This content is from: Local Insights

Eliminating double taxation

Juan Ernesto Menjivar

As part of governmental efforts to reaffirm and revise their internal policies, the Republic of El Salvador and the Government of Spain subscribed on July 7 2008 to a double taxation convention; it became effective on October 8 2008.

The phenomenon of double taxation can be defined as the event in which two or more tributary regulations, or two or more tributary administrations, subject the realisation of the same taxable event to taxation. As a result a taxpayer becomes obligated to pay two or more taxes, in spite of having realised a single taxable event.

Because of the underlying issues regarding double taxation, the adoption of conventions between countries has become necessary to avoid double taxation and fiscal evasion.

The double taxation convention (the convention) subscribed to by El Salvador and Spain applies to the following taxes:

  • Spain:
    o income tax;
    o corporate income tax;
    o non-resident income tax;
    o patrimony tax; and
    o local taxes over income and patrimony.
  • El Salvador:
    o income tax.

In this convention the method used to eliminate double taxation is the credit method, known in Spanish as método de imputación. This method states that, "...Where a resident of a contracting state derives income or owns capital which, in accordance with the internal provisions of the States or the provisions of this convention, may be taxed in the other State, the State where the taxpayer resides will allow a deduction of the tax paid in the other State on the income of that resident..."

Moreover, in respect to the tax exemptions the convention states that, "...Where in accordance with the internal provisions of the States or the internal provisions of the Convention, income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital..."

The convention also regulates, among others, the benefits of the maritime and aerial enterprises. Where an enterprise resident in a contracting state derives income from the other state without having a permanent establishment in that other State, the enterprise will be subject to tax in the contracting state.

Nevertheless, if the income derives from a permanent establishment in the other state, then the benefits attributable to that permanent establishment could be subject to tax in that other State.

In respect of the dividends, interests, canons and royalties, the State that benefits from the portfolio income is the one that must subject that income to tax. In other words, the state where the taxpayer resides will be the one to tax the portfolio income.

Nevertheless, the state where the portfolio income is obtained can also subject such income to tax, but with a limitation on the tax rate to be determined separately for each type of portfolio income in the convention. For example, the tax rate to be applied by the state where a taxpayer receives interest must be no more than 10%.

The convention also contains non-discrimination regulations, with the purpose of protecting nationals of a contracting state from taxation or any other requirement, which is different to or more burdensome than the taxation and connected requirements to which nationals of that other state in the same circumstances are subjected.

Furthermore, the convention determines the procedure to follow where a taxpayer considers that the actions of one or both of the contracting states result or will result in taxation not in accordance with the provisions of the convention. In such an event, the taxpayer may use the Mutual Agreement Procedure, irrespective of the remedies provided by the internal regulations of those states.

The subscription to conventions like this one is vital, because the attitude of the foreign investor is conditioned by the relative security he feels when calculating his fiscal obligations. Also, the Government of El Salvador thereby reflects its commitment to provide stability to the fiscal regulations to attract foreign investment.

Juan Ernesto Menjivar

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