For its part, 2015 has been a difficult year for Ecuador primarily due to the fall in global oil prices and its direct impact on the economy and socio-political environment. The Ecuadorean economy’s estimated growth for 2015 currently stands at 1.9%; a direct contrast with the 4% growth expected at the end of 2014. Below, we have provided an overview of key issues that foreign investors may consider before doing business with Ecuador.
Although Ecuador’s economy has undergone a significant transformation in the last 10 years, foreign ownership, in general, continues to be un-restricted. While there is no legal discrimination against foreign investors, some activities such as oil exploration and drilling, mining, utilities, and defense are highly regulated. Furthermore, all foreign investments into Ecuador must be duly registered with the Central Bank of Ecuador (BCE).
Normally, a foreign company is able to operate in Ecuador by way of a corporation (subsidiary), branch, or partnership. Treatment for profits remitted abroad is the same for all companies, local or foreign, although certain considerations apply for dividend distributions and other transactions to beneficiaries domiciled or located in tax havens, low tax jurisdictions or subject to preferential tax regimes (“blacklisted jurisdictions”).
Setting up a company is relatively simple; two or more individuals or legal entities must execute a public deed, which constitutes the company’s deed of incorporation. The value of the capital and stock presented in the charter should be in US dollars and depends on the type of legal entity set up. This deed, along with the bylaws, must be notarized and submitted to the Superintendence of Companies (“SC”) for approval. After the SC approves the creation of the company, these documents along with the corresponding certificate of approval issued must be registered before the Mercantile Registry and an extract of the charter should be published, at least once, in a local newspaper. The legal existence of the entity is effective upon registration in the Mercantile Registry. It is worth noting that a simplified incorporation and registration process, undertaken online through the SC’s website, is also available for companies that are not part of the Ecuadorian stock market.
Finally, the company must obtain its Tax Identification Number (Registro íšnico de Contribuyente—“RUC”) from the Ecuadorean Internal Revenue Service (Servicio de Rentas Internas—“SRI”).
Profit taxes comprise the totality of income received from professional, labor, commercial, industrial, agricultural, mining, service, and other economic activities (whether ordinary or extraordinary in nature), less discounts, costs, expenses, and deductions arising from activities necessary for the obtaining of such income.
Additionally, Ecuadorean labor legislation states that companies must distribute 15% of their pre-tax earnings amongst their employees. This statutory profit sharing is a deductible expense for corporate income tax purposes. The amounts payable to individual employees are capped and any excess profit sharing must be paid to the Ecuadorian social security regime.
Company taxes on different entities
The tax system in Ecuador is mainly unitary, with most categories of income being taxed at a general rate. A system of local withholdings is in place whereby a certain percentage of a payment is withheld by the payer and remitted to the fiscal authorities. Withholdings are considered tax credits towards taxes due at year-end.
Income taxes in Ecuador are levied on individuals and corporate entities, national or foreign, on their foreign and Ecuadorian-source income. Consequently, all individuals, partnerships and corporations, whether national or foreign, are subjects to tax on the income that is attributable to Ecuador.
Depending on their business activity, companies may be subject to tax incentives intended to promote foreign investment such as strategic substitution of imports and promotion of exports with corporate income tax exemptions for a period of five years.
Auditing requirements for companies
Generally, companies are required to contract the services of statutory auditors, normally referred to as “comisarios” (surveillance agent). Statutory auditors carry out a function, which differs from that assigned to external auditors.
Legal entities, regulated by the Superintendence of Companies or Superintendence of Banks, are required to file financial statements examined by external auditors in the following cases:
– Corporations with assets greater than $1,000,000
– Companies or partnerships with assets of, at least, $100,000
– Branches of foreign companies, or their associations, with assets greater than $100,000
As of 2012 most companies are required to apply International Financial Reporting Standards (“IFRS”) for all accounting activities.
Land and property taxes
The municipal asset tax is levied on all individuals and companies required to keep accounting records in accordance with Ecuadorian tax legislation. This tax is levied annually at a rate of 1.5 per thousand (or 0.15%) of total assets less current and contingent liabilities, as shown on the balance sheet.
The city governments assesses an annual municipal property tax, which ranges between 0.25 per thousand and 5 per thousand (0.025% to 5%) of the commercial value of the property, as determined by valuation carried out every five years by the city government, for both urban and rural properties (rural property is taxed at a maximum of 3 per thousand or 0.3%).
The real estate transfer tax applies to the transfer of real estate at a 10% of profits
Custom duties in Ecuador range from 0% to 20% depending on the nature of the imported goods. Most consumer goods imports pay 20%, while intermediate goods are usually levied at a 10% or 15% rate. Raw materials and capital goods generally pay 0% to 5%. Ecuador has negotiated exceptions under the Andean common tariff that allow lower duties on certain capital goods and industrial inputs. There is duty-free import of agricultural goods and equipment.
Additionally, there are current safeguards on certain imported goods, which range from 5% to 45%. These safeguards are levied in addition to the corresponding custom duty.
In addition to custom duties, imports are subject to 12% Value-Added Tax (“VAT”), 0.5%tax for the Children’s Development Fund and 5% on Remittance Tax, which may be considered as tax credit for income tax calculations purposes in certain cases.
A Special Consumption Tax (Impuesto a los Consumos Especiales — “ICE”) is imposed on specific domestic and imported goods including automobiles, airplanes, cigarettes, alcoholic beverages and soft drinks. The tax base for ICE is the ad valorem value.
Finally the 5% Remittance Tax is also imposed on any transfers abroad of funds from local or foreign bank accounts as well on the extinction of liabilities (e.g. compensation of accounts). Dividends paid abroad are exempt from this tax unless made to blacklisted jurisdictions.
Tax return filing
Income tax returns should be submitted in April of the following fiscal year and based on the 9th digit of the RUC. The fiscal year is the calendar year.
If activities are finalized before year end, the taxpayer should file an anticipated income tax return up to 30 days after the termination of activities.
VAT and withholding tax filings should be submitted on a monthly basis, based on the 9th digit of the RUC.
Corporate Income Tax
Ecuadorian companies owned by Ecuadorian residents or non-Ecuadorian residents resident in a non-tax-haven country will be subject to a 22% CIT rate. Where the company has direct or indirect participation from tax haven residents who collectively own more than 50% of the Ecuadorian company, a 25% rate will apply to all of the company’s taxable income. If the direct or indirect tax haven ownership does not exceed 50%, the 25% tax rate will apply only to the portion of income attributable to the tax haven residents.
The 25% rate also will apply if the foreign owner’s residence has not been disclosed to the Ecuadorian tax authorities.
Post-tax dividends distributed to tax residents are taxed. Dividends paid to non-resident entities generally are not subject to WHT. However, dividends paid to non-resident entities in blacklisted jurisdictions are subject to 13% WHT.
New investments made by in specific locations and industries as determined by law are eligible for certain tax incentives including CIT exemption.
Personal/employee income taxes
Individual income tax is levied based on a progressive tax table with rates ranging from 0% to 35%, according and a current tax-free threshold of $10,800.
Deductions for certain personal expenses relating to housing, clothing, food, education, and health are allowed. Deductions are capped at limits established on an annual basis. The total deduction for personal expenses may not exceed 50 % of total taxable income and in no case exceed the equivalent of 1.3 times the tax-free threshold.
Income earned by non-residents from rendering occasional services in Ecuador is exempt from income tax provided that the remuneration is paid overseas and no charge back is made to a local entity. Where a charge back exists the payment abroad will be subject to 22% WHT.
Mining and mineral resource taxes
The Ecuadorian law does not grant special treatment for mining companies. Therefore, the income tax for these types of companies is 22% for fiscal year 2015. However, an obligation to pay royalties exists.
Value Added Tax
VAT is levied at the rates of either 12% or 0% on the ownership transfer of goods, import of goods and services, as well as services rendered within the country or imported. Royalties and intangible property imported or locally paid are also levied with a 12% VAT rate.
In general, in-kind contributions to companies’ capital, transfer of the whole business, merging, spin-offs and transfer of shares, and securities are transactions not subject to 12% VAT.
Goods and services, which are subject to 0% rate, are explicitly listed in the law, including primary products, medicines, agricultural and machinery equipment, exported goods, milk, salt sugar, transportation of persons and cargo transportation, housing rental, utilities, among others.
The 12% VAT paid on raw materials, fixed assets, components, or services required for the production of goods or rendering of services is also creditable only when the final product is considered taxable at 12% VAT. Similarly, VAT paid on raw materials, services, components, or fixed assets necessary for production of export goods is also recoverable.
Double Taxation Treaties
As a member of the Andean Community, Ecuador has adopted Decision 578, which provides relief from double taxation for individual or company members. Furthermore, Ecuador has tax treaties with Belgium, Brazil, Canada, Chile, China, France, Germany, Italy, Mexico, Romania, Spain, South Korea, Switzerland, and Uruguay.
The base for CIT is taxable income, generally defined as the difference between gross revenue and expenses allowed under tax law. In general, all expenses required to obtain income are deductible, regardless of where they are incurred locally or overseas. There are no territorial prohibitions on payments to foreign affiliates or others. However, payments abroad are generally subject to withholding tax at a 22% rate unless the beneficiary is located in a blacklisted jurisdiction where a 35% withholding tax must be applied.
Deductibility limits apply on, among others on the following payments: 1) royalties, technical assistance, consulting and administration services between related parties, 2) indirectly allocated costs and 3) advertising expenses.
Straight-line depreciation applies, at rates specified by law (real estate 5%, machinery 10%, vehicles 20%, and computer 33%).
Intangible assets must be amortized within the terms specified in the contract or over a 20-year period.
Interest on debts incurred for business purposes are deductible as long as the lender is not located on a blacklisted jurisdiction and up to the limits fixed by the BCE.
Organization, experimentation, and pre-operational expenses are to be amortized over five years at the rate of 20% per year.
Taxes, rates, levies, and contributions to the social security system related to the generation of taxable income are deductible.
Interest and fines paid as penalties imposed on late payments of tax obligations and on income tax payments are not deductible for income tax calculation purposes.
The carry forward of losses is allowed to a maximum of five years, with an amortization limit of 25% per year over the taxable base. There is no loss carry back.
Transfer pricing rules must be applied in transactions carried out with related parties. Local legislation follows the guidelines established by the Organization for Economic Co-operation and Development (“OECD”). Formal documentation requirements exist.