Effective 1 January 2022, companies in Ecuador that receive foreign income which is subject to tax in Ecuador, may claim a tax credit for taxes paid abroad, limited to the amount of Ecuadorian tax attributable to the said income. Previously Ecuador applied the exemption method for the elimination of double taxation. There was no unilateral relief available for double taxation since foreign income derived from any country other than a tax haven or low-tax jurisdiction was exempt from tax in Ecuador. In case the foreign income was derived from a tax haven or low-tax jurisdiction, the erstwhile regime allowed a credit for tax levied in the relevant tax haven or low-tax jurisdiction (see Sec. 12.5. for the list).
Ecuador’s Internal Revenue Service (SRI) issued the rules for the application of the ordinary credit method that enter into force from 9 June 2022. These rules are subject to the provisions of the relevant tax treaty entered into by Ecuador.
As per the rules, the available tax credit for foreign tax paid abroad is the lower of the following:
- The foreign tax actually paid abroad; and
- The value obtained by multiplying the effective rate of income tax, corresponding to the taxpayer's determination of income tax for the period, by the net foreign income (difference of the foreign income less the total expenses attributable for the generation of that income).
The taxpayer’s eligibility to claim a foreign tax credit is subject to the fulfillment of the following conditions:
- The foreign tax actually paid abroad is eligible for credit. The foreign tax could have been paid directly, been withheld at source by the payer, or paid by any other method, provided that the taxpayer has not already obtained a tax credit or a right to a refund for the said foreign tax;
- The foreign tax is eligible for a tax credit for Ecuadorian income tax purposes if the foreign tax is an income tax or any other direct tax that is equivalent to Ecuadorian income tax;
- If a currency other than the legal currency (USD) of Ecuador is used for the payment of the foreign tax, its value must be converted to its equivalent in USD according to the method prescribed in the rules;
- The recognition and quantification of the income obtained abroad is in accordance with the domestic law before taking into account the tax credit for foreign tax paid;
- The foreign tax paid is not eligible for a credit if the income on which the foreign tax was paid is exempt in Ecuador or is not subject to tax in Ecuador;
- Taxpayers must keep necessary evidence of the foreign tax paid, for example by way of a certificate issued by the relevant tax authority of the foreign jurisdiction and duly legalized and translated into Spanish, if applicable; and
- Any excess foreign tax paid is not refundable and may not be carried forward.
Below is a summary of the available methods for various income tax streams based on domestic law.
The credit column shows the type of foreign tax credit granted when the receiving country receives a payment. Four abbreviations are used for the type of foreign tax credit available:
- NC means no credit but foreign withholding taxes can be deducted.
- OC means ordinary credit, i.e., credit for foreign withholding taxes (e.g., withholding taxes).
- IC means indirect credit, i.e., credit for underlying corporate taxes as well as foreign withholding taxes.
- ND means no credit and no deduction for any foreign withholding taxes incurred.