Special regime for micro enterprises offers beneficial tax rate

A tax regime for micro enterprises in Ecuador, introduced in 2020, applies for income tax, VAT and excise tax purposes. A micro enterprise is defined as an enterprise that has annual gross revenue not exceeding USD 300,000 and no more than nine employees. Qualifying micro enterprises are subject to a reduced tax rate of 2% on gross income (i.e., with no deductions for expenses), rather than a 22% rate on net earnings.

The main features of the micro enterprise regime are as follows:

• Micro enterprises in certain sectors are excluded from the regime, e.g., financial institutions, public entities, international organizations, professional services, fuel commercialization, construction contracts, urbanization activities, etc.
• Micro enterprises can still qualify for the special regime if they meet the annual gross income requirement but not the employee requirement.
• Ecuador’s tax authorities publish the registry of qualifying taxpayers for each fiscal year.
• A qualifying enterprise must remain subject to the special tax regime for at least five years as long as it continues to meet the income and employment requirements.
• Micro enterprises falling within the scope of the regime must file tax returns and pay tax on a bi-annual basis (i.e., in January and July).
• New companies commence their activities under the general regime until they are included in the micro enterprise regime.
• Micro enterprises subject to the special regime will not be withholding agents for income tax or VAT purposes unless they are designated as special taxpayers or withholding agents.

Nelson Morales
[email protected]