ECUADOR: An Introduction to Tax
General Insights
Ecuador is a constitutional democracy governed by a 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 derogation 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 Ecuador’s legal currency since the year 2000.
Overview of Ecuador’s 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.
Tax audits are performed by the IRS. The outcome of such audits may be challenged before the IRS, and judicially before the district tax courts.
Capital Remittance Tax (ISD)
The ISD rate for 2025 remains 5% (the general rate). However, the President may modify the ISD rate, by sector or based on variables deemed appropriate, subject to a prior pronouncement from the Ministry of Finance. In no case may the rate exceed 5%.
Accordingly, the President has ruled differentiated tax rates for the import of the following tariff subheadings (applicable from 1 May 2025):
- 0% for the pharmaceuticals sector; and
- 2.5% for other productive sectors.
All other payments made abroad will continue to be taxed at the standard 5% if no exemption applies. It is important to note that dividends remitted abroad are exempt from ISD whenever the beneficiaries are not Ecuadorian tax residents. Likewise, capital and interest remitted abroad are not subject to ISD if the financial transaction complies with certain norms.
ISD tax credit
On 12 January 2022, the Constitutional Court of Ecuador ruled that the Environmental Promotion and State Revenue Optimization Law (Ley de Fomento Ambiental y Optimización de los Ingresos del Estado) is an unconstitutional bill. As a consequence, taxpayers importing goods and merchandise included in the list of the Tax Policy Committee will no longer be able to use the ISD paid for such imports as an income tax credit. Therefore, as is the case with other imports, they may only use the ISD as a cost or expense pursuant to accounting regulations.
The ruling by the Constitutional Court came into effect on 1 January 2025. Therefore, taxpayers were able to use the ISD as an income tax credit until 31 December 2024.
Additionally, taxpayers who have accrued ISD income tax credit as of 31 December 2024, may opt to:
- offset the tax credit against income tax for the fiscal year in which the payments were made; and during the subsequent four fiscal years;
- record the amount as an income tax deductible expense; or
- request its refund, in accordance with Ecuadorian tax regulations.
Controls performed by the Tax Authority on specific transactions
Transfer of shares or similar equity rights and distribution of dividends
The IRS has commenced enforcement actions to collect income tax levied on earnings accrued on the transfer of shares or similar equity rights that are not carried out through Ecuadorian stock exchanges. The general rate is 10% on the accrued earnings. The tax is levied on both the direct or indirect transfer (under certain conditions) of shares or similar equity rights.
The controls are primarily focused on taxpayers with significant equity who hold large quantities of shares that are not listed on the local stock market. To date, the Tax Authority reports that it has collected an average of USD30 million annually on this particular transaction, and it estimates that in 2025 it could collect up to USD50 million. The additional amount, it asserts, corresponds to transactions that have not been duly reported. (Ref. IRS bulletin No NAC-COM-25-025.)
If the projections of the Tax Authority are accurate, the increase in collection could largely correspond to transactions in which shares or similar equity rights are transferred at amounts lower than the market value or the Proportional Equity Value of the rights.
In relation to dividend taxation, the Tax Authority’s main focus is verifying whether formal obligations related to income tax withholdings are complied with, and also to monitor taxpayers who register undistributed profits on their returns. In June 2025, the IRS indicated that it will monitor undistributed dividends as figures show that these amount to USD29 billion. (Ref. IRS bulletin No NAC-COM-25-025.)
In Ecuador, companies may distribute dividends arising on corporate taxed profits. Dividends distributed are subject to withholding tax of up to 10% (gross); conversely, undistributed accumulated corporate profits are not subject to taxation. Our understanding is that the IRS will closely monitor: (i) dividends declared but not paid (taxed at the beneficiary level); and (ii) accumulated profits (potentially taxed at beneficiary level).
Artificial intelligence and data governance
The IRS has announced the implementation of a data governance system and information systematisation equipped with technologies that use artificial intelligence. The project, named “Orion”, aims to modernise tax-auditing procedures and enhance tax collection. Financed by Inter-American Development Bank through a USD60 million loan, the project will be deployed in three phases:
- migration of the current data center to a secure and modern data processing center;
- renewal of software and hardware systems; and,
- implementation of systems for the governance of tax-management data and application of advanced analytics including solutions that use artificial intelligence models.
According to the Tax Authority, Orion will allow for the detection of irregularities in real time, identify omissions of formal obligations, and generate suggested tax returns. This will significantly reduce work burdens for assessing and auditing tax compliance. The implementation of the system is expected to be finalised by 2027.