Ecuador's economy is the eighth largest in Latin America and the Caribbean (out of 33 countries), it has incredible potential for commercial activities in the mining, energy, tourism and agriculture industries. With large natural mineral reserves (in gold, copper and iron), incredible conditions for the development of energy projects, especially photovoltaic and hydroelectric energy, tourist places such as the Galapagos Islands, the Amazon, the Sierra, the Coast and the East for what it is considered one of the most biodiverse countries in the world. Ecuador is also one of the world's leading exporters of bananas, shrimp, flowers and cocoa.
Due to all these interesting factors and many others, such as the fact that it is a dollarized economy, current government policy has focused on promoting attractive conditions for foreign investors and working to improve the benefits that were already granted in the Organic Production Code, Commerce and Investment (COPCI) published in December 2010.
The Law of Productive Development, Attraction of Investments, Employment Generation and Fiscal Stability (Investment Law) promulgated in August 2018, offers investors the possibility of obtaining interesting benefits such as: tax exemptions (income tax and income tax). foreign exchange remittances), reduction of fees, legal stability and the conclusion of arbitration agreements and investment contracts with the State.
This report provides a broad and general vision regarding the legal regulations, permits and management of businesses and companies in the country.
Ecuador and its provinces and territories operate under a common law legal system. The base of the legal system in Ecuador is the Constitution who is on a par with international treatments and conventions. The rest of legal orders are completed with laws, regulations and municipal ordinances according to each province.
Ecuador utilizes a civil law system for private law that is based on the Civil Code of Ecuador. While the ability to make certain laws are in the exclusive domain of the Constituent Assembly, others are within the scope of provincial authority and public powers.
In the case of tax regulations, the IRS is the national authority that has the power to issue regulations.
In Ecuador the main taxes are the following, a more detail analysis will be found hereunder:
Likewise, there are several tax benefits related to new productive investments related to exemption from income tax and foreign currency outflow tax, as well as other tax benefits related to new investments.
The tax system in Ecuador is administered by the following authorities:
In Ecuador, there are several types of companies, including civil societies and commercial companies. The former do not have a regulatory body that controls them-- they are only governed by the regulations established in the Civil Code. The latter are regulated and controlled by the Superintendence of Companies, Insurance and Securities under the Companies Law. Here is a brief description of each of them and their classification:
The most common commercial companies used as a vehicle for the development of a business are: The Anonymous Company (S.A.), the Limited Liability Company (Cía. Ltd.) and the Simplified Public Limited Company (S.A.S).
Distributions of paid-up capital
Dividends distributed in favor of all types of taxpayers, regardless of their tax residence, are subject to withholding at the source of income tax, except for the distribution made to a company resident in Ecuador. Withholding tax will be made as follows:
The distribution of dividends will be deemed effective in the decision of the shareholders' meeting, which resolves the obligation to pay them. However, if the company is a "permanent establishment of non-resident companies," the generating event will be when the surplus of the operation is remitted to the parent company according to the income, costs and expenses that are attributable to said operation in Ecuador, once the labor participation and the income tax incurred have been subtracted.
The company that distributes the dividends becomes the withholding agent, the tax must be withheld at the source (within the 30-day cycle in relation to the decision of the shareholders' meeting) and in the case of "establishment non-resident companies,” the time of withholding will correspond to the date of enforceability of the income tax of the distributing entity.
Interest on debts incurred as a result of the business are deductible for income tax proposes, if the following requirements are met:
Withholding tax implications
Payments made in connection with external financing to foreign financial institutions, legally established as such, or specialized non-financial entities qualified by the corresponding control entities in Ecuador, as well as the interest on external credit granted from government to government or by multilateral organizations are deductible. These will not be subject to income tax in Ecuador or subject to withholding at source. In these cases, the interest may not exceed the maximum reference interest rates set by the Monetary and Financial Policy and Regulation Board on the date of the credit registration or its novation. If in fact they exceed them, in order for said portion to be deductible, a withholding must be made at source equivalent to the general corporate income tax rate on it.
In the cases of interest paid abroad not contemplated in the previous paragraph, a withholding tax equivalent to the 25% tax rate must be applied, regardless of the financier's residence.
The general rate is 25%. This rate can be increased or decreased under certain conditions. In addition, there are special benefits for exporters.
The general tax rate is increased to 28% when one or both of the conditions mentioned below are met:
The IRS in Ecuador considers as tax havens, those domains, jurisdictions, territories, associated states or preferential tax regimes, where the Income Tax rate or of an identical or analogous nature is less than 60% than that corresponding in Ecuador on income of the same nature (15%). This applies especially to payments for services contracted with such jurisdictions.
Capital gains are defined as the profits received by companies domiciled or not in Ecuador and natural persons, Ecuadorian or foreign, resident or not in the country, from the direct or indirect alienation of shares, participations, other rights representing capital or other rights that prove the exploration, exploitation, concession or similar of natural resources; of companies domiciled or permanent establishments in Ecuador. Profits obtained from US$20,000 onwards are subject to a progressive tax rate that ranges from 0% to 10%, when the transaction is not made through the stock exchange in Ecuador.
For the year 2021, the profit from the direct or indirect sale of shares will be taxed from the base of US$42,424 when this transaction is carried out via Ecuadorian stock exchanges. This base is updated annually.
Losses due to direct or indirect disposal of fixed or current assets, shares, participations, other rights representing capital or other rights that allow exploration, exploitation, concession or similar will not be deductible, when the transaction takes place between related parties.
Profits earned by a branch
The IRS imposes a tax equal to 25% after-tax profits earned by a branch of a non-resident corporation. The branch tax is roughly equivalent to a withholding tax of 25% on dividends. The branch tax may be reduced or eliminated under an applicable double-tax treaty.
Income Tax is levied on the tax base generated, which is the taxable profit for a period determined by the taxpayer.
To determine the tax base, the accounting profit must be based on (income less costs and expenses, the result of which must be applied and subtracted 15% of workers' participation). On the result, conciliatory items such as:
The income tax rate that is equivalent to 25% must be applied to this taxable base and in specific cases it is increased to 28% as explained in the tax rate section.
As a general rule, all expenses that are necessary to generate taxable income are deductible.
In specific cases the expenses are not deductible from income tax, such as when:
Income tax reporting
The Income Tax declaration is mandatory for all natural persons, undivided successions and companies, national or foreign, domiciled or not in the country, according to the results of their economic activity; even when all of their income is made up of exempt income, except for:
The income tax declaration is made in April of each year, according to the ninth digit of the Single Taxpayer Registry (RUC), which is declared from April 10 to April 28.
Ecuador is not part of the Organisation for Economic Cooperation and Development (OECD); However, it has taken as a reference its pillars with respect to the arm's length principle, based on which the IRS in a review process can determine transfer pricing adjustments with respect to a transaction that is not carried out under full terms or conditions.. Taxpayers in Ecuador are required to maintain documentation that supports transactions subject to transfer pricing rules. As a general rule, transactions between related parties that exceed the amount of US$3 million must annually submit a Transfer Pricing Annex to the IRS and in the event that it exceeds US$15 million, the IRS must submit a report of transfer pricing prices in order to justify that its transactions are aligned with the arm's length principle.
Payments made abroad by a resident of Ecuador for services, interests, rents, royalties, management or administration expenses, other concepts, are subject to a tax rate of 25%. However, the rate may be reduced by virtue of a double tax treaty applicable with each country with which Ecuador has an agreement. A detail of the countries that has an agreement with Ecuador is as follows:
To apply the benefits established in the double taxation agreements, Ecuador requires that a certificate of tax residence be presented for each fiscal year, with the aim of avoiding abusive tax practices.
Ecuador is not a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Rather, Ecuador relies on the limitation on benefits provisions in its existing income tax treaties and its domestic law to implement the Base Erosion and Profit Shifting standards, especially in aspects related to the arm's length principle.
In Ecuador, an individual is considered to be an employee of a company when an agreement is entered into by virtue of which a person agrees to another or others to render their lawful and personal services, under their dependence, for a remuneration set by the agreement.
As of 2021, the value of US$400 dollars of the United States of America has been set as a unified basic monthly salary, for 8 hours of work per day (Monday to Friday) and 40 hours per week, a salary that is subject to annual variations.
The income received by a natural person with tax residence in Ecuador will be subject to income tax according to a progressive tax directly related to their annual net income.
To calculate the income tax that a taxpayer must pay, the following must be considered: from the total taxable income, the returns, discounts, costs, expenses and deductions, attributable to such income, will be subtracted. We call this result "tax base."
Personal expenses are deductible up to the limit up to 0.325 times the basic taxable fraction of IR 0% of natural persons (in 2021 it is 11,212 x 0.325) up to 1.3 times the basic fraction of IR 0% (in 2021 it is US$14,575.60 = 1.3 x11,212) or maximum up to 50% of total income:
As of 2020, natural persons whose net income exceeds US$100,000 cannot deduct personal expenses, except in cases where the taxpayer, their parents, their spouse or partner, or their economically dependent children suffer from catastrophic, rare or orphan issues.
Income tax rate
The applicable income tax rate is progressive according to the annual net income of the natural person. Net income that exceeds the annual value of US$11,212 onwards is taxed with a progressive income tax ranging from 0% to 35%
The VAT taxes all domain transfers and services rendered in Ecuador, at all stages of commercialization, whether for consideration or free of charge. The current VAT rate is 12%. In specific cases such as exports of goods and services, the VAT rate is 0%.
The values corresponding to discounts and bonuses, goods and packaging returned by the buyer, interest and insurance premiums in installment sales could be deducted.
You have the right to a tax credit for VAT paid on goods and services taxed with this tax, provided that such goods and services are used for the production and marketing of other goods and services taxed with VAT.
The Tax Special Consumptions (TSC) taxes distributors of products, manufacturers of goods, importers of goods and all products determinate by the law that are taxable with this tax.
This tax has the triggering event at the consumption of domestically produced goods and goods imported when starting the customs process.
The rates of this tax depend of the category of the goods and products. The IRS publishes annually the applicable rates.