ECUADOR: An Introduction to Tax

Ecuador Tax Overview 

General Insights 

Ecuador is a constitutional democracy governed by an executive president and a legislative National Assembly. It has an independent judicial system and two additional constitutional branches – the National Electoral Power and the Council for Citizen Participation and Social Control.

The US dollar has been legal tender in Ecuador since the year 2000.

Legislative bills relating to tax enactments, modifications, exemptions, or the elimination of taxes are proposed by the president. Such bills must be enacted by the National Assembly. Economic policies are directed by the executive branch. The executive branch and certain state institutions have the authority to set and modify import duties and public service fees, which do not need approval from the National Assembly.

During President Guillermo Lasso’s administration, Ecuador has directed its policies towards developing international trade. Customs duties have been reduced. Likewise, the Capital Remittance Tax (ISD) has been reduced from 5% to 3.5%. By the end of 2023, the ISD rate will be 2%.

On 17 May 2023, the president issued Executive Decree No 741, to legally dissolve the Ecuadorian parliament, pursuant to Article 148 of the Constitution. The latter was the president’s response to an impeachment procedure started by parliament. As a result, new authorities, including a president, must be elected. The National Electoral Council has called for general elections to be held on 20 August 2023. During this transition period, the president may issue urgent decrees in economic matters, which require prior approval by the Constitutional Court to be enforceable.

Overview of the Tax Authority  

Tax compliance in Ecuador is overseen by the Internal Revenue Service (IRS). The IRS is the entity legally entrusted to manage and collect most taxes in Ecuador, as well as to require relevant information from taxpayers.

Taxpayer audits are performed by the IRS. The outcome of such audits may be appealed before the IRS and the district tax courts.

Tax Incentives on Investments  

Since 2022, companies have been able to benefit from a 3% reduction in the income tax rate whenever they make new investments in Ecuador. These incentives are only applicable to income directly attributed to such investments. The reduction is applicable for up to 15 years, or until the benefit exceeds the amount invested.

Another incentive is the benefits provided by investment contracts, which are a legal tool for making investments in Ecuadorian territory. Investment contracts are executed with the Ecuadorian government through a public deed that stipulates the investment’s terms and conditions, the amount invested, the tax regime and other legal benefits. The investment may be undertaken in any economic sector.

To conclude an investment contract, corporations must follow a formal procedure before the competent Ecuadorian authority. Investors need to develop a viable project that can be approved by the Ecuadorian authorities. Investment contracts provide legal stability and incentives agreed upon with the Ecuadorian government. Tax benefits may not exceed the amount invested.

The term of an investment contract may not exceed 15 years, except when the investment is related to public works or industries, such as in the oil and mining sectors, where the term of the concession or licence exceeds 15 years. Investment contracts may be renewed for up to the same term stipulated in the contract.

As of 2022, companies that sign investment contracts with the Ecuadorian government may benefit from:

1. a 5% reduction in the income tax rate (25%), which will apply during the contractual term or up until the moment the benefit exceeds the invested amount; and
2. an exemption from customs duties and ISD levied on payments remitted abroad for importing the raw materials and capital goods required by the investment (this exemption must be provided for in the investment contract).

Tax Withholdings on Remittances Abroad  

Income earned in Ecuador and remitted abroad is subject to income tax withholding at the following rates:

1. 25% on transactions not subject to specific rates, interest, royalties, technical assistance and services;

2. up to 10% on capital gains; and

3. 25% on 40% of dividends paid.

In certain cases, an additional 12% is withheld when the beneficiary is domiciled in a country or territory considered a tax haven.

A withholding tax of 0% applies on interest paid to private international financial institutions, multilateral institutions and specialised non-financial institutions that are registered before the Superintendence of Banks, as long as certain requirements regarding the interest rate are met.

Tax Withholdings on Payments Made Within Ecuadorian Territory

Overall, payments made to economic agents in Ecuadorian territory are also subject to income tax withholdings. The amounts withheld are credited to the annual income tax of the economic agent subject to the withholding.

The following rates apply:

1. 2.75% on transactions without a specific rate;
2. 0–1% on interest and commissions paid by financial institutions;
3. 1–10% on capital gains;
4. 1.5% on monthly income earned by certain companies in the oil industry (self-withholding);
5. 1.75% on the acquisition of movable property, construction activities, insurance, leasing, and monthly income obtained by telecommunications companies and financial institutions (self-withholding); and
6. 2–10% on fees and commissions paid to individuals.

Treaties and Multilateral Instruments  

Ecuador has entered into double taxation treaties with the following countries: Argentina (applies only to air transport), Belarus, Belgium, Bolivia, Brazil, Canada, Chile, China, Colombia, France, Germany, Italy, Japan, Mexico, Peru, Qatar, Romania, Russia, Singapore, South Korea, Spain, Switzerland and Uruguay.

Ecuador also signed the Multilateral Competent Authority Agreement on the Automatic Exchange of Financial Information and ratified the Convention on Mutual Administrative Assistance in Tax Matters. On 7 April 2021, Ecuador and the United States of America signed an agreement to exchange information relating to tax matters. These international instruments should strengthen fiscal transparency and decrease tax evasion.

Transfer Pricing System  

The Ecuadorian transfer pricing system is mainly based on the OECD principles and technical guidelines, provided that the latter do not contradict particular national provisions on assessing the taxable base for income tax. Taxpayers must file transfer pricing reports, under certain conditions, to allow assessment of compliance with the arm’s length principle.

Other Tax-Related Matters  

Through an executive decree enacted on 20 June 2023, the president issued the Organic Law for the Strengthening of the Family Economy. It provides several reforms to the tax system. Namely, the income tax brackets for individuals were modified, reducing their tax burden.

Likewise, the law increased the amounts related to personal expenses that individuals may deduct from their income tax liability. Individuals may even deduct expenses incurred by their dependants (eg, parents, spouse or partner, and children up to 21 years old or children with disabilities of any age), provided that they do not earn taxable income.

Since 1 July 2023, public events in Ecuador have been subject to a 12% value-added tax (VAT) rate. Previously, such events were not taxed.

From 1 January 2024, resident and non-resident operators of sports betting platforms will be subject to a 15% tax levied on their income. Additionally, individuals will be subject to a 15% tax rate levied on prize money earned on said platforms.