operation of companies dedicated to international services. Service Centres, on the other hand, are designed for companies that for physical or technical reasons cannot operate inside a Service Park. Thus, they can request a special authorization to operate in a Service Centre.
Another requirement that foreign companies need to comply with in order to obtain the fiscal benefits mentioned in this article is to present the type of activities they will be executing in the Services Parks or Centres. There are a range of activities that can be performed; some include:
- International Distribution: services related to the storage and distribution of goods.
Additional Investment Opportunities
The Law of International Services may be an optimal way for Indian companies to benefit from tax benefits and favorable business conditions. Nevertheless, there are several other investment opportunities that Indian companies can profit from. The most promising one is the pharmaceutical industry. According to the Commercial and industrial chamber of El Salvador (Camarasal), the Central American country does not only promote cooperation with India in the renewable energy sector but also in the pharmaceutical sector. In fact, last year, El Salvador invited 24 pharmaceutical companies to come to El Salvador from India in order to foster cooperation with local hospitals, pharmacies, and laboratories, among others. The president of the Camarasal, Javier Steiner, reinforced the good intention of Indian companies and reassures the importance of Indian companies contributing to El Salvador and considers it an attractive market for their products. After having experienced an increased trade activity of 17% with India in 2017, El Salvador is planning to receive more FDI inflows from the Asian subcontinent in the years to come.
Are you Considering Investing in El Salvador?
El Salvador is a booming economy especially due to an increasing inflow of FDI and is fast becoming a prospective destination for foreign investors who are looking for new jurisdictions to conduct business in. In addition to that, the strong relation between El Salvador and India is unlocking new opportunities for savvy investors.
At Biz Latin Hub, our local team provides the support you need to establish your company and do business in El Salvador. If you require more information about how to invest in El Salvador, feel free to contact us now for personalized support.
Check out the video below and see how our tailored due diligence services can reduce commercial risk when operating in Latin America.
