EL SALVADOR Law and Practice Contributed by: Héctor Torres, Annette Herrera and Daniel Leiva, Torres Legal
The LEAD exemptions include: • exemption from taxes, levies, duties, rates and contributions; • exemption from capital gains and ordinary income tax arising from the purchase, sale, transfer or other disposition of digital assets; • exemption from VAT; • exemption from municipal taxes; • exemption from withholding obligations; and • freedom to determine yields in accordance with market conditions. Third, El Salvador’s broader income tax framework is now highly relevant for digital asset structures. Follow- ing the reform to the Income Tax Law, El Salvador has reinforced a territorial approach to taxation by exclud- ing from taxable income certain values received from foreign sources, capital movements, remuneration, emoluments and other income obtained abroad. This is particularly important for international digital asset groups, investment structures and tokenisation pro- jects with cross-border components, as income gen- erated outside El Salvador may fall outside the Sal- vadoran income tax base even when it is not directly covered by the LEAD. Therefore, the Salvadoran tax position for digital assets is not limited to the LEAD. Bitcoin benefits from a specific capital gains exemption under the Bit- coin Law; regulated digital asset issuances and ser- vice providers may benefit from the LEAD exemption regime; and international structures may also benefit from El Salvador’s territorial income tax system. The main tax uncertainties relate to: • the treatment of gains from non-Bitcoin crypto- assets when the activity is not covered by the LEAD; • the distinction between exempt capital gains and ordinary business income; • VAT treatment of cross-border digital asset trans- actions; • transfer pricing considerations for multinational groups with digital asset operations in El Salvador; and
• the practical application of territorial income tax rules to complex digital asset structures involving foreign-source income, offshore platforms or non- resident counterparties. In practice, the main tax uncertainty is not whether El Salvador offers a favourable tax environment for digital assets, but how the different layers of that envi- ronment interact in complex cases. Bitcoin, regulated LEAD activities and foreign-source income may each benefit from different tax treatments. However, where a transaction falls outside those clear categories, tax- payers must carefully analyse characterisation, source of income, VAT, withholding tax, transfer pricing and documentation requirements. This is particularly rele- vant for international groups, DeFi structures, offshore platforms, tokenised income rights and transactions involving non-resident counterparties. 1.2.5 Insolvency El Salvador does not yet have a specific insolvency or resolution regime tailored exclusively to DASPs, issu- ers or other digital asset businesses. As a result, the insolvency of a digital asset company would generally be governed by the ordinary Salvadoran insolvency framework, including the rules on bankruptcy, credi- tors’ proceedings and suspension of payments that remain applicable under the Commercial Code, the Civil Procedures Code and related procedural rules. However, this does not mean that digital asset busi- nesses operate without regulatory safeguards. The LEAD and the CNAD regulatory framework include preventative and protective mechanisms that are highly relevant in an insolvency or distress scenario. Registered DASPs are subject to authorisation, mini- mum operating standards, compliance requirements, regulatory supervision and business continuity obli- gations. In particular, DASP registration requirements include operational, technical, risk management and business continuity documentation, which are intend- ed to reduce the risk of disorderly disruption of ser- vices and to protect users in case of operational or financial stress. Therefore, while these rules are not insolvency rules in the strict procedural sense, they are directly con- nected to insolvency risk management. In the case
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