A. M. 
The Finance Committee of El Salvador’s Legislative Assembly issued a favorable opinion on a key reform of the Tax Code that seeks to eliminate the 3% withholding tax applied to foreign investors on capital gains in the stock market. The proposal, spearheaded by El Salvador’s Ministry of Finance, is not yet final and must be discussed and voted on in a plenary session to determine its approval or rejection.
The initiative proposes amending the fourth paragraph of Article 158 of the Tax Code, with the aim of exempting non-residents of the country who earn income from investments in salvadoran securities from this withholding tax. If approved, these returns would no longer be subject to either the withholding tax or the payment of income tax.
Currently, the law stipulates that amounts paid or credited to foreign investors for this type of income must be subject to a 3% withholding tax. This provision was introduced in november 2015 as part of a fiscal adjustment. However, authorities believe that, in the current context, this tax burden reduces the country’s competitiveness relative to other capital markets in the region.
During the technical analysis, Gerardo Ramos, head of the Legal Division of the General Directorate of Internal Revenue, explained that the reform aims to create more attractive conditions for foreign investment, particularly in the stock market. As he explained, maintaining the withholding tax could encourage capital flight to markets with lower tax burdens, which in the long term would negatively impact tax revenue and economic growth.
The Tax Code is the legal framework that regulates the relationship between the State and taxpayers, establishing rules regarding rights, obligations, tax enforcement, and tax collection. Therefore, any modification to this instrument has direct implications for the country’s fiscal policy and investment environment.
From an economic perspective, the elimination of this tax aims to revitalize the salvadoran stock market, facilitating the arrival of new investors and increasing capital flows. This could translate into greater financing opportunities for local companies and a boost to the development of the financial system.
However, the measure also sparks debate about its impact on tax revenue. Although the 3% withholding tax would no longer be collected in the short term, authorities argue that increased investment could offset that reduction by boosting economic activity.
The committee’s favorable ruling represents an initial step in the legislative process. The proposal must be submitted for consideration by the full Legislative Assembly of El Salvador, where lawmakers will decide whether the reform takes effect or not.
If approved, El Salvador would align itself with regional strategies aimed at attracting foreign capital through tax incentives, in a context where competition for investment is becoming increasingly intense. Meanwhile, the financial sector and market participants remain attentive to the outcome of the vote, which will determine the course of this measure.
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