Registry, use and inactivation of breasfeeding support rooms

Edificio de cristal con el logo de CorralRosales
Through official notice sent via e-mail on October 17th, 2022; the Ministry of Labor makes available the User manual (the “Manual”) containing the general process to register or inactivate breastfeeding support rooms on the Single Labor System (Sistema Único de Trabajo) (“SUT”).


Process Summary.

1.    Log in to SUT System.
  • Access the system by using the link: https://sut.trabajo.gob.ec/
  • Select the option “Sistema para Personas Jurídicas y Naturales”.
  • Log in by using the corresponding user and password.
  • Select the option “Salud y Seguridad en el Trabajo”.
  • Agree to the user statement popup.
2.    Registry and Inactivation of Breastfeeding Support Rooms.
  • Enter the “Salud en el Trabajo” module and select the option “Sala de Apoyo a la Lactancia Materna”.
  • Select the option “Nuevo” on the corresponding list of active breastfeeding rooms registered by the company.
  • Select the option “Nuevo” on the upper part of the registry.
  • Resister the corresponding information about the implementation of the room and select “Guardar”.
  • Once the entry is completed, the options to edit, print or inactivate will be made available.
3.    Registry of the Use of Breastfeeding Support Rooms.
  • Enter the “Salud en el Trabajo” module and select the option “Sala de Apoyo a la Lactancia Materna”.
  • Select the option “Nuevo” on the corresponding list of active breastfeeding  rooms registered by the company.
  • Register the information of the workers that used the room, according to the period.
  • Select the option “Guardar”.

Edmundo Ramos

Specialist in Labor Law
Edmundo Ramos, partner at CorralRosales
eramos@corralrosales.com
+593 2 2544144

Would you like to receive our newsletters with information like the one you have just read?
Click here and subscribe.

NOTE: The above text has been prepared for informational purposes. CorralRosales is not responsible for any loss or damage caused as a consequence of acting or not acting on the basis of the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm in Quito / Guayaquil, Ecuador.

CORRALROSALES

Amendments to several tax regulations

Manos con las uñas pintadas de rosa haciendo uno de una calculadora. Pieza para un boletín tributario de CorralRosales: aparece el logo de CorralRosales también en la pieza gráfica

The President of the Republic issued the Executive Decree 586 on October 31, 2022 which several regulations to Commercial, Investment and Tax Policy. The following is a summary of the main tax reforms:

I.    Amendments to the Regulations for the Application of the Internal Tax Regime Law: 

1.    Professional Services. The term “professional services” is defined as those rendered by professionals accredited with an academic degree, either as an individual or through a legal entity. 

2.    Ghost Entities. If the Internal Revenue Service notifies a taxpayer that it has incurred in the circumstances to be qualified as a non-existent entity, ghost entity, or taxpayer with non-existent transactions, the taxpayer will have 30 business days to refute such assertion. Previously the term was 5 business days.

The taxable base will not be reduced by transactions carried out with companies qualified as non-existent or ghost entities, except for those cases in which the taxpayer supports the material sequentiality of the expense and its economic essence. 

3.    Depreciation of fixed assets. The possibility of requesting accelerated depreciation of assets in cases of obsolescence, intensive use or other reasons is eliminated.

4.    Losses. In the case of individuals and/or non-financial entities, the loss or discount generated in the sale of financial assets corresponding to commercial credits or portfolio, which are negotiated outside the stock market or with related parties, will not be deductible.

5.    Royalties, technical, administrative and consulting services. A limit is again imposed on the deductibility of the sum of expenses for royalties, technical, administrative and consulting services paid to related parties. This limit had been eliminated by Executive Decree 304, published in Official Gazette Supplement 608 of December 30, 2021.

As from fiscal year 2023 the limit will be equivalent to 5% of the taxable income of the respective fiscal year, except in the following cases:

a.    Taxpayers that are in the pre-operative cycle of the business, the limit will be equivalent to 10% of the total assets.
 
b.    Taxpayers whose only activity is to provide technical services to independent parties, if the operating margin indicator (operating profit over operating sales) is equal or higher than 7.5%. If the indicator is lower, a specific deductibility limit will be applied.

c.    Taxpayers that carry out operations with related parties in Ecuador, as long as the taxpayer that incurs the cost or expense has an effective tax rate equal to or lower than that of its related party with which it carries out the operation. 

d.    When the total of royalties, technical, administrative and consulting services operations with related parties within a fiscal year does not exceed 20 basic fractions taxed at zero income tax rate for individuals.

The taxpayer may request a higher limit of deductibility through an advance pricing agreement with the IRS. 

6.    Deferred taxes: The following is added:

a.    In the case of non-financial entities, a deferred tax will be recognized for the value impairment of financial assets corresponding to uncollectible credits that exceed the deduction limits. The deferred tax will be recognized on the value impairment generated as from fiscal year 2023. 


b.    Deferred tax is recognized on the difference between the financial depreciation of property, plant and equipment and the limits established for deductibility. The deferred tax will be recognized on assets acquired as from fiscal year 2023.


7.    Reduction of the tax rate for new investments. In the case of taxpayers that make new investments and are not able to maintain a cost center for such new investment, they must calculate the reduction in the income tax rate based on a formula established for such purpose.


8.    Legal certainty and stability on tax incentives. During the term of the investment contract, the rules that regulate the application of the tax benefits in force at the date on which the contract was entered into, will remain stable. If there are amendments that establish more favorable benefits to the investment, the investor may apply such benefits. 

9.    Settlement and payment of VAT. The transfers of goods and rendering of services carried out by micro, small and medium enterprises must be declared in the following month and paid up to 3 months after the fiscal period in which the invoice was issued, if a payment term was granted for more than one month. 

10.    VAT refund to exporters of services. Exporters of services may request a VAT refund even when: (i) they do not comply with the requirement of habituality; and/or, (ii) the payment for the services is received from a local bank account, provided that the payment is made on behalf of the non-resident. 

11.    VAT paid to popular businesses. In order to support the VAT paid to popular businesses, taxpayers must issue a liquidation of purchase of goods and rendering of services and withhold 100% of the VAT generated. 


12.    Excise tax (ICE) taxable base. Refunds made before the goods or services have been consumed will not be consider for calculating the ICE taxable base.

13.    Mining activity. The following will apply to the amortization of investments made by companies holding mining concessions and companies that have entered into exploitation contracts:

a.    The investments made in the phases of prospecting, initial exploration, advanced exploration and economic evaluation of the deposit must be amortized on a straight-line basis over 5 years from the beginning of production. Amortization shall be directly related to each mining concession. 

b.    Complementary exploration investments during the exploitation phase must be amortized on a straight-line basis over 5 years from the start of production, subject to certification by the competent entity. The amortization must be directly related to each mining concession.


c.    The amortization of investments for the preparation and development of the deposit shall be directly related to each mining concession and shall be made in accordance with the Production Unit Method as from the beginning of production.


d.    For depreciation of property, plant and equipment the following shall apply:

i.    Depreciable property, plant and equipment associated with mining reserves will be depreciated based on the Production Unit Method as of the commencement of production,
ii.    Depreciable property, plant and equipment not associated with mining reserves will be depreciated on a straight-line basis over their useful live from the time they are available for use. The depreciation percentage may not exceed the limits provided for in the regulations. 

II.    Amendments to the Regulations for the Application of Foreign Exchange Tax:

14.    Foreign Exchange Tax (ISD). For the application of the ISD exemption by virtue of investment contracts, the capital goods and raw materials on which the benefit is applied must be classified as such within the CUODE. Otherwise, the Government entity must establish, within the corresponding opinion, that the goods must be exceptionally considered as raw material or capital goods for the project. 

III.    Amendments to the Regulation of Invoices, Withholding Receipts and Complementary Documents: 

15.    Settlements of purchases of goods and rendering of services. This type of documents may be issued for transactions of goods and services carried out with individuals who maintain their RUC in suspended status and who, due to their cultural level are not able to issue invoices. 

16.    Invoice filling requirements. If the transaction does not exceed USD$500.00, the invoice may be issued to “END CONSUMER”. Previously the maximum value was US$200.00. 

IV.    Amendments to the Investment Regulation of the Code of Production, Commerce and Investments: 

17.    Procedure for approval of investment contracts. In order to enter into an investment contract, the investor must submit a list of permits, authorizations or any other title necessary for the execution of the project. If the investor does not have such permits, the documentation supporting the initiation of the procedure to obtain them must be submitted. 

18.    Opinion of the governing body of public finances. The accumulated value of the tax incentives derived from the investment contract may not exceed the amount of the investment. The Government entity of public finances must issue an opinion, verifying the above, within a non-extendable term of 30 days. 

19.    Addenda to investment contracts. Entities that have entered into investment contracts may request -at any time- the execution of an addenda. Such addenda may maintain the tax and non-tax benefits stabilized at the date of subscription of the contract.

Andrea Moya - CorralRosales - Lawyer Ecuador

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144

Would you like to receive our newsletters with information like the one you have just read?
Click here and subscribe.

NOTE: The above text has been prepared for informational purposes. CorralRosales is not liable for any loss or damage incurred as a result of acting or failing to act on the basis of the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm in Quito / Guayaquil, Ecuador.

CORRALROSALES

Partial unconstitutionality of the law for economic development and fiscal sustainability after the COVID-19 pandemic

Manos con las uñas pintadas de rosa haciendo uno de una calculadora. Pieza para un boletín tributario de CorralRosales: aparece el logo de CorralRosales también en la pieza gráfica

On October 28, the Constitutional Court issued the ruling 110-21-IN/22 by which it declared the partial unconstitutionality of the Law for Economic Development and Fiscal Sustainability After the COVID-19 Pandemic. The following are the main effects of such ruling, which has not yet been published in the Official Gazette:

  1. The amendments to the Law of the Special Regime of the Province of Galapagos are declared unconstitutional. This change will be effective as of the publication of the ruling in the Official Gazette.

  2. The amendments to the Hydrocarbons Law are declared unconstitutional, except for the exemption of foreign trade taxes on the importation of fuels, hydrocarbon derivatives, biofuels and natural gas made by individuals or national and foreign entities. This change will be effective as of the publication of the ruling in the Official Gazette.

  3. The tarriff applicable to the popular businesses of the RIMPE regime is declared unconstitutional. This change will be effective as of the fiscal year 2024:

 

  1. The following are declared unconstitutional on the merits with effect as of publication of the ruling in the Official Gazette:

    • The exemption from payment of Inheritance Tax to beneficiaries within the first degree of consanguinity with the deceased.
    • The exemption from criminal liability for any crime, including those of a tax nature, to taxpayers who apply the Regime for the Regularization of Assets Located Abroad is eliminated. The Internal Revenue Service must notify the Financial and Economic Analysis Unit (UAFE) of any suspicious activity.

Andrea Moya - CorralRosales - Lawyer Ecuador

Specialist in Tax
Andrea Moya, partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144

Would you like to receive our newsletters with information like the one you have just read?
Click here and subscribe.

NOTE: The above text has been prepared for informational purposes. CorralRosales is not liable for any loss or damage incurred as a result of acting or failing to act on the basis of the information contained in this document. Any additional determined situation requires the specific opinion and concept of the firm in Quito / Guayaquil, Ecuador.

CORRALROSALES

Acquisition of treasury shares – current regulation and possible reforms

Foto de Sofía Rosales, asociada de CorralRosales + foto de un edificio + Logo de CorralRosales

It may seem strange for a company to be its own shareholder, i.e., to hold a certain number of shares issued by the company itself, commonly known as treasury shares or treasury stock. However, there are several reasons why a company might be interested in acquiring its own shares, and their regulation becomes necessary, since it entails equity and corporate risks. This matter would merit a more in-depth analysis, but this article aims to describe in broad outline the main purposes of treasury stock, the risks it presents, current regulation and possible reforms.

1. Main purposes of treasury stock and its risks

From an equity perspective, the acquisition of treasury stock essentially produces the same effects as a distribution of dividends, especially considering that the Law on Companies determines that, in order to acquire treasury stock, it is necessary to use funds taken from net profits which may be disposed of by the general shareholders’ meeting. The company uses the net profits, which are part of the shareholders’ equity, to pay the selling shareholder the value of the acquired shares. The renowned Spanish lawyer Jesús Alfaro states that: “when a company acquires its own shares, in fact, what it does is to distribute part of its equity to the shareholders or members whose shares or units it acquires.”[1]

In addition, if the treasury stock is resold at a higher value than that at which it was acquired, the shareholders will benefit, since this transaction will generate a profit for the company, which will ultimately be consolidated in the total profit belonging to all shareholders.  

From a tax perspective, it is more convenient for the shareholders to receive income from the sale of shares than from dividends, since the income in the first case is taxed by the Single Income Tax (Impuesto a la Renta Único) over the profit on the sale of shares, while the income from dividends becomes part of the global income subject to Income Tax. In short, the shareholder will have the option to choose between keeping its participation in the company or obtaining a tax benefit on the value received, which could be in the shareholder’s interest in case it considers that its investment has yielded the expected results. It will also be very important to consider whether by selling part of his shares to the issuing company itself, the capital percentage held by shareholder decreases – diluted – or not.

From a different standpoint, holding treasury stock allows certain financial transactions, such as the issuance of convertible bonds. Thus, when the bonds are converted into shares, it is not necessary to carry out a capital increase, but it can be done with shares held in treasury.

The problem is that these types of transactions affect the equity of the company, since the capital stock ceases to be a guarantee against creditors, since, in accounting terms, the capital stock does not have a cash counterpart, but the counterpart is the company’s own shares. This means that the capital stock is not invested in actual assets. For these reasons, as will be discussed below, the legislator is becoming increasingly wary of these transactions. 

2. Current regulation

Pursuant to the Law on Companies, corporations may acquire their own shares in order to: (i) resell them; or (ii) redeem them, provided that the requirements contained in article 192, transcribed below, are met: 

“The general shareholders’ meeting may decide that the corporation acquires the shares issued by it, provided that the following requirements are met:

  1. That a majority of the shareholders attending the corresponding meeting resolve the acquisition of the shares;
  2. That only funds taken from net profits are used for such transaction;
  3. That the capital corresponding to the acquired shares is fully paid-in; and,
  4. That in no case shall the acquisition result in a decrease in the subscribed capital.

As long as the shares are held by the company, the rights inherent to them will be suspended.

A resolution by the general shareholders’ meeting will also be required for these shares to be put back into circulation.”

Article 196 of the Law on Companies refers to the redemption of shares and establishes that:

The redemption of the shares will be done against the capital stock, for which its reduction shall be previously resolved, in the form established by this Law or the bylaws. The redemption of shares may not exceed fifty percent of the capital stock

It derives from the foregoing that corporations, once they acquire their own shares with net profits, may either reintroduce them into the legal market or redeem them by means of a capital reduction.

Prior to the entry into force of the Law for the Modernization of the Law on Companies – in December 2020 – the redemption of shares against distributable profits and not necessarily against the stock capital was allowed, in which case, there was no capital reduction. This possibility was eliminated, which evidences a certain reaction from the lawmakers with respect to the acquisition of treasury stock, which, with this possibility, could be kept in the company without the need to reduce capital or reintroduce them into circulation.

With respect to limited liability companies (compañías de responsabilidad limitada), Article 112 provides as follows:

“The redemption of the corporate units will be done against the capital stock, for which its reduction shall be previously resolved, in the form established by this Law or the bylaws. The redemption of the units may not exceed fifty percent of the capital stock.”

Based on the above and derived from the very nature of limited liability companies, they can only acquire their own shares in order to redeem them. 

At this point, the reader may be asking themselves, in what time does the company have to resell or redeem the shares, in the case of a corporation, or redeem the units, in the case of a limited liability company? Well, this very important point is not currently regulated by the Law on Companies. Therefore, although the possibility of redeeming shares against distributable profits has been eliminated, companies do not have a time limit in which they must either redeem them or resell them.

In other legislations, such as Spain, the regulation of the acquisition of treasury stock is much stricter since it is expressly prohibited[2]. In the event of contravention of this prohibition, a limit of one year is established for the resale or redemption of the shares or units, and a fine of up to the nominal value of the shares or units is imposed.  

Moreover, our legislation does not provide for express regulation on this matter for companies listed on the stock exchange, where these transactions would be particularly dangerous.

Possible reforms

As we have anticipated, the Ecuadorian lawmaker is becoming more and more reluctant to this type of transactions, and although it is not expected to reach a rigidity similar to the Spanish legislation, the draft Law Reforming the Law on Companies for the Promotion of Corporate Governance, currently in process in the National Assembly, foresees the inclusion of the following paragraph in article 192 in fine of the Law on Companies:

The shares must be transferred within a maximum period of one year from their acquisition. Once this period has elapsed without the transfer having taken place, the administration shall immediately proceed to call a general shareholders’ meeting to resolve to redeem the repurchased shares, with the consequent reduction of the capital stock.

This constitutes a significant change compared to current legislation, since companies will not be able to hold treasury stock indefinitely, which would consequently discourage this type of operation. This change could also be seen as protection for minority shareholders and third-party creditors.  

It will be very important to regulate these types of transactions in companies listed on the stock exchange in order to preserve their transparency.

[1] Alfaro, J. (2020) Los negocios de una sociedad sobre sus propias acciones o participaciones. Almacén de Derecho. https://almacendederecho.org/los-negocios-de-una-sociedad-sobre-sus-propias-acciones-o-participaciones

[2] Artículo 134 de la Ley de Sociedades de Capital de España: “En ningún caso las sociedades de capital podrán asumir o suscribir sus propias participaciones o acciones(…)

Sofía Rosales
Associate at CorralRosales
srosales@corralrosales.com