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Ecuador

Last Verified on Wednesday 31st October 2018

    • Ecuador

      Tax attributes are owned by the taxpayer (domestic target). Operating-loss carry-forwards or tax credits will not disappear because of a change in ownership of company shares. It is worth mentioning that losses may be used as a deduction for only five years after they are generated.

      Nevertheless, a company’s tax attributes are not transferred to an acquirer when the transfer of ownership does not include the transfer of shares, for instance, when a transfer of assets and liabilities occurs. In such a case, there are no strategies or structures for preserving tax attributes.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Usually foreign investors who decide to purchase companies in Ecuador tend to acquire shares as part of a foreign direct investment, whether alone or in partnership with Ecuadorian investors. It is important to point out that the profit obtained in the transfer of shares and rights representing equity is subject to the payment of the single income tax in accordance with the following table:

      From

      To

      %

      US$0.00

      US$20,000

      0%

      US$20,001

      US$40,000

      2%

      US$40,001

      US$80,000

      4%

      US$80,001

      US$160,000

      6%

      US$160,001

      US$320,000

      8%

      US$320,001

      And up

      10%

      The creation of the Single Income Tax on profit from the sale of shares was incorporated into the Internal Tax Regime Law through the enactment of the Organic Law for Development of Production, Attraction of Investments and Generation of Employment and Fiscal Stability and Balance on 21 August 2018.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The contribution of assets to a partnership may take into account the real valuation of an asset; the asset may be depreciated in that company based on the value of the contribution. It should be noted that this amount must be reasonable and verifiable, since the parties are liable for any inconsistency in the valuation of assets.

      While the accounting methods allow recording a “good will” value if acquisitions of assets and liabilities are priced higher than the reasonable book value, the amortisation of this “good will” is generally challenged by fiscal authorities. Under certain circumstances, this kind of intangible may be amortised with fiscal effects.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Income earned on the transfer of shares is taxable to the extent that capital representation rights are transferred, directly or indirectly, from Ecuadorian companies domiciled in Ecuador, or permanent establishments in Ecuador. However, transfers of shares that are made through exchanges in Ecuador and that do not exceed twice the maximum tax-exempt amount (US$22.540 for 2018) will be deemed exempt from income tax.

      Indirect sales of shares (ie, those made on shares of companies that are, in turn, shareholders of the Ecuadorian company) must comply with certain parameters to be considered as such. These parameters relate to the participation in the company transferred and the amounts involved in the transaction. 

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In Ecuador, the sale of shares is subject to income tax; thus, this could involve exchange or transfer of shares through a rollover being considered as two separate transactions subject to such taxation. This does not mean that there is a limitation on performing this type of transaction, but it does mean that the opportunity cost of performing the operation in this manner is not the most suitable for the parties.

      We are currently waiting for the regulations regarding the tax treatment for the sale of more than one share package and its taxability within the same fiscal year.

      One option to consider that does not involve a rollover transaction is that the third-party acquirer of the shares performs a company capital increase so that the capital is arranged consistent with the value expected to be transferred through the rollover.

      The capital increase is not subject to income tax, because it does not involve a transfer of shares.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The most common way to buy a business is to do it through local or foreign companies non-resident in Ecuador, often domiciled in jurisdictions protected under double taxation agreements. It is also usual to participate through partnership contracts as in the case of consortia, joint ventures and trust arrangements, except when involving public procurement issues in which, due to the need for domiciliation, they use to invest through their branches, or consortiums established under public regulations or both. Use of jurisdictions classified as tax havens or as jurisdictions with lower tax rates is not recommended, since there are a few tax penalties, mainly related to dividends that would be affected by income tax when the beneficial owner of the shares is an Ecuadorian tax resident, as well as the 5 per cent remittance tax (RT).

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The benefits offered by Ecuador are associated with new productive investments in the country’s strategic and priority sectors to encourage local production and import substitution. On 21 August 2018, the Organic Law for Development of Production, Attraction of Investments, and Generation of Employment and Fiscal Stability and Balance was enacted establishing income tax exemptions in Ecuador for a term of eight to 20 years depending on the new investment made, as well as an exoneration of the currency remittance tax in the case of imports and distribution of dividends for companies that enter into investment contracts with the Ecuadorian state. The incentives granted in the aforementioned law must be applied in certain sectors established in the Law, which as follows.

      Twelve years of exemption from income tax and its advance payment for new investments made outside the jurisdictions of Quito and Guayaquil in the sectors prioritised by the state, which comprise the following:

        • agricultural sector: production of fresh, frozen and industrialised foods;
        • forest and agroforestry chain and their processed products;
        • metalworking;
        • petrochemical and oleochemical industries;
        • pharmaceutical industry;
        • tourism, cinematography, audio-visual production, and international events: This benefit will be applied in the terms and conditions provided in the Regulations;
        • renewable energies including bioenergy or biomass energy;
        • logistics services for foreign trade;
        • applied biotechnology and software;
        • exporting of services: this benefit will be applied in the terms and conditions provided in the regulations;
        • software development and services, technological hardware development and production, digital infrastructure, it security, digital products and content, and online services;
        • energy efficiency: energy-efficiency service companies;
        • sustainable construction materials and technology industries;
        • the industrial, agroindustrial, and agro-associative sectors; and
        • the sectors for strategic substitution of imports and development of exports as determined by Executive Order of the President of the Republic based on recommendations issued by the Sectoral Production Council. It is worth mentioning that if the investment is made in the cantons of Quito and Guayaquil, the exemption provided for in the law is eight years, and when the investment is made in the border areas of Ecuador, exemptions are extended to 15 years. When new investments are made in the sectors considered basic industries, the income tax exemption is for 15 years, and when the investment is made in the border cantons, it is for 20 years. The basic industry sectors are the following:
          •   copper and/or aluminium refining and casting;
          •  flat steel castings manufacturing;
          •  hydrocarbons refining;
          •  petrochemical industry;
          •  cellulose industry; and
          •  naval-vessel construction and repair. Likewise, income tax exemptions are maintained on interest paid abroad for credits granted by foreign financial institutions or non-financial entities registered with the Superintendency of Banks.

      Notwithstanding the foregoing, the mere purchase of shares in a company that performs the aforementioned activities does not per se create such exemptions.

      The RT exemption also applies under the conditions referred to in previous points. Income tax and RT exemption for investment income earned on fixed income securities traded on Ecuadorian exchanges. Additional depreciation expense on assets that encourage care of the environment. Additional income tax deduction for expenses incurred for personnel training, technological innovation and advertising, inter alia (within certain limits and depending on the type of business). Income tax and RT exemption on dividend payments to foreign investors not domiciled in tax havens or lower-tax-rate jurisdictions. Reduced income tax rate (10 points) to companies that reinvest their profits in the purchase of new productive assets – for exporters, producers of goods, and providers of receptive tourism, under certain circumstances. Income tax-rate difference (15 per cent) for SEDZ (Special Economic Development Zone) operators. There is a 15-year income tax exemption on new productive investments made over the next five years in the provinces of Manabí and Esmeraldas, starting from the effective date of this legislation.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Real estate transactions in Ecuador are subject to income tax payment provided the company’s ordinary course of business is real estate sales. A taxpayer who does not perform such activity regularly may make up two transfers per year without paying the corresponding income tax. Real estate sales are not subject to VAT. In this regard, the enactment of the Law for the Development of Production established the income tax exemption for distribution of company, trust, and complementary fund dividends where the exclusive economic activity is investment in real estate property, provided they meet with the following conditions:

      • that they distribute all the profits, returns, or net benefits to their shareholders, quotaholders, investors, or beneficial owners;
      • that their shares or securities are registered in the stock market’s Public Registry and in a stock exchange in the country;
      • that the quotaholder or investor has maintained the investment in the collective fund or in securities from securitisation trusts for a term greater than 360 days; and
      • that at the end of the fiscal year they have at least 50 shareholders, quotaholders, or beneficial owners, none of whom is directly or indirectly the owner of 30 per cent or more of the assets of the fund or trust. Related parties are not to be included in the calculation of quotaholders.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      As to income tax, there is no difference in the tax treatment, as such; however, within the scope of real estate it is important to differentiate between real estate companies (property sales) and construction companies, whose accounting treatment – and therefore tax treatment – should be observed particularly with respect to registration and when paying the tax, the second kind being regulated for the most part.

      As to another category of assets, it is necessary to observe tax treatment on the sale of intangibles (intellectual property rights), portfolio and trust rights, where direct and indirect taxes (IR and VAT) may apply, as well as shares, it being relevant to understand whether the company trades on the stock market, as well as aspects concerning its cost to determine the profit.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Some municipal charges – a licence tax and a 1.5-per-thousand tax – levied on economic activities in a certain municipal jurisdiction must be taken into consideration; these charges are equity and asset-based, respectively. Account should also be taken that 15 per cent of annual net profits before income tax must be paid out to company workers, this being a deductible expense for the calculation of income tax.

      Account must also be taken of the remittance tax, which is a 5 per cent levy on remittances abroad and, by presumption, foreign payments made with funds held abroad, under certain circumstances. Some exemptions should be considered, such as the one afforded to dividends paid abroad, the principal and interest on some loans, and the capital and returns on certain investments, shares included.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Indeed, in Ecuador income tax withholding at the source is applied to foreign payments of tax residents when the income is deemed to be from an Ecuadorian source. There is no withholding for payments on the importing of goods.

      The 5 per cent remittance tax applies in the case of payments, remittances or transfers abroad, with certain exemptions.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The general withholding rate for income tax is 25 per cent, which was modified by the Organic Law for the Reactivation of the Economy, Strengthening of Dollarization and Modernization of Financial Management. Special withholdings apply for payments abroad to jurisdictions listed as tax havens (35 per cent); or in the case of payments that have differentiated treatments, as is the case of reinsurance premium transfers, commissions to exporters, ship chartering, international news agencies, inter alia.

      It is noteworthy that there is no income tax or RT withholding for dividends paid to shareholders that are not tax residents in Ecuador. In the case of RT, exceptions would apply in cases where payments are made to tax havens.

      As per current local regulations, in the case of a double taxation agreement, if the transaction exceeds 20 maximum tax-exempt amounts (US$225,400 in fiscal year 2018), notwithstanding the regulation by the tax authority that sets the rule, a withholding of 25 per cent must be applied in Ecuador, subject to a subsequent tax rebate after the tax authority validates the transaction and application of the agreement. This is without prejudice to the need to obtain a certification of tax residence.

      It should be noted that Ecuador recognises withholding at the source be carried out abroad and corrects the double taxation by the full exemption method, provided the source country is not considered a tax haven or lower-tax jurisdiction. In the event of a withholding from a tax haven, the credit imputation method is applied.

      Finally, we should mention that there are certain treaties with multilateral agencies that could apply to exclude or preclude withholding.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The VAT rate in Ecuador for 2018 is 12 per cent. It is noteworthy that certain goods and services bear a zero per cent rate.

      Transfers of ownership for good and valuable consideration or for free generated in the sale and import of tangible personal property are subject to the tax, as are the provision and import of services and the transfer of copyrights, industrial property and related rights.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      We have found no strategies to mitigate VAT in transfers of goods or services. It should be noted, however, that there are certain transfers with zero per cent VAT, and VAT-free acts do exist, inter alia, such as contributions to partnerships, share transfers, sale of businesses including assets and liabilities, transfers of property resulting from mergers, corporate demergers and transformations, donations to the public sector or to non-profit organisations.

      VAT is a tax that is passed on at each stage of the marketing of goods, eventually falling to the end consumer, through a tax credit mechanism. Special consumption tax, another indirect tax, is applied to the first transfer; however, it is charged in the cost of consumer goods.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Claims for overpayments or improper payments may be proposed to the authorities within three years from the date on which payment was made. Claims for tax assessments may be lodged in administrative proceedings within 20 days from the issue of the act, and in the courts within sixty days after such issue. In both cases, these are working days. The Tax Code states that the actions of the tax authority are regulated and contestable activities. It is worth noting that the power of the tax authorities to carry out acts of assessment expires, in general terms, in three years if the taxpayer’s return is complete and on time, and in six years if otherwise.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In Ecuador, a company cannot be held responsible for the taxes of other companies in the group to which it belongs, nor for taxes that other companies owed prior to its becoming a part of the group, nor afterwards, once the (target) company becomes part of a group of companies.

      According to the Tax Code, a company’s legal representatives and the persons in charge of managing the company account are responsible up to the amount of the assets to be managed and the income generated during its administration.

      Once a company has been acquired, the purchaser is responsible for past and future obligations of the acquired company entailing the obligations of the year in which the company was acquired and going back up to two years. In exceptional cases, it could be responsible for the obligations of the year in which the acquisition is made and going back as far as five years.

      Companies that replace other companies and take over their assets and liabilities, in whole or in part, by merger, transformation, takeover merger, or any other operation, are responsible as acquirers or successors of assets and liabilities.

      Similarly, a corporation whose shares have been sold directly or indirectly will be liable as a substitute of the shareholder (whether an individual or a body corporate) selling the shares and, therefore, will be answerable to the respective authorities for taxes and the fulfilment of formal obligations.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In contracts for the sale of shares in local companies, generally, an indemnification clause for hidden liabilities is usually agreed that includes the buyer’s right to be indemnified by the seller if tax liabilities arise within the Tax Authority’s assessment-authority prescription and expiry periods. This type of agreement, on certain occasions, includes the approximate valuation of the contingency, after a due diligence review, as well as the withholding on the price payment, which is held back for the duration of the prescription and expiry periods.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Compensation for hidden liabilities, whether applied via a discounted price or direct delivery, represents taxable income for the company or shareholders who receive it. We have found no exemptions from this type of income, unless they come from duly retained insurance coverage and relate only to consequential damages and not to loss of profits.

      In general, we could say that we did not found it common to apply a gross-up for indemnity amounts.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      A foreign shareholder of an Ecuadorian company could be faced with paying income tax in Ecuador if profits are received on the sale of such shares.

      Overall, those not residing in Ecuador are under no responsibility to submit statements or fulfil other formal or material duties of a tax nature in Ecuador. However, foreign shareholders must be reported to the tax authority, up to the last level of ownership, and any company in Ecuador failing to do so will be penalised with an income tax rate increase of three percentage points.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      As a rule, interest paid to overseas related parties is deductible. However, it should be noted that credits must not surpass 300 per cent of the equity of the company receiving the loan. In practice, the tax authority will examine the financial conditions of the transaction and may rate it as thin capitalisation, in which case it will cease to allow the deductibility of interest. It should also be noted that payments abroad of both capital and interest will be subject to the 5 per cent remittance tax, unless they involve a productive credit granted by a foreign financial institution or a non-financial registered institution (other exemptions may apply; for instance, in the case of a two-year interest-free presence of the funds in the country, which is dealt with further on). Finally, it is important to consider that interest payments to related parties (other than financial institutions) will be subject to the 25 per cent income tax withholding, regardless of their deductibility, unless there are double taxation agreements, in which case each will need to be observed, as will the specific case.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      We can take into account the following limitations, which are contained in anti-circumvention provisions:

      • royalties, administrative services, technical services and consulting fees paid to overseas related parties are only deductible to the extent that they do not exceed 20 per cent of the tax base plus these costs;
      • indirect costs allocated from abroad (parent or related parties) can only be deductible to the extent they do not exceed 5 per cent of the tax base plus these costs;
      • reimbursement of expenses could be disallowed when the tax authority verifies the intentional use by a country with which a double taxation agreement is in force;
      • interest on credits granted by overseas related parties will be deductible provided that the credit does not exceed 300 per cent of the equity of the company receiving the credit; and
      • charges for commercial leasing are deductible to the extent that they do not exceed the interest rates provided for in the Act (BBA LIBOR).

      It should be noted that all charges between related parties must abide by the principles of arm’s length and economic reality.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In Ecuador, transfer pricing has applied since 2005, following the guidelines of the OECD, with increasing control on the part of the tax authority, which has basically been observing the method applied and the comparable used. The taxpayer must complete and submit a report to the tax authority when it has transactions of more than US$15 million with related parties and the annex when it exceeds the amount of US$3 million.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In Ecuador dividend income is established when the company’s board decides on its distribution. 

      If dividends are distributed to local companies, or individuals or companies not residing in Ecuador, other than companies with an effective beneficiary residing in Ecuador, they will be treated as exempt from Ecuadorian income tax. Dividends will be partially taxed on the part whose shareholder structure was not reported to the Tax Authority. We have found no anti-income-deferral rules.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Regarding Remittance Tax, the law provides that withdrawals of capital contributed to companies or self-financing without interest for productive investments that have stayed in Ecuador for two years or more may be removed without the application of the 5 per cent RT.

      Sales of shares, assets, business, mergers, demergers or other legally permitted sales may also be considered.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Ecuador has signed agreements to prevent double taxation with the following: Singapore, Qatar, Germany, Brazil, China, France, Italy, Romania, Andean Community (Bolivia, Colombia and Peru), Belgium, Chile, Korea, Canada, Spain, Mexico, Switzerland and Uruguay. We find no agreements being negotiated or renegotiated at present.

      Most of the abovementioned agreements follow the OECD model, while Decision 578, which establishes the regime to prevent double taxation between countries of the Andean Area, follows a model of its own that gives preference to taxation at the source.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Ecuador keeps a list of countries that are considered tax havens for tax purposes. In addition, it provides for a “subject-to-tax provision” to identify jurisdictions with lower tax rates, where every country that maintains a tax rate under 60 per cent of that in force in Ecuador – that is, 15 per cent – will be classified as such. Other conditions related to the information or real activities of foreigner companies could raise a tax haven consideration. The consequences are given in terms of the taxability of the transaction with higher income tax rates, the deductibility of expenses (need for financial circumstances) and the elimination of benefits on dividend payments, which would be subject to RT.  Another consequence would be that if there is a withholding by a company domiciled in a tax haven or lower tax rate jurisdiction, the company in Ecuador would not be able to correct the double taxation under the exemption method, but rather it would be under the imputation of credit.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      In Ecuador, there is a socially oriented parafiscal levy in the form of a 15 per cent worker profit-sharing payment made annually to a company’s workforce based on the pre-tax accounting profit (revenue minus costs and expenses, with conciliatory aspects being considered in certain cases), 10 per cent of which is distributed to employees in equal measure and the remaining 5 per cent based on number of dependants.

      At the local level, companies that carry on economic activity in a certain canton must pay the municipal licence tax (calculated based on equity with a tax ranging between US$10 and US$25,000) and the 1.5-per-thousand tax on total assets (which is calculated based on total assets minus current liabilities and contingencies). Regarding this, the Law for the Development of Production clarified that the holding companies or shareholding companies do not carry out economic activities and therefore are not subject to the payment of the municipal patent tax or the 1.5 per thousand on total assets.

      The licence tax does not have to be paid by companies engaged in agricultural, agroforestry and livestock activities.

      Other types of local taxes may apply, such as property taxes in case of real estate ownership.

      Finally, we should mention that in Ecuador a number of heterodox national taxes apply, the main ones being the rural lands tax, the foreign assets tax (regulated entities), the remittance tax, and the consolidated tax (for bananas, agriculture and livestock, fisheries and aquaculture), palm farming and stock transfers, as well as donations, inheritances and endowments).

      Last verified on Wednesday 31st October 2018

    • Ecuador

      The Law for Development of Production, Attraction of Investments, and Generation of Employment and Fiscal Stability and Balance, which contains important tax incentives, was published on 21August 2018. Issuance of the Regulations for the Application of the Law is pending. In this regard, the main reforms introduced by this Development Law are the following: Exemption of from eight to 20 years for new and productive investments in sectors considered priorities and basic industries, return of the income tax advance, single income tax on stock transfers, etc.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Income from a company’s Ecuadorian-based revenue, which includes, sans differentiation, income from capital gains (except for capital gains from the sale of shares), is subject to the 25 per cent income tax rate. Nonetheless, the benefit is not applicable when the shareholder composition of the company resident in Ecuador is made up of shareholders domiciled in tax havens or lower tax rate jurisdictions, when the beneficial owner is an Ecuadorian tax resident, for which the following must be taken into consideration:

      A 28 per cent income tax rate applies when 50 per cent or more of the capital stock is domiciled in such jurisdictions and the beneficial owner is an Ecuadorian tax resident. A 28 per cent rate applies when the company fails to report information to the tax authority on its de facto beneficial shareholders, up to and including the last individual who is part of the corporate chain.

      There are differentiated rates in the case of companies operating in special development zones whose tax rate is ten points less than the regular rate (15 per cent).

      We can add that reinvestment of profits in specific productive assets and it can reduce the income tax rate by 10 percentage points, with some limitations.

      Finally, there is a consolidated tax, with rates ranging between 1 per cent and 2 per cent for the banana sector – and this may include other subsectors such as agriculture and livestock, fisheries or aquaculture – and the application of the single income tax on profit from share sales, which has a maximum rate of 10 per cent.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Indeed, Ecuadorian legislation considers income from indirect transfers of shares in companies in Ecuador to be subject to income tax, classifying the company resident in Ecuador as a substitute taxpayer bound to answer for the taxes incurred. Still, there are certain limitations, respecting the level of participation in the company being sold and the amounts involved in the transaction, on effecting an indirect stock sale.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Ecuador has a 5 per cent remittance tax on monetary remittances abroad and, by presumption, on payments abroad made with funds held abroad, even belonging to third parties. Import of goods and services is taxed locally with the VAT at a current rate of 12 per cent rate. Customs fees and duties on imports should be taken into account (tariffs, safeguards, etc) as well as income tax withholding on payments abroad.

      Last verified on Wednesday 31st October 2018

    • Ecuador

      Currently, the application of double taxation agreements has been limited by the enactment of rules setting forth that a double taxation agreement can be applied automatically up to the amount of 20 maximum tax-exempt amounts of natural persons (US$225,400 in fiscal year 2018); anything over this amount is subject to a withholding of 25 per cent, even if there is a double taxation agreement, such a withholding being open to reimbursement by the Tax Authority after following the respective procedure.

      Last verified on Wednesday 31st October 2018

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