Royalties, technical, administrative and consulting services paid to related parties

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The Internal Revenue Service issued the Circular NAC-DGECCGC22-00000012 on December 19, 2022, to clarify the application over time of the deductibility limit applicable to expenses for royalties, technical, administrative, and consulting services paid to related parties (hereinafter the “Deductibility Limit”).

  1. Background

The President of the Republic issued the Executive Decree 304 published in the Second Supplement of the Official Gazette 608 of December 30, 2021, which contained the Regulations to the Law of Economic Development and Fiscal Sustainability after the COVID 19 Pandemic by means of. Said regulations eliminated the Deductibility Limit established in article 28 #16 of the Internal Tax Regime Law Regulations.The President of the Republic issued the Executive Decree 586 published in the Third Supplement to Official Gazette 186 of November 10, 2022, which amended several regulations and incorporated once again the Deductibility Limit established in article 28 #16 of the Internal Tax Regime Law Regulations.

  1. Consequences:

Considering the amendments detailed above, the Internal Revenue Service issued Circular NAC-DGECCGC22-00000012 whereby it clarifies:1.    For calculating the income taxable base for the fiscal year 2022, the Deductibility Limit will not apply.2.    The advance pricing agreements that have been notified to the taxpayer and which approved an increase in the deductibility limit in force until December 31, 2021, will maintain its legal effects for the year 2022.3.    For the calculating the income taxable base for the fiscal year 2023 and subsequent years, a deductibility limit equal to 5% of the taxable income of each fiscal year will apply, 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.4.    For the fiscal year 2023, the taxpayer may request a higher limit of deductibility through an advance pricing agreement with the Tax Authority, until the last business day of February 2023.

Andrea Moya - CorralRosales - Lawyer Ecuador

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

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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.

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