El Salvador: Minimum Income Tax payment of 1% declared unconstitutional

By the end of 2011, the Salvadoran Income Tax Law was modified by, amongst other things, requesting companies to pay their income tax based on the higher of (a) 30% of net profit or (b) 1% of annual taxable revenues. With the latter there is no possibility to deduct costs or expenses that were already part of the provisions in this same Law.

In November 2013, the Chamber of Constitutional Affairs of the Supreme Court of Justice, declared all articles directly or indirectly related to this 'minimum payment’ unconstitutional based on three statements: Principle of economic capacity, tax progressivity and prohibition of confiscation.

The lawsuit stated that income tax should be calculated over net profits, that is, after deducting costs and expenses, since only this “reveals whether there is available wealth to contribute to public (government) expenses”. In this regard, the Chamber made it clear that “in sustaining Government expenditures, entities must contribute proportional to their economic and social capacity”.

Constitutional experts concurred with this position after determining that 'income over which such a minimum payment is calculated,considers neither production costs nor operating expenditures incurred in generating such income'. This, according to the magistrates, defeats the principle of tax equality.

The progressivity principle is a legal term to express: “the more you have the more you pay”. According to the plaintiffs, the 'minimum payment' disregarded this principle 'by imposing a higher fiscal burden on those tax payers with less tax contributive capacity', for it implied a mere percentage relationship between the taxable income and the amount of tax payable.

A complete copy of the Sentence (in Spanish) can be found at:


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