EY
Inglaterra y Av. Amazonas (esquina)
Edif. Stratta
Quito Ecuador
Executive and immigration contacts
Javier Salazar
+593 (9) 6315-5777
Email: javier.salazar@ec.ey.com
Fernanda Checa +593 (4) 263-4500
Fax: +593 (4) 263-4351 Email: fernanda.checa@ec.ey.com
A. Income tax
Who is liable. Ecuadorians and foreign nationals resident in Ecuador are subject to tax on their worldwide income. Nonresidents are subject to tax on Ecuadorian-source income only, regardless of where it is paid. Both Ecuadorians and foreign residents who receive income for business activities or professional, commer cial or other services performed in Ecuador are subject to income tax.
Individuals are considered resident for tax purposes if their stay in Ecuador exceeds 183 days, consecutive or non-consecutive, within a calendar year. In addition, individuals are considered resident if their stay exceeds 183 days within a 12-month period in two con secutive calendar years.
Income subject to tax. The taxation of various types of income is described below.
Employment income. Taxable income includes income from ser vices rendered under a verbal or written contract of employment, regardless of whether the income is received in cash, in services or in kind.
In general, all employees receive the following annual bonuses, which are exempt from income tax:
• Christmas bonus, known as the thirteenth salary, which equals approximately one-twelfth of their annual compensation.
• Education bonus, known as the fourteenth salary, which equals one Unified Basic Remuneration (USD400 for 2021).
• Retirement funds, which equal one-twelfth of the year’s remu neration (8.33% of annual remuneration). This amount is payable from the second year of employment for the same employer.
Compensation for industrial accidents and death, payments for out-timed dismissal (dismissal without legal notice or legal cause), severance payments and amounts received from pension and retirement funds are also exempt from tax.
Self-employment and business income. Individuals are subject to tax on income from business activities conducted within Ecuador and on income arising from goods and assets located in Ecuador. Business income includes the income of individuals who are sole proprietors or active members of a partnership in a business in which they have invested capital. Income is taxed at the rates set forth in Rates.
Investment income. Dividends are subject to a 10% withholding tax. In addition, this income needed to be incorporated in the global income of the individual for the purposes of applying the progressive tax rates of 0% to 35%, which are applied to taxable income (see Rates).
Royalties received from investments in Ecuador are treated as ordinary income. Royalties received from abroad are exempt from tax if they were subject to tax in the source country.
Interest paid to residents is added to the taxpayer’s taxable income and taxed at the rates set forth in Rates. Interest paid to residents is subject to withholding tax at a rate of 2%, which is credited against the taxpayer’s annual tax due.
Taxation of employer-provided stock options. In general, benefits derived from stock options are taxed as other income (income that is different from salary or professional wages). Each case must be analyzed separately.
Capital gains. Capital gains derived from sales of shares are subject to a single income tax at the following rates:
From To Rate USD USD % 0 20,000 0 20,001 40,000 2 40,001 80,000 4 80,001 160,000 6 160,001 320,000 8 320,000 10
Deductions
Deductible expenses. Social security contributions paid by employ ees are deductible for income tax purposes.
Personal deductions and allowances. For 2021, individuals whose annual net income is less than USD100,000 can deduct personal expenses and spouses’ and dependents’ expenses up to 50% of total annual income, subject to a maximum deduction of USD14,575.60. Deductible expenses include housing, education fees, medical expenses, food costs and clothing. The maximum deductible amount for each of these expenses is USD3,643.77, except for medical expenses, which may be up to USD14,575.60
For 2021, people with rare, catastrophic or orphan diseases (as defined by the Health Ministry), the deduction is twice the maximum deduction (USD22,424).
Third age deduction. For 2021, individuals who are 65 or older can deduct one basic amount of USD1,212 for income tax pur poses.
Disability deduction. For 2021, individuals can claim a deduction corresponding to their percentage of disability as shown in the following table (individuals who live in the Galápagos Islands are subject to a different regime).
Percentage of disability Deduction amount % USD 30 to 49 13,454 50 to 74 15,696 75 to 84 17,939 85 to 100 22,424
Business deductions. The following business expenses are deductible for income tax purposes:
• Costs and expenses directly incurred in the generation of tax able income.
• Interest paid on business debts. The interest rate may not exceed the rate fixed by the Central Bank of Ecuador.
• Certain taxes levied on the business (not including income tax or taxes that give rise to a tax credit).
• Insurance premiums paid to secure employees’ work risks and the assets of the business.
• Losses as a result of force majeure or criminal acts.
• Necessary travel expenses and lodging.
• Depreciation and amortization.
• Amortization of losses (for individuals who have accounting books).
• Wages, salaries and compensation in general, fringe benefits, 15% profit sharing, severance indemnities and other expenses under the Labor Law.
• Provisions for uncollectible receivables.
• Income tax and social security for employees if assumed by the employer.
• Expenses that are payable at the completion of an activity, that are exclusively identified with the normal course of business and that are properly endorsed in contracts or invoices or other obligatory legal instruments.
Rates. For the 2021 income tax year (1 January to 31 December), tax is levied on employment, self-employment and business income at the following rates.
Taxable income
Tax on lower Rate on Exceeding Not exceeding amount excess USD USD USD %
11,212 14,285
5 14,285 17,854 154 10 17,854 21,442 511 12 21,442 42,874
15 42,874 64,297 4,156 20 64,297 85,729 8,440 25 85,729 114,288 13,798 30 114,288 22,366 35
Nonresidents staying in Ecuador for not more than six months in a fiscal year and who receive Ecuadorian-source income are sub ject to a 25% withholding tax, which is a final tax. This tax also applies to dividends distributed before corporate income tax.
B. Inheritance and gift taxes
Income derived from inheritance and gifts are taxed at the following progressive rates for 2021.
inheritances and gifts received
on lower Rate on Exceeding Not exceeding amount excess USD USD USD
C. Social security
Coverage. The Social Security Institute of the government man ages the social security system, which covers health benefits, pensions and certain social payments. All private, public and foreign employees and self-employed professionals are covered by social security legislation.
Expatriates engaged in a labor relationship must make social security contributions. They must ask their Ecuadorian employer to register them with the social security system beginning with their first day of work. Foreign residents who contribute to the system may not continue to receive coverage from their home countries.
Totalization agreements. Ecuador has entered into totalization agreements with Argentina, Bolivia, Brazil, Chile, Colombia, the Dominican Republic, El Salvador, the Netherlands, Paraguay, Peru, Portugal, Spain, Uruguay and Venezuela.
D. Tax filing and payment procedures
Tax on income from wages is withheld at source by employers. Taxpayers might not be required to file returns if 100% of their gross income for the calendar income year consists of employment income from one employer. Otherwise, in the following year, taxpayers must file returns between 10 March and 28 March, depending on the ninth digit of the individual’s taxpayer identifi cation number.
Married persons are taxed separately, not jointly, on all types of income.
The fiscal year runs from 1 January to 31 December.
Late filers must pay a monthly penalty equal to 3% of the tax due, up to 100% of the tax due, plus monthly interest at a low rate.
E. Double tax relief and tax treaties
Foreign income received by Ecuadorian tax residents is exempt from income tax in Ecuador if such income has been subject to tax in the source country, unless the Ecuador Internal Revenue Service has determined that the source country is a tax haven.
Ecuador has entered into double tax treaties with the following jurisdictions.
Argentina* France Romania
Belarus Germany Russian
Belgium Italy Federation
Brazil Japan Singapore Canada Korea (South) Spain
Chile Mexico Switzerland
China Mainland
Qatar Uruguay
* This is a double tax treaty on activities with respect to air traffic.
Ecuador has also entered into a double tax treaty with Bolivia, Colombia and Peru (Andean Community countries), through Decision 578 of the Andean Community, but this particular agree ment has limited application.
F. Temporary visas
An application for a visa may be presented before the Ministry of Foreign Affairs in Ecuador or at the Ecuadorian consulate in the applicant’s country of origin or in the country where the individual is considered a legal resident. Both temporary and permanent residence visas are issued to foreign nationals.
Temporary resident visas are valid for two years and can be renewed multiple times.
G. Temporary visas for labor activities and self-employment
All foreign nationals must obtain temporary visas for labor activities to work legally in Ecuador. Temporary residence visas are valid for two years and can be renewed multiple times, at the discretion of the Ministry of Foreign Affairs.
Depending on the conditions of the assignment, foreign nationals can apply for the following visas:
• Temporary residence visa under labor contract: this type of visa allows expatriates to work in an Ecuadorian company by being part of the local payroll and signing a labor contract. The Ecuadorian branch must be duly incorporated with all docu mentation updated. In addition, the share capital of the com pany must be at least USD12,500.
• Temporary residence visa for legal representation: this type of visa allows expatriates to perform temporary legal representa tion activities in an Ecuadorian company (for example, general managers, presidents and attorneys). The legal representative must be designated by an appointment or a power of attorney. It must meet the same corporate requirements listed above.
A foreign national who wants to begin his or her own business in Ecuador must obtain a temporary residence visa. After 21 months as a temporary resident, he or she will be allowed to obtain a permanent residence visa.
Foreign nationals traveling temporarily in Ecuador may apply for a change of status during their stays in Ecuador without leaving the country. This depends on the purpose of their stays.
All foreign nationals holding one of the visas described above can obtain an Ecuadorian identification.
H. Permanent residence visas
Permanent residence visas are valid for an indefinite period of time. This type of visa allows individuals to obtain an Ecuadorian identification, as well as to work or not work for an Ecuadorian company. In this regard, they are not required to change their migratory category if they are employed by a local company.
Foreign nationals can obtain permanent residence visas if they have stayed in Ecuador as a temporary resident for 21 months.
I. Family and personal considerations
Family members. Depending on the conditions of the expatriate’s assignment, family members can apply for visas as dependents. If the expatriate has a temporary residence visa as a dependent, the spouse is not allowed to work in Ecuador. If the spouse has a temporary residence visa as a holder, the spouse can perform any type of activity in Ecuador. Children can study if they have a temporary or permanent residence visa as a dependent. Such children are not required to obtain a student visa.
Marital property regime. Ecuadorian law provides for a marital property regime that applies to all couples legally married under Ecuadorian law and to foreign couples living in Ecuador who register their marital status with the Ecuadorian officials. Under the regime, all types of property interests arising during the mar riage belong to the couple in common. Income earned on jointly held property is divided equally between spouses. Property acquired before the marriage remains separate, unless it is contributed to the marital community at the time of the marriage.
Driver’s permits. A foreign national may drive legally in Ecuador using his or her home country driver’s license. However, after a foreign national obtains a valid visa, he or she must obtain a cor responding Ecuadorian driver’s license.