Ecuador Tax: ecuador Tax reform passed
Ecuador's National Assembly recently approved a tax reform package that includes major changes to the income tax and VAT laws and doubles the rate of the Overseas Remittance Tax. The changes will come into effect when approved by the President.Income tax
Dividends are now subject to taxation as follows:
- Dividends and earnings, calculated after the payment of income tax, distributed by Ecuadorian or foreign entities resident in Ecuador (i.e. branches), are exempt when distributed to other Ecuadorian entities and foreign entities not domiciled in tax havens or jurisdictions with lower tax rates.
- For individuals, dividends now form part of total income. Tax paid by the distributing entity on dividends may be used as a tax credit up to a maximum of 25% of the amount, but the tax cannot exceed the tax payable by the individual.
- The intention of the reform is that resident individuals pay up to 10% more income tax on gross dividends, applying the progressive income tax table in article 36 of the Tax Law.
- Dividends paid to foreign entities domiciled in a tax haven or a jurisdiction with a preferential tax regime are subject to withholding tax at source (at a rate still to be set).
In another change, to qualify for a 10% reduction on the income tax on reinvested amounts, the taxpayer must: (1) acquire new machinery or equipment to be used in the productive activity; (2) acquire goods related to research and technology with a view to improving productivity, diversifying production and increasing employment; and (3) make a corresponding increase in the capital of the company.Transfer pricing
Taxpayers engaging in transactions with related parties are exempt from application of the transfer pricing rules in the following circumstances:
- When their tax liability exceeds 3% of taxable income;
- They have not entered into any transactions with residents in tax haven jurisdictions or jurisdictions with a preferential tax regime; and
- They have not concluded any contracts with the state for the exploration and exploitation of nonrenewable resources.
Indirect expenses allocated from overseas entities to entities resident in Ecuador by their related parties are deductible only up to a maximum of 5% of taxable income, plus the amount of the expenses. The applicable percentage is 5% on total assets for entities that are in the pre-operating phase.Value Added Tax
VAT is to be levied on the transfer of ownership, on the import of tangible property and on the value of services imported into Ecuador or rendered in Ecuador. Consequently, beneficiaries of imported services must perform a self-assessment for payment of VAT on the purchase of goods and the provision of services.
Paper used for newspapers, as well as newspapers and magazines, will be subject to the standard VAT rate of 12%. The transfer of securities will not be subject to VAT. Exported services remain zero-rated, provided the following conditions are satisfied:
- The exporter is domiciled or resident in Ecuador;
- The beneficiary of the service is not domiciled or resident in Ecuador;
- The use, deployment or exploitation of the service is undertaken in its entirety overseas, although the services may be provided in Ecuador; and
- Payment for the services may not be charged either as a cost or an expense by entities or individuals undertaking activities or business in Ecuador.
Inbound tourist packages are zero-rated for VAT purposes, whether invoiced in or outside Ecuador if provided to nonresident individuals or entities in Ecuador.Overseas Remittance Tax
The rate of the Overseas Remittance Tax, which is imposed on funds sent abroad through a financial institution, will be increased from 1% to 2%. Amounts up to USD 1,000 will be exempt, but no exemption will be available where Ecuadorianissued credit or debit cards are used overseas for purchases or cash advances. Overseas Remittance Tax paid may be used as a tax credit against income tax liability in the current financial year, where the tax is paid on the import of raw materials, capital assets and supplies for production, provided that, at the time the customs declaration is submitted, the goods are subject to a 0% ad valorem rate under Ecuador's national import duties.