- Basic Principles
- Income tax
- Value Added Tax ("IVA")
- Currency Outflow Tax
- Municipal Taxes

1. Basic Principles

1.1 Taxes may only be created by laws passed by the Congress and enacted by the President. Tax bills may only be prepared and submitted to the Congress by the President.

1.2 Generally, taxes in Ecuador are levied by national and municipal governments.

1.3 The Internal Revenue Service ("IRS") is the administrative body that collects national taxes and generally provides interpretative and administrative regulations and rulings concerning the tax laws.

1.4 Municipal taxes are collected and administrative regulations are enacted by each municipal body.

1.5 Tax laws can be modified by tax treaties between the Republic of Ecuador and other countries. Ecuador has executed tax treaties and agreements to avoid double taxation with the Andean Community countries (Colombia, Peru, and Bolivia) and third countries such as Argentina, Brazil, Canada, Chile, Germany, Spain, France, Italy, Switzerland, Belgium, and Mexico.

1.6 The main corporate taxes applicable in Ecuador are the following:

1.6.1. Income Tax
1.6.2. Value Added Tax ("IVA")
1.6.3 Currency Outflow Tax
1.6.4 Municipal Taxes

2. Income tax

2.1 Generally, Ecuadorian entities and foreign entities with a branch or other type of permanent establishment in Ecuador are subject to Ecuadorian income tax. Ecuadorian corporations are liable for income tax on worldwide income. Tax on foreign entities is based on income related exclusively to Ecuadorian business.

2.2 Accounting books and records necessary to support the information shown on tax returns must be kept in Spanish and in US dollars (for internal purposes only, a company may keep different sets of books with different accounting standards). The form of the documentation required is flexible and varies according to circumstances. Typically, the financial statements include a balance sheet, a profit and loss statement, a statement of retained earnings, and statement of changes in financial position.

2.3 The tax administration system is based on the principle of self-assessment. Taxpayers must file a tax return annually with the IRS. On the tax return, taxpayers report their income, deductions, exemptions, and compute their tax plus the amount of the advanced income tax due the subsequent fiscal year. Tax due over the amount withheld must be paid with the return. Penalties and interest are imposed when a tax return is not filed on time or when the taxes caused or withhold are not paid by the due date.

2.4 Tax paid in excess may be claimed through a refund process in front of the competent administrative body or court.

2.5 Income for tax purposes is basically computed according to generally accepted accounting principles, as adjusted by certain regulations and tax provisions. Taxable income may differ from income for financial reports.

2.6 Generally, a corporation's gross profit for the taxable year equals gross receipts or sales, less returns and discounts (plus other income derived from interest, rents, royalties, capital gains and others), and less cost of goods or services sold. On the other hand, generally, only ordinary and necessary business expenses and costs are deductible for tax purposes. Although subject to many special limitations, deductible business expenses and costs generally include (but are not limited to) salaries and wages, bad debts, rents, taxes, interest, cost of goods or services imputable to income, and depreciation and amortization.

2.7 Dividends paid by Ecuadorian entities in favor of individuals not domiciled in Ecuador or foreign entities not domiciled in tax havens or reduced taxation jurisdictions constitute exempted income, once income tax has been paid by the source. If the shareholder of the Ecuadorian entity is a foreign individual not domiciled in Ecuador or a foreign entity (domiciled or not in Ecuador), the income tax paid by the Ecuadorian entity is attributed to the shareholder who may therefore use it as a tax credit in its home country (to the extent permitted by the corresponding local laws).

2.8 The taxable income is taxed at 25% fixed rate. If profit is reinvested –in the purchase of new machinery, equipment and other goods related to research and technology purposes- by increasing the capital stock of the company that generated such profit the income tax rate is lowered to 15%.

2.9 Advanced income tax applies and is equivalent to the amount resulting from adding 0.2% net equity, plus 0.2% total costs and expenses deductible for income tax purposes, plus 0.4% total assets, plus 0.4% total taxable income; less any income tax withholdings applied on the prior fiscal year.
Such advanced income tax is converted into minimum presumed income tax should (i) the company has no taxable revenue or (ii) income tax due is less than the advanced income tax paid plus existing withholdings.

2.10 Carry forward of losses is permitted for five consecutive years to offset taxable income in those years, such offset being limited to 25% of the taxable income of the corresponding year.

2.11 Generally, employers withhold income tax over wages and salaries of their employees. Entities also act as withholding agents on any payments that represent income to their beneficiaries.

2.12. Payments abroad

2.12.1 Dividends remitted abroad after having paid income tax in Ecuador or generated from exempted income -except those paid to tax havens- are not subject to any additional tax or to a withholding tax as far as income tax is concerned.

2.12.2 Generally, other remittances sent abroad that constitute income for the beneficiaries (i.e. royalties), whether forwarded, paid or credited in an account, are subject to a single 25% income tax rate that must be withheld at the source.

2.12.3 The following general exceptions apply:

2.12.3.1 Import of goods is fully exempt.

2.12.3.2 Interests and financial expenses related to financial loans granted by multilateral credit entities and duly registered with the Central Bank.

2.12.3.3 Commissions paid for exports (for up to 2% of the price of the exported goods) and for the promotion of incoming tourism are exempt.

2.12.3.4 Costs and expenses paid abroad by air and maritime transportation companies, as well as by fishing entities for high sea fishery activities are fully exempt.

2.12.3.5 Reinsurance fees paid to foreign entities not domiciled in Ecuador have 96% of the fee exempt.

2.12.3.6 Aircraft and vessel lease for providing international transportation have 90% of the fee exempt.

2.12.3.7 Lease payments of capital goods under a purchase option are fully exempt, as long as the purchase option is executed in due time and other conditions are fulfilled.

2.13. Capital gains

2.13.1 Generally, capital gains arising from assets located within Ecuadorian territory or belonging to Ecuadorian entities are subject to income tax and are therefore subject to normal taxation.

2.13.2 Capital gains from occasional sale of shares, participations and real estate are exempt from income tax. An "occasional sale" is deemed to be any sale that does not correspond to the regular course or within the normal activities of the business.

3. Value Added Tax ("IVA")

3.1 Generally, IVA is applied on transfers of ownership and on imports of movable property of a tangible nature at all phases of commercialization, as well as that of copyrights, industrial property and related rights. It is also applied on the rendering of local services or those rendered outside of Ecuador for use within the country. Some exceptions apply.

3.2 Save for the existing exceptions, IVA rate is 12%.

3.3 The following transfers of ownership are not subject to IVA: (i) contributions in kind for capitalization of entities, (ii) transfer of businesses which include the assets and liabilities, (iii) mergers, spin-offs and transformation of entities, (iv) assignment of shares, participations and other credit instruments.

4. Currency Outflow Tax

4.1 All payments abroad higher than US$1,000 are subject to a 2% currency outflow tax.

4.2 Outflow tax paid on imports of raw materials and capital goods which are subject to 0% duties for their import into Ecuador, may be used as a tax credit against income tax.

5. Municipal Taxes

There are mainly two municipal taxes that affect companies doing business in Ecuador:

5.1 The so-called municipal "patent" tax that must be paid yearly in all counties where commercial operations are carried out. Generally, the amount is not significant, although the formula for calculation is rather complex and varies from one municipality to the other. This tax is capped at US$5,000.

5.2 The 1.5/1,000 tax on total assets. This is an annual tax equal to 1.5 over one thousand on the total value of the assets (some deductions apply). It is paid proportionally in each county where the commercial operations are carried out.

© CORRAL & ROSALES, 2010

PLEASE NOTE: These comments are intended to provide general information only. Corral & Rosales cannot accept any responsibility for loss suffered by any persons acting or refraining from action as a result of information contained herein. Any specific legal questions should be addressed to the firm in Quito, Ecuador.