Opportunities for foreign bitcoin-related investors in El Salvador 

June, 2021 - Diego Martin, Felix Canizales

In El Salvador, the Bitcoin Law was approved by the Legislative Assembly and published in the Official Gazette last June 9th of this year, establishing avacatio legisof ninety days from its publication; in that sense, its entry into force is scheduled for next September 7th.


There are still several questions about how this new law will be implemented in the country, especially considering that we are pioneers in the adoption of Bitcoin as legal tender; however, to date there has been great interest from non-domiciled investors who wish to take advantage of this opportunity to establish Bitcoin and cryptoassets related operations in El Salvador.


Considering the rise and worldwide attention that Bitcoin is currently having, one of the main objectives of the government is precisely to attract foreign investment; therefore, in the following lines we will develop the most important points, from a legal perspective, that a foreign investor should consider when coming to establish an operation in El Salvador, especially from a migration, tax and operational point of view.


Windows of opportunity in El Salvador:


Bitcoin’s current market capitalization is more than 638 billion US dollars, as of the date of publication of this article, with only 12 years of existence. This gives an idea of the size of the Bitcoin market, and thus serves as an indication of the investment opportunities that a market of this size can provide.


To date, there is a wide variety of ways to take advantage of Bitcoin as a form of investment, for example: mining centers, establishment of exchanges, digital wallets, investment advice, advice on its implementation, among others.


I.Migration opportunities:


In El Salvador, previous governments have bet on the tourism sector as an important source of income for the country. In this regard, in the year two thousand nineteen, the new Special Law on Migration and Foreigners Affairs was approved, which has been specially designed to encourage and promote the entry of foreigners into our country in order to promote investment and tourism. This law offers simple and quick procedures for people interested in visiting or setting up operations in our country.


Specifically, in the case at hand, we must consider three important points:a.Entry permit (visa),b.Permit to stay (residence) andc.Obtaining nationality.


a. Entry permit: In El Salvador, nationalities considered as Category A do not require any type of permit to enter the country. Under this category we can find nationalities such as American, Canadian, most European nationalities, all Central American nationalities, among others. If you do not fall under this category, you will need to apply for a visa prior to entering the country, which can take between 5 to 20 days. Finally, there is the possibility to apply for a multiple visa for investors aimed at those persons who wish to establish operations in the country and by virtue of this will be visiting the country constantly, but who will not reside there.

b. Residence permit: The main migration status for those who wish to reside in the country as investors is the Temporary Residence for Business. This status is aimed at those who enter the country with the purpose of carrying out promotional activities or identifying investment opportunities. It has an extendable validity of up to two years and is processed in a maximum of 45 days.

c. Obtaining Salvadoran nationality: In our country there is no automatic nationalization, it is necessary to be a resident beforehand. In this sense, Salvadoran nationality is granted to persons with residence in the country for periods ranging from 1 to 5 years, depending on the nationality of origin.


Finally, it is worth mentioning that President Nayib Bukele has already expressed his commitment to grant special prerogatives to foreigners who come to invest in Bitcoin or related issues in the country.


II.Fiscal opportunities:


First of all, it is important to emphasize that in our country Bitcoin has been given the status of currency, unlike other countries in which it is considered an asset. This differentiation is important when talking about tax issues, since being considered as a currency and not as an asset (according to article 5 of the Bitcoin Law) it will not be subject to capital gains tax. This is a great advantage for Bitcoin investors who profit from the price fluctuations that Bitcoin may have over time. In other words, investors who view Bitcoin as an asset on which they will invest over the long term are the ones who will particularly benefit from this regulation.


Articles 4 and 6 of the Bitcoin Law should also be considered; the former stipulates that tax contributions may be paid in Bitcoin and the latter that for accounting purposes the US dollar will be used as a reference. These two articles allow individuals to use the high volatility of Bitcoin to their advantage and open up the opportunity to reduce their tax impact. To visualize this opportunity we will use the following example:


“John has a tax liability arising from his commercial operations equivalent to USD $30,000. John has the option to pay this tax in Bitcoin or in US Dollars, and he holds both currencies. Today John checks the price of Bitcoin and notices that the exchange rate is as follows: 1BTC = USD $30,000; so he has the option of paying the tax with 1BTC or with $30,000. The next day John checks again and notices that now the exchange rate is like this: 1BTC=$34,000, so he decides to pay the tax this day using Bitcoin since the exchange rate favours him in the sense that now he no longer needs to pay 1BTC in full to comply with his tax obligation, but only has to pay 0.88BTC, saving 0.12BTC equivalent to $4,000.”

Finally, El Salvador offers a tax system in which no property taxes are collected. In that sense, persons interested in setting up operations in the country and establishing physical offices or acquiring a residential property should consider this reduction in their total relocation costs for their benefit.


iii.Operational opportunities for the use of Bitcoin:


As I mentioned earlier, in most countries Bitcoin is considered an asset and therefore people who decide to acquire it, visualize it as an investment rather than a means of payment. Currently this perception is logical considering the few places where Bitcoin is accepted. However, it is important not to lose perspective on the original purpose of this currency, which is to become a universal decentralized means of payment; one that helps mitigate global problems such as financial inclusion, high transaction costs and access to credit.


With this in mind, El Salvador is the first country in the world to allow the use of Bitcoin for its original purpose. According to article 7 of the Bitcoin Law, all economic agents must accept Bitcoin as a form of payment. The president has also clarified that while all economic agents must accept Bitcoin, they are not obliged to receive Bitcoin. This difference between accepting and receiving is important, since through the digital wallet implemented by the government (“Chivo Wallet”), both the person paying and the person accepting the payment will be able to decide in which currency they wish to make their transaction, in other words, it will be possible for a person to pay with Bitcoin but the receiver will get dollars; and vice versa. It is important to stipulate that Chivo Wallet is also compatible with other digital wallets.


Through this methodology, any person (national, tourist or investor) now has the possibility to carry out economic transactions using the cryptocurrency with the majority of Salvadoran economic agents, including those who do not feel comfortable with the use of Bitcoin. It is worth mentioning that a similar strategy has been successfully used in El Tunco Beach (in the Bitcoin Beach project) for several years now. In other words, El Salvador is currently the only country in which Bitcoin investors can make effective use of their investments.


Finally, and in consideration of the current environmental controversy surrounding Bitcoin due to its high energy consumption in its mining process, a project is being developed in El Salvador to generate renewable, clean and cheap energy, making use of the active volcanoes in our country (geothermal energy), to mitigate this environmental contingency. This project will be very attractive and useful for those investors specifically involved in Bitcoin mining.


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