Tax in Ecuador

The Daily Brief – A Taxing Experience in Ecuador

It’s a dirty word, but someone has to blurt it out…taxes !  Ecuador may be your new found haven and paradise, but the Taxman still cometh. Actually, if you are a USA citizen, I am pretty sure the taxman is always with you, hiding in your wallet, keeping very, very close tabs on all that you do.  However disturbing the aforementioned thought might be, tax in Ecuador is an issue that has to be addressed, especially for expat investors, who relocate to Ecuador.

For purposes of this general report, we are using a broad definition for “investor”.  Basically, we are considering an investor, anyone who opens a business or makes any kind of capitol investment in the Ecuadorian economy, real estate (common) or otherwise.

In Ecuador, taxable revenue is considered the following:

salary and bonuses;

employer contributions to home country pension schemes;

medical insurance premiums paid by an employer;

home leave distributions;

cost-of-living allowances;

housing allowances and employers’ contributions to rent and for payment of utilities;

tuition payments.

Tax return filing in Ecuador is due between 10 and 28 March following the end of the tax year.  For purposes of establishing residency, foreigners with a stay lesser than six consecutive months, or not within a same calendar year, are considered non-resident. Non-resident individuals will be subject to a withholding, at the source of income tax, at a rate of 22 percent, in 2013, over the income amount.

For investors that fail to meet the non-resident status, they will be subject, on a personal basis, to income tax rates targeted at the “resident class” in Ecuador.  Those tax rate amounts are as follows:

From USD

To USD

Percent

0

9,210

0

9,210

11,730

5

11,730

14,670

10

14,670

17,610

12

17,610

35,210

15

35,210

52,810

20

52,810

70,420

25

70,420

93,890

30

93,890

Over

35

 

In addition to Income Tax, Ecuador residents may be subject to additional corporate or investment tax rates, separate or in conjunction with Income Tax payments.  Please note, the information provided herein is intended solely as a general review.  Consultation with a tax attorney or CPA is essential, prior to engaging in any investment activity in Ecuador.

Some of the additional investor tax considerations include, investment income and capital gains tax, which is generally treated as ordinary income, with exemptions for share-based investments (stocks) and immovable properties (real estate).  Royalties, for example, are also treated as ordinary income and taxed at a 25% rate.  With regard to dividends, interest and rental income, no tax is levied on dividends paid by Ecuadorian companies to non-resident individuals and resident and non-resident entities, except for those domiciled in tax heavens, if the company has already paid tax on underlying profits. As for interest on savings deposits paid to individuals by Ecuadorian financial entities, it is likewise tax-exempt, as are all time deposits and yields obtained from investments in fixed term securities, provided the term should be for one year or more.

Additionally, there is no special regulation for gains/losses from exercising stock options, from principle residence gains/losses, or from foreign exchange gains/losses.  However, as an interesting note, which may be very different from one’s expat nation of origin, capital losses are not deductible, nor are losses or destruction from gem quality jewelry, art collections or any other personal use items as defined.

However, allowable deductions include:

housing expenses: rental of property used for housing, interest on mortgage loans, and property taxes of the principal residence;

tuition expenses: those paid including those incurred by dependents older than 18 years economically dependent of the taxpayer;

health expenses: services in clinics, hospitals, medical fees, medicines, and insurances;

food expenses: purchase of foods for human consumption and consumption in restaurants;

clothing expenses: incurred in any type of clothing (not including accessories).

It should be further noted that Ecuador does enjoy double taxation treaties with: Germany, Brazil, Belgium, Canada, Chile, Spain, France, Italy, Mexico, Romania, and Switzerland and is a member of the Andean Community of Nations (CAN), members which include Bolivia, Colombia, Peru, and Venezuela.

Also, for corporate investors, they need to be aware that an 11.15% social security tax is paid by the employer, with the employee picking up the remaining 9.35% balance.  However, there are no payroll or unemployment taxes in Ecuador.

The agency responsible for the tax in Ecuador is the Servicio de Rentas Internas (SRI) del Ecuador.  For further research, their website can be found at http://www.sri.gob.ec.

Please, as tax laws change, often dramatically, within a short period of time, it is imperative to consult a CPA or tax attorney.  This is report is intended only as an overview primer.

In closing, I would like to add a personal observation.  It is true that for years the SRI was notoriously lax in the collection of outstanding tax revenue.  The most egregious example was run up by a family of companies, which were determined to have owed over $300 million of uncollected taxes over a single 5-year period.  That was not the tax basis, but the actual amount owed in arrears.

However, those days have come and gone.  In addition to the excellent collection of oil revenue receipts, the Ecuador government has largely fueled its rapid infrastructure and economic expansion on the ability to adequately and professionally collect all back-tax revenues due.  It is now a very serious and professional operation.  It may be painful, but it pays to pay your obligations for tax in Ecuador.  Failure to do so is now seen as a very serious transgression and no longer overlooked, or taken lightly, by a much more professional SRI organization, since the ascent of President Correa to a position of leadership.  Tax scoff-laws be forewarned.  Investment opportunities may be prevalent and enticing throughout Ecuador, but they likely will be a taxing experience.