Constitution of the Republic of El Salvador:

Article 98 – The State is not responsible for compensation for damages caused by political factions

Article 103, Section 3 - Concessions for exploitation of the subsoil

Article 105, Section 2 - Rural land holding

Article 106 - Expropriation for public purpose or social interest

Article 109, Section 1 - Principle of International Reciprocity in relation to the ownership of rural real property

Article 110, Section 4 - Provision of public services

Article 115 - Small-scale trade and industry and small business are reserved exclusively for Salvadorians

Article 120 - Concessions for the establishment of quays, railways, canals or other public works

Article 217 - Manufacture, importation, export of, and trade in arms, ammunition, explosives and similar articles

Article 245 - Subsidiary responsibility of the State for damages caused by public officials or public servants

Laws regulating the establishment of foreign investments in El Salvador:

1) Commercial Code (Book I, Merchants; Book III, Mercantile goods)

2) Labor Code

3) Municipal Code and the Municipal Tax of the Municipality in which the business is located

4) Central American Agreement for the Protection of Industrial Property

5) Law on Banks and Finance Companies

6) Foreign Investment Promotion and Guarantee Law

7) Intellectual Property Promotion and Protection Law

8) General Law on Fisheries Activities

9) Income Tax Law

10) Law on Tax on Transfer of Real Property and Provision of Services

11) Migration Law

12) Organic Law of the Central Reserve Bank of El Salvador

13) Export Reactivation Law

14) Law on Free Zone Regime and Customs Areas

15) Law on the Commercial Register

16) Law Regulating Trade and Industry

17) Social Security Law

18) Law on the Superintendency of Commercial Corporations and Companies

Regulations corresponding to (or regulatory provisions related to) the preceding laws.

For the purpose of applying the Foreign Investment Promotion and Guarantee Law, foreign investment is understood to be all types of capital transfer from other countries into El Salvador, made by foreign natural or juridical persons, for the production of goods and services, and duly registered in the Ministry of Economy (Article 2).

Similarly, the Foreign Investment Promotion and Guarantee Law (Article 3), for the purpose of the preceding definition, establishes the items covered by the term capital:

a) Financial resources in freely convertible currencies.

b) Tangible goods such as: machinery, equipment, accessories, spare parts and raw materials, among others.

c) Intangible goods as mentioned in Article 12 of this Law are: intangible goods, licenses for the use of patents of invention, trademarks and other distinguishing marks, trade names and copyright; contracts for leases of equipment, for marketing administrative know-how, and generally any right that has an economic value conferred by law or derived from an agreement or contract related to the activity regulated in the Foreign Investment Promotion and Guarantee Law regardless of the relationship that exists or might exist between the person supplying the service and the recipient thereof.

d) The reinvestment of profits obtained in the country by foreign investors, provided the profits stemmed from foreign investment duly registered pursuant to this Law.

e) Hard currency loans to natural and juridical persons domiciled in El Salvador, as well as those hard currency transfers destined for the acquisition of obligations issued by juridical persons domiciled in the country.

f) Stocks and shares acquired by foreign investors through capitalization in domiciled corporations or a capital increase in branches registered in El Salvador in conformity with this Law, derived from profits, reserves, revaluation of assets, or from duly registered credits to the corporation, branch or other creditors.

All foreign investments desirous of enjoying the benefits and guarantees granted under the Foreign Investment Promotion and Guarantee Law must be registered in the Foreign Investment Registry, in the Ministry of Finance, which considers the nature, value, source, purpose and date of entry of the foreign investment, as well as any modification during its stay and exit from the country (Articles 2, 3 and 8-11, Foreign Investment Promotion and Guarantee Law; Articles 21-26, Regulation to the Foreign Investment Promotion and Guarantee Law).

Yes, Article 2 of the Foreign Investment Promotion and Guarantee Law speaks of ".... foreign individual or juridical persons.....".

No, Article 2 of the Foreign Investment Promotion and Guarantee Law speaks of ".... foreign individual or juridical persons....."

The local company in receipt of foreign capital may not resort to the foreign investment regime. Nevertheless, the foreign investor who has invested in the local company may do so (Article 3, Paragraph e of the Foreign Investment Promotion and Guarantee Law).

Similarly, limitations exist with respect to foreign investment in local companies.

Article 3, paragraph 3, Law Regulating Trade and Industry:

"Foreigners may engage in trade and industry in the Republic, subject to the following conditions....3) If they wish to invest in companies (regardless of the type) that are dedicated to trade or industry, the liquid assets of those companies shall be twice the amounts mentioned before [100,000 colones for trade and 50,000 colones for industry, in the case of foreign individuals], regardless of the amount of the shares owned by the foreigner in the company...."

Article 9 of the Banks and Financial Institutions Law:

"A minimum of 75% of the shares in banks and financial institutions established in El Salvador shall be owned by: a) Salvadorian or Central American natural persons; b) Salvadorian juridical persons whose stockholders or majority shareholders are natural persons of the countries mentioned in the preceding paragraph; c) Central American banks, in whose country of origin there is adequate supervision, that fulfill at all times existing legal regulatory provisions in that country; d) foreign banks and financial institutions, in whose country of origin there is adequate supervision, that are classified as top-rated banks or financial institutions by internationally recognized classification institutions. The Superintendency [of the Financial System] on the advice of the Central Bank (of Reserve of El Salvador) will prepare an executive order for determining what will be considered top-rated."

No.

There are no nationality quotas, however, at least 90% of the employees must be Salvadorians. In special circumstances, the Ministry of Labor and Social Security may authorize the employment of more than 10% of foreigners when it is difficult or impossible to replace them with nationals, and in such cases the employers are required to train Salvadorian staff under the supervision and control of the aforementioned ministry for a period not exceeding five years (Article 7, Labor Code).

The wages earned by Salvadorians cannot be less than 85% of the total payroll. This percentage may be changed with the authorization of the ministry referred to above (Article 8, Labor Code).

For the calculation of percentages that refer to Articles 7 and 8 of the Labor Code, those of Central American origin are considered as Salvadorians and are not taken into account, until they number four of the foreigners holding posts of director, manager, administrator and in general, of the foreigners who fill managerial posts in a company (Article 10, Labor Code).

In the case of transnational corporations, the above provisions are not applicable provided the corporations have received authorization from the aforementioned ministry (Article 9, Labor Code).

Any person may freely transfer his earnings abroad through the financial system (Article 58, Organic Law of the Central Reserve Bank).

Article 102 of the Constitution - guarantee of economic freedom.

Section 2 of Article 110 of the Constitution - Prohibition of monopolistic practices in order to guarantee free enterprise.

Article 1 of Foreign Investment Promotion and Guarantee Law - guarantee of foreign investment.

The principle of economic non-discrimination is guaranteed in the Constitution, which establishes in Article 3 that all persons are equal under the law, and in Article 101 which establishes social justice as a guiding principle.

Article 3: "All persons are equal under the law. With respect to the enjoyment of civil rights, no restrictions based on nationality, race, sex or religion may be established."

Article 101: "Economic order must be based essentially on principles of social justice that provide all the country’s inhabitants with an existence worthy of the human being."

"The State shall promote economic and social development by increasing production, productivity, and the rational use of resources. It shall also develop the various production sectors and protect the interest of consumers."

Public and private enterprises compete on equal terms, except in the case of state monopolies (see question 3.3). There is, however, a privatization process aimed at privatizing all remaining public enterprises including sugar refineries, the Mortgage Bank, telecommunications, and so forth.

Foreign investment may be made in all sectors of the economy (Articles 2,3 and 12 of Foreign Investment Promotion and Guarantee Law), with the exception of the sectors reserved to the State and those that exclude foreign investment.

Nevertheless, there are sectors or activities in which both foreign and local investments are limited although these sectors are not reserved to the State, namely:

1) The State must grant concessions for the exploitation of the subsoil (Article103, Paragraph 3 National Constitution).

2) The State must grant concessions for a period not exceeding 50 years for the establishment of quays, railways, canals or other public works (Article 120 National Constitution).

3) The State must grant concessions for the provision of public services (Article 110, Paragraph 4 National Constitution).

4) Ownership of rural land is limited to 245 hectares for nationals and foreigners (Article 105, Paragraph 2 National Constitution).

5) No person, natural or juridical, national or foreign, directly or through another person, will be able to own bank or financial shares which amounts to more than 1% of the total capital of the institution without previous authorization from the superintendent of the financial system (Article 10, Law on Banks and Finance Companies).

6) Production, import, export and trade in arms, ammunition, explosives and similar articles may only be done with authorization and under direct State control (Article 217 National Constitution).

Similarly, there are items that may not be imported into the country by any person, whether national or foreigner. A list of those items are included in Decree 647, published in DO 113, Volume 309 of December 20, 1990.

The issue of currency is the only activity reserved exclusively to the State. In accordance with Section 1, Article 111 of the Constitution, power to issue currency is reserved exclusively to the State, which may do so directly or through a public institution.

Sectors or economic activities from which foreign investment is totally excluded (100%):

a) Small-scale trade, industry and provision of services are the patrimony of Salvadorians by birth and nationals of Central America (Article 115 of the Constitution; Article 5, Foreign Investment Promotion and Guarantee Law, Art. 3, Law Regulating Trade and Industry, Article 2 of the Regulations to Law Regulating Trade and Industry);

b) Pursuant to Article 28 of the General Law on Fisheries Activities, foreign governments may not participate or have shares in companies that intend to engage in non-commercial fishing (when carried out with artesanal tackle in small craft, Article 22, paragraph a), commercial fishing (when done with commercial tackle in large craft, Article 22, paragraph b) in coastal areas (up to 12 nautical miles measured from the low-tide line, Article 23, paragraph a) for pelagic and demersal species; and on the high sea (beyond 12 nautical miles as far as 200 nautical miles measured from the low-tide line, Article 23, paragraph b) for demersal species; and

c) Only Salvadorians may perform the function of notaries (Article 4, paragraph l, Law on Notaries).

Sectors or activities in which foreign investment is limited:

a) Article 25 of the General Law on Fisheries Activities establishes that non-commercial fishing (when carried out with artesanal tackle in small craft, Article 22, paragraph a) may be carried on exclusively by: a) individuals who are nationals of El Salvador and Central American nationals resident in the country, b) cooperatives; c) trading companies which satisfy the requirements indicated in the Regulation to the General Law on Fisheries Activities (Article 30 of the Regulation to the LGAP) (among others, the requirement of initial operating capital and proof that at least 90% of the shares are owned by Salvadorian nationals and that more than 60% of the members are non-commercial fishermen by trade).

Similarly, Article 5 of the Foreign Investment Promotion and Guarantee Law embodies this restriction and establishes that coastal fishing is the exclusive patrimony of native-born Salvadorians and native Central Americans.

b) In accordance with Article 26 of the General Law on Fisheries Activities, commercial marine fishing (when done with commercial tackle in large craft, Article 22, paragraph b) in coastal areas (up to 12 nautical miles measured from the low-tide line, Article 23, paragraph a) for pelagic and demersal species; and commercial deep-sea fishing (beyond 12 nautical miles as far as 200 nautical miles measured from the low-tide line, Article 23, paragraph b) for demersal species may be undertaken by: a) Salvadorian and Central American individuals; b) cooperatives; and c) Salvadorian trading companies in which more than 50% of the shares must be owned by Salvadorian persons; the latter circumstance must be proven by authentic method of proof, in the judgement of the General Office of Fisheries Resources. Foreign investors may also invest in that sector provided it is done in conjunction with Salvadorian capital and is incorporated in a Salvadorian trading company in which more than 50% of the equity is owned by Salvadorians.

c) At least 75% of the shares in banks and finance companies must be owned by: a) Salvadorian natural persons or Central Americans; b) Salvadorian juridical persons in which majority shareholders or members are natural persons mentioned in the preceding paragraph; c) Central American banks, in whose country of origin there exists adequate supervision, that satisfy at all times the legal and regulatory provisions in force in that country; d) foreign banks and financial institutions, in whose country of origin there is adequate supervision, that are classified as top-rated banks or financial institutions by internationally recognized classification institutions. The Superintendency of the Financial System on the advice of the Central Reserve Bank will prepare an executive order thereon to determine which ones will be considered of top priority (Article 9, Law on Banks and Finance Companies).

d) Minimum capital requirements exist for foreigners engaged in trade or industry. According to Article 3 of the Law Regulating Trade and Industry and Article 2 of the Regulation to the Law Regulating Trade and Industry, foreigners may engage in trade and industry subject to the following conditions: a) If they engage in trade through individual companies, the liquid capital thereof may not be less than 100,000 colones; b) If they engage in industry through individual companies, the liquid capital thereof may not be less than 50,000 colones; c) If they wish to invest in companies (regardless of the type) that are dedicated to trade and industry, the liquid capital of those companies shall be twice the amounts mentioned before, regardless of the amount of the shares owned by the foreigner in the company; d) Service companies are considered to be assimilated into industry for the purpose of this provision.

e) Ownership of rural real property may not be acquired by foreigners in whose country of origin Salvadorians do not enjoy the same rights, except in the case of land for industrial plants (Article 109 of the Constitution).

Yes, in the case of ownership of rural land by foreigners (Article 109 of the Constitution).

No.

Yes, however there are certain exceptions:

a) In the privatization of the banking system there are certain preferential rights for employees and small investors. Twenty five percent of the shares of the privatized institution is reserved for employees for a period of 30 days from the date of the formal offer for its acquisition in amounts no greater than 100,000 colones. Another 35% of the shares will also be reserved for small investors for a period of 60 days and for amounts no greater than 100,000 colones. The remaining 40% of the shares may be acquired by any other investor (here the foreign investor may enter) (Article 12 of the Law to Privatize Commercial Banks and Savings and Loan Associations).

b) In the case of privatization of refineries and alcohol factories, there are certain preferential rights for the workers in the refinery and the producers in the service area of the refinery. Fifteen percent of the shares of the privatized refinery is reserved for the workers for a period of 200 days from the date of the publication of the sale. In addition, 55% of the shares will be reserved for producers in the service area for the same period mentioned above (Article 8 of the Law to Privatize Refineries and Alcohol Factories).

Foreign and national investors receive the same treatment in economic matters and all foreigners in the country compete on equal terms among themselves. An exception is the advantages granted to foreigners by virtue of free trade agreements, customs unions, and so forth.

The most favored nation clause is included in all investment protection agreements signed and ratified by El Salvador.

Expropriation:

Article 106 of the Constitution - Expropriation is based on public purpose and social interest, with prior fair compensation.

Limitations on property:

a) Articles 9 and 10 of Law on Banks and Finance Companies – Limits on ownership of shares in banks and finance companies.

b) Article 105, Section 2 and Article 109, Section 1 of the Constitution. Limits on the ownership of rural land.

1. As a general rule, compensation is set based on the market value of the expropriated properties and should be paid in advance (Article 106, Section 1 of the Constitution).

2. Exceptions:

a) Compensation may not be made in advance when the expropriation is the result of war, public disaster, for the supply of water and electricity, construction of houses or highways, roads or public thoroughfares (Article 106, Section 2 of the Constitution).

b) When the amount of the compensation so warrants, compensation may be made over time, not to exceed a period of 15 years, recognizing the applicable interest thereon, (Article 106, Section 3 of the Constitution).

The general rule is that expropriation may only occur for public purpose or social interest, with just prior compensation. Nevertheless, possession may take place prior to payment, in case of war, public disaster or for the purpose of supplying water or electricity, or for constructing houses, highways, roads or any other public thoroughfare (Article 106, Section 2 of the Constitution).

Yes.

Sections 1 and 2 of Article 103 of the Constitution

"Recognizes and guarantees the right to private property as a social function. It also recognizes intellectual and artistic property for the period and in the manner determined by law."

Article 1 of the Law to Promote and Protect Intellectual Property

"The provisions of this law are intended to ensure adequate and effective protection of intellectual property, establishing the bases for its promotion, development and protection."

Laws and agreements on intellectual property in force in El Salvador:

a) Foreign exchange may be brought in freely (Article 58 of the Organic Law of the Central Reserve Bank of El Salvador).

b) Capital goods, on payment of the applicable duties.

c) Capital in kind may be brought in freely and, after valuation, registered in the Superintendency of Commercial Enterprises (Commercial Code).

d) Technology, loans and intellectual property rights, freely negotiated (Article 15 of the Foreign Investment Promotion and Guarantee Law, paragraph d). Nevertheless, the value of contracting intangible assets including the amounts for industrial property, technical assistance and services shall be as stipulated in the corresponding documents but the total of these amounts may not exceed 10% of realized net sales in the respective period (Article 13 of the Foreign Investment Promotion And Guarantee Law).

In general, there are no restrictions, paragraphs a), b), and d) of Article 15 of the the Foreign Investment Promotion and Guarantee Law contemplate guaranteeing the foreign investor the free remittance of profits, liquidation funds, and capital gains.

There are, however, two restrictions:

1) In the case of investments made in commercial and service activities, a maximum of 50% of the profits obtained each year on registered investment may be remitted (Article 15, Paragraph a). This provision is not currently being applied because, subsequent to the promulgation of the Foreign Investment Promotion And Guarantee Law, the financial system was liberalized, deregulating control of foreign exchange in the country.

2) There is free remittance abroad of payments for foreign trademarks and patents, technical assistance, and other similar service, provided the value does not exceed 10% of net sales

No, there is free market of exchange. The average exchange rate is calculated by the Central Reserve Bank based on supply and demand in the capital market and is set every seven days (Article 57, Organic Law of the Central Reserve Bank of El Salvador).

Tax regime affecting foreign investment:

1) Income Tax

2) Tax on the transfer of real property and services (VAT):

3) Import tariffs:

No.

None.

As a general rule, the foreign investment regime in El Salvador does not provide any incentive that benefits foreign investment exclusively, with the following exceptions:

a) With respect to industrial parks, the foreign investor who wishes to acquire rural property for industrial purposes in El Salvador may do so even when there is no reciprocity in his country of origin in respect of the purchase of rural property by Salvadorians (Article 109 of the Constitution).

b) In respect of insurance:

Yes. In addition, the foreign investor has recourse to reconsideration before the Ministry of Economy if the foreign investor’s request has been denied (Article 20, the Foreign Investment Promotion And Guarantee Law).

El Salvador has: signed and ratified the ICSID Convention; signed and ratified the Inter-American Convention on International Commercial Arbitration (Convention of Panama); and signed the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention).

As of June 26, 1997 , El Salvador:

a) Has signed and ratified Reciprocal Investment Promotion and Protection Agreements with:

b) Is negotiating Investment Promotion and Protection Agreements with the United States, Canada, the Netherlands, Korea, and Russia.

c) Is negotiating a chapter on investment within the framework of the negotiation of Free Trade Agreement among El Salvador, Guatemala, Honduras, and Mexico.

d) Has signed a Private Investment Guarantee Agreement with the United States (signed January 29, 1960; published D.O. 48 Vol. 186, March 9, 1960).

NOTE: The process of negotiating and signing bilateral and multilateral investment promotion and protection agreements is a dynamic process; consequently the information provided above will very likely be outdated in a short time.

Pursuant to Section 2 of Article 246, the Constitution of the Republic takes precedence over all laws (including international treaties concluded by El Salvador with other states or international organizations, that become laws of the Republic on entry into force in conformity with Section 1 of Article 144 of the Constitution) and regulations.

Likewise, in Section 2 of Article 144, the Constitution establishes that: the law (the law means the internal laws of the Republic) may not amend or revoke a treaty that is in force for El Salvador (on the contrary, the treaty may amend or revoke the secondary law) and; in case of conflict between the law and the treaty, the treaty takes precedence.

As a result, international treaties, including Investment Protection Agreements, are ranked below the Constitution but above secondary domestic laws.

Yes, in accordance with Section 1 of Article 144 of the Constitution, international treaties concluded by El Salvador with other states or international organizations constitute laws of the Republic when they enter into force. Investment protection agreements may therefore be invoked directly before the courts and applied to the case in question.

Yes. The One-Stop Investment Office, in the Department of Capital Transfers, Trade and Investment Board of the Ministry of Economy. The One-Stop Investment Office is responsible for formalizing national and foreign investments in the foreign investment register.