This country-specific Q&A provides an overview of Tax laws and regulations applicable in Ecuador.
How often is tax law amended and what are the processes for such amendments?
Tax reforms have been very often in the past years in Ecuador, at least once a year, with the general objective of attaining equity, efficiency and transparency of the Ecuadorian tax system; as well as, for obtaining a higher collection of taxes and a wealth redistribution.
Ecuadorian Constitution limits the possibility to the president to propose a new law that creates, modifies or eliminates taxes in Ecuador. After this proposal, the bill is send to the legislative (Asamblea Nacional), in which the debate occurs in the specialized commission and between all the members of the assembly.
Something that have improved is that during the debates in the National Assembly academic institutions, civil society and representatives from different productive sector share their opinions on the possible reform, to be considered during the final draft of the bill.
What are the principal procedural obligations of a taxpayer, that is, the maintenance of records over what period and how regularly must it file a return or accounts?
Procedural obligations for taxpayers, in terms of Ecuadorian domestic law, are understood as formal duties. According to our legislation, the main ones are the obligation of inscription in registries, keep accounting of their economic activities and file tax returns.
Regarding tax returns, these can be annual, semi-annual and monthly according to the type of tax and the regulations of the Tax administration.
Also, as formal duties have the obligation to allow the Tax authority to make inspections or to attend to hearings to explain or analyze a certain issue regarding their tax obligations.
In respect of maintaining records, the taxpayer should archive the documents that support their returns until the statute of limitations, being the longest 7 years. Even though, it is recommended that if there´s any document that support any expense registered in a return for any longer that term, it is also maintained.
Who are the key regulatory authorities? How easy is it to deal with them and how long does it take to resolve standard issues?
In Ecuador, according to our tax code, we have central tax administrations, local and exceptional ones. The key regulatory authorities in terms of taxes are Servicio de Rentas Internas, which is in charge and have competence to control and collect intern taxes such as income tax, VAT, outflow tax, between others. Also, the Servicio Nacional de Aduanas del Ecuador is a key regulatory authorities in terms of customs and foreign trade taxes.
Also, depending the place the business is located the local government plays a key role as a local tax administration.
About the time that they take to resolve standard issues, it will depend on the issue and its nature. Generally, claims or tax devolutions can take up to 120 business days, but there are some other issues such a binding inquiries or extraordinary reliefs that they do not have a time set to be resolved by the Tax administration.
Are tax disputes capable of adjudication by a court, tribunal or body independent of the tax authority, and how long should a taxpayer expect such proceedings to take?
Yes, the taxpayer is able to contest a tax assessment or any act of the administration before the same Tax authority by filing an administrative claim or it can be contested judicially.
When the taxpayer files a lawsuit against the act, it is solved by the Tax Court (Tribunal de lo Contencioso Tributario) and if one of the parties do not agree with the ruling there is an extraordinary remedy (recurso de casación) which is solved by the National Court of Justice.
Even though, Ecuadorian procedural code does state terms and dates for all procedural stages to happen, since the volume of cases the Court is never able to follow them strictly. This depends on the city the lawsuit is filed, but generally, the case before the Tax Court will take at least up to a year and the extraordinary remedy before the National Court of Justice can take up until 2 years.
Are there set dates for payment of tax, provisionally or in arrears, and what happens with amounts of tax in dispute with the regulatory authority?
Yes, there are set dates to file tax returns according to the tax identification number and if the duty is annual, semiannual or monthly. In case the taxpayer does not file in time, the tax administration will charge penalties and interests.
When the amount of tax is in dispute before the Tax administration the collection action suspended but the amount still generates interests for the time not being paid. If the amount is contested before the Court, at the beginning of the process the taxpayer will ask to pay or secure 10% of the amount if they want to suspend effects of the administrative act. In case this 10% is not paid, the lawsuit will continue but the Tax administration can collect the tax.
In either of them, the tax contested will still accrues interest until is paid or declared not legal.
Is taxpayer data recognised as highly confidential and adequately safeguarded against disclosure to third parties, including other parts of the Government? Is it a signatory (or does it propose to become a signatory) to the Common Reporting Standard? And/or does it maintain (or intend to maintain) a public Register of beneficial ownership?
The information collected by the Tax administration by the taxpayers is confidential and reserved, and its only to be used by the tax authority own processes such as tax assessments. Nonetheless, if it is required by a competent authority such as a judge, the Tax administration is obliged to disclose it.
Also, it is to be considered that our Tax administration has a lot of information publicly disclosed such as the tax identification number, address, economic activity, income/corporate tax of each year as well as outflow tax per year, the formal duties pending of compliance, and all of the obligations contested, to be collected or in a payment agreement.
Yes, Ecuador is signatory of the Global Forum on Transparency and Exchange of Information for Tax Purposes and as such, it had adopted the Common Reporting Standard. Since the adherence, Ecuador Tax administration (SRI) issued several regulations to apply the CRS and that allows the obliged to report the information on financial accounts regarding non Ecuadorian residents.
At the moment, Ecuador does not have a public registry of beneficial ownerships, but local societies are obliged to report an annex about shareholders, participants, partners, board members and administrators, in which the taxpayers have to report their property and control structure until the last level of property, thus the beneficial owner. But, this information is collected by the Tax administration and is confidential as exposed before.
What are the tests for residence of the main business structures (including transparent entities)?
In Ecuador, are deemed tax residents all companies or business structures created locally and under domestic lay. Also, foreign companies that adopt any structure according to the Companies Law are deemed Ecuadorian tax residents.
Have you found the policing of cross border transactions within an international group to be a target of the tax authorities’ attention and in what ways?
Yes, cross border transaction between related parties according to domestic law are subject of a target by a tax authorities in assessments in a ways to control de deduction limits in this type of transaction, such as in royalties, indirect expenses, etc. Also, a way of targeting is through transfer pricing analysis.
It is to be mentioned, that Ecuadorian taxpayers that have transactions with related parties of more than 3 million dollars, are obliged to present an annex that reports all this operations, detailed by amounts, subjects, jurisdictions.
Is there a CFC or Thin Cap regime? Is there a transfer pricing regime and is it possible to obtain an advance pricing agreement?
Ecuador has thin cap rules for deducibility of interest, according to the current law interests paid between related parties are subject of the following limits for deduction:
For banks, assurance companies and any other companies of the popular and supportive sector, such as, credit and savings cooperatives have a limit of 300% of equity.
For any other company, interests have a limit of a 20% from the EBITDA.
Ecuador does have transfer pricing regime, does have its general rules but also adopted as a technical reference the guidelines for transfer pricing of OECD as part of our domestic law.
Also, it is possible to obtain an advance pricing agreement called “consulta de valoración previa” that has to be filled before the Tax administration and is binding only about the operations reported in the agreement.
Is there a general anti-avoidance rule (GAAR) and, if so, in your experience, how would you describe its application by the tax authority? Eg is the enforcement of the GAAR commonly litigated, is it raised by tax authorities in negotiations only etc?
Yes, Article 17 of the Ecuadorian Tax Code has a general anti-avoidance rule that contains the possibility to qualify the taxing event according to their legal or economic reality.
The application by the tax administration always have been contested by taxpayers before the Courts because of the flaws, ambiguity and lack of technicality.
Also, it is to be considered that the Constitutional Court of Ecuador recently ruled that Article 17 is conditionally constitutional, because of its broadness and ambiguity, in that ruling the Court established several parameters to apply this rule and how the argument should be logically constructed to respect taxpayers’ rights.
Have any of the OECD BEPs recommendations been implemented or are any planned to be implemented and if so, which ones?
Ecuador is not a member of OECD nor the Inclusive Framework, but there are some reforms that either align with BEPS recommendations or have had influence by them.
Such as the thin cap rules about interests, VAT on digital services (Action 1), report on aggressive tax planning practices by advisers (Action 12) and regarding BEPS actions of transfer pricing, as mentioned, the guidelines of OECD are included as a technical reference in our domestic legislation.
In your view, how has BEPS impacted on the government’s tax policies?
As said before, considering Ecuador is not a member of the OECD or the Inclusive Framework, it can be said there has been an indirect impact. Also, there are some reforms that directly come from BEPS such as VAT of digital services and in other cases local policies have distanced from said recommendations.
Does the tax system broadly follow the recognised OECD Model? Does it have taxation of; a) business profits, b) employment income and pensions, c) VAT (or other indirect tax), d) savings income and royalties, e) income from land, f) capital gains, g) stamp and/or capital duties. If so, what are the current rates and are they flat or graduated?
Generally and in certain aspects, our tax system have similarities with the OECD Model, thus Ecuador is not a member.
In general terms, all the taxable income of a business entity is taxed a rate of 25% or 28% in case that they do not report their property chain or have in their chain shareholders in tax havens.
The income of natural persons tax in a graduated rate from 0% to 35%.
VAT in Ecuador has a rate of 12% and 0% for certain good and services.
Regarding capital gains, Ecuador has a single tax on the gains from the alienation of capital representative rights, at a graduated rate from 0 %to 10%.
Finally, regarding dividends they tax on 40% of the total amount of the dividend distributed. In case the divided is paid to nonresidents the rate is 25% and if it is paid to residents the rate is a progressive rate from 0% to 25%.
Is the charge to business tax levied on, broadly, the revenue profits of a business as computed according to the principles of commercial accountancy?
Yes, Ecuador follows International Financial Reporting Standards (IFRS) and also there are rules to do a tax conciliation and determine the base to be taxed.
Are different vehicles for carrying on business, such as companies, partnerships, trusts, etc, recognised as taxable entities? What entities are transparent for tax purposes and why are they used?
Every vehicle for carrying business it is subject to taxation, in general terms, domestic tax legislation defines society as any type of vehicle such as trusts, companies, factual societies, between others.
Regarding certain vehicles such as some trusts, depending the nature and object, can be exempt of taxation as the ones regarding property ownership.
Is liability to business taxation based upon a concepts of fiscal residence or registration? Is so what are the tests?
Both, as said before all Ecuadorian societies are subject to tax, in the broad terms of society that our legislation gives to it and are tax residents too. Also, foreign companies can be tax residents if domiciles or adoption or any form of the Companies Law.
Despite the above mentioned, anyone that wants to pursue an economic activity in Ecuador must register to the tax administration and obtain a tax identification number (RUC).
Are there any special taxation regimes, such as enterprise zones or favourable tax regimes for financial services or co-ordination centres, etc?
Yes. Ecuador does have special taxation regimes and enterprises zones with favorable taxes conditions. For example, the Special Economic Development Zones (ZEDE by its acronym in Spanish) are specific zones delimitated in territory for new investments with tax incentives.
Also, there are several tax benefits and exemptions for new and productive investments in basic industries or prioritized sectors.
About special taxation regimes, there is also a simplified one for taxpayers of income until sixty thousand dollars per year, who have to pay a set amount monthly to cover income tax and VAT.
Also, a regimen for micro-business that simplified formal duties and tax at a rate of 2% on gross income.
Are there any particular tax regimes applicable to intellectual property, such as patent box?
No, in Ecuador there are no particular tax regimens for intellectual property, such as patent box.
Is fiscal consolidation employed or a recognition of groups of corporates for tax purposes and are there any jurisdictional limitations on what can constitute a group for tax purposes? Is a group contribution system employed or how can losses be relieved across group companies otherwise?
The tax administration (SRI) formed economic groups by the information presents in the annex about shareholders, taking into consideration the following criteria, property of more than 40%, direction, administration and commercial relations.
The result of that is the conformation of 302 economic groups that represent more than 50% of the tax collection of Ecuador.
Despite of that, these economic groups do not have implications on taxation per se, because each of the societies or personas that are part of them tax individually according to their own situation.
Are there any withholding taxes?
Yes. Ecuadorian tax system prescribes withholding taxes, principally, for income tax, VAT and outflow tax each one has its different percentages and conditions according to the nature of the taxpayer and transaction.
Are there any recognised environmental taxes payable by businesses?
Yes. Mainly we have one environmental tax paid by businesses called “Impuesto Redimible a las Botellas Plásticas” that tax bottling of beverages in non-returnable plastic bottles.
Also, recently there is a tax for plastic bags that is part of the especial consumption tax, which is charged by businesses to consumers.
Is dividend income received from resident and/or non-resident companies exempt from tax? If not how is it taxed?
In case of dividends received from resident companies, they are only exempt if they are received by another resident company. If they are received by a resident person it will tax only on the 40% of the gross dividend and then at a rate from 0% to 25%.
If it is received by a non-resident from a resident company, it will tax only on the 40% of the gross dividend and at a rate of 25%.
Finally, is a resident receive a dividend from a non-resident company, it will be exempt if it was taxed on the country of source.
If you were advising an international group seeking to re-locate activities from the UK as a result of Brexit, what are the advantages and disadvantages offered by your jurisdiction?
At the moment, Ecuador is good place for new investments since there are a lot of tax exemptions to new and productive investments in terms of corporate tax, outflow tax and duties. Also, with the signature of an investment contract tax stability can be agreed.
Also, recently there has been a development of many vehicles to implement a business in Ecuador with the modernization of our legislation in terms of corporate law.
Additionally, is to be considered that Ecuador is a dollarized country and since the new government the public policies have turns into attract foreign investment.
As disadvantages, our legislation regarding employment is favorable to employees, we have a limited list of tax treaties and the outflow tax. Nonetheless, is to be mentioned that the current president have recurrently stated his intention to progressively reduce this tax.
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