Businesses commonly adopt a corporate form. The most common structures are corporations and limited liability companies (partnerships), which can adopt the following forms:

• Compañía anónima (corporation) – the transfer of issued shares is not subject to limitations. For incorporation, at least two shareholders are required and there is a minimum share capital of USD800.
• Compañía de responsabilidad limitada (corporation/partnership) – the transfer of issued shares requires unanimous approval by the partners (shareholders). For incorporation, at least two partners are required and there is a minimum share capital of USD400.
• Sociedad por acciones simplificada (simplified joint-stock corporation) – issued shares may be freely transferred but cannot be traded on an Ecuadorian stock market. For incorporation, only one shareholder is required. There is no minimum capital requirement. Shareholder agreements can be implemented. This type of company requires relatively fewer formalities for its incorporation and operation.

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 an income tax withholding pursuant of the applicable tax bracket in relation to the relevant dividend received. 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.

• Primary criteria:
1. the entity’s residence; and
2. the entity’s incorporation under Ecuadorian law, as well as its main place of business being within Ecuadorian territory.
• Secondary criteria (if the primary criteria cannot be determined):
1. the location where the entity’s economic activities are performed; and
2. the location where the taxable event occurred.

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.

Pursuant to most double taxation treaties, construction projects executed during a specific period, a factory, industrial or assembly plant, industrial or assembly workshop, may be regarded as a permanent establishment and therefore a tax resident where the relevant activities are executed.

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:

• one or more shareholders are residents of a tax haven territory, and the beneficial owner is a tax resident in Ecuador; and
• the entity does not report to the tax authority its chain of ownership up to the beneficial owner.

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.

Since 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 2024 are as follows:

• up to USD11,902 – exempt;
• over USD11,902 and up to USD15,159 – 5% on the balance in excess of USD11,902;
• over USD15,159 and up to USD19,682 – USD163, plus 10% on the balance in excess of USD15,159;
• over USD19,682 and up to USD26,031 – USD615, plus 12% on the balance in excess of USD19,682;
• over USD26,031 and up to USD34,255 – USD1,377, plus 15% on the balance in excess of USD26,031;
• over USD34,255 and up to USD45,407 – USD2,611, plus 20% on the balance in excess of USD34,255;
• over USD45,407 and up to USD60,450 – USD4,841, plus 25% on the balance in excess of USD45,407;
• over USD60,450 and up to USD80,605 – USD8,602, plus 30% on the balance in excess of USD60,450;
• over USD80,605 and up to USD107,199 – USD14,648, plus 35% on the balance in excess of USD80,605; and
• over USD107,199 – USD23,956, plus 37% on the balance in excess of USD107,199.

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.

• Accounting expenses not deductible for tax purposes:
1. depreciation and amortisation in the amount that exceeds the limits provided for by tax law (real estate, ships and planes – 5%; machinery and equipment – 10%; vehicles and transportation equipment – 20%; hardware and software – 33%; and intangible assets – 20%);
2. provisions and reserves not allowed by Ecuadorian law;
3. interests in the amount that exceeds the maximum rates authorised by the Ecuadorian Monetary Authority;
4. interest paid to related parties exceeding 20% of the entity’s EBITDA, in the given fiscal year;
5. interest paid on foreign loans not registered before the Ecuadorian Central Bank, when required; and
6. overall, any other expense not directly related to taxable income.
• Expenses not supported by valid invoices.
• Tax-exempt income, among others:
1. dividends paid by Ecuadorian entities to other Ecuadorian corporations;
2. occasional capital gains arising from real estate, whenever certain requirements are met and the sale is made by an individual;
3. financial returns generated by investments at terms greater than 180 days; and
4. foreign-source income according to double taxation treaties.

The adjustments are made in the applicable tax return, based on accounting records.

In 2023, an income tax rate reduction was implemented for technology-related initiatives. Indeed, taxpayers who invest their profits in certified projects regarding technological development, may benefit from an 8% to 10% reduction in their income tax rate pursuant to the conditions provided by the Ecuadorian tax regime. The incentive is applicable starting from fiscal year 2024.

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 specific 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).

Operators of free trade zones will benefit from a 0% income tax rate starting from the first year in which the competent authority qualified the latter as such. Henceforth a 15% rate will be applicable for such operators.

Public-Private Partnership (APP) is a regime wherein an entity of the government delegates the execution of a specific activity to a private corporation or enterprise. Said regime is applicable, for example, to the execution of a specific public work or the management of a public asset. The APP regime is applicable to projects that meet specific requirements that include the investment of funds by the private entities.

Legal stability is guaranteed for specific regulatory aspects, provided these are regarded as essential by the competent authorities. The term of an APP contract may be up to 30 years. Such term may be extended for an additional 10-year term.

The income derived from bonds or other securities issued to finance public projects developed through an APP partnership as well as the profit earned in trading such securities are income tax exempted. The benefit does not apply to transactions concluded between related parties.

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. The amount that exceeds such rate is not deductible.

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 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:

• occasional capital gains obtained in the sale of real estate are tax exempt provided certain requirements are met and the seller is an individual; and
• capital gains on the sale of shares and other equity rights are taxed at a 10% rate. 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:

• the face value of the shares;
• the original cost of the shares; or
• the proportional value of equity.

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:

• whenever the entity’s equity sold does not exceed 25%, a deduction of up to USD595,100 (in 2024) applies; or
• whenever the entity’s equity sold exceeds 25%, a deduction of up to USD595,100 (in 2024) applies, and a 5% tax rate on the excess.

The following taxes are commonly applicable:

• Value added tax – VAT of 12% is levied on the sale or provision of goods and services. The tax is collected by the business that sells the goods or provides the services. VAT is paid on a monthly basis. Businesses are allowed to deduct (tax credit) the VAT paid when acquiring goods and using services in the ordinary course of business.
• The VAT rate levied on the provision of tourism services may be reduced to 8%, whenever the services are rendered during certain national holidays or specific weekends defined by the president through and executive decree.
• ICE (excise tax) – excise tax is levied on specific imported or domestic goods (generally luxury or demerit goods). For example, alcoholic beverages, cigarettes and vehicles are subject to the aforementioned tax. ICE is collected by the seller of the goods and paid on a monthly basis.
• ISD (capital remittance tax) – capital remittance tax is levied on funds sent abroad by any Ecuadorian entity. It also applies to payment for imports, in which case, a tax credit is granted whenever the imported merchandise is a raw material used to produce local goods. Exporters that have not deposited into an Ecuadorian account the funds received for their exports must also pay the capital remittance tax whenever such funds are used by the entity. When certain requirements are met, the payment of dividends and interest may be exempt from ISD.

The Ecuadorian tax system has implemented a 3.50% ISD tariff applicable throughout the year 2024.

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:

• banks and other entities that perform financing activities;
• entities that manage funds and trusts;
• securities companies;
• insurance and reinsurance companies; and
• portfolio managers.

Special Temporary Equity Contribution

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.

Alcabala tax (impuesto a las alcabala)

The “Alcabala” tax is levied on the transfer of real estate property. Transactions such as donations or transfer of property through inheritance, as well as transfer by the trustee to the trust’s beneficiaries are levied with this municipal tax. The “Alcabala” tax rate is 1%.

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  income tax withholding rates ranging from 0 to 25%. 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 domiciled abroad are subject to a 10% income tax withholding, whereas Ecuadorian tax residents (individuals) are subject to an income tax withholding rate ranging from 0% to 25%. Dividends received by the latter become part of their taxable income, and, as such, are subject to individual tax rates.

Regarding capital gains on the transfer of shares, see 2.7 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 of publicly traded corporations in Ecuadorian stock exchanges, 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 no double taxation treaties are applicable, the following tax withholding rates apply:

• Dividends paid to non-resident corporations and individuals are subject to a 25% withholding tax rate levied on 40% of the dividend (effective rate: 10%).
• Interest paid to foreign financial institutions related to foreign loans duly registered before the Ecuadorian Central Bank, when required and not exceeding the maximum rate established by the Ecuadorian authorities, is not subject to an income tax withholding. Where no registration has taken place and/or the amount exceeds the maximum rate, a 25% income tax withholding applies.
• Royalties and technical service fees paid to a foreign entity are subject to a 25% income tax withholding.
• Where there is no specific rate, payments made to residents in tax havens are withheld at a 37% rate.

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. Nevertheless, Ecuador has implemented provisions in order to track the entities that benefit from the provisions of tax treaties and other exemptions. Indeed, local taxpayers are required to file a yearly report on their shareholders to their beneficial owners. Likewise, in order to apply lower withholding rates pursuant to tax treaties, taxpayers must hold a certificate of tax residence of the beneficiary of the payments issued by the competent authority.

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 certain tax treaties concluded with countries such as Uruguay, South Korea and China are conditional. Namely, a corporation may benefit from the tax treaty whenever a specific percentage of its beneficial owners are residents in such countries, or if the corporation’s shares are listed on a stock exchange.

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 past 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/or 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 4.1 Withholding 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 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.

As of 2024, the Ecuadorian tax law provides a Controlled Foreign Corporation (CFC) regime. Pursuant to such regime, the income of foreign companies whose final beneficiaries (individuals) are residents in Ecuador, will be subject to taxation in the country. However, if the relevant income was already taxed under another applicable regime in Ecuador (eg, dividends or payments to non-residents), it will not be subject to the CFC regime. The final beneficiary (individual resident in Ecuador) will be responsible for paying the relevant tax.

A foreign entity and its income will be subject to the CFC regime whenever the following conditions are met.

• The ultimate beneficiary holds an effective ownership stake equal to or exceeding 25%. Such ownership may be defined in terms of capital, voting rights, entitlement to dividends, profits, benefits, or returns, or similar factors.
• The entity is subject to an effective income tax rate lower than 60% of the applicable rate in Ecuador, or a rate that is unknown.

To calculate the taxable base, the net profit earned by the entity at the end of the fiscal year applicable in its jurisdiction will be considered.

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.

Additionally, the new CFC regime may be viewed as an anti-avoidance provision. For further details, refer to 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type Rules.

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.

VAT

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.

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 Ecuador 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.

Nevertheless, as of 2024 the Ecuadorian tax regime provides for free trade zones that benefit from incentives including a ISD tax exemption on loans paid to foreign entities by the operators of such zones (see 2.3 Other Special Incentives).

See 6.5 Taxation of Income of Non-local Subsidiaries Under Controlled Foreign Corporation-Type 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. Nevertheless, recent reforms made by the tax authority require ample information of the multinational group of the local reporting taxpayer (Masterfile). In practice, the Ecuadorian tax authority requires a country-by-country report, similar to the one that is filed by the OECD members.

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.

Likewise, the income generated by digital platforms for sports predictions is being targeted in recent reforms by the Ecuadorian tax regime.

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).

As of July 2024, the income perceived by operators of sports-predictions digital platforms is subject to a special income tax. The latter is also applicable to tax residents in Ecuador that engaged in sports prediction operations and perceived profits. The income tax rate is set at 15% of the taxable base.

Non-resident operators must comply with various formal tax obligations. This involves registering before the Ecuadorian tax authority and appointing a representative in the country, as well as fulfilling formal obligations such as filing returns. In case the foreign operator does not comply with such formal obligations, corrective measures may be applied, such as blocking the relevant IP address.

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, see 4.1 Withholding Taxes. Nevertheless, IP licensing agreements must be registered before the Ecuadorian IP authority, otherwise the relevant royalties will not be income tax deductible.