| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 0 | This score was adjusted downward from 2005. There are no specific regulations allowing for funds to form and operate. Hence there are only offshore funds (January 2007 interview). |
| Tax treatment of VC/PE funds & investments | 3 | This score was revised upward from 2005. El Salvador has a reduced tax regime for capital gains, no taxation of dividends if the remitting firm has met tax obligations (EIU, Country Commerce 2006). Pass through is not automatic, but must be structured carefully (November 2005 and January 2007 interviews). |
| Protection of minority shareholder rights | 2 | This score was revised upward from 2005. Minority shareholders can convene a board meeting but have few other rights, such as participation on audit committees or access to information. No legal requirements exist on the percentage of shares that constitute effective control, so applicable rules must be written into each company's statutes or bylaws. Minority rights must be dealt with in shareholders' agreements, and—given the slowness of the judicial system—through arbitration clauses. (EIU, Country Commerce 2006; World Bank, Doing Business 2006; January 2007 interview). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 1 | This score was revised downward from 2005. Somewhat of a moot issue because there are no provisions for locally established funds. There are no formal restrictions on insurers, but is in practice limited by size of the insurance market, which remains small and largely centres on property and casualty coverage (EIU, County Commerce 2006). December 2005 changes to pension fund laws increased from 10% to 30% the share of their capital they may invest in foreign shares listed on the Salvadoran stockmarket (Diario El Mundo). There are only two pension fund managers. |
| Protection of intellectual property rights | 1 | EIU Risk Briefing score. In December 2005 the Salvadoran legislature approved a total of 66 changes to the 1993 IP bill, at the behest of the United States and as part of the requirements for the Dominican Republic–Central American Free-Trade Agreement. Among the changes is the recognition of piracy as a crime; hence, it is punishable by the law. In May 2006 the finance minister, Yolanda de Gavidia, met with representatives of producers and vendors of illegal CDs and DVDs to inform them that from now on piracy will be prosecuted. Software piracy continues to plague El Salvador. In the absence of government enforcement of software-protection laws, the Business Software Alliance, a private industry group, began filing civil suits in 1999. That appeared to have some effect, especially among large high-profile companies. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 2 | The Commercial Code, Code of Mercantile Processes and Banking Law contain sections on bankruptcy, but there is no separate bankruptcy law or court (US Country Commercial Guide 2006). There is no partner liability in legal actions against the firm beyond its capital share (though managers and board members are liable), except in cases of fraud (Word Bank, Doing Business 2006; November 2005 and January 2007 interviews). Creditors have fairly strong de facto and de jure rights (IDB 2005). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 2 | Average of three EIU Risk Briefing scores. Aside from the banking sector, there are few other financial institutions in El Salvador. Although the country's savings-and-loan associations and finance companies have upgraded to full-fledged banks, most foreign firms still bring in long-term finance from outside (EIU, Country Commerce 2006; January 2007 interview). |
| Registration/reserve requirements on inward investments | 3 | The Central Reserve Bank (the central bank) oversees persons and institutions that carry out foreign-exchange transactions, which remain unrestricted. The origin and destination of any transaction exceeding US$10,000 must be reported to central bank officials. The destination of all transactions involving the purchase of forex must be reported to the Ministry of Finance for tax purposes. There are no reserve requirements and no exchange controls (EIU, Country Commerce 2006; January 2007 interview). |
| Corporate governance requirements | 1 | There are only minimal requirements in place such as holding annual meetings, publishing financial reports annually, allowing minority shareholders to call a meeting, and registering companies in the commercial registry (EIU, Country Commerce 2006). There are weak rules on corporate disclosure, director liability, and the ability of shareholders to sue (World Bank, Doing Business 2006). Shareholders' agreements and arbitration clauses are often deemed necessary (January 2007 interview). |
| Strength of the judicial system | 0 | EIU Risk Briefing score. The courts are inefficient and subject to political manipulation; years of official interference have left a culture of corruption. Some legal reforms have been introduced: high-court judges are no longer selected for purely partisan purposes, and some tainted and/or unqualified judges have been removed. Even so, the judiciary labors under a cloud. Resolving business disputes through the court system can be costly and unproductive, and rulings are sometimes not enforced. Where possible, arbitration clauses, specifying a foreign venue, should be inserted in contracts. |
| Perceived corruption | 0 | EIU Risk Briefing score. The government has made a concerted effort in recent years to fight corruption; bribery is a criminal act, and violators are subject to fines and jail terms. Despite this, pay-offs in the political and judicial systems are not uncommon, and institutions are weighed down by a general perception of corruption and incompetence. This spills over into the commercial and business arena, where companies are sometimes expected to pay bribes to transact routine government business. |
| Quality of local accounting industry/use of international standards | 4 | International norms are used in El Salvador's fully dollarized economy (Conferencia Interamericana de Contabilidad). International accounting firms are present and competent (January 2007 interview). |