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LAW FOR THE PROMOTION OF INNOVATION AND MANUFACTURING OF TECHNOLOGIES
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| 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 country's economic growth and sustainable development by strengthening competitiveness through the promotion of innovation and the manufacturing of technology developed in the country. This will foster the growth of a skilled workforce capable of generating advanced technological products and services, while also strengthening participation in supply chains essential for the development of the technology industry globally. |
| PURPOSE ART. 2.-The purposes of this law are: a. To accelerate technological innovation and manufacturing, such as microelectronic and semiconductor components; b. To develop innovative materials and processing technologies; c. To lead the development of advanced technology manufacturing in Latin America; d. To expand and diversify Salvadoran human talent for technological manufacturing; e. To develop, scale, and promote education and training in advanced technological manufacturing, strengthening connections between employers and educational organizations; f. To improve access and interconnections in the supply chain and expand efforts to reduce supply chain vulnerabilities for technological innovation and manufacturing; g. To strengthen and revitalize ecosystems for innovation, technological manufacturing, and its commercialization; and h. To provide appropriate incentives through tax reductions and other incentives specifically designed to encourage investment and development of the technological industry in the national territory. |
| AUTHORITY ART. 3.-The Ministry of Economy shall be responsible for the implementation of this Law. The Ministry of Finance shall be responsible for the effective oversight and control of the customs and tax regime, in accordance with this Law, its Regulations, and other tax regulations. For this purpose, they may conduct inspections to verify compliance with legal obligations. |
| POWERS OF THE AUTHORITY ART. 4.-The Authority shall 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. Conduct 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 foster cooperation and exchange among leading technological innovation organizations at the national and international levels; e. Promote supply chain agility by 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 national and international supply chains, promoting public-private partnerships to improve technology adoption and security in technological manufacturing supply chains, as well as generate trust and transparency among supply chain participants; h. Disseminate and protect the results of industrial technology innovation and promote technology transfer and commercialization; i. Create and maintain the National Registry of Technological Innovation and Manufacturing Companies; and j. Any other measures established by current laws. |
| SCOPE OF APPLICATION ART. 5.-The beneficiaries of this law shall be natural or legal persons, national or foreign, who develop new investments within the national territory in innovation projects or technological manufacturing activities covered by 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 country or those under a special regime derived from an increase in assets as a result of mergers, acquisitions, or any type of operational and administrative restructuring of assets, are excluded from the benefits of this law. Natural or legal persons who enjoy benefits included in other special tax regimes, such as those contemplated in the regulations governing Industrial and Marketing Free Zones and those governing International Service Parks and Centers, among others, shall not be eligible for this law. |
| INCENTIVATED ACTIVITIES ART. 6.This law shall apply to natural or legal persons, national or foreign, that carry out commercial activities in productive sectors related to at least one of the following: a. Programming, management, maintenance, consulting, 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 manufacturing 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.-Beneficiaries of this law who have a valid Qualification Agreement issued by the Ministry of Economy may opt for the following tax incentives for a period of fifteen years, starting on the day following notification of the issuance of the Qualification Agreement by the Ministry of Economy: a. Total exemption from Income Tax for the incentivized activities; b. Exemption from all types of Income Tax withholdings for the incentivized activities; c. Total exemption from municipal taxes on the net assets declared by the beneficiaries; d. Exemption from the payment of Capital Gains, stipulated in Articles 14 and 42 of the Income Tax Law; e. Total exemption from the payment of Import Duties and taxes levied on the importation of goods, inputs, machinery, equipment, and tools necessary for the development of the incentivized activities. |
| GOODS SUBJECT TO EXEMPTION ART. 8.-The total exemption from Import Duties and taxes levied on the importation of goods, as indicated in section e) of Article 7 of this law, applies only to goods essential for the benefited activity. It is mandatory that they be duly identified by the beneficiaries as being for exclusive use for the activity in question. Similarly, 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 shall extend to the importation of firearms, ammunition, goods for the consumption of directors, partners, or company personnel, their families, or related companies, and current assets. |
| CHAPTER III – BENEFICIARIES REQUIREMENTS TO BE A BENEFICIARY ART. 9.-To qualify for the tax incentives established in this law, interested parties must meet the following requirements: a. Be a natural or legal person, national or foreign; b. Be registered with the Salvadoran tax authority, as evidenced by the applicant's Tax Identification Number; c. Prove that their activities fall within those established in Article 6 of this law and that they correspond to new investments; d. Have a valid Qualification Agreement issued by the Ministry of Economy. The procedure for obtaining and maintaining the Qualification Agreement will be established in the regulations of this law. |
| OBLIGATIONS OF THE BENEFICIARIES ART. 10.-Every beneficiary holding 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 period; 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 demonstrate and reliably verify the amount of income subject to the tax incentives established in this law. A separate record is understood to mean those accounting books, records, and reliable documentation that contain only the economic information of the activity in question. Such separate records must also comply with the general requirements on the matter established by tax regulations, pertinent legal laws, and specific provisions issued by the tax authority for these purposes; d. Keep and maintain at the disposal of the tax authorities, in physical or electronic form, all documents and evidence that demonstrate compliance with the respective tax obligations, for the period stipulated in the first paragraph of Article 147 of the Tax Code; e. Provide the information requested by the Ministry of Economy, in the exercise of the powers conferred upon it by this law, for which it may require reports certified 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, upon recommendation of either the Ministry of Economy or the Investment Promotion Office, enter into bilateral agreements with advanced nations in the areas of technological innovation and manufacturing, with the aim of promoting joint programs and investments in these areas or the creation of joint programs or funds for this 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 for the purpose of joint investments in industrial research and development in the areas of innovation and technological manufacturing. The investment project must have the approval or recommendation of the Ministry of Economy. |
| CHAPTER V – INFRACTIONS AND PENALTIES INFRACTIONS AND PENALTIES ART. 13.For the purposes of this law, infractions are divided into less serious, serious, and very serious. The following are considered very serious infractions: a. Applying the tax incentives and benefits granted by this law to activities other than those incentivized by this law; b. Using goods imported under the incentives granted by this law for purposes other than those declared; c. Providing false information to the Ministry of Economy, in its capacity as the governing body of this law, or to the tax or customs authority during the application for qualification, issuance of an agreement, or obtaining tax benefits and incentives. Failure to comply with the provisions of Article 8 of this law is considered a serious infraction. Refusing to appear without justified cause when summoned by the institutions mentioned in this law in a legally binding manner is considered a less serious infraction. In addition to the penalties established by law, the corresponding criminal or civil liability shall be imposed. |
| SANCTIONS ART. 14.-Without prejudice to the payment of any outstanding fees and taxes, the violations established in this law shall be sanctioned administratively by the Ministry of Economy as follows: a. The least serious violation shall be punished with a fine of between 2 and 5 times the monthly minimum wage in the commerce and services sector; b. The serious violation shall be punished with a fine of between 6 and 15 times the monthly minimum wage in the commerce and services sector; and c. The very serious violation shall be punished with a fine of between 15 and 20 times the monthly minimum wage in the commerce and services sector. |
| SANCTIONING PROCEDURE ART. 15.-Upon becoming aware of noncompliance with the obligations established in this law, the Ministry of Economy will initiate sanctioning proceedings in accordance with the provisions of the Administrative Procedures Law. If, at any time during the sanctioning proceedings, the Ministry of Economy considers that the facts it is investigating may constitute a criminal offense, it will certify the documentation and promptly notify the Attorney General's Office so that it may initiate and exercise the appropriate actions. |
| CHAPTER VI – FINAL PROVISIONS SPECIALTY OF THE LAW ART. 16.-This law, by its nature, is special and shall prevail over any other legal system that conflicts with it, whether in force at the time this regime enters into force or issued subsequently. Any modification or repeal of any of the provisions of this law must be expressly made. |
| TAX INCENTIVE EVALUATION MECHANISM ART. 17.-The Ministry of Economy shall 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 in achieving the purposes or objectives of this law. To this end, the Ministry of Economy shall: 1. Within a period of six months from the date of entry into force of this law, prepare and publish a guide establishing indicators of compliance with the objectives and purposes expected with the establishment of the tax incentives indicated in Article 7 of this law. 2. Within six months following the completion of the three-year period from the date of entry into force of this law, prepare and publish a performance evaluation of the objectives and purposes expected with the establishment of the tax incentives of this law, in accordance with the guide indicated in the previous paragraph. 3. If the outcome of such performance evaluation is, in the opinion of the Ministry of Economy, unsatisfactory, it shall prepare and submit to the Legislative Assembly, through the President of the Republic, a proposal to amend this decree containing improvements to the established tax incentives, which may be modified, reduced, or replaced. 4. Any amendment introduced pursuant to this article shall in no case affect Qualification Agreements duly granted by the Ministry of Economy or any other right acquired pursuant to this law. |
| REGULATIONS OF THE LAW ART. 18.-The President of the Republic shall issue the General Regulations for this law, as well as any special regulations that may be necessary to ensure the proper implementation of this law. |
| SUPPLEMENTARY APPLICATION OF THE TAX CODE AND CUSTOMS LEGISLATION ART. 19.-In all matters not covered by this regime, the supplementary application of the Tax Code and other relevant tax laws, as well as customs legislation, as applicable, may be used to regulate these events and thus maintain a consistent application of the provisions of this law, ensuring the benefits granted by this regime. When resorting to the application of customs legislation, the General Directorate of Internal Revenue will promote the respective pronouncement by the General Directorate of Customs, in order to resolve any situation requiring such a pronouncement. |
| ENTRY INTO FORCE ART. 20.-This decree will enter into force thirty days after its publication in the Official Gazette. |
KEY ELEMENTSIn the spirit of promoting innovation, investment, and generally contributing to economic diversification, the Government of El Salvador is in the process of approving and implementing the “Ley de Fomento a la Innovación y Manucatura Tecnológica” (Law for the Promotion of Innovation and Technological Manufacturing) (hereinafter, the “Innovation Law”). With its twenty articles, this law aims to accelerate innovation, contributing to the country's economic growth and sustainable development by establishing beneficial tax exemptions for activities in the Technology Sector (applicable only to new investments) such as: a. Programming, management, maintenance, consulting, and analysis of computer systems or software; b. Development and marketing of data flow and cloud computing services; artificial intelligence, big data analytics; distributed ledger technology; cybersecurity solutions; C. Technologies based on the manufacturing of parts, materials, and equipment or facilities, assembly, including technological equipment or hardware manufacturing plants, 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. All new investments that meet the thresholds established by the Innovation Law and those defined by the governing body of this law, the Ministry of Economy, may benefit from: a. Total exemption from Income Tax on incentivized activities; b. Exemption from all types of Income Tax withholdings on incentivized activities; c. Total exemption from municipal taxes on net assets declared by beneficiaries; d. Exemption from the payment of Capital Gains; e. Total exemption from the Import Tariff on the duties and taxes levied on the importation of goods, machinery, equipment, and tools necessary for the development of incentivized activities. Although it has not yet been published or entered into force, for more information about the Innovation Law, Tax Benefits or any other legal issue, you can contact us atinfo@lexincorp.comor through our telephone numbers listed on our websitewww.lexincorp. com. |
[/vc_column_text][vc_column_text] Written by: Lic. Antonio Guirola [/vc_column_text][/vc_column][/vc_row]
