Businesses commonly adopt a corporate form. The most common structures are corporations and limited liability companies (partnerships), which can adopt the following forms:
Corporate structures are taxed as independent entities. Shareholder and partner liability is limited to the amount of their equity in the company.
Consortiums and joint ventures are corporate entities that are not widely used in Ecuador. They are used primarily when undertaking public works contracts, as well as specific projects with a limited duration. For tax purposes, consortiums and joint ventures are regarded as independent entities and taxed accordingly. Nevertheless, their members’ liability is not limited to their equity.
All corporate entities are considered to be independent taxpayers. Dividends paid by corporate entities are subject to an income tax withholding, unless the beneficiary is a local corporation. Individual beneficiaries of the dividends may be subject to additional income tax if they fall within a tax bracket that is higher than the income tax applicable to corporations. Dividends paid to foreign investors are subject to a 10% income tax withholding. Exemptions may apply under double taxation treaties.
Stakeholders in sectors such as banking, insurance, the stock exchange and securities are obliged to use corporations to carry out their business.
The Ecuadorian stock exchange law provides for trusts, investment funds, commercial funds and hedge funds. Under Ecuadorian law, these legal entities are considered to be independent for both commercial and tax purposes. In some cases, trusts and funds are obliged to act as tax withholding agents.
Stakeholders in the construction sector (both for private and public projects) normally perform their activities using trusts, consortiums and joint ventures.
As a general principle, whenever an entity is domiciled and/or incorporated within Ecuadorian territory, it is regarded as a tax resident in the country.
Under Ecuadorian law, tax residency is determined as follows.
Ecuador has entered double taxation treaties with the following countries: Argentina (limited to air transportation), the Andean Community (Bolivia, Peru and Colombia), Belarus, Belgium, Brazil, Canada, Chile, China, Germany, France, Italy, Japan, Mexico, Qatar, Romania, Singapore, South Korea, Spain, Russia, Switzerland and Uruguay. Ecuadorian double taxation treaties generally follow the OECD model, except for the Andean Community Treaty, certain elements of which follow the United Nations' Model Double Taxation Convention.
Under most of the double taxation treaties, Ecuadorian-source income is taxed locally except for corporate profits (for treaties that follow the OECD model). However, certain income sources – such as royalties and interests, and technical service fees – are subject to tax at lower rates (10% and 15% compared to the general 25% rate).
Entities are subject to a 25% income tax levied on their net taxable profit. However, a 28% income tax rate applies whenever:
Ecuadorian law provides for 15% employee profit-sharing, meaning that the entity is obliged to distribute 15% of its profits among its employees. This expense is tax deductible when determining the taxable base.
Income tax is paid in a single instalment during the first quarter of the fiscal year following the fiscal year that the profit corresponds to.
From 2022, micro businesses are subject to up to 2% income tax levied on their net income.
Regarding transparent entities, see 1.1 Corporate Structures and Tax Treatment and 1.2 Transparent Entities.
Individuals are taxed at progressive rates. The payable income tax bands and rates for 2023 are as follows:
Ecuadorian commercial entities are obliged to keep their accounting records according to International Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). However, accounting profit is subject to adjustment for tax purposes.
The main adjustments (accounting profit versus taxable profit) are as follows.
The adjustments are made in the applicable tax return, based on accounting records.
As of 2023 there are no special incentives specifically for technology investments. Nevertheless, new investments may apply for a general incentive; see 2.3 Other Special Incentives.
As of 2022, Ecuadorian tax law provides for a three percentage points reduction in the income tax rate for new corporations and investments. The latter will be applicable for up to 15 years. The accumulated exemption may not exceed the amount invested.
Entities that concluded new investment contracts with the Ecuadorian government after November 2021 will benefit from a five percentage points reduction in the income tax rate. The accumulated exemption may not exceed the invested amount. The exemption will apply during the contract’s term, which may not exceed 15 years, unless the contract provides for a longer term. Nevertheless, the contract may be renewed by the same time period or less. The entities may also benefit from an exemption on foreign trade taxes and the capital remittance tax (impuesto a la salida de divisas or ISD), regarding the import of capital goods and raw materials related to the investment (whenever certain conditions are met).
Losses registered in a fiscal year can be amortised (carried forward) for up to five years. Taxpayers may offset only up to 25% of the taxable income. Ecuadorian law does not provide for loss carry-back, nor for offsetting income losses against capital gains or vice versa. Losses incurred in transactions with related parties are not tax deductible.
Interest is deductible whenever the related loan is needed for the debtor to undertake its commercial activity. For tax purposes, interest is deductible provided the rate does not exceed the maximum rate set by the Ecuadorian Monetary Authority.
This also applies to foreign loans, which, in certain cases, are subject to registration before the Ecuadorian Central Bank. For registration purposes, the capital of the loan must be deposited in an Ecuadorian bank. Interest paid exceeding the maximum rate applicable to this kind of transaction is subject to income tax withholding.
Interest paid to related parties that exceeds 20% of the entity’s EBITDA plus interest, depreciation and amortisation will not be deductible.
The consolidation of financial statements for tax purposes is not allowed under Ecuadorian law. As such, groups of companies are not allowed to record losses reported by entities other than those incurring the loss.
However, for reporting purposes before the Superintendence of Companies, IFRS rules on consolidating financial statements apply.
Overall, Ecuadorian law does not provide for a particular tax treatment on capital gains, which are taxed as general income.
However, there are exceptions to the general rule, which are listed below:
This treatment also applies to the indirect sale of the equity of an Ecuadorian entity, provided certain requirements are met. An indirect sale occurs when shares owned by any shareholder within the chain of ownership of an Ecuadorian entity are disposed of, including shares held outside Ecuadorian territory. Indeed, any transfer of shares of any entity that directly or indirectly owns an Ecuadorian corporation’s shares is regarded as an indirect sale.
The taxable base applicable to the disposal of shares is determined as the difference between the sale price and:
Whenever the seller is a foreign entity, the Ecuadorian company whose shares are being transferred is obliged to act as a substitute taxpayer and pay the tax on behalf of the shareholder.
The sale of shares listed on an Ecuadorian stock exchange may benefit from the following exemptions and reductions:
The following taxes are commonly applicable:
The Ecuadorian Tax regime provides for a gradual reduction of ISD:
The government is aiming to eventually abolish ISD.
Tax on Overseas Financial Assets
This tax applies at a rate of 0.1% to 0.35% and is levied on the monthly average of funds held abroad. This tax applies to funds held abroad by the following entities:
Special Temporary Equity Contribution
As of 2022, corporations are required to pay a contribution levied on their 2020 net equity, whenever the corporation’s net equity as of 31 December 2020 was equal to or greater than USD5 million. The tax rate is 0.8%. Corporations are required to pay the contribution both in 2022 and 2023. The contribution is not deductible for income tax purposes.
Corporations can apply to pay the contribution in six equal instalments.
Tax on Profit Generated on the Sale of Real Estate
Profit generated on the sale of real estate is subject to this tax at a rate of 10% and payable to the municipality in which the asset is located.
A deduction of 5% of the net profit for each year of ownership is permitted when determining the taxable base. Once the elapsed time from the date of acquisition by the seller is 20 years, the transfer is tax exempt.
Municipal Patent Tax
Businesses, whether individual or corporate structures, are also subject to a municipal tax called “Patente Municipal”, which is payable on an annual basis. The rate of the tax is determined by the municipality based on the entity's equity, and in no case will the tax be lower than USD10 or higher than USD25,000.
1.5 per Thousand Tax on Assets
Businesses are obliged to make an annual tax payment to the municipality of their domicile equivalent to 1.5 per thousand (or 0.15%) of their total accounting assets.
Most closely held local businesses operate using a corporate form. Commonly, the preferred corporate form is a corporation or a limited liability company. New businesses are expected to be incorporated as a simplified joint-stock corporation, as it is significantly cheaper to incorporate this type of entity.
Even though corporate rates are lower than individual rates, there are no rules to prevent individual professionals from earning income at corporate rates, because dividends paid by companies to individuals are taxed at individual rates and subject to a 10% income tax withholding rate. The income tax withheld by the entity distributing the dividends may be recorded as a tax credit by the individual, who then deducts such credit from their final tax.
There are no legal provisions that prevent closely held corporations from accumulating earnings for investment purposes. However, Ecuadorian law considers loans granted by business to shareholders or partners as taxable dividends.
Dividends paid by Ecuadorian corporations to individuals are subject to a 10% income tax withholding. However, dividends received by individuals become part of their taxable income, and, as such, are subject to individual tax rates.
Regarding capital gains on the transfer of shares, see2.7 Capital Gains Taxation.
Dividends paid by publicly traded corporations are subject to the same treatment applicable to dividends in general.
As for capital gains on the sale of shares in publicly traded corporations, some exemptions may apply. Regarding the exemptions on the transfer of shares, see 2.7 Capital Gains Taxation. If a transaction is not made through an Ecuadorian stock exchange, capital gains are subject to a tax rate of 10%.
Where there are no double taxation treaties, the following tax withholding rates apply:
The Ecuadorian tax authority is determined to collect taxes in all transactions. Overall, expenses are tax deductible whenever the relevant tax is withheld by the payor (unless a specific exemption applies). The Ecuadorian tax authority has a particular interest in determining whether the benefits provided for by tax treaties are in fact applicable to transactions concluded by Ecuadorian residents with entities domiciled abroad. Indeed, tax treaties provide for exemptions and reductions on withholding rates. Therefore, the Ecuadorian tax authority analyses whether the provisions of the tax treaties are applicable. Another aspect on which the Ecuadorian tax authority focuses is the economic substance of the transaction (see 4.3 Use of Treaty Country Entities by Non-treaty Country Residents). Nevertheless, the Ecuadorian tax authority faces certain challenges regarding international taxation (see 9.3 Profile of International Tax).
Despite the fact that Ecuador has entered into 20 double taxation treaties and a general treaty concluded within the Andean Community of Nations (which includes Colombia, Peru and Bolivia), the primary tax jurisdictions foreign investors use to invest in local corporate stock or debt are Spain, Uruguay, Germany, Brazil, Mexico and Canada.
Ecuador does not challenge the use of treaty country entities by non-treaty country residents.
However, the Ecuadorian Tax Administration may analyse whether the transactions that benefit from the treaties lack economic substance. In such case, the payments that benefited from the tax treaties will not be considered deductible for income tax purposes for the local corporation.
Benefits provided by the tax treaty concluded with Uruguay are conditional. Namely, a corporation may benefit from the tax treaty whenever 50% of its beneficial owners are residents in Ecuador or Uruguay, or if the corporation’s shares are listed on a stock exchange in Ecuador or Uruguay.
Even though Ecuador is not a member of the OECD, the country applies the transfer pricing parameters contained in the guidelines issued by the organisation. Indeed, its general provisions have become part of Ecuadorian tax law and its regulations.
The main concern is related to export prices as well as royalties, technical service fees and interest paid to related parties. Regarding these issues, local law allows Ecuadorian entities to file a consultation (request for an advance pricing agreement) with the tax authority to determine the parameters under which the transfer pricing valuation will be performed.
Corporations that make frequent transactions with related parties (whenever certain requirements are met) must file a yearly transfer pricing report with the Ecuadorian Tax Administration. In this report, the corporation must demonstrate that the transactions concluded with its related parties comply with the arm’s length principle.
For tax purposes, and particularly for determining transfer pricing, transactions with entities domiciled in tax havens are regarded as if they were concluded with related parties.
Local tax authorities have not challenged the use of related-party limited risk distribution arrangements for the sale or provision of goods or services locally. Nonetheless, Ecuadorian tax law states that transactions between related parties should follow the arm’s length principle.
Ecuador is not a member of the OECD. Nevertheless, Ecuadorian transfer pricing principles and the applicable methodologies generally follow OECD guidelines. Accordingly, local transfer pricing rules and/or enforcement in theory do not vary from OECD standards.
In the last few years, the Ecuadorian tax authority has been focusing its audits on the transfer pricing regime applied by multinational corporations. Regarding the possibility of re-opening earlier years to analyse the fulfilment of the transfer pricing regime, the general rules on tax audits apply (see 8.1 Regular Routine Audit Cycle).
Commonly, transfer pricing disputes are resolved before local tax authorities and courts. The authors are not aware of any international transfer pricing disputes being resolved through double taxation treaties. Local law does not allow mutual agreement procedures (MAPs) to resolve transfer pricing issues between tax authorities and private entities. A local tax authority has yet to publicly enter a MAP with foreign tax authorities.
Nevertheless, as of 2022, tax disputes may be solved through mediation, as per a tax reform enacted in November 2021. This represents a substantial modification in the Ecuadorian tax regime, since prior to the tax reform, all disputes had to be settled through administrative claims or judicial actions.
Until now, transfer pricing issues and claims have been resolved through administrative claims and judicial actions filed by private entities against the Ecuadorian tax authority. The authors are not aware of any specific MAP and/or PTC (pass-through company) processes that Ecuador has been a part of.
Local branches of non-local corporations and local subsidiaries of non-local corporations are taxed equally. The Ecuadorian Constitution and law expressly prohibit any discrimination in the treatment applicable to local and foreign individuals and entities. Nevertheless, payments made by local branches or subsidiaries to their parent corporation may be subject to lower taxation pursuant to tax treaties (see 4.1Withholding Taxes).
Capital gains of non-residents on the sale of shares in local corporations are taxed in Ecuador. Indeed, the tax applies when the gains relate to shares of a non-local holding company that owns the shares of a local corporation, both directly and indirectly.
The main principle under Ecuadorian tax law is to tax capital gains on the sale of shares issued by local corporations whenever the indirect transfer of equity within the chain of ownership (including one abroad) affects the ownership of an Ecuadorian entity and certain requirements are met.
There are no change of control provisions that could apply to trigger tax or duty charges, and, in particular, there are no such provisions that could apply to the disposal of an indirect holding much higher up in the overseas group. All issues related to the direct or indirect transfer of shares are included in previous sections of this chapter.
There are no formulas used to determine the income of foreign-owned local affiliates selling goods or providing services. However, transfer pricing guidelines and the arm’s length principle apply to them.
Ecuador allows for the deduction of payments made to foreign companies, including foreign affiliates, whenever income tax is withheld and payments do not exceed certain limits. Ecuadorian entities may only deduct 5% of their taxable base on foreign allocated expenses and costs paid to a non-local affiliate. From 2023, royalties, and technical, administrative and consulting services fees paid by local affiliates to their head office and related entities, will be tax deductible up to a limit equivalent to 5% of the taxable income of each fiscal year. However, the limit may increase when certain requirements are met.
The general provisions applicable to interest related to foreign loans are explained in 2.5 Imposed Limits on Deduction of Interest.
Additionally, the net amount of interest paid on loan transactions with related parties (for tax purposes) should be no greater than 20% of EBITDA plus interest, depreciation and amortisation of the given fiscal year.
Ecuadorian corporations are taxed on their worldwide business income. As such, foreign income is taxed in Ecuador. However, Ecuadorian law states that the tax paid abroad on foreign income may be used as a tax credit in the local corporation’s annual tax return. The tax credit may be applied only to the foreign-source income, and cannot exceed the relevant tax due.
In general, expenses incurred to generate exempted income are non-deductible. This also applies to foreign exempt income.
Dividends paid by subsidiaries located abroad are regarded as foreign income (see 6.1 Foreign Income of Local Corporations) and taxed accordingly.
Intangible assets developed by local corporations can be used by non-local subsidiaries in their business. However, under transfer pricing principles, the local entity is obliged to charge for such use under the arm’s length principle. All related income is taxable in Ecuador.
There are no specific provisions regarding controlled foreign corporation (CFC) rules in Ecuadorian legislation.
There are no rules related to the substance of non-local affiliates. Nevertheless, to record an expense as deductible, the latter must be related to taxable income, and the transaction must reflect economic substance. Therefore, under Ecuadorian law, transaction simulation is regarded as a felony and is punishable by law. Likewise, practices regarded as tax avoidance are penalised under Ecuadorian criminal law.
Gains obtained by local corporations on the sale of shares held in non-local affiliates are taxed in Ecuador. No specific rule exists on the matter in local law. As such, these gains will be subject to a 25% income tax rate. If the income is taxed abroad, the local corporation could use tax credit in Ecuador, as outlined in 6.1 Foreign Income of Local Corporations.
Overall, the Ecuadorian tax regime considers any practice that involves simulating a transaction for the sole purpose of evading taxes as a felony, and it is punishable as such. It is important to note that assessments from the tax authorities in recent years tend to overlook tax-relevant transactions and operations that do not reflect economic substance and/or essence.
The Ecuadorian Internal Revenue Service or IRS (Servicio de Rentas Internas) does not have a regular, routine audit cycle. Nevertheless, audits of a fiscal year are usually conducted within four years of the date of filing the corresponding tax return. Audits can be conducted within six years if the taxpayer fails to file the tax return on time.
Tax audits are normally performed by reviewing all accounting records and their supporting documentation.
The reports issued regarding tax audits can be challenged before the IRS. Any final administrative resolution issued by the IRS can be challenged before the Ecuadorian tax court.
The Ecuadorian government has already taken certain actions that are partially aligned with Action 1 of the BEPS plan, and specifically the International VAT/GST Guidelines.
Even though Ecuador has not adopted BEPS within its tax regime, the following standards have been implemented.
From 2020, the legal system expressly states that digital services are subject to VAT if the consumer is a resident in Ecuador and the payment is made by such resident. The Ecuadorian tax system provides for a registry of digital service suppliers that are not domiciled in Ecuador, which is administered by the Ecuadorian IRS.
Whenever the provider of a digital service is not registered before the Ecuadorian IRS, the consumer is obliged to act as tax collector. However, if the payment is made through an intermediary (credit card issuer or bank), the intermediary will be liable for collecting the VAT.
The Ecuadorian government is committed to complying with OECD standards and participating in the organisation’s committees. To that end, the Ecuadorian government ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (CAAM).
Nevertheless, there are no indications that the Ecuadorian government will sign the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting.
The authors consider that, to date, international tax does not have a high public profile in Ecuador. However, it is evident that any new development on the matter, particularly regarding BEPS, will, in a relatively short period, be adopted by local authorities, as noted in relation to VAT applicable to digital services.
Regarding Pillar Two of BEPS (substance), as stated in previous sections, the deductibility of expenses is allowed whenever the transaction reflects economic substance. The economic substance in transactions has been an important principle used by the Ecuadorian tax authority in its audits.
Regarding Pillar One of BEPS (coherence), the Ecuadorian tax system lacks a strong technical background on international taxation. The Ecuadorian regime requires a comprehensive reform to comply with Pillar One.
The Ecuadorian tax system is generally fair and balanced as regards competition between foreign and local entities.
Nevertheless, the existence of indiscriminate tax benefits creates a false sense of competitiveness. Over the past decade, Ecuador has implemented several tax benefits that have not incentivised new national and international investment. This has also been to the detriment of good tax practice by going against the principles of generality and equality that should be present in any tax regime.
However, several of the indiscriminate tax benefits were eliminated by a recent reform.
Considering the particularities of the Ecuadorian tax regime regarding the characteristics of the country’s productive sectors, there does not appear to be any pressure for BEPS to be applicable in Ecuador. The country’s exposure to the international community is marginal. Therefore, it is unlikely that there will be pressure from the international or local community to implement tax amendments to fully comply with BEPS.
The main issue with the tax system in Eucador is enforceability, as well as generalised mistrust of taxpayers by the tax authority. It is imperative to implement serious initiatives to train the officials of the local tax authority.
Direct state aid in recent years has mostly been in the form of subsidies granted to the general public applied to the prices of hydrocarbons and fuels. However, these subsidies have now been reduced, although the government has decided not to remove them entirely due to concerns over potential civil unrest.
As previously stated, the Ecuadorian tax system lacks a strong technical background on international taxation. As such, the implementation of new mechanisms, such as actions to deal with hybrid instruments, is far from becoming a reality.
Likewise, there do not appear to be any pieces of legislation or proposals for dealing with hybrid instruments in Ecuador.
Overall, the current tax regime applicable to interest does not provide for restrictions tailored to territorial tax regimes (special economic development zones). Ecuador is a country that requires strong inflows of capital, including capital related to foreign loans. In this sense, imposing additional restrictions on the deductibility of interest would be inconvenient.
Ecuador has not implemented CFC rules.
The double tax convention limitations should not have any impact on either inbound or outbound investors. It is important to note that Ecuador has complementary rules in place to avoid evasion and abuse of law.
The application of transfer pricing in Ecuador is still limited, and for now it mainly applies to export activities. In this sense, before the country implements any changes to transfer pricing, Ecuador needs to further develop its current system. The taxation of profits from intellectual property is not a particular source of controversy or difficulty under Ecuador’s tax regime. Profits related to intellectual property are generally taxed as royalties.
Should the proposal for transparency and country-by-country reporting be implemented, it is unlikely to have any relevance for Ecuadorian taxation purposes.
As of 2020, Ecuador has implemented certain legal provisions to tax transactions effected by digital businesses operating largely outside Ecuadorian territory. Specifically, the Ecuadorian tax system has implemented a registry for foreign digital service providers. Likewise, credit card issuers and banks are responsible for collecting the VAT charged on digital services provided by entities that are not registered with the Ecuadorian IRS.
Ecuador has taken a few steps in relation to digital taxation; specifically, regarding Action 1 under the International VAT/GST Guidelines of BEPS. In this regard, Ecuador has issued legal provisions to collect the VAT charged on digital services provided by foreign entities (see 9.1 Recommended Changes and 9.12 Taxation of Digital Economy Businesses).
Ecuador has not introduced any other provisions dealing with the taxation of offshore intellectual property deployed within the country. However, regarding the deductibility of royalties and technical service fees, please see 4.1 Withholding Taxes.
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New Law for Economic Development to Deal with the Effects of COVID-19
On November 2021, the Ecuadorian President, Guillermo Lasso, proposed a tax bill to address the challenges (above all, economic) posed by the COVID-19 pandemic. The latter caused a recession in 2020 and slowed the growth of the Ecuadorian economy in 2021. The bill constitutes the fulfilment of several conditions agreed upon with the International Monetary Fund (IMF). Such conditions are related to loans granted by the IMF to the Ecuadorian government, which were needed to tackle Ecuador’s fiscal gap.
It is important to note that the President’s bill was enacted through a special procedure provided for by the Ecuadorian Constitution, wherein if the National Assembly (the legislative branch) neither approves nor rejects a bill proposed by the President, the bill will be enforced unamended.
President Lasso’s bill is not free of controversy. Several political and social sectors regarded it as unconstitutional. Within the National Assembly, certain members have proposed the repeal of the Law. On 2 February 2022, the Ecuadorian Constitutional Court agreed to hear a lawsuit alleging the unconstitutionality of the tax bill. On 28 October 2022, the Court ruled that the inheritance tax exemption for first-degree relatives was unconstitutional. The rest of the bill is in force.
Noteworthy aspects of the Law are explained below.
Alternative dispute resolution methods for tax issues
Prior to the enactment of the tax bill, tax disputes, including tax assessments performed by the Ecuadorian Internal Revenue Service (IRS), were resolved exclusively through rulings on the merit by the Ecuadorian tax authorities (administrative procedure) and/or Ecuadorian tax courts (judicial procedure). Before 2022, settlements in tax-related matters were barred by Ecuadorian law. The same applied to taxes collected by other regional/municipal tax authorities.
As of 2022, most tax disputes (except those determined by law) may be settled through mediation, which applies to disputes related to any tax levied by the Ecuadorian IRS – namely, income tax, value-added tax, capital remittance tax (ISD) and excise tax (ICE) – and other taxes collected by regional/municipal tax authorities.
Taxpayers may request mediation in administrative or judicial disputes. In the event that a mediation request is filed, judicial authorities will refer the case to a mediation centre, where the dispute may be settled, while in the case of administrative procedures, the request must be filed before the mediation centre. Aspects of disputes that are not resolved through mediation are to be resolved through administrative or judicial procedures.
In judicial procedures, taxpayers must file a request for mediation in the preliminary stages of the trial. In administrative procedures, mediation can be requested at any moment.
The tax bill introduced several provisional incentives for mediation. In relation to taxes assessed by the IRS, a taxpayer who accepts the said liability during mediation will benefit from a reduction in interest and surcharges ranging from 50% to 100%.
Tax disputes related to assessments made by the IRS generally include the following steps:
Administrative procedures in Ecuador are mainly written, in contrast to judicial procedures, in which oral hearings are allowed. The lack of oral hearings in administrative procedures hinders the ability to explain and discuss complex technical matters with the IRS. The authors expect the alternative dispute resolution mechanism to be instrumental in tax assessments related to transfer pricing and other complicated matters by enabling an open discussion. The nature of mediation could allow the settlement of cases that arise from differences in interpretation.
Mediation centres in Ecuador are generally managed by private entities. However, there are also several government-run centres. The IRS issued a resolution to clarify the scope of the mediation process. This resolution sets out the issues that may or may not be discussed by taxpayers and the IRS in the course of mediation. For instance, the interpretation of tax norms may not be discussed. Nevertheless, parties may agree upon facts and the evidence required to prove these facts. Likewise, the payment of interests and surcharges can be settled during mediation.
New temporary taxes
To reduce the fiscal gap, President Lasso’s bill includes a temporary tax on taxpayers' net equity. This tax is payable by individuals and corporations whose net equity as of 31 December 2020 was equal to or greater than USD1 million or 5 million, respectively.
The applicable rate for individuals is up to 1.5% of their net equity, whereas for corporations the rate is 0.8%. In 2022, the tax was payable by both individuals and corporations, but in 2023 only corporations will have to pay it. The tax is not deductible for income tax purposes.
There is a debate as to whether companies should create reserves in their 2021 financial statements to account for the funds that will be used for paying the tax. Certain audit firms are requiring their clients to reserve the amount to be paid in both 2022 and 2023.
The IRS has issued a resolution stating that companies should account for the reserve whenever they verify the fulfilment of the requirements established in International Accounting Standard (IAS) No 37. The IRS is allowing companies and audit firms to decide whether they create the provision or not. The reserve is not deductible for income tax purposes, regardless of fulfilment of the conditions stated in IAS No 37.
Tax incentives for investment contracts
The Law provides for investment contracts as a legal tool for inbound investments in the Ecuadorian territory. Investment contracts are concluded with the Ecuadorian government through a public deed that stipulates the investment’s terms and conditions, the amount to be invested, the tax and other legal benefits. The investment may be undertaken in any economic sector (previously, investment contracts were limited to industries determined by the Ecuadorian government).
To conclude an investment contract, corporations must follow a formal procedure before the competent Ecuadorian authority. Investors must develop a viable project that will be filed before the Ecuadorian authorities for approval.
Investment contracts provide legal stability and incentives agreed upon with the Ecuadorian government. Tax incentives may not exceed the amount to be invested.
The term of investment contracts may not exceed 15 years, except where the investment is related to public works or industries such as the oil and mining sectors, where the concession or licence has a term exceeding 15 years. The contract may be renewed by for the length originally stipulated therein. Contracts will not be renewed automatically; companies must follow a dedicated procedure for that purpose.
From 2023, companies that concluded investment contracts with the Ecuadorian government will benefit from:
Tax incentives for other investments
New or existing companies that have not concluded an investment contract may benefit from a three percentage point reduction in the income tax rate whenever new investments are made in Ecuador (starting in 2022).
The incentives will be applicable only to income directly attributed to the investment. The reduction will be applicable for up to 15 years or until the incentive exceeds the amount invested.
Other Noteworthy Reforms
From 2023, royalties, technical, administrative and consulting services fees paid by Ecuadorian taxpayers to related parties will be tax deductible up to a limit equivalent to 5% of the taxable income of each fiscal year. However, the limit may increase whenever certain requirements are met.
The sale of shares listed on an Ecuadorian stock exchange may benefit from the following exemptions and reductions on capital gains:
The ISD is levied on all funds sent abroad by any Ecuadorian taxpayer unless an exemption is applicable. The Ecuadorian tax regime provides for a progressive reduction of the ISD:
Originally, the ISD was 5%. The government aims to eventually eliminate the ISD.
Executive Decree 645 provides for the reduction of the excise tax (ICE) rate on the sale of various goods, in particular, the following:
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