Ecuador’s economy is the eighth largest in Latin America and the Caribbean (out of 33 countries), it has incredible potential for commercial activities in the mining, energy, tourism, and agriculture industries. With large natural mineral reserves (in gold, copper, and iron), incredible conditions for the development of energy projects, especially photovoltaic and hydroelectric energy, tourist places such as the Galapagos Islands, the Amazon, the Sierra, the Coast, and the East for what it is considered one of the most biodiverse countries in the world. Ecuador is also one of the world’s leading exporters of bananas, shrimp, flowers, and cocoa.

Due to all these interesting factors and many others, such as the fact that it is a dollarized economy, current government policy has focused on promoting attractive conditions for foreign investors and working to improve the benefits.

This report provides a broad and general vision regarding the legal regulations, permits and management of businesses and companies in the country.

In this chapter 

• Legal system
• Taxation authorities
• Business vehicles
• Financing a corporate subsidiary
• Corporate income tax
• Cross-border payments
• Payroll taxes
• Indirect taxes

Legal system

Ecuador and its provinces operate under a common civil law legal system. The basis of the legal system in Ecuador is the Constitution, under which are the international treatments and conventions and, under these, the organic laws and the rest of the legal orders that are completed with laws, regulations, and municipal ordinances according to each province.

The legal system in Ecuador has the following hierarchies:

Ecuador is governed under a civil law system for private law that is based on the Civil Code of Ecuador. While the ability to make certain laws are in the exclusive domain of the National Assembly, the provincial authority has the right to issue regulations and certain other entities issue regulations in the area of their competence.

Tax regulations

In the case of tax regulations, the IRS is the national authority that has the power to issue regulations.

In Ecuador the main taxes are the following, a more detailed analysis will be found hereunder:

1. Income tax (corporate, and the effective distribution of profits and individuals with tax residence in Ecuador): Rate 25%.
2. Tax on Dividends to be distributed: 10% on value to be distributed.
3. Workers Participation in company profits: Rate 15%.
4. Value-added tax— VAT: The general rate is 15% and in the case of construction materials is 5%.
5. Withholdings at the source of income tax: Rate between 1%-10% (local transactions) and 25% or 37% (foreign transactions).
6. Withholdings at the VAT: Rate between 10%, 20%, 30%, 70% and 100% over the VAT (local transactions) and 100% (foreign transactions).
7. Foreign currency outflow tax (ISD): Rate is 5%.
8. Municipal taxes: Rate is on property and business.
9. Contribution to the Superintendence of Companies: Only for corporations under the authority of the Superintendence of Companies. Value is based on assets held by the entity.
10. Other taxes applicable in 2024 based on assets or equity.

Likewise, there are several tax benefits related to new productive investments related to exemption from income tax and foreign currency outflow tax, as well as other tax benefits related to new investments.

Taxation authorities

The tax system in Ecuador is administered by the following authorities:

1. Internal Revenue Service (IRS): The IRS administers the income tax for several entities. 
2. National Customs Service of Ecuador (SENAE, by its acronym in Spanish): SENAE administers the taxes originated in the importation of goods.
3. Autonomous Decentralized Government of each province: Administers municipal taxes such as the property tax.

Business vehicles

In Ecuador, there are several types of companies, including civil societies and commercial companies. The former does not have a regulatory body that controls them-they are only governed by the regulations established in the Civil Code. The latter are regulated and controlled by the Superintendence of Companies, Insurance and Securities under the Companies Law. Here is a brief description of each of them and their classification:

1. Civil Societies: In Ecuador, the constitution of the Public Limited Companies is approved by a notary public, and therefore these are not under the supervision of the Superintendence of Securities and Insurance Companies.
2. Commercial Companies: In Ecuador, according to the Companies Law, there are seven types of companies that serve as legal vehicles to develop economic activities we just refer to the ones commonly used:
   1. Limited Liability Company (Cia. Ltd.): This company has limited liability of the partners and they are only liable for obligations to the extent of their individual contributions.
   2. Anonymous Company (S.A): This type of company is constituted by two or more shareholders and the shares are freely transferable.
   3. Simplified Stock Company (S.AS.): This type of entity has flexibility regarding its statute and internal organization and has the option of self-regulation, since the autonomy of the will of its shareholders prevails.

Financing a corporate subsidiary

Equity financing

Distributions of paid-up capital

Dividends distributed in favor of all types of taxpayers, regardless of their tax residence, are subject to withholding at the source of income tax, except for the distribution made to a company resident in Ecuador. Withholding tax will be made as follows:

1. The taxable base on which the 25% withholding rate will be applied is 40% of the dividend effectively distributed and it is referred to as the “taxable income.” In effect this is equivalent to 10% of the total to be distributed.
2. The withholding rate for dividends is applied at the source considering the following:
   1. For non-residents, a 25% rate will be applied on the “taxable income.” (The Company can practically directly apply the 10% withholding on the dividend effectively distributed, since this represents 25% of the 40%).
   2. If the company that distributes the dividends does not report its corporate composition to its beneficial owner, it must apply the 37% rate on the “taxable income” (The Company can practically directly apply the 14.80% withholding on the effectively distributed dividend, since this represents 37% of the 40%).
   3. If it is distributed to individuals residing in Ecuador or the distribution is made to a non-resident whose effective beneficiary is an individuals residing in Ecuador, a progressive rate of 0% to 25% of tax will be applied on the “taxable income.”

Tax event

The distribution of dividends will be deemed effective in the decision of the shareholders’ meeting, which resolves the obligation to pay them. However, if the company is a “permanent establishment of non-resident companies,” the generating event will be when the surplus of the operation is remitted to the parent company according to the income, costs and expenses that are attributable to said operation in Ecuador once the labor participation and the income tax incurred have been subtracted.

Withholding agents

The company that distributes the dividends becomes the withholding agent, the tax must be withheld at the source (within the 30-day cycle in relation to the decision of the shareholders’ meeting) and in the case of “establishment non-resident companies,” the time of withholding will correspond to the date of enforceability of the income tax of the distributing entity.

Debt financing

General

Interest on debts incurred in connection to the business are deductible for income tax proposes, if the following requirements are met:

1. The interest rate does not exceed the rate defined by the Monetary and Financial Policy and Regulation Board.
2. In the case of external credit, the credit must be registered with the Central Bank of Ecuador.
3. In the case of interest paid or accrued by banks, insurance companies, and entities of the financial sector of the Popular and Solidarity Economy, for external credits granted directly or indirectly by related parties, the total amount of these may not be greater than three hundred percent (300%) with respect to equity.
4. In the case of other companies or individuals, the total amount of net interest in operations carried out with related parties must not exceed twenty percent (20%) of EBITDA.

Withholding tax implications

Payments made in connection with external financing to foreign financial institutions, legally established as such, or specialized non-financial entities qualified by the corresponding control entities in Ecuador, as well as the interest on external credit granted from government to government or by multilateral organizations are deductible. These will not be subject to income tax in Ecuador or subject to withholding at source. In these cases, the interest may not exceed the maximum reference interest rates set by the Monetary and Financial Policy and Regulation Board on the date of the credit registration or its novation. If in fact they exceed them, for the portion to be deductible, a withholding must be made at source equivalent to the general corporate income tax rate on it.

In the cases of interest paid abroad not contemplated in the previous paragraph, a withholding tax equivalent to the 25% tax rate must be applied, regardless of the financier’s residence.

Corporate income tax

Income tax rate

The general rate is 25%. This rate can be increased or decreased under certain conditions.

The general tax rate is increased to 28% when one or both conditions mentioned below are met:

1. The company does not report its shareholding composition in a timely manner until the last effective beneficiary.
2. The beneficial owner is a tax resident of Ecuador, but is protected in a tax haven, lower tax jurisdiction or preferential tax regime and its participation exceeds 50%. If the participation is less than 50%, the 28% rate will apply to the proportion of said participation.

Tax havens

The IRS in Ecuador considers as tax havens, those domains, jurisdictions, territories, associated states or preferential tax regimes, where the Income Tax rate of an identical or analogous nature is less than 60% than that corresponding in Ecuador on income of the same nature (15%). This applies especially to payments for services contracted with such jurisdictions.

Capital gains

Capital gains are defined as the profits received by companies domiciled or not in Ecuador and individuals, Ecuadorian or foreign, resident, or not in the country, from the direct or indirect alienation of shares, participations, other rights representing capital or other rights that prove the exploration, exploitation, concession or similar of natural resources; of companies domiciled or permanent establishments in Ecuador. Profits obtained are subject to a tax rate of 10%, when the transaction is not made through the stock exchange in Ecuador.

The indirect sale shall be deemed to have occurred provided that the following has occurred concurrently:

1. At any time within the fiscal year in which the sale occurs, the real value of the capital rights of the resident company or permanent establishment in Ecuador directly or indirectly represents 20% or more of the real value of all representative rights of the non-resident company in Ecuador.
2. Within the same fiscal year, or during the twelve months prior to the transaction, the sale corresponds directly or indirectly to an accumulated amount greater than US$3,570,600 for the year 2024. This amount will be increased to US$11,902,000, when the transaction does not exceed 10% of the total share capital.

Losses due to direct or indirect disposal of fixed or current assets, shares, participations, other rights representing capital or other rights that allow exploration, exploitation, concession or similar will not be deductible when the transaction takes place between related parties.

Branch tax

Profits earned by a branch

The IRS imposes a tax equal to 25% after-tax profits earned by a branch of a non-resident corporation. The branch tax is roughly equivalent to a withholding tax of 25% on dividends. The branch tax may be reduced or eliminated under an applicable double-tax treaty.

The taxation for a Branch as well as for the Permanent Establishments is the same applicable to any local corporation.

Computation of taxable income

Taxable base

Income Tax is levied on the tax base generated, which is the taxable profit for a period determined by the taxpayer.

To determine the taxable basis, the accounting profit (income less costs and expenses to which the 15% profit sharing must be applied) shall be reconciled by subtracting and/or adding items as shown below: 

The income tax rate that is equivalent to 25% must be applied to this taxable base and in specific cases it is increased to 28% as explained in the tax rate section.

Deductions

Generally, all expenses that are necessary to generate taxable income are deductible.  In specific cases the expenses are not deductible from income tax, such as when:

1. These serve to generate exempt income.
2. They do not have supporting documents.
3. These do not have economic essence.
4. These exceed the deductibility limits specified for each type of expense (depreciation, royalties, loans, other expenses).

Income tax reporting

The Income Tax declaration is mandatory for individuals, undivided successions and companies, national or foreign, domiciled or not in the country, according to the results of their economic activity; even when all of their income is made up of exempt income, except for:

1. Payers domiciled abroad, who do not have a representative in the country and who exclusively have income subject to withholding at source.
2. Individuals whose gross income during the fiscal year does not exceed the untaxed basic fraction.

The income tax declaration is made in April of each year, according to the ninth digit of the Single Taxpayer Registry (RUC), which is declared from April 10 to April 28.

Cross-border payments

Transfer pricing

Ecuador is now part of the Organisation for Economic Cooperation and Development (OECD); However, it has taken as a reference its pillars with respect to the arm’s length principle, based on which the IRS in a review process can determine transfer pricing adjustments with respect to a transaction that is not carried out under full terms or conditions.  Taxpayers in Ecuador are required to maintain documentation that supports transactions subject to transfer pricing rules.  As a rule, transactions between related parties that exceed the amount of US$3 million must annually submit a Transfer Pricing Annex to the IRS and in the event that it exceeds US$10 million, the IRS must submit a report of transfer pricing prices in order to justify that its transactions are aligned with the arm’s length principle.

Withholding on income tax

Payments made abroad by a resident of Ecuador for services, interests, rents, royalties, management or administration expenses, other concepts, are subject to a tax rate of 25%. However, the rate may be reduced by virtue of a double tax treaty applicable with each country with which Ecuador has an agreement. A detail of the countries that have an agreement with Ecuador is as follows:

To apply the benefits established in the double taxation agreements, Ecuador requires that a certificate of tax residence be presented for each fiscal year, with the aim of avoiding abusive tax practices.

Multilateral Instrument

Ecuador is not a signatory to the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). Rather, Ecuador relies on the limitation on benefits provisions in its existing income tax treaties and its domestic law to implement the Base Erosion and Profit Shifting standards, especially in aspects related to the arm’s length principle.

International tax reform

Ecuador is not a member of the OECD. Thus, the country does not intend to adopt the rules of OECD Pillars One and Two

Payroll taxes

In Ecuador, an individual is an employee of a company when an agreement is entered into by virtue of which a person agrees to another or others to render their lawful and personal services, under their dependence, for a remuneration set by the agreement.

As of 2024, the amount of US$460 has been set as a unified basic monthly salary, for 8 hours of work per day (Monday to Friday) and 40 hours per week.  This salary is subject to annual variations.

Contributions to the Ecuadorian Institute of Social Security

1. Type: There are two contributions:
   1. Employer contribution: It is contributed by the employer (12.15%).
   2. Personal contribution: Contributed by the employee (9.45%).
2. Period: It takes place monthly until the 15th of each month.
3. Calculation method: The percentage to be paid is 21.6% of the monthly salary paid to the worker, which must be paid as follows: 9.45% is deducted from the worker's salary for personal contribution and the remaining percentage 12.15% is paid by the employer.

Profit sharing

1. Calculation method: The Company must distribute among its workers 15% of the Net Profit obtained in each fiscal year.
2. Term: This amount must be paid annually until April 15th.
3. Form of distribution:
   1. 10% of these benefits are distributed among all workers and former workers according to the time they have rendered their services.
   2. The remaining 5% is distributed in proportion to the family responsibilities of each worker and former worker.
4. In the case of former workers, they will receive the value proportional to the time they rendered services to the permanent establishment in the year.

Income tax for individuals with tax residence in Ecuador

The income received by individuals with tax residence in Ecuador will be subject to income tax according to a progressive tax directly related to their annual net income.

To calculate the income tax that a taxpayer must pay, the following must be considered: from the total taxable income, the returns, discounts, costs, expenses, and deductions, attributable to such income, will be subtracted. We call this result “tax base.”

Tax base

1. Taxable income from work in a dependency relationship: It is made up of taxed income minus the value of personal contributions to the Ecuadorian Social Security Institute (IESS) (this is equivalent to 9.45% of salaries), except when these are paid by the employer.
2. Tax base for seniors: Seniors will be deducted a basic fraction taxed with a zero Income Tax rate (US$ 11,902  for 2024).
3. Taxable base for people with disabilities or substitutes: People with disabilities or substitutes will be deducted two basic fractions taxed with zero Income Tax rate (US$23,804  for 2024), according to the following table:
   
   

Deductible expenses

For 2024, the deductions that a person can apply to calculate their income tax are revised, whereby a reduction equivalent to 18% is applied to the lower amount between projected personal expenses and the amount of the basic family basket for the month of January because of the number of family dependents.  This reduction will be applied directly to the tax liability:

The family dependents are the following:

1. Children up to 21 years of age who are economically dependent on the taxpayer.
2. Parents who are financially dependent on the taxpayer.
3. Couples or spouses who have no activity or economic income.
4. Children, partners or spouses with catastrophic illnesses.

It is worth mentioning that taxpayers or their dependents with rare, catastrophic and/or orphan diseases will be entitled to the maximum deductible expenses, regardless of the actual number of family dependents.

If two or more taxpayers have the same family dependents, these may be distributed among them at their discretion. However, under no circumstance may two or more taxpayers claim the same family dependents for the reduction of personal expenses.

Income tax rate

The applicable income tax rate is progressive according to the annual net income of the natural person. Net income that exceeds the annual value of US$11,902  onwards is taxed with a progressive income tax ranging from 0% to 37%.

Indirect taxes

Value-added tax

The VAT taxes all domain transfers and services rendered in Ecuador, at all stages of commercialization, whether for consideration or free of charge.  The current general VAT rate is 15% and for construction materials is 5% %.  In specific cases such as exports of goods and services, the VAT rate is 0%.

The values corresponding to discounts and bonuses, goods and packaging returned by the buyer, interest and insurance premiums in installment sales could be deducted.

You have the right to a tax credit for VAT paid on goods and services taxed with this tax, provided that such goods and services are used for the production and marketing of other goods and services taxed with VAT.

Tax Special Consumptions (TSC)

The Tax Special Consumptions (TSC) taxes distributors of products, manufacturers of goods, importers of goods and all products determined by the law that are taxable with this tax.

This tax has the triggering event at the consumption of domestically produced goods and goods imported when starting the customs process.

The rates of this tax depend on the category of the goods and products. The IRS publishes annually the applicable rates.