ISR Reform in El Salvador: what changed with expense deductions and how to understand it without overcomplicating it

The Legislative Assembly of El Salvador approved on May 7, 2026 a new authentic interpretation of article 28 of the Income Tax Law (ISR). Although the name sounds technical, the underlying topic is very practical: clarifying which costs, expenses, shrinkage and losses a company can deduct when calculating its taxable income.

The measure was approved with 57 votes and repealed the interpretation issued in 2019, on the grounds that there were still gaps and unclear criteria in the application of the regulation. It was also indicated that the new interpretation will enter into force eight days after its publication in the Official Gazette.

What does this mean in simple terms?

In simple words, the change seeks to tell taxpayers and the tax administration something very specific: yes, costs and expenses that are truly necessary to produce income or preserve the source that generates it can be deducted, provided they meet certain minimum conditions.

This includes not only traditional purchases or operating expenses, but also shrinkage, losses or expenses inherent to the economic activity, as long as they are real, reasonable, measurable, specific to the business and properly documented.

In other words: the authentic interpretation is not saying that "everything can now be deducted." What it is saying is that if a cost or expense is a natural part of the business operation and you can correctly demonstrate it, it should be treated as deductible within the ISR calculation.

What changed compared to what existed before?

This is the most important point of the reform.

The interpretation approved in 2026 returns to the 2019 approach, but adds two relevant clarifications. The first is that shrinkage or loss no longer needs to be recognized or certified by active organizations or regulatory entities to be deductible; it is now emphasized that it must be documented and recorded in the taxpayer's accounting or special records, as applicable.

The second clarification is even more practical: to admit that cost or expense as deductible, it will no longer be necessary for computed tax to result when establishing the taxable income. In other words, the deduction is not ruled out simply because no tax ends up being payable in that fiscal year.

That point may seem small, but in practice it carries a lot of weight for companies with tight margins, businesses with temporary operating losses or sectors where there is normal inventory deterioration, technical waste or unavoidable expenses tied to the activity.

What types of expenses does the law have in mind?

The interpretation expressly mentions that deductibility applies in industrial, commercial and service activities, and provides examples of sectors where these shrinkages or losses are easier to visualize: perishable goods, consumer goods, textiles, the electrical industry and hydrocarbons, among others.

But what is truly important is not the specific sector, but the criterion. The logic of the regulation is that the cost or expense must be:

  • necessary to produce income;
  • specific to the business;
  • exclusively intended for business purposes;
  • inherent to the activity;
  • real and reasonable;
  • measurable;
  • and properly supported. 

What practical problem does this interpretation attempt to solve?

The problem was a lack of uniformity. Although since 2019 an interpretation of article 28 already existed, doubts kept arising about when a shrinkage, loss or expense should be admitted as deductible and what level of certification was required for it.

The new interpretation attempts to reduce those doubts and send a more objective message: if the expense is directly linked to the economic activity, is reasonable, actually exists and is well documented, it must enter the deductibility analysis. Furthermore, the Assembly expressly stated that the change seeks to strengthen legal certainty, tax certainty and the uniform application of the regulation.

For companies and entrepreneurs, that means something important: the debate should no longer focus so much on whether the expense "sounds logical," but on whether it can be properly proven.

What a company should understand today

The most useful lesson from this reform is not "now I can deduct more." The correct lesson is this: now it is even more important to have your house in order.

Because the change does not eliminate the need for documentation. On the contrary: it makes it more important. For a shrinkage, loss or expense to be defensible as deductible, it must be properly documented and recorded. If documentation is lacking, if accounting is weak or if the expense cannot be clearly connected to the business activity, the problem does not disappear simply because a broader interpretation exists.

In that sense, this reform benefits above all those who already work in an orderly manner or decide to start doing so.

What should your company review?

If your company wants to correctly take advantage of this criterion, it is advisable to review at least the following:

  • whether the expense or loss is directly linked to the economic activity;
  • whether there is sufficient documentary support;
  • whether it is correctly recorded in accounting or special records;
  • whether the amount can be considered real and reasonable;
  • whether the company can explain why that cost was necessary to produce income or preserve its source;
  • and whether its internal recording and documentation policies are prepared for a potential tax review.

Watch out: this is not an "amnesty" nor an automatic deduction

A dangerous reading must be avoided. This interpretation does not automatically make any expense deductible. Nor does it replace the need for accounting, tax and documentary analysis.

What it does is clarify criteria and remove some interpretive barriers that existed since 2019. But the taxpayer still has to demonstrate that the expense is specific to the business, necessary, reasonable and properly supported.

The role of the DGII

Another relevant point is that the new regulation empowers the General Directorate of Internal Revenue (DGII) to issue guidelines, circulars, resolutions, guides and other administrative actions that facilitate the correct application of the authentic interpretation. This means there may still be subsequent technical development on how to document or apply certain assumptions in practice.

For companies, that means staying attentive not only to the approved decree, but also to the operational criteria that the Ministry of Finance issues afterward.

Conclusion

The new interpretation of article 28 of the ISR Law in El Salvador is relevant because it settles a discussion that for many companies was too ambiguous: which losses, shrinkages or expenses can truly be deducted.

The short answer is useful and simple: those costs and expenses that are real, necessary, specific to the business, measurable, reasonable and properly recorded and documented can be deducted, even if no computed tax ends up resulting in that fiscal year.

For some companies, this interpretation may provide more peace of mind. But for all it leaves the same lesson: in tax matters, the best defense remains a well-documented operation.

Frequently Asked Questions

It approved a new authentic interpretation of article 28 of the Income Tax Law to clarify which costs and expenses can be deductible.

No. It must be a real, reasonable, necessary expense or cost, specific to the business, linked to the economic activity and properly documented and recorded.

It was clarified that the shrinkage, loss, expense or cost must be supported in the taxpayer's accounting or special records, and that it will not be necessary for computed tax to exist in order to admit its deduction.

Companies and taxpayers in industry, commerce and services that incur shrinkages, losses or expenses inherent to their activity and can properly document them.

Yes. The interpretation empowers the DGII to issue guidelines, circulars, resolutions and guides for its correct application.

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