Ecuador Personal Income Tax

Ecuadorians and foreign nationals resident in Ecuador are subject to tax on their worldwide income. Nonresidents are subject to tax on Ecuadorian-source income only, regardless of where it is paid. Both Ecuadorians and foreign residents who receive income for business activities or professional, commer­cial or other services performed in Ecuador are subject to income tax.

Individuals are considered resident for tax purposes if their stay in Ecuador exceeds 183 days, consecutive or non-consecutive, within a calendar year. In addition, individuals are considered resident if their stay exceeds 183 days within a 12-month period in two con­secutive calendar years.

Income subject to tax. The taxation of various types of income is described below.

Employment income. Taxable income includes income from ser­vices rendered under a verbal or written contract of employment, regardless of whether the income is received in cash, in services or in kind.

In general, all employees receive the following annual bonuses, which are exempt from income tax:

  • Christmas bonus, known as the thirteenth salary, which equals approximately one-twelfth of their annual compensation.
  • Education bonus, known as the fourteenth salary, which equals one Unified Basic Remuneration (USD366 for 2016).
  • Retirement funds, which equal one-twelfth of the year’s remu­neration (8.33% of annual remuneration). This amount is payable from the second year of employment for the same employer.

Compensation for industrial accidents and death, payments for out-timed dismissal (dismissal without legal notice or legal cause), severance payments and amounts received from pension and retirement funds are also exempt from tax.

Self-employment and business income. Individuals are subject to tax on income from business activities conducted within Ecuador and on income arising from goods and assets located in Ecuador.

Business income includes the income of individuals who are sole proprietors or active members of a partnership in a commercial, industrial, mining or agricultural business in which they have in vested capital. Income is taxed at the rates set forth in Rates.

Investment income. In general, dividends are exempt from with­holding tax if they are distributed after corporate income tax. However, this income needed to be incorporated in the global income of the individual for the purposes of applying the pro­gressive tax rates of 0% to 35%, which are applied to taxable income (see Rates).

In general, dividends remitted abroad to Ecuadorian and foreign individuals and companies are not subject to income tax with­holding. However, dividends remitted to companies located in tax havens are subject to an additional withholding tax, equal to the maximum income tax rate applicable to individuals (35%) less the current corporate income tax rate (25% for 2016), which results in an additional withholding of 10% for 2016.

The above rules also apply to trust funds.

Royalties received from investments in Ecuador are treated as ordinary income. Royalties received from abroad are exempt from tax if they were subject to tax in the source country.

Interest paid to residents is added to the taxpayer’s taxable income and taxed at the rates set forth in Rates. Interest paid to residents is subject to withholding tax at a rate of 2%, which is credited against the taxpayer’s annual tax due.

Taxation of employer-provided stock options. In general, benefits derived from stock options are taxed as other income (income that is different from salary or professional wages). Each case must be analyzed separately.

Capital gains. Capital gains derived from occasional sales of shares are subject to income tax at a rate of 22% for 2016.

Deductions

Deductible expenses. Social security contributions paid by employ­ees are deductible for income tax purposes.

Personal deductions and allowances. For 2016, individuals can deduct personal expenses and spouses’ and dependents’ expenses up to 50% of total annual income, subject to a maximum deduc­tion of USD14,521. Deductible expenses include housing, educa­tion fees, medical expenses, food costs and clothing. The maxi­mum deductible amount for each of these expenses is USD3,630.25, except for medical expenses, which may be up to USD14,521.

Business deductions. The following business expenses are deductible for income tax purposes:

  • Costs and expenses directly incurred in the generation of tax­able income.
  • Interest paid on business debts. The interest rate may not exceed the rate fixed by the Central Bank of Ecuador.
  • Certain taxes levied on the business (not including income tax or taxes that give rise to a tax credit).
  • Insurance premiums paid to secure employees’ work risks and the assets of the business.
  • Losses as a result of force majeure or criminal acts.
  • Necessary travel expenses and lodging.
  • Depreciation and amortization.
  • Amortization of losses (for individuals who have accounting books).
  • Wages, salaries and compensation in general, fringe benefits, 15% profit sharing, severance indemnities and other expenses under the Labor Law.
  • Provisions for uncollectible receivables.
  • Income tax and social security for employees if assumed by the employer.
  • Provisions for retirement pension funds for employees with at least a 10-year relationship with the employer.
  • Expenses that are payable at the completion of an activity, that are exclusively identified with the normal course of business and that are properly endorsed in contracts or invoices or other obligatory legal instruments.

Rates. For the 2016 income tax year (1 January to 31 December), tax is levied on employment, self-employment and business income at the following rates.

Taxable income (USD)

Exceeding               Not exceeding

 

Tax on lower
amount
USD
Rate on
excess
%
0 11,170 0 0
11,170 14,240 0 5
14,240 17,800 153 10
17,800 21,370 509 12
21,370 42,740 938 15
42,740 64,090 4,143 20
64,090 85,470 8,413 25
85,470 113,940 13,758 30
113,940 22,299 35

 

Nonresidents staying in Ecuador for not more than six months in a fiscal year and who receive Ecuadorian-source income are sub­ject to a 22% withholding tax, which is a final tax. This tax also applies to dividends distributed before corporate income tax.

Relief for losses. Losses may be carried forward to offset profits in the following five tax years. Losses may only offset the busi­ness income of individuals who maintain accounting books. The amount offset cannot exceed more than 25% of the taxable income in the current fiscal year.

Inheritance and gift taxes

Income derived from inheritance and gifts are taxed at the follow­ing progressive rates for 2016.

 

Total inheritances
and gifts received (USD)

Exceeding                  Not exceeding

      Tax on lower                            Rate on

amount (USD)                    excess (%)

0 71,220 0 0
71,220 142,430 0 5
142,430 284,870 3,561 10
284,870 427,320 17,805 15
427,320 569,770 39,172 20
569,770 712,200 67,662 25
712,200 854,630 103,270 30
854,630 145,999 35

 

Social security

Coverage. The Social Security Institute of the government man­ages the social security system, which covers health benefits, pensions and certain social payments. All private, public and foreign employees and self-employed professionals are covered by social security legislation.

Expatriates engaged in a labor relationship must make social security contributions. They must ask their Ecuadorian employer to register them with the social security system beginning with their first day of work. Foreign residents who contribute to the system may not continue to receive coverage from their home countries.

Totalization agreements. Ecuador has entered into totalization agreements with Chile, Colombia, Netherlands, Peru, Paraguay, Spain, Uruguay and Venezuela.

Tax filing and payment procedures

Tax on income from wages is withheld at source by employers. Taxpayers might not be required to file returns if 100% of their gross income for the calendar income year consists of employ­ment income from one employer. Otherwise, in the following year, taxpayers must file returns between 10 March and 28 March, depending on the ninth digit of the individual’s taxpayer identifi­cation number.

Married persons are taxed separately, not jointly, on all types of income.

The fiscal year runs from 1 January to 31 December.

Late filers must pay a monthly penalty equal to 3% of the tax due, up to 100% of the tax due, plus monthly interest at a low rate.

Double tax relief and tax treaties

Foreign income received by Ecuadorian tax residents is exempt from income tax in Ecuador if such income has been subject to tax in the source country, unless the Ecuador Internal Revenue Service has determined that the source country is a tax haven.

Ecuador has entered into double tax treaties with the following countries.

Argentina*                         France                               Romania

Belgium                              Germany                           Singapore

Brazil                                  Italy                                   Spain

Canada                               Korea (South)                   Switzerland

Chile                                   Mexico                              Uruguay

China

* This is a double tax treaty on activities with respect to air traffic.

Ecuador has also entered into a double tax treaty with Bolivia, Colombia and Peru (Andean Community countries), through Decision 578 of the Andean Community, but this particular agree­ment has limited application.

Temporary visas

Applications for visas may be presented at the Ministry of Foreign Affairs in Ecuador, at the Ecuadorian consulate in the applicant’s country of origin or in the country where he or she is considered a legal resident. Both immigrant and non-immigrant visas are issued to foreign nationals.

Work visas and self-employment

All foreign nationals must obtain work visas to work legally in Ecuador. Work visas are valid for one or two years and are renew­able for one or two years each time, at the discretion of the Foreign Affairs Ministry.

Depending on the conditions of the assignment, foreign nationals can apply for the following work visas:

  • Work visa under labor contract: this type of visa allows expatri­ates to work in an Ecuadorian company by being part of the local payroll and signing a labor contract. In general, the per­centage of foreign nationals working in an Ecuadorian compa­ny may not exceed 20% of the total number of employees. The Ecuadorian branch must be incorporated and have all corporate documents updated. In addition, the share capital of the com­pany must be at least USD12,500.
  • Work visa under assignment letter: this visa allows assignees to work in an Ecuadorian company and receive their compensa­tion from a foreign company. They maintain a labor relationship with the foreign company. It must meet the same corporate requirements listed above.
  • Work visa for temporary legal representation: this type of visa allows expatriates to perform temporary legal representation activities in an Ecuadorian company (for example, general managers, presidents and attorneys). The legal representative must be designated by an appointment or a power of attorney. It must meet the same corporate requirements listed above.

A foreign national who obtains an immigrant visa may begin his or her own business in Ecuador. However, a foreign national heading for an indefinite period a foreign company, branch or subsidiary must obtain an immigrant visa and also become a resident of Ecuador.

Foreign nationals traveling temporarily in Ecuador with business visas may apply for a change of status during their stays in Ecuador without leaving the country. This depends on the pur­pose of their stays.

Residence permits

Permanent residence permits are valid for an indefinite period of time. This type of visa allows individuals to obtain an Ecuadorian identification, as well as to work or not work for an Ecuadorian company. In this regard, they are not required to change their migratory category if they are employed by a local company.

Family and personal considerations

Family members. Depending on the conditions of the expatriate’s assignment, family members could apply for visas as dependents. If the expatriate has a non-immigrant visa, the spouse is not allowed to work in Ecuador. If the spouse has an immigrant visa as a dependent, the spouse can perform any type of activity in Ecuador. Children can study by having a visa as a dependent, either as non-immigrant or immigrant. Such children are not required to obtain a student visa.

Marital property regime. Ecuadorian law provides for a marital property regime that applies to all couples legally married under Ecuadorian law and to foreign couples living in Ecuador who register their marital status with the Ecuadorian officials. Under the regime, all types of property interests arising during the mar­riage belong to the couple in common. Income earned on jointly held property is divided equally between spouses. Property acquir­ed before the marriage remains separate, unless it is contri buted to the marital community at the time of the marriage.

Driver’s permits. A foreign national may drive legally in Ecuador using his or her home country driver’s license. However, after a foreign national obtains a valid visa, he or she must obtain a cor­responding Ecuadorian driver’s license.