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The merger of companies and tax effects in El Salvador

Diego Martín Menjívar

Many believe otherwise, but it is not necessary to satisfy a multitude of individual legal acts to produce the full transfer of assets and liabilities of the merged companies to the resulting entity (or acquirer). The asset transfer works by law, using this universal title, and the different rights and obligations of the merged companies are transferred in one single and individual act: The new company or the merging one acquires the rights and all the obligations of the merged companies (Article 315 of the Commercial Code).

From the tax point of view it has the same effect: the acquiring company or the resulting entity takes on all the obligations that the merged companies had (Article 44 of the Tax Code).

All assets that were in favour of the company or merging companies are transferred as a whole to the new entity. However, it should be viewed from the standpoint of neutral tax transfers of assets to which reference has been made. The tax law is a way to encourage this type of reorganisation by the merger. This premise is based on the idea that such operations do not constitute alienation, from the tax point of view, therefore is not considered a tax event (Article 1.12 Tax on Transfer of Real Estate Law).

The professor Sanin Bernal (A New Corporate Law, Medellin, El Propuesto Desde El Estatuto Tributario Editorial Dike) believes that the legal and practical effect of this disposition is very important, because it strips the merger of any tax consequence associated with any transfer of title. This means it does not lead to taxes such as the income tax and VAT. This approach is used in our current legislation (Article 231 of Constitution).

The real estate registered in the company or the merging companies' relevant register will continue to name them. However, once registered in the Register of Commerce the Deed of Merger, the entity will be able to transfer the property because it is the rightful owner, having already acquired them by the merger. This should be written in the respective deed.

Nevertheless, the merger, (unlike any other act of transfer as sale, donation, transfer by inheritance) does not traditionally signal a tax event

But the resulting entity and the merged companies will have other types of tributary obligations that do not imply tax events, such as:

  • The obligation to register in the Register of Taxpayers (Article 86 of the Tax Code);
  • The obligation to name an auditor to inform the authorities about taxes (Article 131 of the Tax Code); and
  • The obligation to report the termination of activities (Article 144 of the Tax Code).

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