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Ecuador enacts new law that includes tax amnesty and new tax incentives

On 21 August 2018, Ecuador enacted a new law that includes a tax amnesty for taxes due before 2 April 2018, new tax incentives and modifications to the corporate income tax.

Tax amnesty

The law establishes a tax amnesty under which certain taxpayers may pay their outstanding taxes that were due before 2 April 2018, without paying any interest, penalties and extra charges incurred on those outstanding taxes. To benefit from the amnesty, taxpayers must pay all of the taxes due within 90 days of the beginning of the amnesty period (21 August 2018). The law allows certain taxpayers to request more time for paying the taxes due. Such taxpayers could have two years to pay the taxes due.

Taxpayers with cases pending at the administrative or judicial level may benefit from the amnesty, provided they pay all of the taxes due and withdraw their claim or lawsuit. If the Ecuadorian Internal Revenue Service (IRS) owes a taxpayer due to a tax claim in favor of the taxpayer, that amount may be used to offset the taxpayer’s tax liability.

The amnesty also applies to customs taxes, social security and corporate contributions, interest on fines imposed by the transit authorities and others. The amnesty does not apply to the corporate income tax due on the corporate income tax return for fiscal year 2017.

Incentives for private investments

Corporate income tax exemption for new investments in “prioritized sectors

The law exempts income derived from new investments in the legally established prioritized sectors from the corporate income tax. The exemption applies as follows:

Length of exemption
New investment location

8 years

Urban areas of Quito and Guayaquil

12 years

Outside of Quito and Guayaquil

15 years

“Prioritized industries,” agro-industry and agro-associative sectors within the border cantons

The law requires taxpayers to generate a certain amount of employment for the exemption to apply.

Prioritized sectors

The law expands the exemption to the following prioritized sectors:

  • Agriculture
  • Oleo chemistry
  • Cinematography and international events
  • Exportation of services, which will be regulated through another law
  • Development and software services, production and development of technological hardware, digital infrastructure, computer security, products and digital content, and online services
  • Energy efficiency service companies
  • Sustainable construction materials and technology industries

Income tax exemption for investments in basic industries

The law increases the income tax exemption period for new productive investments in basic industries from 10 to 15 years. The exemption period will be extended for an additional five years if the investments are made in border cantons.

The law requires taxpayers to generate a certain amount of employment for the exemption to apply.

Outflow tax exemption for new investments

Investment contracts

The law establishes an “outflow tax” exemption that applies to:

  • Payments for imports of goods and raw materials that are necessary for the development of a project, up to the amounts and in accordance with the terms established in a contract between the taxpayer and the Government
  • Dividends distributed by domestic or foreign companies domiciled in Ecuador (after the payment of Income Tax) to beneficiaries who are individuals resident in Ecuador or abroad

The exemption only applies if the investment amounts are received from outside of Ecuador.

Reinvestment

The law exempts companies that reinvest at least 50% of their profits in new productive assets from the payment of outflow tax on dividends to beneficiaries resident in Ecuador.

Corporate income tax

Exemption for dividend distributions

The law exempts from withholding income tax, dividends and profits calculated after the payment of income tax, that are distributed by domestic or foreign companies resident in Ecuador to other domestic or foreign companies, or individuals not resident in Ecuador.

The exemption does not apply when the beneficiary of the dividends is an Ecuadorian individual resident, or when the company that distributes the dividend does not comply with the obligation to report its beneficiaries.

Direct and indirect transfer of shares

The profits derived by companies and individuals from the direct or indirect transfer of shares of domiciled companies or permanent establishments in Ecuador are exempt from the corporate income tax up to US$22,540 annually for FY 2018.

Once the annual exemption amount is exceeded, the remaining profits are subject to the following tax rates:

From
To
%

-

20,000

0%

20,001

40,000

2%

40,001

80,000

4%

80,001

160,000

6%

160,001

320,000

8%

320,001

And up

10%

*Note: Values expressed in US dollars

Corporate income tax rates

The law establishes a 25% corporate income tax rate for:

  • Companies incorporated in Ecuador
  • Branches of foreign companies
  • Permanent establishments

The law establishes a 28% corporate income tax rate for companies that have shareholders, partners, participants, constituents, or beneficiaries and have not reported information about those entities or individuals to the IRS. The 28% rate will only apply to the taxable base not reported in the “corporate composition” (proportional income tax). The 25% rate will apply to the rest of the taxable base.

The 28% tax rate also applies to companies with: (1) a resident owner that is established or protected in a tax haven, jurisdiction of lower tax or preferential tax regime; and (2) a beneficial owner that is an Ecuadorian tax resident. The 28% rate will apply to the taxable base in which an Ecuadorian resident participates within the corporate composition (proportional income tax). The 25% rate will apply to the rest of the taxable base.

The 28% corporate income tax rate will apply to the complete taxable base when 50% (or more) of the corporate composition is not reported or if an Ecuadorian resident is the beneficial owner.

Corporate income tax rate reduction

Taxpayers that reinvest their profits in programs and projects rated as a priority by the Government will have their corporate income tax rate reduced to 15% for income derived from those programs and projects.

Taxpayers that reinvest their profits in all other programs and projects in Ecuador will have their corporate income tax rate reduced to 17% for any income derived from those programs and projects.

Advance income tax payment

When using the percentages formula on assets, equity, taxable income and deductible expenses to calculate advance income tax payments, the law requires taxpayers to subtract the withholding taxes paid in the previous fiscal year from the total.

If the advance income tax payments exceed the income tax liability, the law allows individuals and undivided estates that must keep accounts and companies to request a refund for the total that exceeds the income tax.

The law eliminates the regulations on “the minimum tax” figure.

Value added tax (VAT)

Tax credit

The law allows taxpayers to use the tax credit for the VAT paid in local acquisitions and imports of goods and services for up to five years from the date of payment. The law allows taxpayers to request a refund or to offset their taxes with the tax credit originating from VAT withholdings for up to five years from the date of payment.

0% VAT

The following items would be subject to a 0% VAT rate:

  • Raw materials and supplies, parts and spare parts of tire tractors
  • Electric vehicles
  • Batteries, chargers for hybrid and electric vehicles
  • Solar panels and plants for wastewater treatment

5% outflow tax

The law exempts the following payments from the 5% outflow tax:

  • Cross-border payments for the amortization of capital and interest generated on loans granted by public or private financial intermediaries or other types of institutions operating in international markets duly qualified by “control entities” for 360 calendar days or more
  • Cross-border payments for maintaining ships in a shipyard

Additionally, offsetting accounts will no longer trigger the outflow tax.

EYG no. 010987-18Gbl

Download this Tax Alert as a PDF file.

 

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