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
https://www.sc.gob.sv/ 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.
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.
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.