El Salvador

Bureau of Economic and Business Affairs
Report
June 29, 2017

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Executive SummaryShare    

The government of El Salvador (GOES) has not been effective in improving its investment climate. In recent years, El Salvador has lagged behind the region in attracting foreign direct investment (FDI), in both absolute terms and as a proportion of GDP. The Salvadoran Central Reserve Bank (“Central Bank”) estimated FDI inflows of less than USD 345 million between January and September 2016, significantly less than the over USD1 billion average for other countries in the region during the same period. Political polarization, cumbersome bureaucracy and regulations, an ineffective judicial system, and widespread violence are barriers to investment in El Salvador.

On September 9, 2015, El Salvador’s second Millennium Challenge Corporation (MCC) Compact entered into force. With its “More Investment, Less Poverty” theme, the USD 277 million Compact (plus USD 88.2 million from El Salvador in counterpart funding) includes projects to improve the investment climate, logistical infrastructure and human capital over five years. The investment climate initiative includes the creation of a new entity that endeavors to streamline business and investment regulations (“Organismo de Mejora Regulatoria”), which works with the private sector to improve trade facilitation and permitting processes, among other things.

The Presidents of El Salvador, Guatemala, and Honduras announced the Northern Triangle Countries’ Alliance for Prosperity Plan in 2014. The goal of the Alliance is a more integrated region that is democratic, provides greater economic opportunities, effective public institutions, and improved security for its citizens. Its success depends greatly on the political will of the three governments. For Fiscal Year 2016, the U.S. Congress made available up to USD 750 million for the United States to implement its Strategy for Engagement in Central America, including support to the Alliance for Prosperity Plan and other regional priorities.

The U.S.-Central American-Dominican Republic Free Trade Agreement (CAFTA-DR), entered into force for the United States and El Salvador in 2006. El Salvador also has free trade agreements with Mexico, Chile, Panama, Colombia, and Taiwan. El Salvador, jointly with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that includes a Free Trade Area. El Salvador is in the process of reaching trade agreements with Canada, Peru, and South Korea. A Partial Scope Agreement with Trinidad and Tobago and Ecuador, will soon enter into force, and El Salvador is negotiating a similar agreement with Belize and Bolivia, as well as re-negotiating one with Venezuela.

The GOES continues to take some measures to improve the business climate, with very limited results. In January 2015, in its five-year planning document (Plan Quinquenal), the government identified 44 geographic areas for prioritized economic development efforts. Also in 2015, the Legislative Assembly passed relevant legislation, such as better regulation and oversight of remittances, strengthened penalties against bulk cash smuggling, and increased financial inclusion by improving access to financial services and “e-money.” The Assembly also approved an electronic signature law and reformed the country’s fiscal incentive law in order to promote increased investment in renewable energy in 2015. The Ministry of Economy took steps to facilitate access to and improve both its physical and online “one-stop window” for investors. However, the government also introduced new taxes on telecommunications transactions and income over $500,000.

Table 1

Measure

Year

Index/Rank

Website Address

TI Corruption Perceptions Index

2016

95 of 176

http://www.transparency.org/
research/cpi/overview

World Bank’s Doing Business Report “Ease of Doing Business”

2017

95 of 189

doingbusiness.org/rankings

Global Innovation Index

2016

104 of 128

https://www.globalinnovationindex.org/
analysis-indicator

U.S. FDI in partner country ($M USD, stock positions)

2015

2.605 billion

http://www.bea.gov/
international/factsheet/

World Bank GNI per capita

2015

3,940

http://data.worldbank.org/
indicator/NY.GNP.PCAP.CD

1. Openness To, and Restrictions Upon, Foreign InvestmentShare    

Policies Toward Foreign Direct Investment

The GOES recognizes that attracting FDI is crucial to improving the economy. FDI is not screened by the government, which passed FDI promotion legislation over the past several years. However, FDI levels are still paltry and lag far behind regional neighbors. The Central Bank reported investment inflows at USD 428.6 million in 2015, and it attracted only around USD 344 million in the first nine months of 2016. Meanwhile, in 2015, El Salvador’s regional neighbors attracted, on average, USD 1.4 billion per country.

Political polarization, inconsistent and burdensome commercial regulations, an ineffective judicial system, and widespread violent crime undermine El Salvador’s investment climate. CAFTA-DR includes an investment chapter with and other dispute resolution mechanisms.

In November 2014, Presidents Salvador Sanchez Ceren of El Salvador, Otto Perez Molina of Guatemala and Juan Orlando Hernandez of Honduras presented a plan to promote economic, social and institutional development in their countries, known as the Alliance for Prosperity in the Northern Triangle. The plan involves joint efforts to promote economic integration in the Northern Triangle of Central America; to invest in human capital; to provide greater opportunities to all citizens; to ensure more accountable, transparent, and effective public institutions; and to guarantee a safe and secure environment for their people, with a particular focus on the underlying conditions driving migration to the United States. The three Northern Triangle countries allocated over USD 2.6 billion from their national budgets to support the Alliance for Prosperity in 2016 and the United States is supporting it with a portion of the USD 750 million allocated in FY 2016 to the U.S. Strategy for Engagement in Central America.

Under the Alliance for Prosperity, GOES achievements include:

  • The creation of a National Council for Public Safety, bringing together diverse sectors of society and generating an integrated approach to addressing crime and violence prevention called “Plan El Salvador Seguro” (El Salvador’s Security Plan).
  • A renewed focus on fighting extortions through the establishment and strengthening of Anti-Extortion Units across the country. These police/prosecutor teams work with business owners to prosecute extortions affecting the business community. Overall, Salvadoran prosecutors obtained a total of 1,365 convictions for extortion-related charges in 2016. The specialized prosecution unit maintained a 93 percent conviction rate during 2016.
  • The launch of a “Youth Employment and Employability Program,” focused on programs for health, education, and job market opportunities for young people.

The Exports and Investment Promotion Agency of El Salvador (PROESA) supports investment in nine main sectors: textiles and apparel; business services; tourism; aeronautics; agro-industry; medical devices; footwear manufacturing; logistic and infrastructure networks; and healthcare services. More information can found at http://www.proesa.gob.sv/investment/sector-opportunities

The National Association of Private Enterprise (ANEP), El Salvador’s umbrella business/private sector organization, has established an ongoing dialogue with relevant GOES ministries.

Limits on Foreign Control and Right to Private Ownership and Establishment

Foreign citizens and private companies can freely establish businesses in El Salvador. No single natural or legal person – whether national or foreign – can own more than 245 hectares (605 acres) of land. Per the Salvadoran Constitution, there is no restriction on the ownership of rural land by foreigners in El Salvador, unless Salvadoran nationals face restrictions in the corresponding country. If the rural land will be used for industrial purposes, however, the reciprocity requirement does not apply. Foreigners may engage in commercial fishing anywhere in Salvadoran waters provided they obtain a license from the Center for the Development of Fishing and Aquaculture (CENDEPESCA), a government entity.

Other Investment Policy Reviews

El Salvador has been a World Trade Organization (WTO) member since 1995. The latest trade policy review performed by the WTO was published in March 2010 (document: WT/TPR/S/226/Rev.1).

https://docsonline.wto.org/dol2fe/Pages/FE_Search/FE_S_S009-DP.aspx?language=E&CatalogueIdList=103057,87169,1750,40298&CurrentCatalogueIdIndex=0&FullTextHash=

The latest investment policy review performed by the United Nations Conference on Trade and Development (UNCTAD) was published in 2010: http://unctad.org/en/Docs/diaepcb200920_en.pdf

Business Facilitation

El Salvador has various laws that promote and protect investments, as well as providing benefits to local and foreign investors. These include: the Investment Law, the International Services Law; the Free Trade Zones Law; the Tourism Law, the Renewable Energy Incentives Law; the Law on Public Private Partnerships; the Special Law for Streamlining Procedures for the Promotion of Construction Projects; and the Legal Stability Law for Investments.

The 1999 Investment Law grants equal treatment to foreign and domestic investors. With the exception of limitations imposed on micro businesses, which are defined as having 10 or fewer employees and yearly sales of USD 121,319.40 or less, foreign investors may freely establish any type of domestic businesses. Investors who begin operations with 10 or fewer employees must present plans to increase employment to the Ministry of Economy’s National Investment Office. The Investment Law provides that any mined resource is the exclusive property of the state. The government may, however, grant private concessions for resource extraction, but there have been no new permits issued in recent years.

Per the Salvadoran constitution, there are no special restrictions on ownership of rural land by citizens of other countries, unless Salvadoran citizens are restricted in their rural land ownership in those countries. If rural land will be used for industrial purposes, the reciprocity requirement is lifted.

Business Registration

Per the World Bank, eight steps taking an average of 15 days are necessary to register a new business in El Salvador.

In November 2015, the GOES inaugurated the Business Services Office (Oficina de Atencion Empresarial) to cater to entrepreneurs and investors. The new office has two important components: "Growing Your Business" (Crecemos Tu Empresa) and the National Investment Office (Direccion Nacional de Inversiones, DNI). Growing Your Businesses provides business and investment advice, especially for micro-, small- and medium-sized enterprises. The DNI administers investment incentives and facilitates business registration.

Contact information:

Business Services Office
Telephone: (503) 2590-9000
Address: 3 calle Poniente, entre la 71 y 73 avenida Norte, N.° 3729, edificio Bel Air, colonia Escalón, San Salvador. Schedule: Monday-Friday, 7:30 a.m. - 3:30 p.m.
Crecemos Tu Empresa
E-mail: crecemostuempresa@ minec.gob.sv
Website: www.minec.gob.sv/crecemostuempresa

The National Investment Office:

Luisa Valiente, National Director of Investments, lvaliente@minec.gob.sv;
Roberto Salguero, Deputy Director of Administration, rsalguero@minec.gob.sv
Special Investments; Christel Schulz, Business Climate Deputy, cdearce@minec.gob.sv
Monica Aguirre, Deputy Director of Investment Facilitation, maguirre@minec.gob.sv.
Telephone: (503) 2590-5806.

The Directorate for Coordination of Productive Policies at the Ministry of Economy focuses on five areas: Productive Development, Capacity Building, Trade Facilitation, Taxation, and Export Promotion. More information cab found at: http://www.minec.gob.sv/fomento/

The Productive Development Fund (FONDEPRO) provides grants to small enterprises to strengthen competitiveness. More information cab found at: http://www.fondepro.gob.sv/

The National Commission for Micro and Small Businesses (CONAMYPE) supports micro and small businesses by providing training, technical assistance, financing, venture capital, and loan guarantee programs. CONAMYPE also provides assistance on market access and export promotion, marketing, business registration, and the promotion of business ventures led by women and youth.

The Micro and Small Businesses Promotion Law defines a microenterprise as a natural or legal person with annual gross sales up to 482 minimum monthly wages, equivalent to USD 121,319.40 and up to ten workers. A small business is defined as a natural or legal person with annual gross sales between 482 minimum monthly wages (USD 121,319.40) and 4,817 minimum monthly wages (USD 1,212,438.90) and up to 50 employees. To facilitate credit to small businesses, Salvadoran law allows for inventories, receivables, intellectual property rights, consumables, or any good with economic value to be used as collateral for loans. More information cab found at : https://www.conamype.gob.sv/

Outward Investment

While the government encourages Salvadoran investors to invest in El Salvador, it does not promote nor restrict investment abroad.

2. Bilateral Investment Agreements and Taxation TreatiesShare    

El Salvador has bilateral investment treaties in force with Argentina, Belize, BLEU (Belgium-Luxembourg Economic Union), Chile, Czech Republic, Finland, France, Germany, Israel, Republic of Korea, Morocco, the Netherlands, Paraguay, Peru, Spain, Switzerland, Taiwan Province of China, United Kingdom, and Uruguay.

The agreement entered into force for the United States and El Salvador, Guatemala, Honduras, and Nicaragua in 2006, for the Dominican Republic in 2007, and for Costa Rica in 2009. CAFTA-DR's investment chapter provides protection to most categories of investment, including enterprises, debt, concessions, contract, and intellectual property. Under this agreement, U.S. investors enjoy the right to establish, acquire, and operate investments in El Salvador on an equal footing with local investors. Among the rights afforded to U.S. investors are due process protection and the right to receive a fair market value for property in the event of an expropriation. Investor rights are protected under CAFTA-DR by an effective, impartial procedure for dispute settlement that is fully transparent and open to the public.

El Salvador also has free trade agreements with Mexico, Chile, Panama, Colombia, and Taiwan. The free trade agreements that El Salvador has with Mexico, Chile, and Panama include investment provisions. El Salvador is also negotiating trade agreements with Canada, Peru, and South Korea that are expected to contain investment provisions. The Salvadoran government signed a Partial Scope Agreement (PSA) with Cuba in 2011, concluded negotiations on a PSA with Trinidad and Tobago in October 2014 and with Ecuador in September 2016. These PSAs have not come into force. El Salvador is also negotiating PSAs with Belize and Bolivia, as well as re-negotiating one with Venezuela.

El Salvador, along with Costa Rica, Guatemala, Honduras, Nicaragua, and Panama, signed an Association Agreement with the European Union that establishes a Free Trade Area. The agreement, which entered into force with El Salvador in August 2013, includes a provision for Central American countries to receive access to a wider range of EU development aid. El Salvador is one of the five Central American Common Market countries, which have an investment treaty among themselves.

El Salvador does not have a bilateral taxation treaty with the United States.

On June 1, 2015, El Salvador signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, becoming the 86th signatory. El Salvador is the 8th Latin American country and the 3rd member of the Central American Common Market - after Costa Rica and Guatemala - to join the Convention.

El Salvador became a member of the Global Forum on Transparency and Exchange of Information for Tax Purposes in 2011. El Salvador’s Phase 1 peer review report, which demonstrates its high level of commitment to the international standard for tax transparency and exchange of information, was published in March 2015. The 86 jurisdictions participating in the Convention can be found at: www.oecd.org/ctp/exchange-of-tax-information/Status_of_convention.pdf

3. Legal RegimeShare    

Transparency of the Regulatory System

The laws and regulations of El Salvador are relatively transparent and generally foster competition. The GOES publishes some of its draft laws and regulations for public comments online, especially the ones that affect the financial sector, and some other economic laws that pertain to the Ministry of Economy. The government controls the price of some goods and services, including electricity, liquid propane gas, gasoline, fares on public transport, and medicines. The government also directly subsidizes water services. Regulatory agencies are often understaffed and inexperienced in dealing with complex issues. New foreign investors should review the regulatory environment carefully.

The Superintendent of Electricity and Telecommunications (SIGET) oversees electricity rates, telecommunications, and distribution of electromagnetic frequencies. In 2003, the government amended the 1996 Electricity Law with the intention of reducing volatility in the wholesale market and thereby stabilizing retail electricity prices and encouraging new investment. The reforms allowed SIGET to develop a cost-based pricing model for the electricity sector, which it introduced to the marketplace in 2011. The new system requires the adoption of additional long-term contracts and should alleviate various market distortions. The Salvadoran government subsidizes consumers using up to 99 kWh monthly. The electricity subsidy costs the government upwards of USD 141.8 million annually. Energy sector companies warn that ever-changing subsidies and the government’s inability to pay the subsidies in a timely manner erodethe financial stability of the power sector and discourage needed investment in new generation capacity.

International Regulatory Considerations

El Salvador belongs to the Central American Common Market and the Central American Integration System (Spanish acronym SICA), organizations which are working on regional integration, such as the harmonization of tariffs and customs procedures. El Salvador commonly incorporates international standards, such as the Pan-American Standards Commission (Spanish acronym COPANT), into its regulatory system.

El Salvador is a member of the WTO Agreement on Technical Barriers to the Trade (TBT Agreement) and has adopted the Code of Good Practice annexed to the TBT Agreement.

There are opportunities to provide comments when the government forms committees to discuss proposed laws, and when regulations are being developed at government agencies. Companies complained, however, that laws are passed without following required notification processes, and not in accordance with CAFTA-DR and WTO regulations.

El Salvador is a member of UNCTAD’s international network of transparent investment procedures: http://elsalvador.eregulations.org/. Foreign and national investors can find detailed information on administrative procedures applicable to investment and income generating operations including the number of steps, name and contact details of the entities and persons in charge of procedures, required documents and conditions, costs, processing time, and legal bases justifying the procedures. Accounting systems are generally consistent with international norms.

Legal System and Judicial Independence

El Salvador's commercial law is based on the Commercial Code and the corresponding Commercial Code of Procedures. There is a specialized commercial court that resolves these disputes. All documents and payments can be submitted electronically to the Commerce Registry.

Local investment and commercial dispute resolution proceedings in El Salvador routinely last many years. The Salvadoran Foundation for Economic and Social Development (FUSADES), an internationally-recognized think tank and research entity, characterizes domestic courts as being unwilling to enforce arbitration awards and instead opting to politicize conflicts between the government and the investors.

Foreign investors may seek redress for commercial disputes through local domestic courts but some investors find the slow-moving legal system to be costly and unproductive. The handling of some cases demonstrates that the legal system may be subject to manipulation by diverse interests, and final judgments are at time difficult to enforce. Any person thinking of investing in El Salvador should carry out proper due diligence by hiring competent local legal counsel. In recent years, there were several U.S. firms tied up in litigation associated with their investments.

Laws and Regulations on Foreign Direct Investment

Miempresa (https://www.miempresa.gob.sv/) is the Ministry of Economy’s website for new businesses in El Salvador. At Miempresa, investors can register new companies with the Ministry of Labor, Social Security Institute, pension fund administrators, and certain municipalities; request a tax identification number/card; and perform certain administrative functions.

The country’s eRegulations site (http://elsalvador.eregulations.org/) provides information on procedures, costs, entities, and regulations involved in setting up a new business in El Salvador.

The Exports and Investment Promoting Agency of El Salvador (PROESA) was created to attract domestic and foreign private investment, promote exports of goods and services produced in the country, evaluate and monitor the business climate and drive investment and export policies. PROESA provides direct technical assistance to investors interested in starting up operations in El Salvador, regardless of the size of the investment or number of employees. For more information, please visit http://www.proesa.gob.sv/

Competition and Anti-Trust Laws

The Competition Law entered into force in 2006 and established the Office of the Superintendent of Competition. According to the Organization for Economic Co-operation and Development (OECD) and the Inter-American Development Bank (IDB), the Office employs enforcement standards that are consistent with global best practices and has appropriate authority to enforce the law effectively. Appeals of decisions made by the Office of the Superintendent of Competition are made directly to the Supreme Court, the country´s highest court. Please visit

http://www.sc.gob.sv/appsc/home/ for more information.

Expropriation and Compensation

The Constitution allows the government to expropriate private property for reasons of public utility or social interest, and indemnification can take place either before or after the fact. There are no recent cases of expropriation. In 1980, a rural/agricultural land reform established that no single natural or legal person could own more than 245 hectares (605 acres) of land, and the government expropriated the land of some large landholders. In 1980, private banks were nationalized, but were subsequently returned to private ownership. A 2003 amendment to the Electricity Law requires energy generating companies to obtain government approval before removing fixed capital from the country, which is intended to prevent energy supply disruptions.

Dispute Settlement

ICSID Convention and New York Convention

El Salvador is a member state to the International Centre for Settlement of Investment Disputes (ICSID Convention). ICSID is included in a number of El Salvador’s investment treaties as the forum available to foreign investors. Within the domestic legal framework it is also mentioned in the Investment Law, with the limitations mentioned above regarding the change to the Arbitration Law in 2009.

El Salvador is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention) and the Inter-American Convention on International Commercial Arbitration (The Panama Convention).

Investor-State Dispute Settlement

Amended Article 15 of the 1999 Investment Law limits a foreign investor’s access to international dispute resolution and may obligate them to use national courts, if the foreigner comes from a country without a pre-existing trade agreement with El Salvador. The rights of investors from CAFTA-DR countries are protected under the trade agreement’s dispute settlement procedures. Submissions to national dispute panels and panel hearings are open to the public, and interested third parties have the opportunity to be heard. In 2002, the government approved a law that allowed private sector organizations to establish arbitration centers for the resolution of commercial disputes, including those involving foreign investors.

El Salvador approved the Mediation, Conciliation and Arbitration Law in 2002. However, in 2009, El Salvador modified its arbitration law to allow parties to arbitration disputes the ability to appeal a ruling to the Salvadoran courts. Investors complain that the modification dilutes the fundamental efficacy of arbitration as an alternative method of resolving disputes. According to the Law, arbitration takes place at the Arbitration and Mediation Center, a branch of the Chamber of Commerce and Industry of El Salvador. Seehttp://www.mediacionyarbitraje.com.sv/ for more information.

In October 2016, the World Bank’s International Centre for Settlement of Investment Disputes ruled in favor of El Salvador on a case brought by an international mining company that challenged the government’s failure sought to force government acceptance of a gold-mining project. The ruling served to galvanize the country’s anti-mining movement, which led to the approval of a bill banning the exploration and extraction of metal mining in the country.

Bankruptcy Regulations

The Commercial Code, the Commercial Code of Procedures, and the Banking Law all contain sections that deal with the process for declaring bankruptcy. However there is no separate bankruptcy law or court. According to data collected by the 2017 World Bank's Doing Business report, resolving insolvency in El Salvador takes 3.5 years on average and costs 12 percent of the debtor’s estate, with the most likely outcome being that the company will be sold piecemeal. The average recovery rate is 32.9 cents per U.S. dollar. El Salvador scores 2 out of 3 points on the commencement of proceedings index, 4 out of 6 points on the management of debtor’s assets index, 0 out of 3 points on the reorganization proceedings index, and 3 out of 4 points on the creditor participation index. El Salvador’s total score on the strength of insolvency framework index is 9 out of 16. Globally, El Salvador ranks 80 out of 190 on Ease of Resolving Insolvency.

4. Industrial PoliciesShare    

Investment Incentives

The International Services Law, approved in 2007, established service parks and centers with incentives similar to those received by El Salvador's free trade zones. Service park developers are exempted from income tax for 15 years, municipal taxes for ten years, and real estate transfer taxes. Service park administrators are exempted from income tax for 15 years and municipal taxes for ten years.

Firms located in the service parks/service centers may receive the following permanent benefits:

  • Tariff exemption for the import of capital goods, machinery, equipment, tools, supplies, accessories, furniture and other goods needed for the development of the service activities (goods and services, i.e., food and beverages, tobacco products, alcoholic beverages, rental fees, home equipment and furniture, cleaning articles, luxury goods, transportation vehicles, and hotel services are not exempted from taxation);
  • Full and indefinite exemption from income tax and municipal taxes on company assets.

Service firms operating under the existing Free Trade Zone Law are also covered. However, if the services are provided to the Salvadoran market, they cannot receive the benefits of the International Services Law.

The following services are covered under the International Services Law: international distribution, logistical international operations, call centers, information technology, research and development, marine vessels repair and maintenance, aircraft repair and maintenance, entrepreneurial processes (e.g., business process outsourcing), hospital-medical services, international financial services, container repair and maintenance, technology equipment repair, elderly and convalescent care, telemedicine, and cinematography postproduction services.

The Tourism Law establishes fiscal incentives for those who invest a minimum of USD 25,000 in tourism-related projects in El Salvador, including: value-added tax exemption for the acquisition of real state; import tariffs waiver for construction materials, goods, equipment (subject to limitation); and, a ten-year income tax waiver. The investor also benefits from a five-year exemption from land acquisition taxes and a 50 percent break in municipal taxes. To take advantage of these incentives, the enterprise must contribute five percent of its profits during the exemption period to a government-administered Tourism Promotion Fund.

The Renewable Energy Incentives Law promotes investment projects that use renewable energy sources. On October 15, 2015, the Legislative Assembly approved amendments to the Law to encourage the use of renewable energy sources and reduce dependence on environmentally-unfriendly fossil fuels. These reforms extended the benefits and tax for new investments in projects to install power generation plants and for projects expansion, using renewable energy sources, such as hydro, geothermal, wind, solar, marine, biogas and biomass.

The incentives include full exemption, during the first 10 years, from customs duties on the importation of machinery, equipment, materials, and supplies used for the construction and expansion of substations, transmission or sub-transmission lines. Revenues directly derived from power generation based on renewable sources enjoy full exemption from income tax for a period of five years in case of projects above 10 MW and 10 years for smaller projects. The Law also provides an exemption from payment of any type of income tax derived directly from the sale of certified emission reductions (CERs) under the Mechanism for Clean Development of the Kyoto Protocol, or carbon markets (CDM).

Foreign Trade Zones/Free Ports/Trade Facilitation

The 1998 Free Trade Zone Law is designed to attract investment in a wide range of activities, although the vast majority of the businesses in export processing zones are textile plants. A Salvadoran partner is not needed to operate in a foreign trade zone, and some textile operations are completely foreign-owned.

The 1998 law established rules for export processing zones and bonded areas. The foreign trade zones are outside the nation's customs jurisdiction while the bonded areas are within its jurisdiction, but subject to special treatment. Local and foreign companies can establish themselves in a foreign trade zone to produce goods or services for export or to provide services linked to international trade. The regulations for the bonded areas are similar.

Qualifying firms located in the foreign trade zones and bonded areas may enjoy the following benefits:

  • Exemption from all duties and taxes on imports of raw materials and the machinery and equipment needed to produce for export;
  • Exemption from taxes for fuels and lubricants used for producing exports if they not domestically produced;
  • Exemption from income tax, municipal taxes on company assets and property; the exemptions are for 15 years if the company is located in the metropolitan area of San Salvador and for 20 years if the company is located outside of the metropolitan area of San Salvador.
  • Exemption from taxes on certain real estate transfers, e.g., for the acquisition of goods to be employed in the authorized activity.

Companies in the foreign trade zones are also allowed to sell goods or services in the Salvadoran market if they pay applicable taxes for the proportion sold locally. Additional rules apply to textile and apparel products.

There are 17 free trade zones operating in El Salvador. They host 242 companies operating in areas such as textiles, distribution, call centers, business process outsourcing, agribusiness, agriculture, electronics, and metallurgy. Owned primarily by Salvadoran, U.S., Taiwanese, and Korean investors, as of June 2016 the firms employed a labor force of over 70,000 people. Section 5, above, on Performance Requirements and Incentives, outlines the incentives available to investors in these zones .

Under the 1990 Export Reactivation Law, firms were able to apply for tax rebates ("drawbacks") of six percent of the FOB value of manufactured or processed exports shipped outside the Central American Common Market area, but the benefit was eliminated in 2011. Later that same year, however, the Salvadoran government approved regulations to support producers. The regulations include a new form of “drawback,” approved by the WTO, which consists of a refund of custom duties paid on imported inputs and intermediate goods exclusively used in the production of goods exported outside of the Central American region. The regulations also included the creation of a Business Production Promotion Committee with the participation of the private and public sector to work on policies to strengthen the export sector, and the creation of an Export and Import Center. Since 2011, all import and export procedures are handled by the Import and Export Center (Centro de Trámites de Importaciones y Exportaciones - CIEX El Salvador). More information about the procedures can be found at: http://www.ciexelsalvador.gob.sv/registroSIMP/

Performance and Data Localization Requirements

February 2013 reforms to the country’s Free Trade Zone Law made it compliant with WTO regulations. The reforms eliminated permanent tax exemptions based on export performance, and instead grant tax credits based on the number of employees and level of investment. El Salvador's Investment Law does not require investors to meet export targets, transfer technology, incorporate a specific percentage of local content, or fulfill other performance criteria. Current labor laws, however, require that 90 percent of the workforce in plants and in clerical positions be comprised of Salvadoran citizens. These restrictions regarding nationality and percentages are more lax for professional and technical jobs.

Foreign investors and domestic firms are eligible for the same incentives. Exports of goods and services are levied zero value-added tax.

Investors who plan to live and work in El Salvador for an extended period will need to obtain temporary residency, which may be renewed periodically. Under Article 11 of the Investment Law, foreigners with investments totaling more than USD 1 million have the right to obtain an Investor's Residency status, which allows them to work and remain in the country. This type of residency may be requested within 30 days after the investment has been registered. The residency status covers the investor and their family for a period of one year, and may be extended annually. It is customary for companies to employ local lawyers to manage the process of obtaining residency. The American Chamber of Commerce in El Salvador can also provide information regarding the process. Please visit http://www.amchamsal.com/?lang=en for more information.

The International Services Law establishes benefits for businesses that invest at least USD 150,000 during the first year of operations, including working capital and fixed assets, hire no fewer than 10 permanent employees, and have at least a one-year contract. For hospital/medical services, the minimum investment in fixed assets must be USD 10 million, if surgical services are provided, or a minimum of USD 3 million, if surgical services are not provided. Hospitals or clinics must be located outside of major metropolitan areas, and medical service must also be provided only to patients with insurance.

El Salvador's Investment Law does not require investors to incorporate a specific percentage of local content, to turn over source code or provide access to surveillance, or to fulfill other performance criteria.

5. Protection of Property RightsShare    

Real Property

Private property, both non-real estate and real estate, is recognized and protected in El Salvador. Companies that plan to buy land or other real estate are advised to hire competent local legal counsel to advise them on the property's title prior to purchase.

No single natural or legal person-whether national or foreign-can own more than 245 hectares (605 acres) of land. Per the Constitution, a principle of reciprocity is applied regarding the ownership of rural land, meaning there are no restrictions on the ownership of rural land by foreigners in El Salvador, unless this restriction is applied to Salvadoran nationals in the corresponding states. If the rural land will be used for industrial purposes, however, the reciprocity requirement is lifted.

Real property can be transferred without government authorization. For title transfer to be valid vis-a-vis third parties, however, it needs to be properly registered. Real estate lease law tends to heavily protect the interests of tenants; the law allows tenants to remain on property after their lease expires, provided they continue to pay rent. Likewise, the law limits the amount of rent that can be charged and makes eviction processes extremely difficult.

Squatters occupying private property in good faith can eventually acquire title. If the owner of the property is unknown, squatters can acquire title after 20 years of good faith possession through a judicial procedure; if the owner is known, squatters can acquire title after 30 years.

Squatters may never acquire title to public land, although municipalities often grant the right of use to the squatter.

Zoning is regulated by municipal rules. Municipalities have broad power regarding the use of property within their jurisdiction. Zoning maps, if they exist, are generally not available to the public.

The ineffectiveness of the judicial system discourages investment in real estate and makes execution of real estate guarantees difficult. The real property lease law provides extensive protection to tenants, but landowners’ interests often go unprotected. Securitization of real estate guarantees or titles is legally permissible but does not occur frequently in practice.

In April 2012, the Legislative Assembly passed a constitutional reform recognizing the existence and the rights of indigenous peoples. However, there are no provisions for traditional use of lands or for indigenous peoples to share in revenue from exploitation of natural resources, as the government does not specifically demarcate any lands as belonging to indigenous communities.

According to the latest agricultural census (2007-2008), agricultural land in El Salvador totals 2,283,444.48 acres, of which 1,695,653.4 acres are owned and not rented out (74 percent), 478,127.32 acres are rented (21 percent), and 109,665.48 acres (five percent) are not clearly defined. For more information, please visit http://www.censos.gob.sv/

El Salvador ranks 71th of 190 economies on the World Bank's Doing Business 2017 report in the Ease of Registering Property category. According to the collected data, registering a property takes on average of five steps over a period of 31 days, and costs 3.8 percent of the reported value of the property.

Intellectual Property Rights

El Salvador revised several laws to comply with CAFTA-DR's provisions on intellectual property rights (IPR). The Intellectual Property Promotion and Protection Law (1993, revised in 2005), Law of Trademarks and Other Distinctive Signs (2002, revised in 2005), and Penal Code establish the legal framework to protect IPR. Investors can register trademarks, patents, copyrights, and other forms of intellectual property with the National Registry Center's Intellectual Property Office. Reforms extended the copyright term from 50 to 70 years. In 2008, the government enacted test data exclusivity regulations for pharmaceuticals and agrochemicals, which will be protected for five and 10 years respectively, and ratified an international agreement extending protection to satellite signals.On February 15, 2017, the Legislative Assembly approved amendments to El Salvador's Intellectual Property Law. USTR expressed concerns that it had not had an opportunity to review the draft legislation and noted that the CAFTA-DR contains transparency provisions. USTR indicated it would seek bilateral discussion of the proposed legislation and is engaging with the GOES to explore substantive issues with the proposed amendments.

The National Directorate of Medicines (NDM) has registered 60 products for data protection since 2008, including seven in 2016. The NDM protects the confidentiality of relevant test data and the list of such protected medications is available at the NDM’s website: http://www.medicamentos.gob.sv/index.php/es/servicios-m/informes/unidad-de-registro-y-visado/listado-de-productos-farmaceuticos-con-proteccion-de-datos-de-prueba.

Salvadoran authorities have limited resources to dedicate to IPR issues and enforcement of existing laws. The Salvadoran Intellectual Property Association (Asociacion Salvadoreña de Propiedad Intelectual, ASPI) notes that piracy is common in El Salvador because the police focus on investigating criminal networks rather than points of sale. The contraband and piracy of medicines and software also remain a problem, as well as the purchase of drugs online, whereby unlicensed or counterfeit products are imported to El Salvador. The National Civil Police (PNC) has an Intellectual Property Section with eight investigators. According to ASPI, the PNC section coordinates well with other government and private entities. Nevertheless, the PNC admits that a lack of resources and expertise, e.g., regarding information technology, hinders its effectiveness in combatting IPR crimes. Most PNC operations focused on copyright infringement, and there were only 19 arrests in 2016. During the year, the police seized a total of 56,919 pirated optical media discs (CDs and DVDs), along with six DVD/CD burners and 15 burner towers used to make pirated discs. The police also seized tens of thousands of counterfeit products, including 56,919 fake Disney toys and purported Casio brand wristwatches (9,980) and clocks (7,700). Other commonly counterfeited brands included Tommy Hilfiger, Calvin Klein, Levis, Polo Ralph Lauren, Sony, Dell, HP, Converse, Puma, and Hello Kitty. Both ASPI and the PNC would like the Attorney General’s Office to do more to prosecute IPR cases; only two or three prosecutors are dedicated to such work.

Contraband and counterfeit products, especially cigarettes, liquor, toothpaste and cooking oil, remain widespread. The Distributors Association of El Salvador (ADES) estimates that around 50 percent of the liquor consumed in El Salvador is smuggled. Most contraband cigarettes come in from China, Panama, and Paraguay and undercut legitimately-imported cigarettes, which are subject to a 39 percent tariff. According to ADES, most contraband cigarettes are smuggled in by gangs, with the complicity of Salvadoran authorities. A February 2017 study by CID Gallup Latin America, noting the link between contraband cigarettes and gang finances, estimated that 32 percent of the 940 million cigarettes consumed annually in El Salvador are contraband. Gallup estimated that, during 2014, the GOES lost USD 15 million in tax revenue due to cigarette smuggling.

The national Intellectual Property Registry has two registered geographical indications for El Salvador: “Balsamo de El Salvador” (balm for medicinal, cosmetic and gastronomic uses – registered since 1935) and “Café Ilamatepec” (coffee – registered in 2010). Salvadoran hard liquor “Chaparro” is in the process of registration.

El Salvador is not listed in the U.S. Trade Representative’s notorious market report nor on the Special 301 list.

El Salvador is a signatory of the Berne Convention for the Protection of Literary and Artistic Works; the Paris Convention for the Protection of Industrial Property; the Geneva Convention for the Protection of Producers of Phonograms Against Unauthorized Duplication; the World Intellectual Property Organization (WIPO) Copyright Treaty; the WIPO Performance and Phonograms Treaty; the Rome Convention for the Protection of Performers, Phonogram Producers, and Broadcasting Organizations; and the Beijing Treaty on Audiovisual Performances (2012), which grants performing artists certain economic rights (such as rights over broadcast, reproduction, and distribution) of live and recorded works.

For additional information about treaty obligations and points of contact at local IP offices, please see WIPO’s country profiles at http://www.wipo.int/directory/en/details.jsp?country_code=SV

6. Financial SectorShare    

Capital Markets and Portfolio Investment

The Superintendent of the Financial System supervises individual and consolidated activities of banks and non-bank financial intermediaries, financial conglomerates, stock market participants, insurance companies, and pension fund administrators. Interest rates are determined by market forces. Foreign investors may obtain credit in the local financial market under the same conditions as local investors. According to the legislation, the maximum interest rate for credit cards and loans is 1.6 times the weighted average effective rate established by the Central Bank. There are different maximum interest rates according to the different market segments and amounts (consumption, credit cards, mortgages, home repair/remodeling, business, and microcredits).

On July 31, 2014, the Legislative Assembly approved the Financial Transactions Tax Law. The law assesses a 0.25 percent tax on many financial transactions such as electronic, check or wire transfers and payments exceeding USD 1,000; loan or disbursements; and transactions between entities of the financial system. There are also several exemptions from the tax, such as end-use credit card payments; social security, pensions, and insurance payments; transactions made by the state, NGOs, diplomats, or international organizations; and stock exchange primary market operations. The 0.25 percent withholding tax is designed to capture some revenue from the informal sector and expand the tax base. The taxes withheld are credited against any obligation due to the tax authorities within a two-year period of the withholding date.

The 1994 Securities Market Law established the present framework for the Salvadoran securities exchange, which opened in 1992. The Salvadoran securities exchange played an important role in past years in the privatization of state enterprises and more recently in securitizations and facilitating foreign portfolio investment. Stocks, government and private bonds, and other financial instruments are traded on the exchange, which is regulated by the Superintendent of the Financial System.

Foreigners may buy stocks, bonds, and other instruments sold on the exchange and may have their own securities listed, once approved by the Superintendent. Companies interested in listing must first register with the National Registry Center's Registry of Commerce. Between 2015 and 2016, the exchange averaged daily trading volumes of about USD 11.3 million. Government-regulated private pension funds, Salvadoran insurance companies, and local banks are the largest buyers on the Salvadoran securities exchange.

Money and Banking System

El Salvador's banks are among the largest in Central America and many are owned by foreign financial institutions. The penetration of financial services is relatively low with only 35 percent of Salvadorans holding bank accounts. The banking system is sound and generally well-managed and supervised. El Salvador’s Central Bank is responsible for regulating the banking system, monitoring compliance of liquidity reserve requirements, and managing the payment systems.

The banking system's total assets as of January 2017 totaled USD 16 billion. Under Salvadoran banking law, there is no difference in regulations between foreign and domestic banks and foreign banks can offer all the same services as domestic banks.

The Non-Bank Financial Intermediaries Law regulates the organization, operation, and activities of financial institutions such as cooperative savings associations, nongovernmental organizations, and other microfinance institutions. The Money Laundering Law requires financial institutions to report suspicious transactions to the Attorney General and the Superintendent of the Financial System.

The Insurance Companies Law regulates the operation of both local and foreign insurance firms. Foreign firms, including U.S., Colombian, Canadian, and Spanish companies, have invested in Salvadoran insurers.

Foreign Exchange and Remittances

Foreign Exchange

There are no restrictions on transferring investment-related funds out of the country. Foreign businesses can freely remit or reinvest profits, repatriate capital, and bring in capital for additional investment. The 1999 Investment Law allows unrestricted remittance of royalties and fees from the use of foreign patents, trademarks, technical assistance, and other services. Tax reforms introduced in 2011, however, levy a five percent tax on national or foreign shareholders’ profits. Moreover, shareholders domiciled in a state, country or territory that is considered a tax haven or has low or no taxes, will be subject to a tax of twenty-five percent.

The Monetary Integration Law dollarized El Salvador in 2001 and the U.S. dollar accounts for nearly all currency in circulation and can be used in all transactions. Salvadoran banks, in accordance with the law, must keep all accounts in dollars. Dollarization is supported by family remittances – almost all from workers in the United States – that totaled USD 4.6 billion in 2016.

Remittance Policies

There are no restrictions placed on investment remittances. The Caribbean Financial Action Task Force report on monitoring remittances, www.cfatf-gafic.org/index.php/member-countries/d-m/el-salvador, noted that El Salvador has strengthened its remittances regimen, prohibiting anonymous accounts and limiting suspicious transactions. On July 23, 2015, the Legislature approved reforms to the Law of Supervision and Regulation of the Financial System so that any entity sending or receiving systematic or substantial amounts of money by any means, at the national and international level, falls under the jurisdiction of the Superintendence of the Financial System.

Sovereign Wealth Funds

El Salvador does not have a sovereign wealth fund.

7. State-Owned EnterprisesShare    

El Salvador successfully liberalized many sectors where the government previously exerted monopoly control, effectively limiting most forms of direct competition from state-owned enterprises. El Salvador maintains state-owned enterprises (SOEs) in energy production, water supply and sanitation, ports and airports, and the national lottery.

While energy distribution was privatized in 1999, the Salvadoran Government maintains significant energy production facilities through state-owned Rio Lempa Executive Hydroelectric Commission (CEL), a significant producer of hydro-electric and geothermal energy. The primary water service provider is the National Water and Sewer Administration (ANDA), which provides services to 40 percent of the total population of El Salvador. As an umbrella institution, ANDA defines policies, regulates and provides services. The Autonomous Executive Port Commission (CEPA) operates both the ports and the airports. CEL, ANDA and CEPA Board Chairs hold Minister-level rank and report directly to the President.

The Law on Public Administration Procurement and Contracting (LACAP) covers all procurement of goods and services by all Salvadoran public institutions, including the municipalities. Exceptions to LACAP include: procurement and contracting financed with funds coming from other countries (bilateral agreements) or international bodies; agreements between state institutions; and the contracting of personal services by public institutions under the provisions of the Law on Salaries, Contracts and Day Work. The government has a website where tenders by government institutions are published. For more information, please visit https://www.comprasal.gob.sv/comprasal_web/.

Alba Petroleos is a joint-venture between a consortium of mayors from the leftist Farabundo Marti National Liberation Front (FMLN) party and a subsidiary of Venezuela's state-owned oil company PDVSA. Alba Petroleos operates dozens of gasoline service stations across the country and has expanded into a number of other industries, including energy production, food production, medicines, micro-lending, supermarket, bus transportation, and aviation. Because of its official relationship with the ruling FMLN party, critics charge that the conglomerate receives preferential treatment from the government. Critics also allege that Alba Petroleos’ commercial practices, including financial reporting, are non-transparent. The company’s high dependence on the cash flow from the oil credit line with PDVSA combined with a politically-driven business model and poor financial management appears to be driving Alba Petroleos towards insolvency.

Privatization Program

El Salvador does not have a privatization program.

8. Responsible Business ConductShare    

The private sector in El Salvador, including several prominent U.S. companies, embraced the concept of responsible business conduct (RBC). There are a number of local foundations that promote RBC practices, entrepreneurial values, and philanthropic initiatives. El Salvador is also a member of international institutions such as Forum Empresa (an alliance of RBC institutions in the Western Hemisphere), AccountAbility (UK), and the InterAmerican Corporate Social Responsibility Network. Businesses have RBC programs in the workplace that provide education and training, transportation, lunch programs, and childcare. In addition, RBC programs include inclusive hiring practices and provided assistance to surrounding communities in areas such as health, education, senior housing, and HIV/AIDS awareness.

The Secretariat of Transparency and Corruption was launched in 2009 with the mandate to develop guidelines, strategies, and actions to promote transparency and combat corruption in government The watchdog organization Transparency International is represented in-country by the Salvadoran Foundation for Development (FUNDE), which publicly stated that the Secretariat of Transparency and Corruption, and its Active Transparency (Transparencia Activa) propaganda body, are commissioned, among other things, to attack and discredit those who criticize the government. According to FUNDE, Transparencia Activa grossly manipulates information and misrepresents the facts.

The Technical Committee of the National Council against Trafficking in Persons (the TIP Council) is a cabinet- level body that, as of January 2017, was revising the “Protocol for Interinstitutional Action for the Integral Care of Trafficking in Persons Victims.” The protocol describes methods for the care and referral of victims and includes information and materials to create awareness of local TIP Council resources that are available to the public.

More information can be found at:

http://gobiernoabierto.abiertoalpublico.org/
http://www.opengovpartnership.org/country/el-salvador

El Salvador does not waive or weaken labor laws, consumer protection, or environmental regulations to attract foreign investment.

9. CorruptionShare    

U.S. companies operating in El Salvador are subject to the U.S. Foreign Corrupt Practices Act.

Corruption can be a challenge to investment in El Salvador. El Salvador ranks 95 out of 176 countries in Transparency International's Corruption Perceptions 2016 Index. El Salvador has laws, regulations and penalties to combat corruption, but their effectiveness is questionable. Soliciting, offering, or accepting a bribe is a criminal act in El Salvador. The Attorney General's Anticorruption and Complex Crimes Unit handles allegations of corruption against public officials. The Constitution establishes a Court of Accounts that is charged with investigating public officials and entities and, when necessary, passing such cases to the Attorney General for prosecution. Executive-branch employees are subject to a code of ethics, including administrative enforcement mechanisms, and the government established an Ethics Tribunal in 2006.

In 2011, El Salvador approved the Law on Access to Public Information and joined the Open Government Partnership, becoming one of the first countries to do so. The Open Government Partnership promotes government commitments made jointly with civil society on transparency, accountability, citizen participation and use of new technologies.

Corruption scandals at the federal, legislative, and municipal levels are commonplace and there have been credible allegations of judicial corruption. The law provides criminal penalties for corruption by officials, but the government does not implement the law effectively. The NGO Social Initiative for Democracy stated that officials, particularly in the judicial system, often engaged in corrupt practices with impunity. Long-standing government practices in El Salvador, including cash payments to officials, shielded budgetary accounts, and diversion of government funds, make corruption easy and accountability difficult. For example, the accepted practice of ensuring party loyalty through off-the-books cash payments to public officials has persisted across five presidential administrations. The Attorney General’s Office expressed frustration over the lack of transparency within the government as it pursues illicit enrichment cases against current and former officials. El Salvador has an active, free press that reports on corruption. In late 2015, the Probity Section of the Supreme Court began, for the first time, to investigate allegations of illicit enrichment of public officials. The Supreme Court reported that, as of July 2016, the Probity Section investigated 72 current and former public officials for evidence of illicit enrichment and submitted five cases to the Attorney General’s Office for possible criminal investigation. As of mid-July 2016, the Attorney General’s Office reported investigating 93 cases related to corruption, resulting in seven convictions.

In August 2016, the Attorney General’s Office opened a criminal corruption case against former president Mauricio Funes (2009-14), currently a fugitive in Nicaragua, and prosecuted the former attorney general and a prominent businessman linked to several administrations under charges related to corruption. In October 2016, the Attorney General’s Office brought embezzlement, misappropriation, and money laundering charges against former president Elias Antonio (Tony) Saca (2004-2009).

The illicit enrichment law requires appointed and elected officials to declare their assets to the Probity Section of the Supreme Court. The declarations are not available to the public, and the law does not establish sanctions for noncompliance. In May 2016, the Supreme Court established three criteria for selecting which cases to investigate: the age of the case (i.e., proximity to the statute of limitations), the relevance of the position, and the seriousness and notoriety of the alleged illicit enrichment.

The law provides for the right of access to government information, but authorities did not always effectively implement the law. As of July 2016, the Institute for Access to Public Information had formally received 1,001 cases, 81 percent of which are resolved. The law gives a narrow list of exceptions that outline the grounds for nondisclosure and provide for a reasonably short timeline for the relevant authority to respond, no processing fees, and administrative sanctions for noncompliance.

El Salvador is not a signatory to the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions. El Salvador is a signatory to the UN Anticorruption Convention and the Organization of American States’ Inter-American Convention against Corruption.

Resources to Report Corruption

Contact at government agency responsible for combating corruption:

Doctor Marcel Orestes Posada, President of the Court of Government Ethics
Court of Government Ethics (Tribunal de Etica Gubernamental)
Calle Los Espliegos #30, Colonia San Francisco, San Salvador
(503) 2560-6400
http://www.teg.gob.sv/

Contact at "watchdog" organization:

Roberto Rubio-Fabián
Executive Director
National Development Foundation (Fundacion Nacional para el Desarrollo)
Fundación Nacional para el Desarrollo, Calle Arturo Ambrogi #411, entre 103 y 105 Avenida Norte, Colonia Escalón,
San Salvador
(503) 2209-5300
direccion@funde.org

10. Political and Security EnvironmentShare    

El Salvador's 12-year civil war ended in 1992 upon the signing of peace accords. Since then, there has been no political violence aimed at foreign investors, their businesses, or their property.

The constitution provides for freedom of internal movement, foreign travel, emigration, and repatriation. The government has generally respected these rights, although in many areas, the government cannot ensure freedom of movement, due to the strength of criminal gang activity.

Each gang has its own defined territory and will restrict entry. Gang members often do not allow persons living in another gang’s controlled area to enter their territory, even when travelling in public transportation or for commercial deliveries. Gangs frequently force people to present identification cards (that contain their addresses) to determine where they live. If gang members discover that a person lives in a rival gang’s territory, that person might be killed, beaten, or not allowed to enter the territory. Bus companies and distributors often must pay extortion fees to operate within gang territories, and these costs are passed on to paying customers.

A GOES Central Bank report released in April 2016, estimated that violence costs El Salvador USD 4 billion or 16 percent of its GDP in 2014. The study put extortion fees paid by businesses at USD 756 million. Another estimate, by the Institute for Economics and Peace, calculated the true cost of Salvadoran violence in 2015 to be USD 8.5 billion, while the World Economic Forum’s 2016-17 Global Competitiveness Index reported that costs due to organized crime for Salvadoran businesses are the highest among 138 countries.

11. Labor Policies and PracticesShare    

In 2015, El Salvador had a labor force of approximately 2.9 million, according to the Ministry of Economy. While Salvadoran labor is regarded as hard working, general education and professional skill levels are low. According to many large employers, there is a lack of middle management-level talent, which sometimes results in the necessity to bring in managers from abroad. Employers do not report labor-related difficulties in incorporating technology into their workplaces.

The Salvadoran Constitution guarantees the right of employees in the private sector to organize into associations and unions. In practice, unions are independent of the government and employers. Unions may strike only to obtain or modify a collective bargaining agreement or to protect professional rights. They must also engage in negotiation, mediation, and arbitration processes before striking, although many groups skip or go through these steps quickly. The law prohibits workers from appealing a government decision declaring a strike illegal. Employers are free to hire union or non-union labor. Closed shops are illegal. Labor laws are generally in accordance with internationally-recognized standards, but are not enforced consistently by government authorities. Although El Salvador improved labor rights since the CAFTA-DR entered into force in 2006 and the passage of the 2014 Special Trafficking in Persons Law, there is still room for better implementation.

The current administration has committed to promote labor rights and linked labor rights to its efforts to increase economic productivity and boost employment. Challenges include a need to elaborate policies protecting the right to unionize in order to meet international best practices, improving regulations guaranteeing the right to a safe workplace, and adequate government resources to conduct inspections. Workplace discrimination, related specifically to disability and gender, remain a significant issue. According to labor unions, government sources, and the private sector, the Ministry of Labor has serious budget constraints, which affect its ability to thoroughly inspect for labor violations.

While workers have the right to strike, the law contains cumbersome and complex registration procedures for conducting a legal strike. The law does not recognize the right to strike for public and municipal employees or for workers in essential services, which include those services where disruption would jeopardize or endanger life, security, health, or normal conditions of existence for some or all of the population. The law does not specify which services meet this definition, and courts therefore apply this provision on a case-by-case basis.

The government does not effectively enforce the laws on freedom of association and the right to collective bargaining in all cases. Resources to conduct inspections were inadequate, and remedies remained ineffective. There are penalties in place for employers who disrupt the right of a union to exist, but these are generally not sufficient to deter violations. The Ministry of Labor lacks sufficient resources, such as vehicles, fuel, and computers, to enforce the law fully. Judicial procedures were subject to lengthy delays and appeals. According to union representatives, the government did not consistently enforce labor rights for public workers, maquila/textile workers, subcontracted workers in the construction industry, security guards, informal sector workers, or migrant workers. As of June 2016, the Ministry of Labor had received five claims of violation of the freedom of association.

El Salvador’s Labor Law mandates that the minimum wage must be proposed by the National Minimum Wage Council. In December 2016, El Salvador’s National Minimum Wage Council approved minimum wage increases that ranged by sector from 19 to 105 percent, which raised concerns about the country’s competitiveness. Private sector trade associations complained that the wage determination process was politicized, and one trade association challenged the increase as unconstitutional before the Supreme Court. Only about 28 percent of Salvadorans work in the formal sector, opening the government up for criticism that the minimum wage increase constitutes another barrier to formalization and is likely to suppress the increased tax revenue that would come along with higher participation in the formal economy.

12. OPIC and Other Investment Insurance ProgramsShare    

Overseas Private Investment Cooperation (OPIC) has an agreement with El Salvador that requires it to approve all insurance applications. This agreement is being re-negotiated and it may eliminate this requirement. In 2006, OPIC signed an agreement with the El Salvador’s National Investment and Exports Promotion Agency (PROESA) to improve outreach to U.S. small business investors in El Salvador. El Salvador uses the U.S. dollar, so full inconvertibility insurance is unnecessary, but investors may want to protect against the possibility of not being able to transfer funds for other reasons. El Salvador is a member of the Multilateral Investment Guarantee Agency (MIGA).

13. Foreign Direct Investment and Foreign Portfolio Investment StatisticsShare    

Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy

 

Host Country Statistical Source*

USG or International Statistical Source

USG or International Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

Economic Data

Year

Amount

Year

Amount

 

Host Country Gross Domestic Product (GDP) ($M USD)

2015

$25.85 billion

2015

$25.85 billion

www.worldbank.org/en/country

Foreign Direct Investment

Host Country Statistical Source*

USG or International Statistical Source

USG or international Source of Data:
BEA; IMF; Eurostat; UNCTAD, Other

U.S. FDI in partner country ($M USD, stock positions)

2015

$ 2,639.79 m

2015

$2,605 m

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Host country’s FDI in the United States ($M USD, stock positions)

2015

N/A

2015

N/A

BEA data available at http://bea.gov/international/direct_investment_
multinational_companies_comprehensive_data.htm

Total inbound stock of FDI as % host GDP

2015

10.2%

2015

10.1%

N/A

* Source: Central Bank, El Salvador
 

Table 3: Sources and Destination of FDI

Direct Investment from/in Counterpart Economy Data

From Top Five Sources/To Top Five Destinations (US Dollars, Millions)

Inward Direct Investment

Outward Direct Investment

Total Inward

9,158

100%

Total Outward

2

100%

United States

2,640

28.8%

Guatemala

1

50%

Panama

2,230

24.4%

Nicaragua

1

50%

Mexico

973

10.6%

Costa Rica

N/A

N/A

Spain

843

9.2%

Honduras

N/A

N/A

Colombia

763

8.3%

Panama

N/A

N/A

"0" reflects amounts rounded to +/- USD 500,000.


Table 4: Sources of Portfolio Investment

There is no IMF data for portfolio investment assets available for El Salvador.

14. Contact for More InformationShare    

U.S. Embassy San Salvador
Address: Final Blvd. Santa Elena, Antiguo Cuscatlán, La Libertad, El Salvador
+ (503) 2501-2999
webmasterss@state.gov
http://sansalvador.usembassy.gov/index.html

To reach the U.S. Foreign Commercial Service (FCS) Office, please email: san.salvador.office.box@trade.gov