Transparency of the Regulatory System
The laws and regulations of El Salvador are relatively transparent and generally foster competition. Legal, regulatory, and accounting systems are transparent and consistent with international norms. However, the discretionary application of rules can complicate routine transactions, such as customs clearances and permitting applications. Regulatory agencies are often understaffed and inexperienced in dealing with complex issues. New foreign investors should review the regulatory environment carefully. In addition to applicable national laws and regulations, localities may impose permitting requirements on investors.
Companies have noted that the GOES has enacted laws and regulations without following required notice and comment procedures. The Regulatory Improvement Law, enacted in December 2018, requires government agencies to publish online the list of laws and regulations they plan to approve, reform or repeal each year. Institutions cannot adopt or modify regulations and laws not included in that list. Prior to adopting or amending laws or regulations, the Simplified Administrative Procedures Law requires the GOES to perform a Regulatory Impact Analysis (RIA) based on a standardized methodology. Proposed legislation and regulations, as well as RIAs, must be made available for public comment. In practice, the Legislative Assembly does not publish draft legislation on its website and does not solicit comments on pending legislation. The GOES does not yet require the use of a centralized online portal to publish regulatory actions. The implications of the recent reforms are not yet apparent, though private sector stakeholders have expressed support for the measures.
The GOES 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 and residential electricity rates.
The Superintendent of Electricity and Telecommunications (SIGET) oversees electricity rates, telecommunications, and distribution of electromagnetic frequencies. The Salvadoran government subsidizes residential consumers for electricity use of up to 100 kWh monthly. The electricity subsidy costs the government between USD 50 million to USD 60 million annually. Energy sector companies have warned that the government’s inability to pay the subsidies in a timely manner has discouraged investment in new generation capacity.
El Salvador’s public finances are relatively transparent. Budget documents, including the executive budget proposal, enacted budget, and end-of-year reports, as well as information on debt obligations are accessible to the public at: http://www.transparenciafiscal.gob.sv/ptf/es/ . An independent institution, the Court of Accounts, audits the financial statements, economic performance, cash flow statements, and budget execution of all GOES ministries and agencies. The results of these audits are publicly available online. However, the Office of the President manages reserved expenses and other special funds that are not subject to disclosure or audit.
International Regulatory Considerations
El Salvador belongs to the Central American Common Market and the Central American Integration System (SICA), organizations which are working on regional integration, (e.g., 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, adheres to the Agreement on Technical Barriers to Trade (TBT Agreement), and has adopted the Code of Good Practice annexed to the TBT Agreement. El Salvador is also a signatory to the Trade Facilitation Agreement (TFA) and has notified its Categories A, B, and C commitments. El Salvador has established a National Trade Facilitation Committee as required by the TFA, though it has met only twice since its formation.
El Salvador is a member of the U.N. Conference on Trade and Development’s international network of transparent investment procedures: http://tramites.gob.sv . Investors can find information on administrative procedures applicable to investment and income-generating operations including the name and contact details for those in charge of procedures, required documents and conditions, costs, processing time, and legal bases for the procedures.
Legal System and Judicial Independence
El Salvador’s legal system is codified law. Commercial law is based on the Commercial Code and the corresponding Commercial and Civil Code of Procedures. There are specialized commercial courts that resolve disputes.
Although foreign investors may seek redress for commercial disputes through Salvadoran courts, many investors report the legal system to be slow, costly, and unproductive. Local investment and commercial dispute resolution proceedings routinely last many years. The judicial system is independent of the executive branch, but may be subject to manipulation by diverse interests. Final judgments are at times difficult to enforce. The Embassy recommends that potential investors carry out proper due diligence by hiring competent local legal counsel.
Laws and Regulations on Foreign Direct Investment
Miempresa 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. Website: https://www.miempresa.gob.sv/
The country’s eRegulations site provides information on procedures, costs, entities, and regulations involved in setting up a new business in El Salvador. Website: http://tramites.gob.sv/
The Exports and Investment Promoting Agency of El Salvador (PROESA) is responsible for attracting domestic and foreign private investment, promoting exports of goods and services, evaluating and monitoring the business climate, and driving 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. Website: http://www.proesa.gob.sv/
Competition and Anti-Trust Laws
The Office of the Superintendent of Competition reviews transactions for competition concerns. The OECD and the Inter-American Development Bank have indicated that the Superintendent employs enforcement standards that are consistent with global best practices and has appropriate authority to enforce the Competition Law effectively. Superintendent decisions may be appealed directly to the Supreme Court, the country´s highest court. Website: http://www.sc.gob.sv/home/
Expropriation and Compensation
The Constitution allows the government to expropriate private property for reasons of public utility or social interest. 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 in 1989-90. A 2003 amendment to the Electricity Law requires energy generating companies to obtain government approval before removing fixed capital from the country.
ICSID Convention and New York Convention
El Salvador is a member state to the ICSID Convention. ICSID is included in a number of El Salvador’s investment treaties as the forum available to foreign investors.
Investor-State Dispute Settlement
In 2016, ICSID ruled in favor of El Salvador on a case brought by an international mining company that sought to force government acceptance of a gold-mining project. Following the ruling, El Salvador banned the exploration and extraction of metal mining in the country.
The rights of investors from CAFTA-DR countries are protected under the trade agreement’s dispute settlement procedures. There have been no successful claims by U.S. investors under CAFTA-DR. There are currently no pending claims by U.S. investors.
For foreign investors from a country without a trade agreement with El Salvador, amended Article 15 of the 1999 Investment Law limits access to international dispute resolution and may obligate them to use national courts. Submissions to national dispute panels and panel hearings are open to the public. Interested third parties have the opportunity to be heard.
International Commercial Arbitration and Foreign Courts
A 2002 law allows private sector organizations to establish arbitration centers for the resolution of commercial disputes, including those involving foreign investors. In 2009, El Salvador modified its arbitration law to allow parties to appeal a ruling to the Salvadoran courts. Investors have complained that the modification dilutes the efficacy of arbitration as an alternative method of resolving disputes. Arbitrations takes place at the Arbitration and Mediation Center, a branch of the Chamber of Commerce and Industry of El Salvador. Website: http://www.mediacionyarbitraje.com.sv/
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). Local courts recognize and enforce foreign arbitral awards and court judgments, but the process can be lengthy and difficult.
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 2019 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 32.5 percent. Globally, El Salvador ranks 89 out of 190 on Ease of Resolving Insolvency. Website: http://www.doingbusiness.org/~/media/WBG/DoingBusiness/Documents/Profiles/Country/SLV.pdf