Exemption of withholding duty on Christmas bonus payment for fiscal year 2009

We hereby inform our clients and friends that on December 3rd, 2009 the Congress of El Salvador (“Congress”) approved Decree No. 215, which establishes that, temporarily, employers are not to withhold income tax over monies to be paid as Christmas bonus to public and private employees.

According to information provided by the Official Gazette, the Decree is scheduled to be published in the December 4th, 2009 edition, therefore Decree 215 came into effect and has been in force since its publication date in the Official Gazette (December 4, 2009).

In relation to the Decree’s content, it is important to point out that it exempts withholding agents of their duty to deduct and withhold income tax established by the Income Tax Act. However, it does not regulate in a clearly manner if income received as Christmas bonus will or will not be taxed (i.e. must be declared as taxable income in the 2009 tax returns).

This issue has already been discussed and remarked on by Congress representatives and commented upon in the major newspapers, so we expect that a new decree will be issued to clarify if income from Christmas bonuses will or will not be subject to income tax retention and if it will be considered as an nontaxable income for annual tax returns to be filed in 2010.

We will advise as soon as we obtain more information about any changes or initiatives regarding this topic.

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