Ecuador Corporate Tax Guide

Ecuador

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Quito GMT -5

EY

Inglaterra y Amazonas esq. Edificio Stratta 11th Floor P.O. Box 170507 Quito Ecuador

Principal Tax Contact

 Javier Salazar

+593 (9) 6315-5777

+593 (9) 6315-5777

Mobile: +593 (9) 9978-2007 Email: javier.salazar@ec.ey.com

International Tax and Transaction Services – International Corporate Tax Advisory Carlos Cazar

+593 (4) 263-4500

Mobile: +593 (9) 9815-5662 Email: carlos.cazar@ec.ey.com

Guayaquil GMT -5

EY +593 (4) 263-4500 Ave. Francisco de Orellana

Fax: +593 (4) 263-4351 y A. Borges

Edificio CENTRUM – 14th Floor Guayaquil Ecuador

Business Tax Advisory, Indirect Tax and Global Trade Carlos Cazar

+593 (4) 263-4500

Mobile: +593 (9) 9815-5662 Email: carlos.cazar@ec.ey.com

Because of the frequent changes to the tax law in Ecuador in recent years, readers should obtain updated information before engaging in transactions.

A. At a glance

Corporate Income Tax Rate (%) 25 (a)

Capital Gains Tax Rate (%) 0 to 10 (b)

Branch Tax Rate (%) 25 (a)

Withholding Tax (%) (c)

Dividends 10/14 (d) Interest 25 (e) Royalties 25 Technical Assistance 25 Services 25 Branch Remittance Tax 0

Net Operating Losses (Years) Carryback

5 (f)

(a) Companies that reinvest their profits in Ecuador and use them to acquire assets for productive activities in Ecuador are entitled to a reduction of 10 percentage points in the corporate income tax rate on the reinvested amount (that is, the reinvested profits are taxed at 15%) if the company increases its capital stock and such increase is registered with the Commercial Register by 31 December of the fiscal year.

(b) Capital gains tax on sales of tangible assets is not imposed in Ecuador. Gains derived from direct or indirect transfers of shares of Ecuadorian entities are subject to flat-rate income tax.

(c) These withholding taxes are imposed on remittances abroad to non-domiciled companies and nonresident individuals. The withholding tax rates may be reduced under tax treaties. For further details concerning withholding taxes, see Section B.

(d) For details, see Section B.

(e) A 25% withholding tax is imposed on payments of interest to non-domiciled companies and nonresident individuals unless the interest is paid on loans granted by financial institutions, nonfinancial specialized entities registered with the Superintendence of Banks or multilateral institutions (Andean Corporation for Promotion, International Monetary Fund or World Bank). Thin-capitalization rules apply to the deductibility of interest paid to related parties (see Section E).

(f) See Section C.

B. Taxes on corporate income and gains

Corporate income tax. Corporate income tax is levied on compa nies domiciled in Ecuador and on foreign companies. Companies domiciled in Ecuador include those incorporated in Ecuador and companies incorporated in foreign countries that have been approved as branches by the Superintendence of Companies after a legal proceeding. Companies incorporated in Ecuador are sub ject to tax on their worldwide income. Foreign companies are subject to tax on income derived from activities within Ecuador and from goods and assets located within Ecuador.

Rate of corporate tax. The standard rate of corporate income tax is 25%.

The corporate income tax rate is increased to 28% if either of the following conditions is met:

• The local entity has not reported the corporate structure (until the last individual ultimate beneficial owner) or partially reported it.

• An entity domiciled in a tax haven, low-tax jurisdiction or in a preferential-regime jurisdiction is in the corporate structure of the local taxpayer and its beneficial owner is an individual resident in Ecuador.

The 28% rate is applied to the tax base in proportion to the own ership affected by one of the events listed above. If this owner ship is equal to or exceeds 50% of the local entity corporate capital, the 28% rate applies to the entire tax base.

Exporting, manufacturing or receptive tourism companies that reinvest their profits in Ecuador and use them to acquire assets for productive activities in Ecuador are entitled to a reduction of 10 percentage points in the corporate income tax rate on the reinvested amount (that is, the reinvested profits are taxed at 15%) if they retain the reinvested profits until 31 December of the tax year following the tax year in which the profits are earned.

Capital gains. Capital gains tax on sales of tangible assets is not imposed in Ecuador.

Gains derived from direct or indirect transfers of shares (and other capital representative rights) of Ecuadorian entities are subject to tax at a flat rate of 10%.

Indirect transfers are taxable if both of the following conditions are met:

• At any time during the tax year in which the transfer is per formed, the real value of the shares of the Ecuadorian entity or permanent establishment represents directly or indirectly 20% or more of the real value of the nonresident company’s shares.

• In the same fiscal year or 12 months before the transaction, the transfer of shares of the nonresident company by the same seller directly or indirectly corresponds to an aggregate amount exceeding 300 basic fractions of income tax for individuals (USD3,393,000 for the 2022 fiscal year). This amount is in creased to 1,000 basic fractions of income tax for individuals (USD11,310,000 for the 2022 fiscal year) if the transaction does not exceed the 10% of the total share capital.

Under the above rule, the Ecuadorian entity whose shares were negotiated or transferred is considered the substitute for the taxpayer and, consequently, is responsible for the income tax payment.

This tax does not apply in the case of corporate restructures, mergers or spin-offs, provided that the beneficial owners of the shares do not change before and after the procedure.

Losses on transfers of shares between related parties are not deductible.

Administration. The fiscal year runs from 1 January to 31 December. No other closing dates are permitted, regardless of the date a business begins operations. Returns must be filed between 10 April and 28 April.

Companies have the option to make an advance payment equal to 50% of income tax from the preceding year, subtracting the with holdings made with respect to the taxpayer in that preceding year.

As a result, if no tax is payable for a fiscal year or the tax payable is lower than the advance payment, it is possible to file a refund petition for the income tax overpaid.

The penalty for late filing is 3% of the income tax due for each month or fraction of a month of the delay, up to a maximum of 100% of the tax due. Interest at the maximum legal rate, which floats, is levied on all increases in tax assessments from the date the tax was originally due to the date of payment.

Withholding taxes. A 25% withholding tax is generally imposed on the following payments abroad:

• Interest, royalties and payments for technical assistance to nondomiciled companies and nonresident individuals

• Payments to nonresident individuals for services rendered

• Payments to non-domiciled companies for professional services rendered abroad or occasional services rendered in Ecuador

Income tax withholding at a rate of 25% applies to all reimburse ments of expenses abroad.

Income tax withholding at a rate of 35% applies to cross-border payments made to recipients in tax havens, low-taxation jurisdic tions or preferential tax regimes.

Penalties are imposed for failures to comply with the withholding requirements. Withholding agents who deliberately fail to pro vide taxpayers, totally or partially, with tax withholding receipts are subject to imprisonment and fines.

Dividends. Dividends distributed to nonresidents after the pay ment of income tax are subject to an effective income tax or with holding tax of 10% (tax base of 40% taxed at a 25% rate). The effective rate is increased to 14% (tax base of 40% taxed at a 35% rate) if the local entity does not fufill its obligation to report the corporate structure up to the final beneficiary. The rate may be reduced in accordance with an applicable treaty. If the effective beneficiary is an individual resident in Ecuador, a withholding tax is imposed at rates up to 25% according to a progressive table issued by the tax authorities.

For anticipated dividend distributions (before the annual income tax return), withholding tax at a rate equal to the corporate income tax rate is applied. This is a self-assessment methodology and the income tax paid is considered to be a tax credit for the local entity in its annual income tax return.

Foreign tax relief. Foreign income received by companies domi ciled in Ecuador is taxable, and the amount of the withholding tax may be used as a tax credit up to the rate applicable in Ecuador depending on the type of income.

C. Determination of trading income

General. Taxable income is based on accounting profits after the corresponding tax reconciliation adjustments.

In computing taxable income, a company can deduct expenses incurred in producing income, including production and distribution costs, interest charges, royalty payments and depreciation. Also, employee profit-sharing distributions (15% of gross profit) can be deducted before computing taxes. Special provisions gov ern the computation of taxable income from the export of petro leum, air and maritime transportation, the banana sector and other agro-livestock activities that are subject to the single tax regime.

Expenses incurred abroad are generally deductible if correspond ing taxes are withheld and if the payment constitutes taxable income for the recipient. The following cross-border payments are deductible subject to specified limitations:

• Payments for imports, including interest and financing fees, as provided in import licenses

• Export fees of up to 2% of the export value

• Interest paid to related parties that are subject to the thincapitalization rules (see Section E)

• Payments under financial leases

• Indirect costs allocation (up to 5% of the total of the tax base and these costs)

Nondeductible expenses include the following:

• Interest paid on foreign loans, to the extent the interest rate exceeds the limit established by the Central Bank Board, and interest on foreign loans not registered at the Ecuadorian Central Bank

• Interest payments to related parties that exceed 20% of the earnings before interest, taxes, depreciation and amortization (EBITDA) of the local entity

• Losses on sales of assets between related parties

• Accounting provisions for the payment of eviction and employer retirement pensions

• Leasing payments with respect to leasebacks or trade with related parties

Inventories. Inventory is generally stated at cost (calculated using the average, first-in, first-out [FIFO] or actual methods). Inventory write-offs must be documented through a sworn statement that the inventory was destroyed or donated.

Tax depreciation and amortization. Depreciation and amortization expenses are deductible for income tax purposes. The tax law provides the following maximum straight-line depreciation rates applicable for tax purposes.

Asset Rate (%)

Commercial and industrial buildings, aircraft and ships 5 Office equipment 10 Motor vehicles and trucks 20 Plant and machinery 10 Computers 33

For tax purposes, as a general rule, expenditures to acquire prop erty and other assets that produce revenue must be amortized over at least 5 years, using a straight-line depreciation rate of 20%. Intangibles must be amortized over either the term of the relevant contract or a 20-year period.

The tax authorities may approve other methods and annual rates for depreciation and amortization.

Research and development expenses are generally written off over five years.

Relief for losses. Net operating losses may be carried forward and offset against profits in the following five years, provided that the amount offset does not exceed 25% of the year’s profits. Loss carrybacks are not permitted.

Groups of companies. For tax purposes, no measures exist for fil ing consolidated returns and relieving losses within a group.

D. Other significant taxes

The following table summarizes other significant taxes.

Nature of tax Rate (%)

Value-added tax (VAT); imposed on sales and commercial transactions, imports, rendering of services (including imported “digital services”) and intellectual property rights; principal products that are exempt are food products in their natural state, drugs and veterinary products, as well as additional products as a result of the COVID-19 pandemic; for VAT purposes, digital services are those provided and/or contracted through the internet or any adaptation or application of protocols, platforms or technology used by the internet or other networks, through which similar services are provided that, by their nature, are automated and require minimal human intervention, regardless of the device used for downloading, viewing or use; for digital services relating to the delivery and shipping of tangible movable goods, the tax is calculated on the commission paid in addition to the value of the goods; the payment of VAT generated on digital services supply is assumed by the Ecuadorian resident importer of the services 12 Outflow tax (OT); imposed on all cross-border payments or money transactions abroad, with or without the intervention of financial institutions, and monies deposited abroad through bank transfers, OT also applies to any form of termination of obligations and checks or wire transfers; tax is withheld at source; foreign banks operating in Ecuador must pay the tax monthly; the tax law provides that OT applies to payments made from foreign bank accounts of Ecuadorian entities if OT was not levied on the cash when it was initially transferred to the foreign bank account and to exports of goods and services if the cash does not enter Ecuador within six months after the goods arrive at their destination or the services begin to be rendered; OT paid on imports of raw materials, supplies and capital goods may be used as a tax credit for income tax purposes for the following five years if such goods are used in production processes and listed in a resolution issued by the Internal Revenue Service (IRS) of Ecuador 5 Temporary contribution; imposed on the net equity reported in the 2020 income tax return of all companies with more than USD5 million in assets; the contribution should be paid during 2022 and 2023; rate applied to all of he assets of the company

E. Miscellaneous matters

Foreign-exchange controls. All transactions in Ecuador must be conducted in US dollars.

Debt-to-equity rules. A thin-capitalization rule applies in Ecuador. Any interest paid on loans from related parties in excess of 20% of income before mandatory employee profit sharing, interest, depreciation and amortization is not deductible. For banks, insur ance companies and other financial institutions of the popularand solidarity-based economy (small financial entities that are not controlled by the Superintendence of Banks, but the Superintendence of the Popular and Solidarity Economy), the thin-capitalization rule applicable on loans from related parties is a 3:1 debt-to-equity ratio.

Free-trade zone. The signatories of the Andean Community or the former Andean Pact (Bolivia, Colombia, Ecuador and Peru) have entered into a free-trade agreement. However, Peru signed the agreement with some restrictions. Under the agreement, merchandise and goods manufactured in one of the signatory countries may enter the other signatory countries free of customs duties. All items imported from other countries are subject to a common external customs duty.

Transfer pricing. In general, transfer-pricing rules in Ecuador fol low Organisation for Economic Co-operation and Development (OECD) rules, because they require fulfillment of the arm’s-length standard. Nevertheless, the technical preferences of the IRS are quite specific and may imply significant differences when mea suring compliance with the rules. Special rules apply to oil, ba nanas and metallic commodities.

In addition to traditional ownership-control criteria to determine relationships between parties, since 2008, the law considers com panies related if they are domiciled in foreign jurisdictions listed as tax havens by the Ecuadorian IRS (87 jurisdictions) or if they are paying anywhere else a corporate income tax deemed as “low” by the IRS (as of 2020, the threshold is 15%).

Transfer-pricing information must be documented by all compa nies having transactions with related parties, including domestic ones. Companies must file their documentation with the IRS if certain conditions are met, as described below.

Income taxpayers that have carried out transactions with related parties during a fiscal year in an amount exceeding USD3 million must submit the Transfer Pricing Annex to the IRS.

Income taxpayers that have carried out transactions with related parties during a fiscal year in an amount that exceeds USD15 mil lion must submit the Transfer Pricing Annex and the Transfer Pricing Comprehensive Report to the IRS.

Income taxpayers that do not meet the minimum amounts mentioned above must submit the Transfer Pricing Annex or the Transfer Pricing Comprehensive Report at the request of the IRS.

Transactions that are added up for purposes of the threshold in clude most balance-sheet movements.

Certain transactions (most of them are domestic if certain condi tions are met) are not added up for purposes of the threshold and are not part of the compulsory Annex or Report, but their docu mentation may be requested at any time by the IRS.

The deadline to file the Transfer Pricing Annex and the Transfer Pricing Comprehensive Report is two months after the deadline for the filing of the corporate income tax return, which includes certain declarations on the total amounts of relevant related par ties’ transactions.

Taxpayers involved in transactions with related parties are ex empt from the application of the transfer-pricing regime if they satisfy all of the following conditions:

• Their corporate income tax is higher than 3% of taxable in come.

• They do not conduct business with residents in tax havens or lower-tax jurisdictions.

• They do not have contracts with government institutions for the exploration or exploitation of nonrenewable resources.

Transactions covered by an Advanced Pricing Ruling (APR) of the IRS do not need to be reported. APRs may be requested at any time and for any transaction, but they are commonly used to eliminate deductibility restrictions that the Ecuadorian tax law imposes on related-party transactions regarding administrative and technical services, royalties, consultancy, technical assis tance and similar items.

F. Treaty withholding tax rates

Under an agreement with Bolivia, Colombia and Peru (the Andean Pact), income earned in those jurisdictions is generally not taxed in Ecuador to avoid double taxation. The withholding tax rates under Ecuador’s bilateral treaties are shown in the fol lowing table.

Dividends (a) Interest Royalties % % %

Belarus 5/10 10 10

Belgium 15 10 10

Brazil 0 15 15 (c)

Canada 5/15 15 10/15

Chile 5/15 4/15 10/15

China Mainland 0/5 0/10 0/10

France 15 10/15 15

Germany 15 15 15

Italy 15 0/10 5

Japan 5 0/10 10

Korea (South) 5/10 0/12 5/12

Mexico 0 0 25

Qatar 5/10 10 10

Romania 15 10 10

Russian Federation 5/10 10 10/15

Singapore 0/5 0/10 10

Spain 15 10/15 15 Switzerland 15 10 10 Uruguay 10/15 15 10/15 Non-treaty jurisdictions 10/14 (a) 25 (b) 25

(a) Only 40% of distributed dividends (if paid from profits taxed at the corporate level) is taxable under Ecuadorian domestic law.

(b) A 25% withholding tax is imposed on the payment of interest abroad unless the interest is paid on loans granted by financial institutions, specialized nonfinancial entities qualified by the control authorities in Ecuador or multilat eral institutions.

(c) Trademark royalties are taxed at a rate of 25%.