LAW FOR THE PROMOTION OF INNOVATION AND MANUFACTURING OF TECHNOLOGIES

CHAPTER I-GENERAL PROVISIONS

 Object

ART 1.- The purpose of this law is to contribute to the economic growth and sustainable development of the country by strengthening competitiveness through the promotion of innovation and the manufacture of technology developed in the national territory, promoter of the growth of the workforce trained to generate advanced technological products and services, likewise strengthening participation in essential supply chains for the development of the technology industry globally.

PURPOSE

ART. 2.- The purpose of this law is:

a. Accelerate technological innovation and manufacturing, such as microelectronics and semiconductor components;

b. Develop innovative materials and processing technologies;

c. Lead the development of advanced technology manufacturing in Latin America;

d. Expand and diversify Salvadoran human talent for technological manufacturing;

e. Develop, scale, and promote education and training in advanced technological manufacturing, strengthening connections between employers and educational organizations;

f. Improve supply chain access and interconnections and expand efforts to reduce supply chain vulnerabilities for technological innovation and manufacturing;

g. Strengthen and revitalize the ecosystems of innovation, technological manufacturing and its commercialization; and

h. Provide appropriate incentives through tax reductions and other incentives specifically designed to encourage investment and development of the technology industry in the national territory.

AUTHORITY

ART. 3.- The application of this Law will correspond to the Ministry of Economy. The surveillance and effective control of the customs and tax regime will correspond to the Ministry of Finance, in accordance with this Law, its Regulations and other tax regulations. For which they may carry out inspections in order to verify compliance with legal obligations.

ATTRIBUTIONS OF THE AUTHORITY

ART. 4.- The Authority will have the following powers:

a. Regulate the operation and application of this law;

b. Issue Qualification Agreements in accordance with the provisions of this law and its regulations;

c. Carry out inspections and controls to verify compliance with the obligations established in this law;

d. Promote the design and implementation of public policies to facilitate industrial technological innovation and promote cooperation and exchange between the main national and international technological innovation organizations;

e. Foster supply chain agility, developing technology that supports increased manufacturing capacity and reduced lead time, especially during crises and the effects of supply chain stressors;

f. Establish and implement best practices in advanced processes and workforce training through collaboration between leading companies and suppliers;

g. Foster collaboration within supply chains at a national and international level, promoting public-private partnerships to improve technology adoption and security in technological manufacturing supply chains, as well as generating trust and transparency among participants in the supply chains;

h. Dissemination and protection of the results of industrial technology innovation and promotion of technology transfer and commercialization;

i. Create and maintain the National Registry of Technological Innovation and Manufacturing Industries Companies; and,

j. Any other established by current laws.

AREA OF APPLICATION

ART. 5.- The beneficiaries of this law will be natural or legal persons, national or foreign, who develop within the national territory a new investment in innovation projects or technological manufactures included in article 7 of this law.

Investments made prior to the entry into force of this law, as well as investments related to operations already established in the territory or those under the special regime derived from the increase in equity as a result of merger, absorption, or any type of restructuring processes. operational and administrative assets, are excluded from the benefits of this law.

Natural or legal persons who enjoy the benefits included in other special tax regimes, such as those contemplated in the regulations that regulate Industrial and Commercial Free Zones and that that regulates Parks and Centers, may not benefit from this law. International Service, among others.

INCENTIVED ACTIVITIES

ART. 6. This law will be applicable to natural or legal persons, national or foreign, who carry out commercial activities in productive sectors related to at least one of the following items:

a. Programming, management, maintenance, consultancy and analysis of computer systems or software;

b. Development and marketing of cloud computing and data flow services; artificial intelligence, big 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.

CHAPTER II – TAX INCENTIVES

 TAX INCENTIVES

ART. 7.- The beneficiaries of this law who have a current Qualification Agreement issued by the Ministry of Economy may opt for the following tax incentives for a period of fifteen years from the day following the notification of the issuance of the Agreement Qualification by the Ministry of Economy:

a. Total exemption from Income Tax with respect to the incentivized activities;

b. Exemption from all types of withholdings of Income Tax 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 the Capital Gains, stipulated in articles 14 and 42 of the Income Tax Law;

e. Total exemption from the payment of Import Tariff Duties and taxes levied on the importation of goods, inputs, machinery, equipment and tools necessary for the development of the incentivized activities.

ASSETS SUBJECT TO EXEMPTION

ART. 8.- The total exemption from Import Tariff Duties and taxes levied on the import of goods indicated in literal e) of article 7 of this law, is applicable only to goods that are essential for the benefited activity, being mandatory that are duly identified by the beneficiaries as for exclusive use for the activity in question. Likewise, the quantity of goods to be imported must be proportional to the installed capacity of the beneficiary through which the incentivized activity will be carried out. No exemption regulated in this law will be extensive to the importation of firearms, ammunition, goods for the consumption of directors, partners or staff of the company, family members of these or related companies, and assets of current assets.

CHAPTER III – BENEFICIARIES

 REQUIREMENTS TO BE A BENEFICIARY

ART. 9.- To be beneficiaries of the tax incentives established in this law, interested persons must meet the following requirements:

a. Be natural or legal persons, national or foreign;

b. Be registered with the Salvadoran tax authority, which will be accredited with the Tax Identification Number of the applicant.

c. Prove that their activities are included within those established in article 6 of this law and prove that they correspond to new investments.

d. Valid Qualification Agreement issued by the Ministry of Economy.

The procedure for obtaining and keeping the Qualification Agreement will be established in the regulations of this law.

OBLIGATIONS OF THE BENEFICIARIES

ART. 10.- All beneficiary holders of a Qualification Agreement granted in accordance with this law must comply with the following obligations:

a. Those established in this law and in the respective Agreement, during the stipulated term;

b. Comply with the operating permits and authorizations corresponding to the type of productive activity, trade or services to be performed;

c. Keep separate accounting records to reliably demonstrate and verify the amount of income subject to the tax incentives established in this law. By separate record, those accounting books, records and reliable documentation that contain only the economic information of the activity in question must be understood.

Said separate records must also comply with the general requirements established on the subject by tax regulations, pertinent legal laws and specific provisions that the tax authority establishes for these purposes;

d. Preserve and maintain available to the tax administration, in physical or electronic form, all the documents and evidence that prove compliance with the respective tax obligations, for the term stipulated in the first paragraph of article 147 of the Tax Code;

e. Provide the information that is requested by the Ministry of Economy, in the exercise of the powers that this law confers on it, for which it may require certified reports by qualified auditors.

CHAPTER IV-INTERNATIONAL COOPERATION

 ON THE PROMOTION OF BILATERAL AGREEMENTS

ART. 11.- The President of the Republic or the Minister of Foreign Affairs may, by recommendation, either from the Ministry of Economy or the Investment Promotion Office, enter into bilateral agreements with advanced nations in terms of technological innovation and manufacturing, with the in order to promote joint programs and investments in said matters or the creation of joint programs or funds for said purpose.

ON THE PROMOTION OF RECIPROCAL AGREEMENTS

ART. 12.- The President of the Republic or the Minister of Foreign Affairs may enter into cooperation agreements with multinational companies, in order to make joint investments in research and industrial development in terms of innovation and technology manufacturing. The investment project must have the approval or recommendation of the Ministry of Economy.

CHAPTER V – INFRINGEMENTS AND SANCTIONS

 INFRINGEMENTS AND SANCTIONS

ART. 13. For the purposes of this law, offenses are divided into less serious, serious and very serious.

The following are considered very serious infractions:

a. Apply tax incentives and benefits granted by this law to activities that are not encouraged by this law;

b. Giving use other than that declared to the goods that have been imported under the incentives granted by this law;

c. Provide false information to the Ministry of Economy in its capacity as governing body of this law, to the tax or customs authority during the application for qualification, issuance of Agreement or obtaining tax benefits and incentives.

Failure to comply with the provisions of article 8 of this law are considered serious infractions.

It is considered a less serious infraction to refuse to appear without justified cause to the appeals that are legally made by the institutions mentioned in this law. In addition to the sanctions established by law, the corresponding criminal or civil liability will be imposed.

SANCTIONS

ART. 14.- Without prejudice to the payment of rights and taxes owed, the infractions established in this law will be sanctioned at administrative headquarters by the Ministry of Economy in the following way:

a. The less serious infraction will be sanctioned with a fine of between 2 and 5 monthly minimum wages in the commerce and services sector;

b. The serious infraction will be sanctioned with a fine between 6 to 15 monthly minimum wages of the commerce and services sector; and,

c. The very serious infraction will be sanctioned with a fine between 15 to 20 monthly minimum wages of the commerce and services sector.

SANCTION PROCEDURE

ART. 15.- Upon learning of non-compliance with the obligations established in this law, the Ministry of Economy will initiate the sanctioning procedure in accordance with the provisions of the Administrative Procedures Law. If at any time during the sanctioning procedure, the Ministry of the Economy considers that the facts on which it instructs may constitute a criminal offense, it will certify the documentation and notify the Attorney General of the Republic in a timely manner so that it promotes and exercises the corresponding actions.

CHAPTER VI – FINAL PROVISIONS

 SPECIALTY OF THE LAW

ART. 16.- This law, by its nature, is special in nature and will prevail over any other legal order that contradicts it, whether it is in force at the time this regime comes into effect, or is issued later.

The modification or repeal of any of the provisions contemplated by this law must be made expressly.

TAX INCENTIVES EVALUATION MECHANISM

ART. 17.- The Ministry of Economy must evaluate, after a period of three years from the date of entry into force of this law, the effectiveness of the tax incentives established in article 7 for the fulfillment of the purposes or objectives of this

For this purpose, the Ministry of Economy must:

1. Within a period of six months from the date of entry into force of this law, prepare and publish a guide in which indicators of compliance with the objectives and purposes expected with the establishment of the indicated tax incentives are established. in article 7 of this law.

2. Within the term of six months following the completion of the term of three years counted from the effective date of this law, prepare and publish a performance evaluation of the objectives and purposes expected with the establishment of tax incentives for this law, in accordance with the guide indicated in the previous literal.

3. If the result of said performance evaluation is, at the discretion of the Ministry of Economy, unsatisfactory, prepare and present to the Legislative Assembly, through the President of the Republic, a proposal to reform this decree that contains improvements on tax incentives. established, and these may be modified, reduced or replaced.

4. Any amendment introduced by virtue of this article will in no case affect Qualification Agreements duly granted by the Ministry of Economy or any other right acquired by virtue of this law.

REGULATION OF THE LAW

ART. 18.- The President of the Republic will issue the General Regulations of this law, as well as those special regulations that may be necessary, to enable the correct application of this law.

SUPPLEMENTARY APPLICATION OF THE TAX CODE AND CUSTOMS LEGISLATION

ART. 19.- In all aspects not contemplated in this regime, the supplementary application of the Tax Code and other relevant tax laws may be used, as well as customs legislation, as the case may be, for the purpose of regulating these events, and in this way, maintain a coherent application of the provisions of this law, in order to be able to enjoy the benefits that this regime grants. When it comes to resorting to the application of customs legislation, the General Directorate of Internal Taxes will promote the respective pronouncement by the General Directorate of Customs, in order to solve any situation that requires this pronouncement.

ENTRY INTO FORCE

ART. 20.- This decree will enter into force thirty days after its publication in the Official Gazette.

KEY ELEMENTS

In the spirit of promoting Innovation, investment and generally contributing to economic diversification, El Salvador´s Government is in the midst of approving and instituting the “Ley de Fomento a la Innovación y Manucatura Tecnológica” which translates to the “Law for the Promotion of Innovation and Technological Manufacturing” (hereinafter as the “Innovation Law”).

With its twenty articles, this law is aimed at acceleratng innovation, contributing to the country´s economic growth and sustainable development through the establishment of beneficial tax exemptions for Tech Sector activities (applicable to new investmentes only) such as:

a.       Programming, management, maintenance, consultancy and analysis of computer systems or software;

b.       Development and marketing of cloud computing and data flow services; artificial intelligence, big 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; and

d.       Engineering and systems technologies necessary to integrate basic industrial technologies into global production chains.

Any new investment that meets the thresholds established by the Innovation Law and those to be defined by this law´s governing body, “Ministerio de Economía” (the Ministry of Economy) could benefit from:

a.       Total exemption from Income Tax with respect to the incentivized activities;

b.       Exemption from all types of withholdings of Income Tax 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 the Capital Gains;

e.       Total exemption from Import Tariff Duties and taxes levied on importation of goods, machinery, equipment and tools necessary for the development of the incentivized activities.

While it has not yet been published or entered into force, for more information regarding the Innovation Law, Tax Benefits or any other legal issue, you can reach us at info@lexincorp.com or through our telephones listed on out website www.lexincorp.com.

Written by: Lic. Antonio Guirola