Corporate tax in Ecuador

Summary

Corporate Income Tax Rate (%) 22 (a)
Capital Gains Tax Rate (%) 0 / 22 (b)
Branch Tax Rate (%) 22 (a)
Withholding Tax (%) (c)
Dividends 0 (d)
Interest 22 (e)
Royalties 22
Technical Assistance 22
Services 22
Branch Remittance Tax 0
Net Operating Losses (years)
Carryback 0
Carryforward 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 12%) 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 considered to be income subject to corporate 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) A 13% withholding tax is imposed on dividends paid to recipients located in tax havens or other jurisdictions with a lower rate of income tax or in the case of anticipated dividend distributions (before the annual income tax determi­nation).

e) A 22% withholding tax is imposed on payments of interest to non-domiciled companies and nonresident individuals unless the interest is paid on loans grant ed by financial institutions or multilateral institutions (Andean Cor­poration for Promotion, Inter national 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.

Taxes on corporate income and gains

Corporate income tax. Corporate income tax is levied on compa­nies 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 ap – proved as branches by the Superintendence of Companies after a legal proceeding. Companies incorporated in Ecuador are subject 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 22%.

If an entity has shareholders domiciled in tax-haven jurisdictions, the corporate income tax rate is increased to 25%, and it is ap­plied to the tax base in proportion to the tax-haven shareholders’ ownership; if this ownership exceeds 50%, the 25% rate applies to the entire tax base.

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 12%) 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 of Ecuadorian entities are considered to be income subject to cor­porate income tax. Indirect transfers of tax are taxable if both of the following conditions are met:

  • At any time during the tax year in which the sale is performed, the real value of the shares of the Ecuadorian entity represents directly or indirectly more than the 10% of the real value of the shares of the nonresident company. The tax administration will establish by resolution the procedure for calculating this per­centage. However, as of the time of writing, this resolution had not yet been issued.
  • In the same fiscal year, the sale of shares of the nonresident company, directly or indirectly corresponds to an aggregate amount exceeding 300 basic fractions of income tax for indi­viduals (USD3,240,000 for the 2015 fiscal year).

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

This tax does not apply in the case of mergers, spin-offs or corporate transformations.

Losses on sales 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 be tween 10 April and 28 April.

Companies must make an advance payment of income tax equal to the sum of 0.2% of the equity of the company, 0.2% of the total costs and expenses deducted in the calculation of income tax, 0.4% of the total assets of the company and 0.4% of the total income subject to income tax. The equity and total assets are determined as of the end of the preceding fiscal year. The other amount is the total for the preceding fiscal year.

The amount of the advance payment is calculated in the annual tax return. The advance payment is payable in two installments, which are due in July and September. To calculate the amount of the advance payment, the withholdings made with respect to the taxpayer in the preceding year are subtracted.

The advance payment is considered a minimum tax. As a result, if no tax is payable for a fiscal year, the advance tax is considered a final tax payment that may not be refunded or offset against tax in future years.

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 22% withholding tax is generally imposed on the following payments abroad:

  • Interest, royalties and payments for technical assistance to non-domiciled 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 22% applies to all reimburse­ments of expenses abroad.

Income tax withholding at a rate of 35% applies to payments made to tax-haven jurisdictions.

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

Dividends. In general, dividends distributed after the payment of income tax are not subject to income tax or withholding tax. How ever, if the beneficiary is an Ecuadorian individual, a with­holding tax is imposed (between 1% and 13%). Also, a 13% with­holding tax is imposed on dividends paid to recipients located in tax havens or other jurisdictions with a lower income tax rate. For anticipated dividend distributions (before the annual income tax determination), withholding tax at a rate equal to the corporate income tax rate is applied.

Foreign tax relief. Ecuador does not grant relief for foreign taxes paid to companies domiciled in Ecuador.

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 gov­ern the computation of taxable profits from the ex port of petro­leum, maritime transportation and video films.

Expenses incurred abroad are generally deductible if correspond­ing 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 thin-capitalization rules (see Section E)
  • Payments under financial leases
  • Indirect costs allocation (up to 5% of the tax base)
  • Royalties, technical services, management fees and consulting services paid to related parties (up to 20% of the sum of the tax base and these expenses)

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 (the maximum rate is the Prime Rate), and interest on foreign loans not registered at the Ecuadorian Central Bank
  • Losses on sales of assets between related parties
  • Leasing payments with respect to leasebacks or trade with related parties

Inventories. Inventory is generally stated at cost (calculated using the average, last-in, first-out [LIFO], 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 prop­erty and other assets that produce revenue must be amortized over 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.

Organizational costs may be amortized over a 10-year period. Research and development expenses are generally written off over five years.

Depreciation of fixed assets in excess of their original cost is permitted if business assets are revalued as a result of inflation or increased replacement costs.

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 carry backs are not permitted.

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

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 and intellectual property rights;
principal products that are exempt are food
products in their natural state, drugs and
Veterinary products
12
Currency exportation tax (CET); 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, checks or wire
transfers; tax is withheld at source; foreign
banks operating in Ecuador must pay the tax
monthly; the tax law provides that CET applies
to payments made from foreign bank accounts
of Ecuadorian entities if CET 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; CET 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
5

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 a 3:1 debt-to-equity ratio is not deductible.

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. How ever, 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. Transfer-pricing regulations in Ecuador are based on the Organisation for Economic Co-operation Development rules, requiring that all transactions among related parties must be conducted in accordance with arm’s-length principles. Since 2008, the tax administration has considered companies to be related if any of the following circumstances exist:

  • Companies are carrying out transactions with companies domi­ciled in countries with a lower fiscal imposition than Ecuador. A lower fiscal imposition is deemed to occur if any of the follow­ing conditions are satisfied:

— The foreign country is on a list of countries established by the Internal Revenue Service of Ecuador.

— The fiscal imposition paid by the foreign party in its coun­try of establishment is lower than 60% of the Ecuadorian income tax rate (22%).

— The foreign party is a limited liability company established under US laws with owners not resident in the United States, and either the company or its owners are not subject to the US federal income tax or are located in Delaware, Florida, Nevada or Wyoming (these states do not have state income tax).

  • More than 50% of a company’s purchases or sales is executed with the same supplier or client, the tax administration notified the taxpayer regarding this relationship, and the taxpayer cannot prove that no relationship exists with respect to management, administration, control or capital (presumption of commercial relationship).

The following are the rules regarding the filing of transfer-pricing information:

  • Income tax payers that have carried out transactions with related parties (foreign or local) during a fiscal year in an amount ex­ceeding USD3 million must submit to the Transfer Pricing Annex to the tax administration.
  • Income tax payers that have carried out transactions with related parties (foreign and local) during a fiscal year in an amount that exceeds USD6 million must submit the Transfer Pricing Annex and the Transfer Pricing Comprehensive Report.
  • Income taxpayers that do not meet the minimum amounts men­tioned above must submit the Transfer Pricing Annex or the Transfer Pricing Comprehensive Report if the tax administra­tion requires it.

The deadline to file the Transfer Pricing Annex and the Transfer Pricing Comprehensive Report is two months after the company files an income tax return that includes a transfer-pricing analysis.

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

  • Their corporate income tax is higher than 3% of taxable income.
  • 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 non-renewable resources.

Treaty withholding tax rates

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

  Dividends (a)

%

Interest

%

Royalties

%

Belgium 15 10 10
Brazil 0 15 15 (c)
Canada 5/15 15 10/15
Chile 5/15 4/15 10/15
China 0/5 0/10 0/10
France 15 10/15 15
Germany 15 15 15
Italy 15 0/10 5
Korea (South) 5/10 0/12 5/12
Mexico 5 10/15 10
Romania 15 10 10
Spain 15 10/15 15
Switzerland 15 10 10
Uruguay 10/15 15 10/15
Non-treaty countries 0 22 (b) 22
    a) Dividends are exempt from withholding tax under Ecuadorian domestic law if corporate income tax was paid on the profits out of which the dividends were distributed.
    b) A 22% withholding tax is imposed on the payment of interest abroad unless the interest is paid on loans granted by financial institutions or multilateral institutions.
    c) Trademark royalties are taxed at a rate of 22%.

Ecuador has signed a tax treaty with Singapore, which is awaiting ratification by the Ecuadorian Assembly.