Tax simplification and progressivity law
On 31 December 2019, the Organic Law of Tax Simplification and Progressivity was published, containing tax reforms with effect from 1 January 2020. The main business-related provisions are summarised as follows:
Only dividends and profits, calculated after payment of income tax, distributed by national resident or foreign resident companies in Ecuador, in favour of other national societies are exempt from income tax. The capitalisation of profits will not be considered as a dividend distribution.
40% of the dividend effectively distributed is considered as taxable income. The company making the distribution must act as a withholding agent on taxable income, as follows:
- Withholding of up to 25%, if distributed to beneficial owners resident in Ecuador
- 25% withholding if distributed in favour of natural or legal persons not resident in Ecuador
- Withholding of 35% if distributed in favour of shareholders based or located in tax havens, or when the duty to inform about the owners of the representative capital stock (shareholders, partners, beneficiaries) has not been fulfilled.
Those who produce or sell agricultural products that are kept in a natural state (agricultural, poultry, livestock, beekeeping, cunicultural and meat sectors) may benefit from the single income tax, by which the tax is calculated based on a progressive income chart by applying a rate from 0% to 2% on income, plus a tax on the basic fraction.
For banana sector activities, the single income tax is established, involving the payment of a fee of up to 2% on the gross income obtained from the local production and sale of bananas; and 3% on the income generated by banana exports.
The obligation to determine and pay advance income tax is replaced by a voluntary option to pay 50% of the previous year’s liability, minus any tax withheld.
For banks, insurance companies, and entities in the financial sector of the Popular and Solidarity Economy, interest on external loans granted by related parties will be deductible as long as the total amount of these loans does not exceed 300% of equity. The excess will be non-deductible.
For other companies and individuals, interest on loans granted by related parties will be deductible as long as the interest does not exceed 20% of the profit before labour participation, interest, depreciation and amortisation. The excess will be non-deductible.
An additional 50% deduction is provided on organisational and sponsoring artistic and cultural events expenses.
An additional 50% may be deducted on insurance contracted for export credit.
An additional 100% of advertising and sponsorship expenses incurred in favour of athletes, programs, and previously qualified sports projects may be deducted.
Donations to educational entities for undergraduate and postgraduate careers related to education sciences, of up to 1% of taxable income, will be deductible.
Value Added Tax (VAT)
The 0% rate is extended to include flowers, foliage, cut branches, agricultural cultivation or agricultural activity, tyres for tractors up to 300 hp, glucometers, lancets, glucose test strips, insulin pumps, pacemakers, newsprint, and boats, machinery and materials for the industrial fishing sector.
The import of digital services will be subject to VAT at 12%.
Services subject to 0% VAT will include the provision of web page domains, servers (hosting), cloud computing, and electric vehicle recharging.
Exporters and tourist operators who invoice receptive tourist services are excluded as VAT withholding agents. Credit card issuers for digital service payments are included as withholding agents.
Special consumption tax (ICE)
The minimum marketing margins for the calculation of ICE are increased from 25% to 30%.
The determination of the tax base and rates for the payment of the ICE are reformed, particularly for plastic cases, mobile telephony and beer.
A tax regime for microenterprises is established, involving the payment of income tax of 2% on gross income, submission of semi-annual VAT and ICE declarations, and no obligation to act as a withholding agent, except for the importation of services.
Exporters may access a simplified return mechanism for taxes on foreign trade, except VAT.