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Ecuador Publishes Tax Reform Law for 2020

Ecuador published the Law of Simplicity and Tax Progressivity (Law No. SAN-2019-1270) in the Official Gazette on 31 December 2019, which includes tax reform measures for 2020. Key measures of the law include:

  • The introduction of a temporary additional corporate income tax on companies whose gross income exceeded USD 1 million in the 2018 fiscal year that is payable for fiscal years 2020, 2021, and 2022 according to the following rates based on total taxable income declared for the 2018 fiscal year:
    • 1,000,000.00 to 5,000,000.00 - 0.10%
    • 5,000,000.01 to 10,000,000.00 - 0.15%
    • 10,000,000.01 and over - 0.20%
  • The introduction of a simplified tax regime that includes a single tax at a flat rate of 2% on gross income for individual entrepreneurs and micro-enterprises;
  • The introduction of general income tax withholding on dividends distributed to non-resident companies and individuals, which is levied at the general tax rate (25%) for non-residents on 40% of the dividend amount (i.e., an effective 10% rate), with specific rules applying in certain cases, including:
    • if the ultimate beneficiary (individual) of the dividend is resident in Ecuador, the rules for distributions of dividends to resident individuals apply, which includes that the income is taxed as part of an individual's overall income and the distributing company must withhold tax at a rate of up to 25%; and
    • if the distributing company fails to report its shareholding composition, the dividend amount is taxed at the maximum tax rate for individuals (35%)
  • The repeal of mandatory advance income tax payment obligations;
  • The introduction of a single tax on agricultural income, with progressive rates of 0.0% to 1.8% for producers and local merchants and from 1.3% to 2.0% for exporters; and
  • The amendment of VAT rules to provide that the import of digital services consumed in Ecuador are within the scope of VAT, including provisions for VAT registration by non-resident service providers, as well as provisions for VAT on supplies made by service providers that are not registered, which includes:
    • the treatment of recipients as the taxpayer; or
    • if an intermediary is involved in facilitating the payment, withholding by the intermediary (credit card issuers and others specified by resolution)
  • The introduction of restrictions on the deduction of interest, which include:
    • for companies in general, the total amount of net interest expense in operations carried out with related parties may not exceed 20% of profit before labor participation (mandatory profit sharing), interest, depreciation, and amortization corresponding to the respective fiscal year, except for interest payments for loans used to finance delegated management and public interest projects, qualified by the competent public authority; and
    • for banks, insurance companies, and certain other financial sector entities, interest paid or accrued for external credits granted directly or indirectly by related parties may not exceed 300% of the entity's equity.

The measures generally apply from 1 January 2020.

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