Resolution NAC-DGERCGC20-00000060 issued on September 29, 2020 and published in the Special Edition of the Official Registry 1100 on September 30, 2020, the Director of the Internal Revenue Service established the rules for applying the tax regime for small businesses.
1. Definitions
- Small business: It is a productive unit that has up to 9 workers and an annual revenue equal to or less than US$300,000.00. For classifying an enterprise as a small business, the amount of income will prevail over the number of workers.
- Main economic activity: The economic activity registered in the Tax Registry (RUC) which generates the higher amount of income during a fiscal year in comparison with the other activities.
- Commissioner: Individual, corporation or permanent establishment that habitually engages in the sale of goods, rights, or the provision of services in exchange for a commission.
- Capital gains: Profits derived from the placement of capital, shares, credits, and investments of any nature, as long as they do not involve productive processes, the provision of services or other work. For example, the lease of real estate.
- Self-employed individuals: Individuals who regularly performs an economic activity on his own account without a labor relationship and receives an income different from a salary or wage. Economic activities of liberal occupation are excluded.
- Professional services: Services provided by individuals who have a professional title and are directly related to that title. Including activities related to education, teaching and training related to the professional title.
2. Inclusion/exclusion from the microenterprise regime
The Internal Revenue Service will be able to include or exclude ex officio in the register of small businesses those taxpayers who fulfill or no longer fulfill the conditions to be considered as such. This registry will be published on the IRS website until September 30 of each year.
Taxpayers will be subject to this regime from the first day of the fiscal year following their inclusion of the registry.
The ex officio exclusion will be executed without the need for prior notice and will take effect from the first day of the fiscal year following that exclusion.
Taxpayers who have been subject to the regime for 5 years will cease to be part of it from the first day of the year following the date on which the maximum time was reached.
When taxpayers consider that their inclusion or exclusion from the regime is not appropriate, they are able to file a petition to have that decision reviewed in a term of 20 days counted from the publication of the registry.
3. Registration of new taxpayers
When obtaining the tax registry (RUC), the taxpayer must inform the Tax Authority all its economic activities, the income that might be derived from such activities and the number of workers.
If the taxpayer fulfills the conditions to be considered as a small business, it will be able to start its activity under the small business regime. Otherwise, he will begin its activity subject to the general regime and the authority is able to include the taxpayer in the regime ex officio.
4. Limitations to the regime for microenterprises
Taxpayers who exclusively develop one or more of the following activities will not be subject to the small business regime:
- Those taxpayers who are subject to the Simplified Tax Regime for Ecuador (RISE) and Simplified Tax Regime for the Organizations of the Popular and Solidarity Economy.
- International organizations, multilateral organizations, specialized international agencies, non-governmental organizations, government institutions and public enterprises.
- The financial institutions subject to the control of the Superintendence of Banks, and the organizations of the popular and solidary financial sector, subject to the control of the Superintendence of Popular and Solidary Economy.
- Those taxpayers who exclusively develop construction and urbanization activities.
- Those taxpayers who exclusively develop activities of liberal occupation, as well as individuals whose economic activity is the provision of professional services, notaries, and registrars.
- Those taxpayers who provide public transport services to passengers, as well as the services of commercial transport.
- Those taxpayers who exclusively obtain income from a labor relationship.
- Those taxpayers who exclusively obtain income subject to single income tax.
- Those taxpayers that exclusively obtain capital gains, including holding companies.
- Those taxpayers that carry out exploration, exploitation and/or transportation activities of non-renewable natural resources.
- Those taxpayers that receive income from international transport of passengers, cargo, express airlines, or couriers incorporated under foreign laws and that operate in the country through branches, permanent establishments, agents, or representatives.
- Distributors of hydrocarbon derivatives, liquefied petroleum gas, natural gas, and biofuels.
5. Taxpayer’s obligations
Taxpayers subject to the small business regime must comply with the formal and material obligations set forth in the law, including the following:
- Entities are required to keep accounting books in accordance with the regulations established by the controlling authorities. In the case of individuals, if they are required to keep accounting books, they must follow the International Financial Reporting Standards for SMEs.
- Taxpayers are required to issue invoices and withholding receipts and complementary documents in applicable cases. The documents must contain the caption “Small Business Taxpayer”.
- Taxpayers are required to file value added tax (VAT), excise tax (ICE) and income tax returns on a semester basis, in the months of July (first semester) and January (second semester).
However, taxpayers may file the VAT and ICE tax return on a monthly basis, during the entire fiscal year. - Taxpayers must file an annual income tax return, in addition to the semi-annual income tax returns in the following cases:
- Entities and permanent establishments in all cases.
- Individuals who receive income from sources different form the activities subject to the small business regime.
- Individuals who request the reimbursement of income tax.
- Taxpayers who are required to file the Simplified Transaction Annex (ATS) must file it every six months. If they choose to file the VAT return on a monthly basis, the ATS must also be filed on a monthly basis.
- Taxpayers who are required to file the excise tax annex must file it every six months. If they choose to file the excise tax return on a monthly basis, the annex must also be filed on a monthly basis.
6. Withholding taxes
Taxpayers subject to the small business regime are not required to withhold income tax or VAT, except if they are qualified by the IRS as special taxpayers or withholding agents and in other cases established by law.
<p style="text-align: justify;">However, taxpayers under the regime will be subject to income tax and VAT withholding. In the case of income tax, the withholding tax percentage will be 1.75% over the income derived from the business activities subject to the regime. If the taxpayer obtains revenue from sources other than the business activity subject to the regime, such revenue will be subject to the withholding percentages provided in the current tax regulations.If taxpayers subject to the regime have made withholdings, they must declare and pay them as follows:
- Value added tax withholdings on a monthly or semi-annual basis, depending on the periodicity of the VAT return.
- Income tax withholdings on a semi-annual basis, in the months of July -first semester- and January -second semester-.
- If the taxpayer did not make any withholdings, the return must not be filed.
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