The income tax treaty between Ecuador and Japan entered into force on 28 December 2019. The treaty, signed 15 January 2019, is the first of its kind between the two countries.
The treaty covers Ecuadorian income tax and covers Japanese income tax, corporation tax, special income tax for reconstruction, local corporation tax, and local inhabitant taxes.
If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement based on its place of head or main office, its place of effective management, the place where it is incorporated or otherwise constituted, and any other relevant factors. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.
The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services in a Contracting State through employees or other engaged personnel when the activities continue for a period or periods aggregating more than 183 days within any 12-month period.
The following capital gains derived by a resident of one Contracting State may be taxed by the other State:
Gains from the alienation of other property by a resident of a Contracting State may only be taxed by that State.
Ecuador generally applies the exemption method for the elimination of double taxation, while Japan applies the credit method. However, for income covered by Articles 10 (Dividends), 11 (Interest), and 12 (Royalties), Ecuador applies the credit method.
Article 28 (Entitlement to Benefits) includes a general anti-abuse provision, which provides that a benefit under the treaty will not be granted in respect of an item of income if it is reasonable to conclude that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit would be in accordance with the object and purpose of the relevant provisions of the treaty.
Provisions are also included in the final protocol to the treaty to restrict treaty benefits where income of a resident of a Contracting State is attributed to a permanent establishment in a third state, and:
This restriction will not apply, however, if the income emanates from or is incidental to the active conduct of a business carried on through the permanent establishment, other than the business of making, managing or simply holding investments for the enterprise's own account, unless these activities are banking, insurance or securities activities carried on by a bank, insurance enterprise or registered securities dealer, respectively. Further, even where benefits would be denied for income attributed to a PE in a third state as above, the competent authority of a Contracting State may still grant benefits in respect of the income if it is determined that granting the benefits would be justified.
The final protocol to the treaty provides that any income derived by a silent partner that is a resident of a Contracting State in respect of a silent partnership (Tokumei Kumiai) contract or another similar contract concluded under the laws of Japan or any contract similar to those contracts concluded under the laws of Ecuador that are introduced after the date of signature of the treaty may be taxed in the other Contracting State according to the laws of that other State, provided that such income arises in that other State and is deductible in computing the taxable income of the payer in that other State.
The treaty generally applies from 1 January 2020, although Article 25 (Exchange of Information) applies from 28 December 2019 and Article 26 (Assistance in the Collection of Taxes) will apply from the date to be agreed between the Governments of the Contracting States through an exchange of diplomatic notes.