The following is a summary of the main amendments proposed in the draft of the “Draft Law for Fiscal Transparency, Optimization of Tax Expenditure, Encouragement of Job Creation, Strengthening of the Monetary and Financial Systems and Responsible Management of Public Finance”
- The taxable income will be 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.
- The exemption for dividends paid to companies and for individuals residing abroad is eliminated. The applicable withholding percentage will be 25%.
- In the case of dividends distributed in favor of individuals residing in Ecuador, the Tax Authority will establish the withholding percentage.
- If the company 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 paid on loans granted by related or independent parties may not exceed 20% of the entity’s profit. Interest paid in excess of this ratio will be considered non-deductible.
- Indirect expenses allocated from abroad by related parties will be considered non-deductible expenses.
- The following additional deductions are reduced from 100 to 50%: (i) net increase in employment, (ii) medical insurance and / or prepaid medicine expenses granted to employees; (iii) depreciation of assets that reduce the environmental impact; and, (iv) certain expenses incurred by micro, small and medium businesses, such as: research and development expenses, expenses to improve productivity, and travel and promotion expenses for accessing international markets.
- The deductibility of advertising and promotion costs and expenses will not be limited.
- Payment of the advance income tax is no longer mandatory.
- The reduction of the income tax rate for exporting entities that reinvest their profits goes from 10 to 8 percentage points.
- Income obtained abroad that has been subject to tax in the country of origin will no longer be exempted from paying income tax in Ecuador. The tax paid abroad will be considered as tax credit.
Value Added Tax (VAT)
- The following goods will be subject to 0%VAT:
- Test strips for glucose.
- Digital services:
Digital services will be subject to 12% VAT. Digital services are those provided and / or contracted through the Internet that are automated and require minimal human intervention.
In the case of import of digital services, VAT will be paid by the importer of the service. Credit card issuing entities will withhold the VAT when the digital service provider is not registered in Ecuador.
- Taxable base: The presumptive minimum profit margin to be applied on the ex-customs or ex-factory price is increased from 25 to 30% based.
- Taxed goods: The following goods are taxed at the rates described below:
- Liquids containing nicotine to be administered through nicotine administration systems (electronic cigarettes): 50%
- Soft drinks with sugar content less than or equal to 25 grams per liter and energy drinks: 11%
- Soft drinks with sugar content greater than 25 grams per liter: US$0.20 per 100 grams of sugar.
- Vehicles: the calculation formula is modified according to the sale price of the vehicle to avoid leaps in the rates.
- Post-paid mobile phone service provided to individuals: 10%
- Craft beer: The rate is reduced from US $ 2.00 per liter to US $ 1.5 per liter.
- Industrial beer: The rate is increased according to market share.
- Plastic bags: US$ 0.10 per bag
Currency Exit Tax
- Loans granted abroad: (i) there is no longer required that term of the credit is at least 360 days, and, (ii) the loan may be used to invest in shares issued by Ecuadorian entites.
- Dividends: Dividends paid to entities or individuals residing in tax havens is exempted.
The tax rate applicable to the import of raw materials and capital goods, is reduced from 5 to 2.5%; however, the right to tax credit for such imports is eliminated.
Single and Temporary Tax
Who are obliged to pay? Companies whose gross income in fiscal year 2018 exceeded one million dollars.
How much should be paid? The amount to be paid is shown in the following table. The amount shall not exceed 25% of the generated, declared or determined income tax of fiscal year 2018.Gross taxable income from (USD $) Gross taxable income up to (USD $) Rate 1,000,000 5,000,000 0.10% 5,000,001 10,000,000 0.15% 10,000,001 Onwards 0.20%
When should it be paid? Until March 31 of fiscal years 2020, 2021 and 2022.
Capital Repatriation Regime
The tax residents of Ecuador can benefit from this regime if as of December 31, 2018:
- They have maintained abroad revenues subject to income tax in Ecuador or, have made monetary transactions subject to outflow tax (ISD), which have not been declared or if the tax has not been paid.
- Have kept assets abroad which have been acquired with these revenues and, that have not been registered in the equity declaration.
If taxpayers decide to repatriate and invest the income in Ecuador, they will be subject to the following rules:
- If the income is declared until March 31, 2020, it will be subject to pay a tax rate equal to 1%;
- If the income is declared from April 1, 2020 until June 30, 2020, it will be subject to pay a tax rate equal to 2%; and
- If the income is declared from July 1, 2020 until December 31, 2020, it will be subject to pay a tax rate equal to 4%
- If taxpayers decide to declare their income, assets or investments abroad, but not repatriate and reinvest in Ecuador, it will be subject to pay a tax rate equal to 8%.
The income will be regarded as invested in Ecuador if it remains in Ecuador for a minimum period of 12 consecutive months counted from the date on which the investment is made and if it’s purpose is one of those established in the law, such as: investments and financial products provided by financial institutions, stock exchanges and stock brokerage houses, acquisition of real estate and other assets necessary to carry out economic activities in the country or, investments destined to research and development of technology.