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The tax reform bill (Bill) proposed by recently elected Ecuadorian President Daniel Noboa aims to promote foreign investment by granting tax stability, income tax exemptions, abatements for Free Trade Zones, among other changes. Highlights of the Bill follow.
Income Tax
Tax stability
Taxpayers who increase their effective income tax rate by 2% will not be affected by any future tax reforms for up to five years, providing tax stability. This stability can be waived if a more favorable law is subsequently created, but the taxpayer will not be entitled to a refund of the amount paid in previous tax periods.
Tax exemption for renewable energy
New investments in renewable energy projects will be exempt of income tax for 10 years.
Tax residency for investments
Currently, the local regulation does not establish temporary tax residency for foreign investors. The Bill establishes that investors who make productive investments of at least USD$150,000 and have monthly income of USD$2,500 may obtain temporary tax residency during the first 120 days of their entry to this regime.
New taxable income
Income received by companies and individuals in the purchase and sale of virtual and/or digital assets will be identified as income subject to the income tax.
Self-withholding for big taxpayers
"Big taxpayers" are individuals and/or companies that together account for at least 50% of tax revenues. In addition, they have the highest volume and relevance of transactions.
Companies in this category must withhold income tax monthly on their total taxable income. The withholding amount may not exceed 3% and the withholding will be tax credit for annual income tax.
Withholding for the production and/or commercialization of minerals
The production and/or commercialization of minerals coming from a mining concession will be subject to income tax withholding of up to 5% of the gross amount of each transaction.
Taxable customs base
The taxable basis of customs taxes shall include freight in addition to the customs value of the imported goods.
Free trade zone
Special Economic Development Zones will be replaced by Free Trade Zones. These will be a delimited geographic area within the national territory that is subject to special regimes regarding foreign trade, customs, tax and financial matters where industrial, logistics, commercial, and similar activities are carried out.
Under the Bill, Free Trade Zones will have the following tax regime:
- Operator users or users of the Free Trade Zones will enjoy 0% income tax rate for five years, after which they will enjoy a 15% rate for the remaining time of their declaration.
- Transactions occurring in Free Trade Zones will be exempt from VAT, Remittance Tax, taxes on foreign trade and any other that may be created, even if express exemption is required. Provincial and municipal taxes may also be exempt.
- A refund of VAT may be requested on purchases from suppliers located in the national territory.
- There will be tax stability during the Free Trade Zone delimitation period.
The legislature will debate, approve, modify or deny the bill by the end of December, and it will became effective once it is summited to the Official Public Registry. The bill is expected to be in force this month (December 2023) such that the new tax regime will begin in 2024.
For additional information with respect to this Alert, please contact the following:
EY Addvalue Asesores Cia. Ltda., Quito
- Javier Salazar
EY Addvalue Asesores Cia. Ltda., Guayaquil
- Carlos Cazar
- Eduardo Góngora
