The “Law for Economic Efficiency and Job Creation” was published on December 20, 2023, in the Supplement of the Official Gazette 461. Below, we detail the most important content regarding tax and customs matters:
1. Temporary tax domicile: Non-tax residents who enter Ecuador can apply for 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 invest 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 the production, industrialization, transportation, supply, and commercialization of natural gas or green hydrogen, will be exempted from income tax for 10 years from the year in which income is generated. The exoneration will not exceed the total amount of investment.
3. Benefits for the tourism sector: Those taxpayers who make new investments in tourism projects qualified by the Ministry of Tourism will be exempted from income tax for 7 years from the year in which income is generated. The investment projects must be of at least US$100,000.00 and 10% must be destined for rural tourism.
Taxpayers registered in the Ministry of Tourism’s registry as tourism service providers will not be required to withhold income tax on payments made abroad for commissions paid to lodging platforms.
4. Additional deduction for employment generation: Those who generate a net increase of jobs for:
a. Young people between 18 and 29 years of age will be entitled to an additional deduction of 50% of the value of the salaries on which social security contributions have been made. The deduction will be an additional 75% if the young people are graduates of public institutions.
b. Workers in the construction and agriculture sectors will be entitled to an additional deduction of 75% of the value of the wages.
5. Tax stability: Taxpayers who pay 2 additional percentage points over the applicable income tax rate are entitled to tax stability over the tax regime.
6. Self-withholding for large taxpayers: Large Taxpayers will not be subject to income tax withholding, except in those transactions carried out with the public sector.
However, they will be required to self-withhold income tax over their taxable income. The withholding percentage will be set by the Internal Revenue Service.7. CFC Rules: The CFC (Controlled Foreign Corporation) regime is created to prevent the taxpayer from deferring the payment of income tax through structures incorporated abroad.
For such purpose, the tax resident in Ecuador is attributed, for the calculation of its income tax, the income of companies located abroad even if such income has not been distributed.
8. 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.
Real estate projects must be qualified by the Ministry of Urban Development and Housing. Projects intended for owner-occupied housing do not require qualification.
9. Banking: The use of the financial system is mandatory for all transactions over US$100.00 (the currently value is US$1,000.00).
10. Sports Betting Operators: The “Income Tax on Sports Betting Operators” was amended. The tax will be applicable as of July 2024.Both resident and non-resident operators are required to pay 15% of their total income minus the prizes paid in respect of which withholding tax has been applied. Non-resident operators will be required to appoint an agent in Ecuador and obtain a tax ID.
11. Calculation of customs tariffs: The freight cost is reinstated for the calculation of the taxable base of customs duties.
12. Investment contracts: Job creation is required for applying tax incentives for new investments. The importation of capital goods and raw materials will be exempted from payment of outflow (ISD) and customs duties. The exemption of other import taxes is eliminated.
13. Free Trade Zones: The Free Trade Zone regime is established under a multi-business modality. 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. 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 20% 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.
14. 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 payment must be made within 150 days from December 20, 2023.
The President of the Republic, the members of the National Assembly and their relatives up to the fourth degree of consanguinity and second degree of affinity are not eligible for this remission. This prohibition does not include the companies they control or participate in.
Andrea Moya, Partner at CorralRosales
amoya@corralrosales.com
+593 2 2544144
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.