Discusses distribution network from how products enter to final destination, including reliability of distribution systems, distribution centers, ports, etc.
Well-known U.S. products are often imported via distributors and not directly from the manufacturer. However, a product may gain brand recognition before a formal supplier/distributor relationship is established. Owners of small stores often travel to the United States to purchase small quantities of products for resale, especially for used vehicles, auto parts, clothing, jewelry, cosmetics, and certain household goods.
Most containerized imports enter via Guatemala and Honduras and are then trucked to El Salvador. Little cargo enters through El Salvador’s Pacific maritime Acajutla Port, which was built to manage bulk exports and imports. Air cargo enters via the international airport. Major distribution centers are located in free trade zones. Large distributors usually import consumer and non-consumer products and sell to wholesale distributors or directly to the retail stores. Large department stores and importers of machinery and raw materials buy directly from U.S manufacturers, consolidate shipments and then export to El Salvador.
El Salvador follows the international commercial terms (INCOTERMS) for drafting contracts to stipulate the obligations of buyer and seller. All the INCOTERMS that apply to sea and inland waterway transport are implemented and accepted, among them: Free Alongside Ship (FAS), Free on Board (FOB), Cost and Freight (CFR), Cost, Insurance and Freight (CIF), as well as those that apply to any mode of transport, Ex Works, Free Carriers, Carriage Paid to, Carriage and Insurance Paid to, Delivered at Terminal, Deliver at Place and Delivered Duty Paid.
Using an Agent to Sell US Products and Services
The use of an agent or distributor is a proven market entry strategy for El Salvador. For most products and services, one agent for the country is sufficient as commercial activity is concentrated in San Salvador. An exclusive territorial contract is most recommended only when the business relationship has proven to be stable, professional, and profitable for both parties. U.S. companies must include CAFTA-DR provisions when drafting distributorship agreements with Salvadoran companies. The full text of CAFTA-DR Chapter 11 (Cross-Border Trade in Services) can be found in the following website: CAFTA-DR Chapter 11
U.S. companies should become familiar with Sections “B” and “C” of Chapter III, Title III of the Salvadoran Commercial Code, which regulates the agent and distributor relationship. According to Article 392, an agent, representative, or distributor is a natural or juridical person who, on a permanent basis and, with or without legal representation, and through a contract, is appointed by a principal to establish a representation or distribution agency for a specific product or service in the country. The representation or distribution agency may be exclusive or not, as agreed upon by the parties. The Commercial Code also specifies causes to terminate or modify the contract. These include failure to fulfill the contract, fraud by the agent, serious negligence, and continued decrease in the sales. A representative agent revealing confidential information is also grounds for termination.
If the principal should terminate, modify or not extend the representation, agency or distribution agreement without having met any of the conditions specified in Article 398 of the Commercial Code, the agent shall be entitled to compensation for the damages. The law describes the compensation allowed.
In El Salvador, as in other countries, finding the right partner or representative is key for success. For a nominal fee, the U.S. Commercial Service offers a range of services to help U.S. companies find potential partners, agents or distributors. U.S. firms interested in these services contact the nearest U.S. Export Assistance Center (USEAC) or visit the Commercial Service San Salvador web page
A local lawyer plays a critical role in providing in-depth local analyses of the legal requirements regarding contracts or agreements with local partners. A lawyer can also provide valuable insights for U.S. companies wishing to participate in government tenders. As company’s legal representative, a lawyer can obtain bid documents. While the U.S. Commercial Service cannot recommend a specific law firm, it can provide a list of Business Service Providers in different areas who can assist companies.
Establishing an Office
The government of El Salvador’s National Investment Office (ONI - Oficina Nacional de Inversiones) operates a near “one-stop” window to help foreign companies and individuals complete the requirements needed to obtain a license to establish a business in El Salvador, as a branch, agency, office, or joint venture. It also provides assistance with labor-related issues, immigration, and information about the free trade zone law regime. Hiring a local legal representative or a lawyer to work with ONI is recommended as a way to help ensure that all steps are completed.
The Registry of Commerce Office in the National Registry Center (CNR-Centro Nacional de Registro), has created an “Integrated Services Window” so individuals can submit the requirements to open a business requested by the National Registry Center, Ministry of Finance, Ministry of Labor, and as Social Security Institute (ISSS) in one place.
Following is a list of required authorizations or licenses that can be obtained at the “Integrated Services Window”:
a. Company Registration
b. Initial Balance Registration
c. First time Establishment Registration
d. Income Tax Identification Number (NIT) (Ministry of Finance)
e. Value Added Tax Identification Number (IVA) (Ministry of Finance)
f. Invoices Correlative Registration (Correlativo de Facturas) (Ministry of Finance)
g. First time Employer’s Identification Number (NIP) (Salvadoran Social Security Institute)
h. Work Place Registration (Ministry of Labor)
Based on the Salvadoran Commercial Codes the minimum capital required for a business to begin operations is USD $1,603.58.
All companies operating in El Salvador must prepare their accounting records in Spanish. The Spanish version of the accounting system must be approved by a certified public accountant. The names of the company’s board of directors and administrative personnel must be provided to the Registry of Commerce Office at the National Registry Center.
Also, the U.S. company must obtain a municipal services clearance from the municipality where the company and its facilities are located and certification that the firm is properly registered in the National Industrial and Commercial Establishments Directory at the General Director of Statistics and Census (Direccion General de Estadisticas y Censos, DIGESTYC). Once the Registry of Commerce Office has issued the company’s license, it must be published in a local newspaper.
Firms that sell or manufacture pharmaceuticals are required to obtain a permit from the National Directorate of Medicines (Direccion Nacional de Medicamentos – DNM). The DNM must also approve each pharmaceutical product as safe for sale in El Salvador and issues a registration certificate (per product) that has to be renewed every 5 years.
Companies in the banking and insurance sector are regulated by the Financial System Superintendency (Superintendencia del Sistema Financiero) and must register with this agency.
An environmental permit is required for many projects, including road infrastructure, activities at maritime ports, sewage systems, mining, energy transmission, dams, water development, commercial fishing, tourism services, food processing, commercial construction and others listed in the environmental law of the Ministry of Environment and Natural Resources, MARN.
El Salvador began adopting the franchise business model in late 1970s, when McDonald’s and KFC entered the market. Since then the business environment for U.S. franchises has been favorable and Salvadoran consumers have shown clear preference for U.S. franchises over local or other international franchise concepts.
El Salvador is a small and competitive market and overall there are no significant challenges for U.S. franchise firms. There are about 100 local companies operating under international franchise business models. U.S. companies dominate with 75% market share and investment varies from low cost operations up to larger investments, such as hotels.
U.S. franchise systems operate successfully in many segments, including: hotels, car rentals, accounting, fitness, mailing and shipping, real estate, training, and travel. Fast-food franchises and casual dining restaurants have been the most successful, including: Starbucks Coffee Company, Taco Bell, Domino’s Pizza, Red Mango, Denny’s, Ruby Tuesday, TCBY, Olive Garden, Panda Express, and Smashburger.
There is no specific law or government agency that regulates franchise operations or contracts in El Salvador. CAFTA-DR enhanced protection for U.S. brands and trademarks, removed technical barriers for U.S. exports and provided alternative dispute resolutions for U.S. companies doing business in El Salvador.
Trademark laws meet international standards to protect trademarks and distinctive signs. To get full protection, the trademarks must be registered at the Intellectual Property Registry at the National Registry Center.
A highly publicized court case between a prominent U.S. franchisor and its former franchisee suggests that enforcement of franchise contracts in the courts can be difficult. Consequently, we urge franchisors to develop their business plan based on careful analysis of the business bona fides of their potential franchisees.
In El Salvador direct marketing is widely used. Companies use catalogs, flyers and mailers, and other modes of communication. Most often a marketing advertisement is inserted in Salvadoran newspapers or magazines. When companies hire advertising or marketing services, it usually includes a special report on TV news or in newspapers. Marketing services can also contract with local utility companies to put advertisements on utility bills. Distributing flyers at busy street corners and parking lots is also common, although this has been affected by the COVID-19 pandemic. Marketing through contact centers is aggressively used by telecommunication companies and the financial sector, particularly banks and credit card companies.
Digital direct marketing is in its nascent stage in El Salvador. Companies are just becoming comfortable using text messaging, social media (mainly Facebook, WhatsApp, and Instagram), email, electronic billboards, and blogs to reach Salvadoran consumers. One of the newer ways being used for direct advertising is the use of social influencers to create Instagram and Facebook stories for their social media channels, where they show how good a product or a service is.
Joint ventures involving U.S. and Salvadoran companies must be legally established in a contract signed by both parties. Foreign investments, whether a joint venture, direct investment, partnership, branch or subsidiary, must be incorporated in El Salvador to operate. Once incorporated and duly registered, the investment enjoys national treatment.
The Law for Trademarks and Other Distinctive Signs includes licensing and raises protections for trademarks and distinctive signs to internationally accepted standards. This law also obliges national and foreign firms to register in the Commerce Registry and the Intellectual Property Registry. To have the exclusive right of the use of commercial names and trademarks, any expression and/or advertising sign, including patents and industrial designs, a lawyer or legal representative must register the trademark at: Centro Nacional de Registros
U.S. Express Delivery companies (FedEx, Transexpress, UPS) operate in the country, with daily arrivals and departures to and from El Salvador. DHL is also present in the market. Though couriers try to meet their service standards, customs procedures for express shipments are a burdensome process, which delays the release of goods and documents. Though there is a USD $200 de minimis on the value of the invoice, it’s not taken into consideration to speed the release, affecting not only e-commerce, but also the release of samples.
The success or failure of an operation in a foreign country is often closely tied to the quality of the information a company was able to obtain about creditworthiness, bona fides, and business practices of the local partner. The Commercial Section strongly recommends checking the bona fides carefully as soon as a business relationship begins to develop. The Commercial Section offers a service known as the International Company Profile (ICP) to help a U.S. firm determine if a company is a suitable trading partner. The report includes data on the firm’s management, business activities, product lines, financial conditions, credit-worthiness, and trading experience. Some private sector credit-reporting services, including Equifax and TransUnion, also provide credit reports on Salvadoran firms.