Identifier
Created
Classification
Origin
05SANSALVADOR2689
2005-09-28 20:27:00
UNCLASSIFIED
Embassy San Salvador
Cable title:  

REGISTERING A BUSINESS IN EL SALVADOR

Tags:  KMCA EINV ES 
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This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 03 SAN SALVADOR 002689 

SIPDIS

STATE PASS USAID FOR SBRENT AND USTR FOR FSIDDIQI
STATE ALSO PASS MCC FOR FMCNAUGHT
USDOC FOR 3134/USFCS/OIO/WH/MKESHISHIAN/BARTHUR
USDOC ALSO FOR 4332/ITA/MAC/MSIEGELMAN
TREASURY FOR MFRANCO

E.O. 12958: N/A
TAGS: KMCA EINV ES
SUBJECT: REGISTERING A BUSINESS IN EL SALVADOR


Summary
-------
UNCLAS SECTION 01 OF 03 SAN SALVADOR 002689

SIPDIS

STATE PASS USAID FOR SBRENT AND USTR FOR FSIDDIQI
STATE ALSO PASS MCC FOR FMCNAUGHT
USDOC FOR 3134/USFCS/OIO/WH/MKESHISHIAN/BARTHUR
USDOC ALSO FOR 4332/ITA/MAC/MSIEGELMAN
TREASURY FOR MFRANCO

E.O. 12958: N/A
TAGS: KMCA EINV ES
SUBJECT: REGISTERING A BUSINESS IN EL SALVADOR


Summary
--------------

1. The World Bank's "Doing Business in 2006" reports that
it takes 40 days and about $2,775 to register a limited
liability company (corporation) with start-up capital of
$23,500 in El Salvador. We believe the process takes 40
days but that the actual cost is only about $775, $2,000
less than the World Bank reports. The Salvadoran
Government, in addition to efforts to correct the World Bank
survey, is actively pursuing further efficiency
improvements. Meanwhile, private sector representatives
confirm that it is possible to register a business in 40
days at a cost of under $775, but they question whether
there exists political will to revise the commercial code
and revamp the registration process to make further
improvements. End summary.

A Detailed Look at the Registration Process
--------------

2. The World Bank's "Doing Business in 2006" reports on the
time and cost needed to register a limited liability company
(corporation) with start-up capital of $23,500 in El
Salvador. The first step is to make available minimum start-
up capital of at least $2,857.14 (1 day). [Note: Other
business structures, such as sole proprietorship, do not
require start-up capital and include many fewer steps. End
note.] Next, a Salvadoran notary must prepare articles of
incorporation in a formal legal document (2 days). Evidence
of start-up capital and the articles of incorporation are
then submitted to the National Registry Center (CNR) for
approval, along with a registration fee of $117.20. The CNR
verifies that the company name is not in use and then
provides a registration receipt (2 days). The corporation is
now a legal entity, but not yet licensed to operate.


3. The corporation must then apply for a tax identification
number and value added tax identification number from the
Ministry of Finance by presenting a copy of the registered
articles of incorporation and paying a $0.23 fee (1 day).
With the tax registration complete, the next step is to
register with municipal authorities (1 day),the Ministry of
Labor (1 day),the Social Security Institute (1 day),and
the Pension Funds Administrator (1 day). Upon completion of

these steps, the Ministry of Economy's Census and Statistics
Office must approve the corporation's chart of accounts and
initial audit statement--there is an $8 fee associated with
this step, in addition to the fees charged by the accountant
and auditor to prepare the documents submitted (1 day). The
corporation then applies for a business license from the CNR
and also registers its initial financial statement, a
process that costs about $142.86 (10 days). Once approved,
notice of the license must be published in the official
gazette three times at three-day intervals (9 days). One
final requirement identified by the World Bank is that the
corporation makes a company seal, at a cost determined by
the seal maker (1 day). However, Ministry of Economy
officials report there is no requirement to prepare such a
seal.


4. If the process is initiated on a Monday, after about 40
calendar days, it's officially time to open for business.
Costs include $268.29 in government fees (calculated in
colones, the currency used before dollarization) plus fees
for services provided by notaries, lawyers, and accountants.
The World Bank estimates these fees at about $2,500.
Although the methodology used to select law firms is not
clearly described, the five firms surveyed in El Salvador
are among the most expensive in the country, catering
primarily to foreign investors and offering service in
English through global networks. Many other firms offer
services to register a corporation of the same size used in
the World Bank study for between $300 and $700 (including
preparation of a chart of accounts and audit statement).
Thus, the total cost to register a business is more in the
area of $768.29 (using a $500 estimate for legal and
accounting fees),far less than the $2,775 estimated by the
Word Bank and only 32.7 percent of GDP per capita.


5. According to last year's "Doing Business in 2005," it
took 115 days to register a business. So the question is,
how did the Salvadorans cut 75 days in one year? Officials
at the ministry of Economy's National Investment Office
(ONI) insist that law firms surveyed last year simply didn't
do their homework well and responded based on their
perceptions of registration experiences from several years
ago, before ONI was up and running and before the CNR had
revamped its operations--see paras. 6 and 7.

Government Efforts to Streamline
--------------

6. ONI was established in 2000 with the passage of a new
Investment Law; it serves as a one-stop window, and many of
the steps described above can be completed there, including
transactions with the CNR, Ministry of Finance, Social
Security Institute, Ministry of Labor, and Census and
Statistics Office. The Ministry of Economy has also created
a National Center for Micro and Small Business (CONAMYPE)
that provides similar one-stop services for its
constituents.


7. Meanwhile, the CNR has undergone a complete
transformation in recent years, and the time noted for
completion of steps listed above is much shorter than it had
been just several years ago. Through the program "Efficient
El Salvador," coordinated by the Technical Secretariat at
the Office of the President, the CNR has drafted a bill that
would allow a corporation to input its articles of
incorporation directly into an electronic legal template at
the CNR, eliminating the requirement that they be prepared
by a notary. Staff at the Technical Secretariat are hopeful
that the legislation will be ready for approval before the
end of 2004.


8. What the 2000 Investment Law did not achieve, however,
was to update the business registration procedures
stipulated in the commercial code. While ONI does provide a
simplified approach to completing the numerous steps
required to register a business, it does not integrate the
process in any way. On September 8 and again on September
13, Technical Secretary Eduardo Zablah told the DCM that the
government would undertake a comprehensive review of the
business registration process, including necessary legal
reform. Zablah's staff later told Econoff that within a
month a special commission led by former Vice President
Quintanilla Schmidt would be formed to study the issue. No
timeline was given for completion.

The View from the Private Sector
--------------

9. Waldo Jimenez, a researcher at the National Association
of Private Enterprise (a union of business associations
representing large and small businesses),told Econoff that
he did not believe the government would undertake
substantive reform on business registration. He noted that
registration costs--in terms of direct fees and time spent--
had been for years a prominent agenda item for discussions
between the private sector and government. He did
acknowledge that there had been improvements in recent
years, pointing specifically to ONI, but was concerned there
was no political will to go further and streamline the
commercial code.


10. Enzo Betaglio, Executive Director of the American
Chamber of Commerce in El Salvador (AmCham),told econoff
that he consulted with several local law firms and they
estimate registering a business takes about 40 days and
costs $1,600. He also noted that the firms he contacted,
all AmCham members, are among the most expensive in the
country. Max Portillo, President of the Association of
Small and Medium-sized Businesses in El Salvador, told
Econoff that a well-informed entrepreneur could in fact
register a business in 40 days and for maybe even less than
$775. However, he added that among the businesses his
association serves, there is scant knowledge of government
regulation, and much time is often lost figuring out how to
proceed. He also emphasized that for small businesses,
these transaction costs are relatively high and are a
significant deterrent to entering the formal economy.
Franlin Montano, Executive Director of the Salvadoran
Association of Microfinance Organizations, reported that
given the information gaps, 60 days is a more typical
timeframe for completion of business registration
procedures.

Comment
--------------

11. The government has made credible efforts to streamline
business registration procedures, especially through ONI and
the CNR. The World Bank should correct the record and
significantly lower its estimate of the cost of registering
a business: a more accurate estimate would be about $775, 33
percent of GDP per capita.


12. There remains plenty of room for improvement in the
process, however. For example, information dissemination
remains weak. Businesses seldom have perfect knowledge of
the steps required to get licensed (the World Bank study
assumes perfect knowledge),and this is especially true
among small businesses. Expanding the services offered by
CONAMYPE would be one way to help close this information
gap.


13. On the legislative front, revising the Commercial Code
should be another priority to allow the introduction of a
consolidated business application that feeds into a shared
database. Realistically, we believe such a reform is
unlikely in the near future, given the upcoming elections--
the topic has not featured at all on the legislative agenda,
although the Supreme Court has said that they have been
working on this. Zablah's comments to the DCM on September
8 and 13 were the first we had heard from the executive
branch on this subject. It is a promising sign that Zablah
followed up with his staff after those meetings to request
the establishment of a commission on the topic of doing
business. End comment.