Ecuadorian tax reform includes increased rates and new temporary contributions affecting corporations

Executive summary

Due to the Internal Armed Conflict declared in Ecuador, a Tax Reform has been approved by the Legislature and issued by the Ecuadorian President. These reforms to the Tax Law currently in force start this year.

The Tax Reform provides for an increase in certain tax rates, such as the Value Added Tax (VAT) and the Remittance Tax (RT), as well as the creation of temporary contributions. The regulations are already in force and many of the reforms will be applied as of 1 April 2024.

In addition, another Tax Reform was issued to promote tourism in Ecuador.

These tax reforms have established new payments and contributions to be made at the beginning of fiscal year 2024, considering taxable bases from previous years. The change in rates has implications for all Ecuadorian companies and their shareholders.

VAT rate

The VAT rate was permanently reformed to 13%. Nevertheless, the President has the discretion to modify the rate from 13% up to 15%, with the prior approval of the Ministry of Economy and Finance. Thus, by decree, the President has temporarily modified the VAT rate to 15%, which will be applied as from 1 April 2024.

The VAT rate on local transfers of construction materials will be 5%, however.

Remittance Tax rate

The triggering event for this tax is the cross-border transfer of currency. At the moment, the rate is 3.5%; however, this reform increases it to 5%, which will be applicable beginning 1 April 2024. The possibility of modifying the RT rate on a sectorial basis without exceeding the rate established in the law (i.e., 5%) was also established.

Temporary Security Contribution

Companies resident in Ecuador as well as permanent establishments that have obtained profits subject to the Corporate Income Tax for the fiscal year 2022 are subject to the payment of a new Temporary Security Contribution.

The rate of the contribution will be 3.25% and it must be paid in 2024 and 2025, both by 31 March.

Temporary Contribution on Profits of Banks and Credit Offices

Banks and credit offices resident in Ecuador that have obtained profits subject to Corporate Income Tax in fiscal year 2023 will have to pay this contribution, levied at a rate ranging from 5% to 25% depending on the amount of their profits.

Unlike the Temporary Security Contribution, this contribution must be paid 31 May 2024.

Self-withholding 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 classified as Big Taxpayers shall make a monthly self-withholding on the total of their taxable income, which will constitute a tax credit when their Corporate Income Tax is due.

The self-withholding percentages established by the tax authority are the following:

Payments to nonresidents for tourist services

Payments made for services related to the organization, production and presentation of artistic and cultural shows in Ecuador will be subject to a 15% Corporate Income Tax withholding.

8% VAT

By Decree, the VAT rate may be reduced to 8% for the provision of services of tourist activities during holidays.

Withholding in the production and/or commercialization of minerals

Commercialization of mineral substances that requires the obtaining of commercial licenses, as well as production and commercialization of mineral substances that come from mining concessions, are subject to a Corporate Income Tax withholding of up to 10% of the gross amount of each transaction.

Exemption for RT

Cross-border payments made by domestic and foreign airlines will be exempt from Remittance Tax.

Contact Information

For additional information concerning this Alert, please contact:

EY Ecuador — EY Addvalue Asesores Cía. Ltda.

• Carlos Cazar

EY Ecuador — EY Addvalue Asesores Cía. Ltda.

• Eduardo Góngora

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.