Ecuador: advance payment of Income Tax on undistributed profits
The Organic Law for Social Transparency introduced a highly relevant figure in the tax planning of corporations in Ecuador. This measure includes an advance payment of Income Tax (IR) on undistributed profits, regulated under Article 39.2.1 of the Internal Tax Regime Law (LRTI).
Why was it introduced?
This mechanism seeks to incentivize the timely distribution or capitalization of profits in Ecuador, preventing the indefinite accumulation of earnings within a company’s equity.
According to the regulation, resident companies in Ecuador and permanent establishments of non-resident companies that have not distributed their accumulated profits by July 31st of each fiscal year will be required to make an advance IR payment. This amount is calculated based on said undistributed profits. This advance does not constitute a final tax but rather a compensable tax credit.
How is the advance payment calculated?
The advance payment is calculated by applying a single rate to 100% of undistributed profits, in accordance with a progressive scale ranging from 0% for profits of up to USD 100,000 to 2.50% for amounts exceeding USD 500 million. This regulatory design significantly increases the financial burden on companies with high levels of accumulated equity.
A key technical aspect is the determination of the taxable base, which is constructed from the equity accounts declared in Income Tax Form 101. For the year 2025, the base is determined using information from the 2024 fiscal year, while from 2026 onwards, broader criteria will be used -including profits recorded in voluntary reserves, contributions for future capitalization, or other equivalent equity accounts. This reflects the legislator’s focus on prioritizing economic substance over accounting form.
When to make the payment for profits in Ecuador?
Regarding the declaration and payment, the advance must generally be filed in August, according to the ninth digit of the RUC (Taxpayer ID). However, for the 2025 period, an exceptional regime was established with payments in November and December, in two equal installments. Taxpayers can opt for installment payments, which mitigates the impact on cash flow.
The advance payment may be offset against the single tax on dividends, against Income Tax incurred in the same or subsequent fiscal years (for up to three years), or even claimed as a refund, if the legal requirements are met. Nevertheless, if the company neither distributes nor capitalizes the profits during the two subsequent fiscal years, it loses the right to offset or recover the advance payment, and the amount must be recorded as a non-deductible expense. This reinforces the deterrent nature of the regulation.
Conclusions
In conclusion, the advance payment on undistributed profits constitutes an instrument of tax control and economic policy that compels companies to reassess their strategies regarding profit retention, dividend distribution, and capitalization, adopting an integrated approach that aligns accounting, financial, and tax considerations.
If you wish to expand your operations to Ecuador, do not hesitate to contact us to help you achieve a secure and prosperous international expansion for your multinational or investment fund.
At Auxadi, we offer comprehensive services in accounting, tax, payroll, transfer pricing and corporate legal services to multinationals and funds. With experience since 1979 and a presence in over 50 countries, including 26 proprietary subsidiaries, our advanced technological platform and proven methodology enable us to guarantee efficient management in compliance with local regulations.
Author:
Guillermo Enrique León
Tax Manager – EC
Can Auxadi help?
Auxadi can become your ideal partner. We offer a one stop shop value added outsourcing services in the areas of accounting and reporting, tax compliance, payroll management and representation services, among others.
Local Knowledge – International Coverage
Founded in 1979, Auxadi is a family-owned business working for multinational corporations, private equity funds and real estate funds. It’s the leading firm in international accounting, tax compliance, payroll, transfer pricing, and corporate legal services management connecting Europe and the Americas with the rest of the world, offering services in 50 countries. Its client list includes many of the top 100 PERE companies. Headquartered in Madrid, with offices in US and further 26 international subsidiaries, Auxadi serves 1,500+ SPVs across 50 jurisdictions.
All information contained in this publication is up to date on 2024. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice.No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.
