El Salvador has significantly eased how businesses claim tax deductions, removing a seven-year-old restriction that had barred companies from deducting costs in years when they generated no tax liability. The new decree also replaces complex external certification requirements with simpler internal accounting standards, marking a notable shift toward taxpayer certainty and simplified compliance. 

RF Report

El Salvador has released a more taxpayer-friendly interpretation of how businesses can deduct operating costs. On 11 May 2026, the Legislative Assembly issued Decree No. 568, replacing a seven-year-old rule that had restricted deductions in several key ways. The new interpretation took effect on 19 May 2026, eight days after its official publication in the Official Gazette.

What changed and why it matters

The decree revises Article 28 of the Income Tax Law, which governs what expenses qualify as deductible from earned income. The revision overturns two major restrictions that had limited business deductions under the previous Decree No. 345 of 29 May 2019. These weren’t minor technical adjustments—they represent a fundamental shift in how El Salvador’s tax authority interprets what businesses can claim.

The legislative preamble to Decree No. 568 suggests the government recognised that the 2019 decree had become a constraint on legitimate business activity. The earlier rule was criticised for allowing the Tax Administration to apply discretionary, biased criteria when evaluating deductions, often to the detriment of taxpayers. By establishing a clearer, more objective framework, the new decree aims to reduce disputes and provide businesses with greater certainty.

Loss carryback rule removed

The most significant change concerns timing and profitability thresholds. Under Decree No. 345 a business could not claim a deduction if, at the end of the fiscal year, it had generated no computed tax liability—meaning it owed no income tax. This created a catch-22: companies operating at a loss, or those with heavy legitimate expenses that reduced taxable income to zero or below, were effectively prevented from recognising those expenses for tax purposes in that period.

Decree No. 568 eliminates this restriction. It explicitly states that “it shall not be necessary for a Computed Tax to result” for a deduction to be admissible. This protects capital-intensive operations, startups with significant setup costs, seasonal businesses with low-margin years, and any enterprise experiencing temporary downturns. A manufacturing company investing heavily in equipment or a retailer absorbing inventory shrinkage can now claim those costs regardless of whether they generate a tax bill in that fiscal year.

Simplified documentation requirements

The original rule required that claimed costs be “recognised or certified by relevant authorities or corresponding regulatory entities.” This language created practical barriers. A small business might need approvals from multiple agencies depending on its sector, adding complexity and delay to the claims process. Companies in less-regulated industries or those lacking formal certifications faced particular challenges.

The new decree dispenses with this requirement. Costs are deductible as long as they are “duly documented and recorded in the taxpayer’s Accounting records or Special Registers, as applicable.” This shifts the evidentiary standard from external validation to internal recordkeeping—essentially, a company’s own accounting becomes the primary proof, supplemented by supporting documentation (invoices, receipts, contracts). The approach trusts businesses to maintain honest books while reserving the Tax Administration’s right to audit and verify later if needed.

Scope and application

The updated interpretation applies broadly across industrial, commercial, and service sectors—including perishable goods trading, textiles, electrical manufacturing, and hydrocarbons. The decree acknowledges that different industries face different cost structures and shrinkage rates; a perishable goods trader naturally incurs spoilage, for example, while a service firm might face different necessary expenses.

Costs must remain necessary and inherent to the business activity, measurable, and genuinely incurred. A business cannot claim personal or unrelated expenses. The deduction must connect logically to producing income or maintaining the income-generating source. This standard—”necessary and inherent to the activity” with “real and reasonable cost”—provides a framework that is more objective than the previous rule but still sets boundaries.

Practical implications

For companies that had been denied deductions under the 2019 framework, this shift provides relief and clarity. A business that suffered losses in 2025 can now retrospectively claim deductions it may not have been able to recognise under the old rule (subject to the statute of limitations). Looking forward, businesses can plan capital expenditures and absorb operational costs with more confidence that they’ll be recognised.

The General Directorate of Internal Taxes retains authority to issue implementing guidance, circulars, and resolutions as needed. This suggests the tax authority will continue to clarify grey areas and respond to industry-specific questions, but within a framework that tilts toward deductibility rather than restriction.

The decree represents a notable policy shift in El Salvador’s tax environment—one that prioritises simplicity, transparency, and taxpayer protection over strict control-oriented interpretations.