Tax Regime for Microenterprises

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Regulation NAC-DGERCGC20-00000011 issued by the Internal Revenue Service and published on February 21, 2020 in the Supplement to the Official Registry 148, establishes the rules for applying the Tax Regime for Microenterprises created by the Law of Simplification and Tax Progressivity.

Microenterprises are those individuals or entities whose annual income is equal to or less than US $ 300,000.00 and, that have 1 to 9 workers.

The Internal Revenue Service is able to include or exclude from the especial regime, taxpayers who meet the conditions to qualify as microenterprises. For this purpose, the Tax Authority is able to update the taxpayer tax ID without prior notice and, it must publish a microenterprises registry on its web page (https://www.sri.gob.ec/web/guest/catastros).

Taxpayers who consider that they should not have been included in the microenterprises tax regimen may request their exclusion until April 7, 2020.

Taxpayers included in the Tax Regime for Microenterprises must comply with the following:

  1. Issue invoices in accordance with current regulations.
  2. Request proof of sale to support the acquisition of goods or provision of services.
  3. Keep accounting books or a record of income and expenses as appropriate.
  4. File tax returns when appropriate. In the case of VAT and excise tax (ICE), the tax returns must be filed semiannually in the months of July and January of each year.
  5. Submit the annexes of information when appropriate, and
  6. Fulfill the other formal duties indicated in the Tax Code.

Taxpayers registered in the microenterprise’s registry must apply the regime from February 2020. Therefore, they will not act as withholding agents for income tax or value added tax since said month.

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DISCLAIMER: The previous text has been prepared for informational purposes. CorralRosales is not responsible for any loss or damage caused as a result of having acted or stopped acting based on the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm.

CORRALROSALES

Law for Simplification and Progressivity of the Tax Regime

progressivity-tax-regime

Below we will analyse the Law for Simplification and Progressivity of the Tax Regime published on December 31, 2019 in the Supplement of the Official Registry 111, amended the Internal Tax Regime Law.

Dividends:

Dividends distributed to individuals with tax residence in Ecuador and entities and individuals located abroad are subject to income tax. Only dividends distributed to entities with tax residence in Ecuador or permanent establishments located in Ecuador are exempted from income tax.

The taxable income is equal to 40% of the dividend effectively distributed. The concept of global dividend is eliminated (dividend distributed plus taxes paid by the company) and consequently the tax credit for taxes paid by the company.

Dividends distributed to individuals with tax residence in Ecuador are subject to up to 25% withholding. The Tax Authority will issue a regulation establishing the withholding percentage applicable, according to the amount of the dividend.

Dividends distributed to entities and individuals residing abroad will be subject to 25% withholding tax. However, if the Ecuadorian entity that distributes the dividends fails to report its corporate structure, the withholding percentage applicable to the dividend paid abroad will be 35%.

It is ratified that the capital increase with retained earnings (stock dividend) will not be taxed.

Interest Expense:

In the case of interest paid by banks, insurance companies and entities of the financial sector of the Popular and Solidarity Economy:

Interest that exceeds the interest rate established by the Monetary and Financial Policy and Regulation Board will not be deductible.

The total amount of the loans granted abroad -directly or indirectly- by related parties, may not be greater than 300% of the entity equity. Interest paid or accrued with respect to credits that exceed this percentage will not be deductible.

In the case of interest paid by entities or individuals, the total amount of the net interest paid on loans granted by related parties must not exceed 20% of the entity´s profit before labor participation, plus interest, depreciation and amortization corresponding to the respective fiscal year. Interest paid or accrued that exceed this percentage will not be deductible.

Creation a temporary tax to be paid:

  • How much should be paid? 

Entities that perform economic activities and whose taxable income in fiscal year 2018 are equal to or exceeded one million dollars.

  • How much should be paid?

The amount to be paid must be calculated according to the following chart:

Gross taxable income
from (US$) 

Gross taxable income up
to
 (US$)

Rate
1.000.000 5.000.000 0,10%
5.000.001 10.000.000 0,15%
10.000.001 Onwards 0,20%

The amount of the tax shall not exceed 25% of the income tax generated in the fiscal year 2018.

  • When should the tax be paid?
When should the tax be paid? The tax shall be paid annually during the fiscal years 2020, 2021 and 2022, until March 31st of each year. Failure to submit the tax form within the deadline will be sanctioned with a fine equal to US$1,500.00 for each month or fraction of a month. The fine will not exceed 100% of the contribution.

Important reforms

  • VAT on digital services:

Digital services are subject to 12% VAT. The taxable event occurs when: In the case of import of digital services, the taxable event occurs when the importer of the service -an entity or permanent establishment located in Ecuador- pays the service provider. In the case of delivery of goods, the taxable event occurs when the importer pays for the delivery services of such goods. The VAT will be applicable over the amount of such delivery services.

The VAT on digital services will be applicable starting July 2020.

Web domain services, hosting and cloud computing services are subject to 0% VAT.

  • Foreign Exchange Control Tax:

The exemptions of foreign exchange control tax were amended as follows:

  1. Investments from abroad made in the Ecuador stock market. These investments may be made in equity securities or in fixed income securities.
  2. Dividends: Dividends paid to entities or individuals residing in tax havens is exempted. This exemption is not applicable if the dividends are distributed to foreign entities which shareholder –directly or indirectly- are individuals or entities with tax residence in Ecuador which are shareholders of the entity that distributed the dividend.
  3. Payments made abroad for financial returns, and capital gains derived form:
    • Investments from abroad made in the Ecuador stock market. These investments may be made in equity securities or in fixed income securities.
    • Securities issued by entities domiciled in Ecuador, that were acquired abroad, destined to finance housing, microcredit or productive investments.
    • Fixed-term deposits or investments made with resources from abroad in local financial institutions.

This exemption does not apply if the payment is made between related parties.

CORRALROSALES