Branch vs. Local Company: Legal Options for Foreign Companies in El Salvador

Isabel Bustamante, Associate at ARIAS El Salvador, a specialist in Corporate and Commercial Law, shares this article on the options available to foreign companies seeking to establish their corporate presence and commence operations in the country. 

In recent years, El Salvador has been positioning itself as a destination of interest for foreign investment, both due to reforms aimed at facilitating business and its strategic location within the Central American region. According to records shared by the Central Reserve Bank, foreign direct investment in El Salvador has increased, making it pertinent to note that foreign companies interested in investing in El Salvador often face a key initial decision: how to establish themselves and which legal vehicle to use. In this process, it is common for them to seek local legal advice to evaluate these alternatives. 

In this regard, Salvadoran legislation mainly offers two alternatives: (i) the establishment of a branch of the foreign company, or (ii) the incorporation of a local company under Salvadoran law, wholly or partially controlled by the parent company. 

Although both structures allow the conduct of economic activities in the country, their requirements and their legal, operational, and risk implications differ. This distinction is not merely formal but rather has direct consequences in terms of legal personality, patrimonial liability, representation regime, and perception by third parties. 

With the aim of providing a comprehensive and practical overview, this article analyzes the main elements that foreign clients should consider when evaluating these options, their differences, similarities, and applicable advantages. First, it is essential to analyze each of them: 

The Branch of a Foreign Company 

The branch of a foreign company is an extension or permanent establishment of such company within Salvadoran territory, capable of assuming obligations through contracts with third parties, creating commercial relationships, and carrying out economic activities in general. However, from a legal standpoint, the branch does not constitute a legal entity separate from the parent company but rather acts as a continuation of the latter within the country. 

This characteristic is fundamental to understanding all the legal implications of this structure. The branch lacks its own independent patrimony, does not have full legal autonomy, and always acts in the name and on behalf of the foreign company that establishes it. 

In practice, the branch allows the foreign company to operate directly in El Salvador without incorporating a new company, maintaining a single corporate identity and a centralized structure. 

           How is it established? 

For a foreign company to legally operate in El Salvador through a branch, it must comply with a series of requirements that involve different stages before three essential institutions: the Ministry of Economy, the Registry of Commerce, and the Ministry of Finance. 

Before the Ministry of Economy, the investment must be registered. For this registration, the following must be evidenced: (a) the legal existence of the parent company, through corporate documents that include the company’s general information, duly legalized and apostilled; (b) the company’s intention to establish a branch in the Republic of El Salvador, through a resolution of the competent body of the foreign company authorizing the establishment of the branch in El Salvador; and (c) the initial capital contribution as a new investor in El Salvador, through the corresponding documentation and its opening balance sheet. 

Before the Registry of Commerce, the resolution issued by the Ministry of Economy is filed together with the related documentation, and authorization is requested to carry out acts of commerce in El Salvador. 

Subsequently, before the Ministry of Finance, the assignment of the Tax Identification Number (NIT) and the Taxpayer Registration Number (NRC) is processed, which are indispensable requirements for the branch to validly operate in El Salvador, comply with its tax obligations, and fully exercise its capacity to enter into obligations with third parties. 

To complete this process, a power of attorney must be granted by the parent company so that an attorney-in-fact may act on its behalf; such attorney-in-fact must be permanently domiciled in the country. These requirements seek to ensure that Salvadoran authorities and third parties have clarity as to who is responsible for the branch’s operations, what its representation structure is, and what the patrimonial backing of the entity operating in the country is. 

          Who signs on behalf of the branch? 

The branch does not create a new or separate corporate governance structure in El Salvador. The only existing corporate governance is that of the parent company, which continues to direct and make strategic and management decisions, without the existence of a local board of directors, administrator, or independent corporate structure. 

For this reason, operations in El Salvador are carried out exclusively through one or more attorneys-in-fact, domiciled in the country and appointed by the parent company, who act in its name and on its behalf, in accordance with the powers expressly granted to them. Such attorneys-in-fact do not manage the company nor make corporate decisions; rather, they execute acts and enter into contracts within the limits of the mandate conferred. 

In practice, this means that the branch’s capacity to act in El Salvador will depend directly on the scope of the powers granted to the attorney-in-fact. When such powers are broad, local operations may be carried out efficiently; however, when the mandate is limited or restrictive, many decisions must continue to be approved by the parent company’s corporate governance, which may generate delays or operational rigidities in day-to-day management, contracting with third parties, and compliance with obligations before Salvadoran authorities. 

          Legal Liability of the Parent Company 

One of the most relevant and, in many cases, decisive aspects when evaluating the branch structure is the liability regime. 

Given that the branch lacks its own legal personality and does not constitute a subject distinct from the foreign company, the acts carried out in El Salvador through such structure are directly attributable to the parent company. Consequently, the foreign company is liable for the obligations incurred through its branch, as there is no patrimonial separation nor a legal regime of limitation of liability applicable to this structure. Nevertheless, in tax matters, liability is limited to the investment and the profits generated locally, as tax legislation establishes such distinction. 

From a legal perspective, this characteristic provides greater security to third parties; however, from the standpoint of the foreign company, it implies direct patrimonial exposure, which must be carefully evaluated, particularly in regulated or high-risk sectors. 

The Local Company Incorporated in El Salvador 

A local company is a distinct and independent legal entity, incorporated in accordance with Salvadoran laws, even when its shareholders are foreign companies. Unlike the branch, the local company has legal personality, its own assets, and its own management bodies, as well as a legal identity separate from that of its foreign shareholder or partners. 

In El Salvador, the corporate forms most commonly used by foreign investors are the corporation (sociedad anónima) and the limited liability company (sociedad de responsabilidad limitada), without prejudice to other available structures, although the choice depends on the size, nature, and objectives of the business. 

The main characteristic and advantage of the local company is the patrimonial separation between the foreign company (as shareholder or partner) and the company incorporated in El Salvador. In general terms, the liability of the partners is limited to the amount of their contributions, subject to the caveats and exceptions expressly provided by law. 

This separation makes it possible to mitigate legal and financial risks, structure more complex operations, and facilitate relationships with third parties that prefer to deal with fully autonomous local entities. 

          How is it incorporated? 

For a foreign client, there are different options to incorporate a company; the main ones are the following, together with their general requirements: