Draft law for economic efficiency and job creation

On November 27, 2023, the President of the Republic submitted to the Legislature the draft of the “Law for Economic Efficiency and Job Creation”. The draft bill was classified as urgent; therefore, it must be processed by the National Assembly within the next 30 calendar days.

Below, we detail the most important content regarding tax and custom matters:

1.    Temporary tax domicile: Non-tax residents that enter Ecuador can apply a temporary tax regime. This regime allows the payment of income tax solely on Ecuadorian source income. The following individuals are eligible for applying this regime: (i) those who make an investment in real estate or productive activities of at least US$150,000; or (ii) those who have monthly earnings of at least US$2.500 over which social security contributions are paid.

2.    Income tax exemptions: Those taxpayers who invest in non-conventional renewable energy and industrialization of natural gases will be entitled to an income tax exemption of 10 years, beginning from the date in which income is generated. The exemption will not exceed the total amount of the investment.

3.    Additional deduction for employment generation: Those who generate a net increase of jobs for young people between ages 18 and 29 years old will be entitled to an additional deduction of the salary expense according to the following chart:

New jobs created	Percentage of additional deduction
12	20%
25	30%
50	40%
100	50%
200	60%
300	70%
400	80%
500	90%

4.    Tax stability: Taxpayers who pay 2 additional percentage points over the applicable income tax rate are entitled to tax stability over the tax regime.

5.    Self-withholding for large taxpayers: Large taxpayers will be required to self-withhold income tax over their taxable income on a monthly basis. The withholding rate will be up to 3%, as established by future regulations.

6.    VAT paid on real estate projects: There will be a right to obtain a refund of VAT paid on the acquisition of goods and services for the construction of real estate projects.

7.    Banking: The use of the financial system is mandatory for all transactions over US$100.00 (the currently value is US$1,000.00).

8.    Calculation of customs tariffs: The freight cost is reinstated for the calculation of the taxable base of customs duties.

9.    Investment contracts: Job creation is required for applying tax incentives for new investments.

10.    Free Trade Zones: A free trade zone regime is established. This regime may be applied by a single user, or by several users organized under the same regime. The activities that can be developed in a free trade zone are:

a.    Production of goods, such as manufacturing, agriculture, aquaculture, and forestry.
b.    Provision of services, including tourism, auditing, consulting, professional services, telecommunications, healthcare, scientific research, and technical support.
c.    Commerce and logistics, such as transportation, storage, distribution, and handling.

The free trade zone regime will have the following characteristics:

a.    Tax regime: Tax benefits include:

–    Income tax rate of 0% for 5 years and 15% for the entire period of the regime.
–    Exemption of foreign trade taxes on the import of capital goods and raw materials, destined to the free trade zone.
–    Exemption from Value Added Tax (VAT), Outflow Tax (ISD), foreign trade taxes and other taxes that may be created in the future regarding the transactions carried out within the free trade zone.
–    Exemption of income tax on dividends paid by operators and users to their shareholders.

b.    Labor regime: employment agreements entered within the free trade zones will be considered as temporary and can be renewed indefinitely.

c.    Customs regime and foreign trade:

–    Goods that enter the free trade zone from the Ecuadorian territory shall be considered as exported.
–    Goods that enter the Ecuadorian territory from a free trade zone are considered imported. Up to a maximum of 30% of the goods produced in free trade zones can be allocated to the Ecuadorian territory.
–    Goods exported from a free trade zone to third parties are not subject to export customs formalities.

11.    Remission of interest, fines and surcharges: The remission of interest, fines and surcharges is established for the payment of tax obligations collected by the Internal Revenue Service. The percentages, deadlines and conditions will be established by future regulations.