A Guide To Corporate Inversions In Bitcoin City

A corporate inversion (also called a tax inversion), is a restructuring process where a foreign company is created in a more favorable tax jurisdiction, and the currently operating parent company is completely purchased by the foreign company. In this way, the original parent becomes a subsidiary of the foreign parent, thus moving its tax residence to the foreign country. Businesses may choose to do this not only to relocate operations overseas to reduce their income tax burden, but also to gain preferential access to additional markets, labor pools, and generally to gain more flexibility when operating internationally. But primarily, corporate inversions benefit shareholders because inversions typically have a positive net benefit as the reduction in corporate income tax exceeds the shareholder’s personal tax liability. When combined with a residency package for the shareholders themselves, the benefits can be significant – especially when relocating to a special economic zone such as Bitcoin City, or throughout El Salvador where there is a ‘territorial tax system’ (i.e. no taxes on foreign income) and otherwise the business and personal income, municipal, payroll, property, and capital gains taxes are zero!

Let’s explore what structures are available to you in this new economic zone. Companies in El Salvador can take on various legal forms, depending on their business needs and requirements. Typically 3 types of legal entities are established in El Salvador: Limited Partnerships, Corporations (S.A. de C.V.), and foreign branch offices. Limited Partnerships work best for specialized small firms, like law firms or medical practices. Foreign branch offices allow for international businesses to operate here while keeping their tax residency overseas. But the Sociedad Anónima de Capital Variable (S.A. de C.V.), which is a limited liability corporation with variable shares, is the most widely used legal entity among foreign and local investors.

One great advantage of this legal entity type is that the shareholders can indicate several business activities during the registration process, even though only a small number of those are ultimately executed. Up to 100% foreign ownership is allowed, and the company can sponsor foreign employees, but at least 90% of the employees must be locals. There are no capital controls and the minimum share capital is quite low – only $2000, which must be verified by an independent auditor. Finally, there must be at least two shareholders, and a fiscal address and local legal representation is required.

Basic Steps to Creating a Corporation in El Salvador and Performing a Corporate Inversion

We’ll begin with the creation of the S.A. de C.V.

1. The Principal(s) (existing business or new shareholders) must establish three options for a company name not already in the Commercial Registry. Due to the fact that the vast majority of business names in El Salvador are Spanish, most English options will be available, but it is still necessary to conduct due diligence around similar names to avoid potential future conflicts. Once established, the name and relevant marks should also be registered as Trademarks, which is a separate process.

2. The Principal(s) should identify the business activities the company will engage in (aka ‘Corporate Purpose’). It is recommended to list as many potential activities as possible, since you aren’t required to engage in all of them, and adding more later requires additional registry.

3. Our team will generate various Powers of Attorney to draw up the necessary forms and obtain local tax ID numbers for shareholders. To do this, we will require high-resolution copies of the ID page of your passport, documents that prove the legal existence of the company (company statutes) and certification of the legal representation of the company if the Principal(s) are legal entities and not natural persons. The Powers will need to be witnessed by a Salvadoran notary (all Salvadoran notaries are lawyers, but not all Salvadoran lawyers are notaries). This is easiest to do while you are ‘in-country’ but if you are abroad, you may visit a Salvadoran embassy or consulate, where this service is offered for a fee. The original documents must be returned by post, as facsimiles aren’t sufficient.

4. Our team will pay 25% of the share capital into a certified check, drawn by a local bank to serve as a temporary security for the business. This transaction may also be performed ‘in specie’ using Bitcoin, but the use of US Dollars is highly preferential, due to market volatility and the current wording of securities law in El Salvador.

5. Our team will create, and the Principal(s) must sign, the company ‘Constitution’. Procedures for obtaining these signatures are as described in paragraph 3 above.

6. Our team then registers the company Constitution, bylaws, initial balance, audits, and additional relevant documentation and obtains the license of commerce.

7. Our team will then obtain a local company tax ID number (also known as NRC).

8. Our team will open the corporate bank account. Again, this requirement may be satisfied with Bitcoin held in trust by the corporation, but the use of US Dollars is preferential at this time for the reasons listed above.

9. Our team then deposits the required minimum capital to activate the corporate bank account.

10. Finally, our team registers the company with all relevant government authorities.

Upon completion of the registration, we will compile all the forms, affidavits, registrations, minute book, share issuance log, El Salvador share certificates, invoices, and receipts into a corporate book for delivery to the Principals abroad, or kept in our offices for future use.

Notes:

• All foreign documents must be duly registered. In the event that the shareholders are foreign companies, the foreign registration documents should also be duly apostilled or authenticated.
• A shareholder takes the form of a natural or legal person (i.e. an individual or a company) that owns part of the company corresponding to the share contribution the person has made. Additionally, the share contribution is significant as the shareholder´s liability is limited to that amount. In El Salvador, the Corporate Law denotes that the S.A. de C.V. requires two or more shareholders in order to conduct business. Local banks will request additional documentation if the company shareholder is a legal person (i.e. a company).
• In the event that the shareholders cannot appear before a public notary for the constitution of the company (or as a matter of convenience), they can grant a power of attorney to an individual to constitute the company on their behalf.
• The company can be administrated by a Board of Directors or by a Single Administrator. The Board of Directors must be established by at least two persons and one substitute. Single administration is formed with one person and his/her respective substitute.
• The Single Administrator is the only person who can act as the legal representative of the company.
• Apart from being the starting capital of the company, the share capital contribution plays a major role when requesting highly-graded bank loans or entering a joint venture.
• If desired, the share capital can be increased or decreased at any point during or after the incorporation process, but the share capital should be an amount that reflects the company’s size and business operations.
• The Local Director/Legal Representative represents the company and its operations. The Local Director plays an important role in the company to ensure that the company operates in accordance with local law and regulation.
• The certificate which establishes the Legal Representative is valid for seven years, and may be renewed for seven year periods. Furthermore, a legal substitute for the local director must be appointed.
• A fiscal address for registration is a necessary requirement for all legal entities to be established in El Salvador and must be recorded by the Salvadoran tax authority, Ministerio de Hacienda (https://mh.gob.sv).
• In turn, the newly established company receives its unique taxpayer number (NRC), which identifies the registered address of the company, and as such, will be used for all tax purposes and other official communication.
• Newly opened bank accounts may have restrictions on sending and receiving money internationally for 6 months. This is bank policy and not a legal requirement.
• All changes to the balance of a company must be reported monthly, and tax payments made concurrently.
• Every Company in El Salvador is required to have a Commercial License. The purpose of the license is to establish that the company is owned by the shareholders and has the ability to engage in commercial activities.
• Without the license, the company cannot legally operate in El Salvador. This license must be renewed every year and must be signed by the legal representative or by a third party who has been granted a power of attorney to renew the license.
• The company financial statements are legal obligations that every company must present at the moment of its registration and, addition, at the end of the fiscal year. The financial statements must be elaborated by a public accountant.
• Additionally, issuance of equity on the Liquid Network is available. Issuing equity is a complex legal procedure, and if you are a foreign national, you are encouraged to seek outside legal counsel in your jurisdiction of origin before attempting a private placement or public offering.
  

Preparing the existing business for the inversion

1. Identify the entire holdings and current valuations thereof for the existing business and include them in a statement, preferably authenticated by an accountant in the original jurisdiction.

2. Prepare a ‘Share Sell Agreement’ in the original jurisdiction, taking care to note any ‘anti-inversion policy’ that may exist in the original jurisdiction. You are advised to seek counsel from a competent attorney familiar with your jurisdiction to ensure compliance.

3. It is highly advised that the Principal(s) resolve any outstanding tax liability and request a statement thereof from the relevant authorities concurrent to the date of the proposed sale.

Preparing the new business for the inversion

1. Prepare a ‘Share Purchase Agreement’ in El Salvador. A Salvadoran attorney is required and the Agreement must be prepared on Protocol Paper.

2. The Agreement must be translated by a certified Salvadoran translator if the Principal(s) are not Spanish speakers or the country of original jurisdiction is not a Spanish-speaking country, and witnessed by a Salvadoran notary.

Complete the inversion

1. The Principal(s) of the existing and new businesses must execute the Agreements concurrently, and, depending on the requirements of the original jurisdiction, a notary or person of standing from that jurisdiction may be required to witness the signatures.

2. The Agreement must be translated by a certified Salvadoran translator if the Principal(s) are not Spanish speakers or the country of original jurisdiction is not a Spanish-speaking country, and witnessed by a Salvadoran notary.