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12.2.1. Main Rules

Effective 1 January 2020, the following restrictions apply to the deduction of interest paid on loans from related parties:

  • For companies, the deduction of net interest expense in respect of operations carried out with related parties is restricted to 20% of profit before labor participation (mandatory profit sharing), interest, depreciation, and amortization corresponding to the respective fiscal year. The limit does not apply to interest payments on loans used to finance delegated management and public interest projects, as qualified by the competent public authority; and
  • For banks, insurance companies, and certain other financial sector entities, interest paid or accrued on external credits granted directly or indirectly by related parties is not deductible if it exceeds a 3:1 debt-to-equity ratio.

Until 31 December 2019, Ecuador's thin capitalization rules applied when the average debt-to-equity of a company exceeded a 3:1 ratio. In such cases, interest payments on foreign related party loans in excess of the ratio was not deductible.