US embassy cable - 05SANSALVADOR2689

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.