BDO Corporate Tax News

Ecuador - New tax law aims to stimulate the economy but also includes CFC regime

This article has been updated. It was originally published on 22 January 2024
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The Economic Efficiency and Job Creation Law published in Ecuador’s official gazette on 20 December 2024 contains several provisions designed to boost the economy and create employment. However, the law also includes a new controlled foreign company (CFC) regime to prevent taxpayers from deferring the payment of income tax by using foreign low taxed entities. The new rules apply as from 1 January 2024.

The salient tax measures in the Economic Efficiency and Job Creation Law are as follows:
  • Tax stability regime: A tax stability regime is introduced under which companies that agree to pay two percentage points over the applicable income tax rate are entitled to tax stability with respect to the tax regime.
  • Temporary tax regime for individuals: A new temporary residence regime is introduced for nonresident individuals, under which qualifying individuals only pay income tax on Ecuador-source income for five years. To qualify, the individual must invest at least USD 150,000 in real estate or productive activities or have monthly earnings of at least USD 2,500 and such income must be subject to Ecuadorian social security.
  • RIMPE regime: The RIMPE regime, i.e., the simplified tax regime for entrepreneurs and popular businesses, is revised to exempt businesses with annual gross income of less than USD 2,000; those with annual gross income exceeding USD 2,000 and up to USD 20,000 pay a maximum of USD 60. Artisans are no longer included in the RIMPE regime; instead, they are now subject to the normal tax regime.
  • Deductions: To boost employment, particularly of young persons and women, the following additional deductions are available to employers:
    • An employer that hires new employees between 18 and 29 years of age is entitled to an additional deduction of 50% of the employees’ wages on which social security contributions have been made, and the deduction will be an additional 75% if the individuals have graduated from public education institutions.
    • Taxpayers in the construction and agriculture sectors are entitled to an additional deduction of 75% of wages of newly hired employees.
    • Although not included in the Economic Efficiency and Job Creation Law, a measure introduced in 2023 to encourage the hiring of women allows an employer to deduct up to an additional 140% of their wages and social security benefits if specific conditions are fulfilled. The percentage of the deduction depends on the period of service:

    • For costs and expenses to be deductible, taxpayers must use the banking/financial system for all transactions exceeding USD 500.
  • Exemptions:
    • Taxpayers that invest in non-conventional renewable energy and the production, industrialization, transportation, supply and commercialization of natural gas or green hydrogen are exempt from income tax for 10 years from the year in which income is generated.
    • Taxpayers that make new investments in tourism projects qualified by the Ministry of Tourism are exempt from income tax for seven years from the year in which income is generated. The investment must be at least USD 100,000, with at least 10% destined for rural tourism.
  • Controlled foreign company regime: As mentioned above, a new CFC regime is introduced to prevent taxpayers from deferring the payment of income tax by using foreign low-taxed entities. The law defines a CFC as a foreign company that is controlled directly or indirectly by an Ecuadorian taxpayer and the CFC’s effective tax rate is less than 60% of the Ecuador rate, or the effective tax rate is unknown. “Control” for these purposes means a participation equal to or greater than 25% of the capital, voting or similar rights of the company. The CFC regime also captures nonresident companies or Ecuador permanent establishments (PEs) of a foreign company. If the CFC regime is triggered, the net passive income of the CFC is attributed to the ultimate beneficiary in Ecuador (unless attributed to an Ecuador PE), which must be declared in the ultimate beneficiary's annual return and taxed in Ecuador even if not distributed. Any tax paid abroad may be credited.
  • Transfer pricing: Taxpayers must file a comprehensive report and a transfer pricing annex if their cumulative annual transactions with related parties exceed USD 15 million; only the transfer pricing annex must be prepared if the annual related party transactions exceed USD 3 million.
  • Free trade zone: A multi-business free zone regime is introduced. Operators of a free zone are entitled to a 0% income tax rate for the first five years of operation and 15% thereafter. A 0% VAT applies to goods imported into Ecuador by free zone operators and users.
  • Public-Private Partnership (PPP): A PPP regime is introduced, under which qualifying projects that are set up for at least five years are entitled to a 0% income tax rate for 30 years that may be renewed for an additional 10 years.
  • Self-withholding: Large taxpayers are not subject to income tax by a withholding agent except in the case of transactions conducted with the public sector. However, large taxpayers must self-withhold tax on their taxable income at a rate that has been established by the Ecuadorian tax authorities. The tax authorities issued a resolution that sets the specific self-withholding rates for the 500 large taxpayers in the country, with the rates ranging from 1.25% to 10%, depending on the sector:
  •  Remission of interest, penalties and surcharges: If a taxpayer fulfils all of its tax obligations, it is possible to obtain a remission of interest, penalties and surcharges if certain requirements are met, including that the outstanding tax is paid within 150 days from 20 December 2023.

Nelson Morales
BDO in Ecuador