By: Miguel Ángel Saltos Orrala
Introduction
This work offers a description of the most important reforms to the Organic Law of the Internal Tax Regime of Ecuador, promoted by the Organic Law of Economic Efficiency and Employment Generation. Relevant changes are addressed in topics such as temporary tax residence for foreigners, tax incentives for free zones and renewable energies, additional deductions for labor contracts, and regulations on the use of vehicles and advertising expenses. In addition, new measures on banking and sanctions for tax non-compliance are included, providing a comprehensive understanding of the fiscal implications of these legislative reforms in Ecuador.
1.- Temporary tax residence regime for foreigners
The temporary tax residence regime for foreigners, according to the Organic Law of Economic Efficiency and Employment Generation of Ecuador (Art. 3), establishes the following:
Definition of the Regime : This regime allows non-residents in Ecuador to obtain a temporary tax residence.
Duration : Temporary tax residence has a duration of five years.
Requirements : To qualify, a minimum investment in Ecuador of USD 150,000 in real estate or productive activities is required, or having a non-Ecuadorian monthly income of at least USD 2,500.
Investment Conditions : The investment must be maintained in Ecuador for at least five years.
Tax Obligations : Temporary residents must pay income tax only on Ecuadorian source income.
Affiliation with Social Security : In case of monthly income, the person must enroll in Ecuadorian social security during their stay.
Deadline to Meet Conditions : The conditions must be met within 120 days from entry to Ecuador.
2.- Tax incentives for investments in free zones, renewable energies and tourism
Article 5 of the Organic Law of Economic Efficiency and Employment Generation establishes the following:
Free Zones : Operator users or qualified Free Zone users enjoy 0% income tax for five years from the first year of income. Then, a flat rate of 15% will apply for the rest of the time of your declaration.
Renewable Energies and Natural Gas : New investments in non-conventional renewable energies, natural gas or green hydrogen have income tax exemption for 10 years from the first year of income generated by the new investment.
Tourism : Investments in tourism projects are exempt from income tax for 7 years from the first year of income generated by the new investment, with minimum investments of USD 100,000 and 10% allocated to rural tourism.
In all cases, the accumulated amount of the exemption will not exceed the total investment and the change of ownership of already operational assets does not count as a new investment. Failure to comply will result in the collection of taxes owed and possible penalties.
3.- Additional deductions for hiring young people and people who have completed their custodial sentences
Net increase in employment opportunities for young people : Employers that generate employment for young people (18-29 years old) or people obliged to pay alimony have an additional 50% deduction on salaries and wages expenses. This deduction increases to 75% if the employees are young graduates of public educational institutions. Also, a net increase in employment in construction and agriculture provides a 75% deduction. The deductions are not cumulative and apply only in the year of increase and the following year. Employers must comply with tax and labor obligations.
Net increase in employment positions for people who have served their custodial sentences : Employers who hire people who have served their custodial sentences or their spouses have a 75% deduction on salaries and wages. If the employee was deprived of liberty without an enforceable conviction, the deduction is 50%. These deductions are not cumulative with those of Article 9.2 and require that the employer be up to date with tax and labor obligations.
4.- Other deductions
Vehicles : Expenses on vehicles used for economic activities are deductible, including depreciation, leasing, loan interest and taxes. However, if the value of the vehicle exceeds USD 35,000, these deductions do not apply, except for armored, 100% electric or zero-emission vehicles used in public or commercial transportation.
Advertising : Advertising expenses are deductible, with an additional 150% for certain donations to athletes, educational programs, health entities and others, detailed in the law. Advertising expenses for ultra-processed foods are not deductible, except in proportion to other goods or services.
Reductions for Personal Expenses : For people with disabilities, catastrophic or rare diseases, the reduction is 18% of the lowest value of the declared expenses and 100 times the value of the basic family basket.
5.- Tax stability and reduction of the income tax rate
The article on Tax Stability offers taxpayers the possibility of benefiting from a stable system for 5 years, increasing their income tax rate by 2%, under the conditions of the SRI regulations. Taxpayers can resign if a subsequent reform is more favorable, but without the right to a refund of what they have already paid.
Article 37.1 of the Organic Law of the Internal Tax Regime is reformed, thus allowing a reduction in the income tax rate for taxpayers who reinvest in sports, culture, science, technology, and innovation projects, with discounts of 10% for priority projects and 8% for others, according to accreditation from competent entities.
6.- Withholding regime at source for Large Taxpayers
Article 17 modifies the withholding regime at source for Large Taxpayers. It establishes that they will not be retained except in certain situations, such as contracts with the State, government entities, and social security. Large Taxpayers will make a monthly self-withholding on taxed income, excluding those already withheld. The percentage will be defined by the SRI and applied to taxed income or to the total if exempt income is not differentiated. This self-withholding will be settled in the SRI form and will constitute a tax credit. Companies with other self-withholding regimes or special regimes are excepted.
7.- Controlled Foreign Company (CFC)
Definition of Controlled Foreign Company : Entity not tax resident in Ecuador but controlled by an Ecuadorian tax resident with at least 25% ownership. Companies that have an effective tax rate significantly lower than the Ecuadorian one are included.
Income Achieved by the CFC Regime : Specifies that the income of a CFC attributable to an Ecuadorian tax resident includes capital gains, properties, dividends, and other passive income or services that originate in Ecuador.
Attribution of Income to the Final Beneficiary : The income from the CFC must be incorporated into the tax return of the Ecuadorian final beneficiary, according to its participation in the CFC.
Periodicity of Taxation of CFC Income : The income generated by a Controlled Foreign Company (CFC) is taxable for the Ecuadorian taxpayer in the year in which it is generated. This applies regardless of when the CFC dividends are distributed and is based on the taxpayer’s effective shareholding ratio in the CFC at the end of each financial year. In summary, CFC income is considered for tax purposes at the time of its generation, not at the time of its distribution.
Calculation of CFC Income Value : The tax base is calculated on the net income of the CFC, using the tax rules of Chapter V. The calculation is made at the end of the fiscal year of the CFC, considering its tax jurisdiction or creation . The basis is determined in the currency of the CFC and is converted to US dollars at the exchange rate on the closing day of the fiscal year. Tax losses can only be offset against future profits of the same CFC.
Interaction with Other Tax Regimes : Requires taxpayers to keep a record of the income of each CFC to avoid improper duplication or exclusion of taxed income. This record must be adjusted in case other withholdings or taxes have already levied on the same income. In addition, it allows taxpayers to credit as tax credit the taxes paid abroad by the CFC, in proportion to the income taxed in Ecuador.
CFC Accounting Information Requirements : Taxpayers must have the accounting of Controlled Foreign Companies (CFC) available to the Tax Administration. In the event of non-compliance, all gross income of the CFC will be taxed in proportion to the taxpayer’s share. The accounting must comply with the requirements of Chapter VI of Title One of the law and must be presented to the Tax Administration upon request, within a period of no less than 10 business days.
8.- New Tax Measures in Real Estate Projects, Electric Vehicles and Mineral Marketing
VAT Refund on Real Estate Projects : Individuals and companies that pay VAT on goods and services to build real estate projects can request a VAT refund in 90 days without interest, except for those who carry out more than two home projects per year. Those who execute more than two projects will lose the capital gains exemption.
VAT on Electric Vehicle Rental : People and companies that pay VAT for renting 100% electric or zero-emission vehicles for public or commercial transportation can request a refund in 90 days without interest.
Withholding on the Marketing of Minerals : An income tax withholding of up to 10% is applied on the marketing of licensed mineral substances, declared and paid for by the seller, and extendable to other goods regulated by regulation.
9.- New minimum amounts for banking and changes to fines
Changes to minimum banking amounts : Banking is required for payments over $500, and only these allow deductions in Income Tax and credits in VAT.
New fines for not issuing invoices : Imposes fines of 1 to 30 basic remunerations for not issuing or transmitting sales receipts, regulated by the Internal Revenue Service.
Fines for concealment of assets : Sanctions the concealment of assets not declared to the SRI with fines of 2% per month, up to 10% of the total value, of undeclared assets or income.
Fines for not delivering information to the SRI : Establishes fines of up to 10 basic remunerations for not delivering information to the SRI, with more severe penalties for financial institutions for non-compliance.
10.- Public-Private Partnerships
Objective and Scope : The law establishes the institutional framework, the applicable rules and processes for the participation of the private sector and the popular and solidarity economy in the management of public investment projects related to infrastructure and public services or strategic sectors.
Interinstitutional Committee of Public-Private Associations (CIAPP) : The CIAPP is created as an intersectoral collegiate body of the Central Public Administration, in charge of exercising the powers related to PPPs.
PPP Contract : This contract is the only enabling title to regulate the use of the assets affected by the PPP Project and the provision of the public service defined therein. The Delegating Entity ensures that all technical, legal, environmental, financial and any other requirements and obligations provided for in sectoral laws are met.
Convenience Analysis : Before applying this modality, an analysis is carried out to evaluate the contracting options and determine the best contractual alternative in favor of the State. It is only applied to public projects that comply with the procedures of the law and exceed the minimum total investment value defined in its regulations.
Project Classification : PPP projects are classified according to their origin, as public or private initiative projects.
Award of the PPP Contract : It is awarded through a reasoned resolution of the Delegating Entity, choosing the most advantageous proposal for the interests of the State.
Private Initiatives : Non-disqualified legal entities can present PPP projects assuming the costs of developing their proposal.
Public Contributions : The Delegating Entity may make public contributions such as deferred payments, subsidies, contributions in kind and other property rights, depending on the type of project. These public contributions that involve monetary obligations are considered fiscal commitments.
11.- Conclusion
The “Organic Law of Economic Efficiency and Employment Generation” reveals a clear focus of the Ecuadorian legislator on revitalizing the economy through tax reforms and investment promotion. Book I, with its reforms in various laws, seeks to optimize the tax regime and facilitate investment, while Book II establishes a specific regime to attract investments. Together, these books reflect a comprehensive effort to strengthen the economy, generate employment, and promote fiscal equity in Ecuador.
We hope that the law truly serves as a legal tool that allows a reactivation of the Ecuadorian economy, that the goal of generating employment in decent conditions is met and that better days will soon arrive for our country.
Contact information:
Abg. Miguel Ángel Saltos | Email: miguel.saltos@lince-saltos.com | Telephone: (+593 4) 2630313
