ECUADOR: An Introduction to Tax

General Insights

Ecuador is a constitutional democracy governed by an executive president and a legislative National Assembly. It has an independent judicial system and two additional constitutional branches: the National Electoral Power and the Council for Citizen Participation and Social Control.

Legislative bills relating to tax enactments, modifications, exemptions, or the elimination of taxes are proposed by the president. Such bills must be enacted by the National Assembly. Economic policies are directed by the executive branch. The executive branch and certain state institutions have the authority to set and modify import duties and public service fees, which do not need approval from the National Assembly.

The US dollar has been legal tender in Ecuador since the year 2000.

Overview of the Tax Authority

Tax compliance in Ecuador is overseen by the Internal Revenue Service (IRS). The IRS is the entity legally entrusted to manage and collect most taxes in Ecuador, as well as to require relevant information from taxpayers.

Taxpayer audits are performed by the IRS. The outcome of such audits may be appealed before the IRS and the district tax courts.

Self-Withholding Income Tax Applicable to Major Taxpayers

Staring in January 2024, taxpayers classified as “major taxpayers” are required to self-withhold income tax on taxable income perceived monthly. The IRS determines the self-withholding tax rates, ranging from 1.25% to 10%.

The specific tax rates are assigned based on the effective tax rate determined in control procedures, and on the income tax due by the taxpayer in the previous fiscal year. Notwithstanding the foregoing, taxpayers may request a modification of the self-withholding rates, considering their specific economic, and legal circumstances, and the nature of their business.

VAT

With the enactment of the Organic Law to Address Internal Armed Conflict, Social and Economic Crisis, the VAT rate was set at 13% (previously 12%). This law also empowered the president to adjust the tax rate between 13% and 15%, subject to a favourable opinion from the public finance authority. Consequently, as of April 2024, the applicable VAT rate is 15%.

Specific VAT rate for local acquisition of construction materials

The Ecuadorian government implemented a measure to incentivise the construction sector and mitigate the impact of the VAT rate increase. Specifically, the government set a 5% VAT rate on local transfers of specific construction materials, including steel, concrete, binders, recyclable metal materials, mortars, aggregates, cement additives, pre-cast concrete, and clay.

Refund of VAT paid for real estate projects

Taxpayers who have paid VAT on local purchases or imports of goods and services for the construction of real estate projects are entitled to a refund within a maximum of 90 days. Real estate projects must be registered with the relevant ministry, except for those intended for personal housing and not exceeding two projects per year.

For this purpose, the maximum amount subject to VAT refund will be 6.5% of the total reference cost of the real estate project. In the case of real estate projects for personal housing, a VAT refund of up to 7% of the total reference cost of the project is available.

Temporary Security Contribution (CTS)

Companies and permanent establishments that are tax resident in Ecuador are subject to a CTS of 3.25% on income tax-liable profits reported in the fiscal year 2022. This contribution must be paid in March 2024 and 2025.

Temporary Fiscal Residence

Non-resident individuals may apply for a special temporary residence regime, which must be requested within 120 business days following their entry into the country. Taxpayers under this regime will only pay income tax on income earned in Ecuador. This regime is valid for five years.

Temporary fiscal residents are not required to file a wealth declaration or report their global income. To qualify for this regime, the regulations require (among other things) the natural person to have made investments in productive activities, in real estate, or to have proven monthly income and affiliation to social security.

Tax Benefits for New Productive Investments

Tourism

Taxpayers making new and productive investments focused on tourism are entitled to a seven-year income tax exemption, starting from the first year in which income attributable directly and solely to the new investment is generated. The investment projects must be worth at least USD100,000, with at least 10% earmarked to rural tourism.

Additionally, taxpayers providing accommodation services to foreign tourists are entitled to apply a 0% VAT rate. Accommodation establishments charging 0% VAT on their services to foreign tourists, either directly or through legally established tour operators or dual agencies, are entitled to a tax credit for amounts that cannot be offset against VAT incurred on taxable purchases.

Non-conventional renewable energies

Taxpayers making new productive investments aimed at transitioning to non-conventional renewable energy generation, production, industrialisation, transport, supply, and commercialisation of natural gas or green hydrogen in Ecuador will enjoy an income tax exemption for ten years (counting from the first year in which income attributable directly and solely to the new investment is generated). This exemption shall not exceed the total investment amount.

Free Trade Zones

Taxpayers (operators and users) of qualified Free Trade Zones will benefit from a 0% income tax rate for the first five years starting from the first year in which they generate income.

After the first five years, operators and users will have a fixed 15% income tax rate as long as they maintain their status as operators or users of the Free Trade Zone.

Ecuadorian companies already qualified as administrators, users, or operators of Free Trade Zones can benefit from these tax advantages, but only in relation to new investments made after the enactment of the Organic Law for Strengthening Tourism Activities and Employment Promotion.

Additional Tax Benefits

The Organic Law of Economic Efficiency and Employment Generation provides additional deductions applicable in the settlement and payment of income tax. These deductions (150%) apply to expenses related to advertising, promotion, sponsorship, and/or patronage made in favour of:

• athletes;
• artistic and cultural events;
• students and non-profit organisations; and
• national police.

To access these benefits, it is necessary for the beneficiary to have a certification from the corresponding governing body and a favourable opinion from the public finance authority.

Other Tax-Related Matters

Tax stability system

Taxpayers may opt for the tax stability system regarding the general income tax regime for five years, in exchange for an increase in the applicable tax rate by two percentage points (ie, increasing the income tax rate to 27%).

Capital remittance tax (ISD)

The ISD rate increased from 2% to 5%. However, the president may modify the ISD rate generally, by sectors or based on variables deemed appropriate, subject to a favourable judgment from the Ministry of Finance. In no case may the rate exceed 5%.

Public entertainment

Payments made abroad by individuals or companies for services related to the organisation, production, and presentation of artistic and cultural events held in Ecuador are subject to a 15% income tax withholding (previously 25%).

Sports betting platforms

From 1 January 2024, resident and non-resident operators of sports betting platforms will be subject to a 15% tax levied on their income. Additionally, individuals will be subject to a 15% tax rate levied on prize money earned on said platforms.