Ecuador is a country with a relatively stable body of legislation but, in recent times see it taking steps to adapt to global challenges and take advantage of the competitive opportunities of a post-COVID business landscape. The country recently published its tax reform law (which came into force at the end of November 2021), with the main objective of modernizing, encouraging economic recovery and financing the government’s efforts during the pandemic.
Here we detail the most important aspects the reform.
Companies negotiating investment agreements with the government under the new legal regime will benefit from a corporate income tax reduction of up to five percentage points. The accumulated amount of the profit cannot exceed the total amount of the investment and the profit will last the time of subscription of the contract.
Companies that subscribe to Investment Agreements may also benefit from exemptions from foreign trade taxes and Foreign Exchange Exit Tax (ISD) on the import of capital goods and raw materials necessary for the development of the project. The term of the investment contract will be a maximum of 15 years and may be renewed for the same number of years, although renewal will not be automatic and must be defined as convenient to the nature of the investment project.
Ecuadorian companies must pay the temporary contribution if their net worth, as of 31 December 2020, was equal to or greater than $5 million
Other aspects of investment contracts have been adjusted:
- In addition to tax stability, the investor may be granted legal stability relating to the specific sectoral regulations that have been declared essential for the management of strategic sectors or the provision of public services.
- Investors who have failed to comply with the contributions or acquisitions committed within the period provided for in the contract, or those who have failed to execute the investment within the foreseen period, may request to reform the investment schedule.
Temporary Contributions for Individuals
The tax reform establishes a contribution for resident individuals, who had a net worth of more than US$1 million as of 1 January 2021 (or $2 million for the conjugal society), either in local assets or held abroad. The contribution is due by 31 March 2022 and the rate is 1% for taxpayers with assets between $1 million and $1.2 million and 1.5% for taxpayers with assets between $1.2 million and $2 million.
To determine the tax base of the contribution, the values corresponding to: (i) land that maintains primary forests and ecological diversity zones, (ii) a main residence, (iii) unproductive agricultural land will be deductible. For cases (ii) and (iii) the deduction from the tax base will be up to $200,000 together. The contribution must also be paid by non-residents in relation to property located in Ecuador.
Additionally, those paying this contribution may deduct from the taxable base an amount equivalent to 5% of the average of their income tax caused in the financial years 2018, 2019 and 2020, without said value exceeding 5% of the total value to be paid (with certain conditions).
Temporary Contributions on Corporate Assets
Ecuadorian companies must pay the temporary contribution if their net worth, as of 31 December 2020, was equal to or greater than $5 million. The applicable tax rate is 0.8% and companies will pay the contribution in both 2022 and 2023.
Public entities, diplomatic missions, international agencies / organisations and non-profit entities are not obliged to pay this contribution.
Other tax reforms
From December 2021, the benefits provided for in international treaties to avoid double taxation will be applied automatically. Ecuadorian companies must apply withholding tax on payments made to residents of countries with which Ecuador has signed double taxation treaties, provided that the amount paid (within a fiscal year) exceeded a specific amount (US$565,000 in 2021).
The import of hydrocarbons, biofuels and natural gas and the services provided to foreign tourists by hotels and entities that offer tourist facilities are exempt from VAT.
The fees paid by Ecuadorian companies for international loans or capital contributions made by productive investments, and the sales of shares or similar assets by foreigners, are exempt from the Foreign Exchange Exit Tax (ISD).
The reform includes new income tax deductions for: (i) depreciation and amortization of machinery, (ii) equipment and technologies of sustainable construction, (iii) sponsorships and sponsorships made to educational entities, (iv) contributions and donations in favor of environmental projects.
Alternative methods for the resolution of tax conflicts
Tax disputes, including tax determinations filed by the Tax Office of Ecuador, can now be resolved through mediation. This mediation may be requested by the taxpayer in administrative proceedings and in judicial proceedings. The dispute will then be referred to a mediation centre.
The government of President Guillermo Lasso is working on the economic reactivation of Ecuador. The Portfolios of Production, Tourism, Telecommunications, Public Works and Energy constantly drive foreign investment, with a varied portfolio. To this we must add the important milestone of achieving entry to the Pacific Alliance, which will undoubtedly allow further economic growth in the medium and long term, and is an objective pursued by this tax reform.
If you’d like any more information on how your business will be affected by tax reforms, contact our Ecuador Team.
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All information contained in this publication is up to date on 2022. 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.