Ecuador is increasingly becoming an investment destination of choice in Latin America. Investors planning on starting a business in Ecuador have the opportunity to take advantage of the country’s economic offerings and strategic position in the region as the country works hard to open up its business environment.
When planning your expansion to Ecuador, you’ll need to understand and comply with local accounting and tax regulations. Knowing when to engage with an accountant during company formation procedures, and when paying your taxes and filing returns is crucial.
We connect with our Ecuador accounting team to deliver key insights to foreign investors forming a company in Ecuador.
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How to Form a Company in Ecuador? Understanding the types of legal entities in Ecuador?
There are several legal entities to choose from when starting a business in Ecuador.
The Superintendence of Companies (Superintendencia de Compañías, Valores y Seguros in Spanish) is the government agency responsible for managing these companies, with the exception of the civil partnership structure.
1. Corporations (compañía anónima)
Minimum capital: US$800. At least 25% of the capital must be paid at the time the company is incorporated. The remaining 75% can be paid within 24 months of incorporation.
Number of shareholders: Minimum of 2.
Shareholder liability: Shareholder’s liability is limited to the amount of their contribution.
Legal Representation: General Manager, or President in absence of the General Manager.
Governing bodies: Shareholders Meeting and Board of Directors (optional).
Transfer of shares: Free transfer of shares. Transfers must be registered in corporate books and notified to the Superintendence of Companies and Internal Revenue Service.
2. Limited liability companies (compañía de responsabilidad limitada)
Minimum capital: US$400. At least 50% of the capital must be paid at the time the company is incorporated. The remaining 50% can be paid within 12 months of incorporation.
Number of shareholders: Minimum of 2 and maximum of 15.
Restrictions to shareholders: Banks, insurance companies, foreign corporations cannot be shareholders in a limited liability company.
Shareholder liability: Shareholder’s liability is limited to the amount of their contribution.
Legal Representation: General Manager, or President in absence of the General Manager.
Governing bodies: Shareholders Meeting and Board of Directors (optional).
Transfer of shares: Transfer of shares requires the unanimous approval of the shareholder’s meeting. Agreements for the transfer of shares have to be made before a notary.
Transfers must be registered in corporate books and notified to the Superintendence of Companies and Internal Revenue Service.
3. Branches of foreign companies
Minimum capital: US$2,000. You must register this capital in the Central Bank of Ecuador as foreign investment.
Legal Representation: Must be an attorney domiciled in Ecuador.
Governing bodies: Board of Directors of parent company.
Transfer of shares: Free transfer of shares at the country of the parent company. No authorization is required in Ecuador.
4. Civil Partnerships (sociedad anónima civil)
Minimum capital: No minimum capital established, but in practice a minimum of US$800 is usually applied.
Number of shareholders: Minimum of 2.
Shareholder liability: Shareholder’s liability is limited to the amount of their shares. Nevertheless, in practice they can respond with their personal goods.
Legal Representation: General Manager, or President in absence of the General Manager.
Governing bodies: Shareholders Meeting, Board of Directors (optional).
Transfer of shares: Free transfer of shares. Transfers must be registered in corporate books.
This business structure isn’t regulated by the Superintendence of Companies. A civil partnership is incorporated by way of a public deed, presented before a Notary.
Doing Business – Obtain your tax identification number
Taxation procedures are carried out by the Internal Revenue Service agency (in Spanish: Servicio de Rentas Internas or SRI).
To obtain the tax identification number (known as a ‘RUC’ in Ecuador) as an individual, you must submit documents such as a personal identification and proof of your address.
For companies, this procedure must be carried out by a legal representative, who must provide:
- personal identification
- a document that verifies the address of the company
- a format, provided by the regulatory entity, detailing all the required data of shareholders.
It is important to take into consideration that there are specific tax requirements for the different types of business. The SRI website offers more information on specific tax details.
Starting a business in Ecuador: Paying taxes
When starting a business in Ecuador, it is important to know that there are different types of methods for filing taxes, such as monthly, semi-annual and annual. The monthly return method is the most used.
In order to avoid congestion for tax payments in the country, Ecuadorian regulation outlines a schedule for businesses to present their returns based on the ninth digit of their tax identification number or RUC. It’s important your company understands when they must pay tax based on their RUC number.
General rules on tax thresholds for your company depends on its business structure and earnings.
To calculate the income tax that must be paid by a taxpayer or as a company, you need to work out your ‘tax base’. This is determined by subtracting returns, discounts, costs, expenses and deductions from your total taxable income.
Once this tax base is determined, companies can measure it against available SRI resources to identify their tax rate percentage on the SRI website.
When the percentage has been identified, it is multiplied by the excess fraction. This process must be carried out and signed by a certified public accountant in Ecuador.
Finally, any natural or legal person, national or foreign, who receives profits from the commercial activity of a company does not need to pay additional income tax on them; this payment is already made by the company generating the profits.
Filing Business Income Tax Returns
Annually in Ecuador, companies are required to declare income tax generated during the fiscal year.
To calculate the values your company needs to declare, you must engage with a certified public accountant in the country. Your accountant’s signature must be included on the formal returns.
Tax incentives for prospective investors and entrepreneurs
Starting a business in Ecuador is appealing because of the recent government policies that encourage entrepreneurship.
The Investment Law and COPCI2 benefits are directed to investments that meet certain criteria of new, productive investments in prioritized sectors of the economy. These criteria differ depending on the size of the business.
There is also a difference in benefits depending on the location investors intend to operate in. New investments located within the cities of Quito and Guayaquil are given 8 years of tax benefits, while those located outside these cities are entitled to 12 years of tax benefits. Investment projects located on the border with either Colombia or Peru can enjoy up to 15 years of tax incentives.
The benefits, if granted, will be contained in an investment contract that must be signed with the Ecuadorian state. Outside of this contract, other concurrent benefits from other laws in the fields of tourism, mining, aviation, marine, and other areas could apply.
The fundamental benefits of Ecuador’s investment law include:
- Income tax reduction for existing companies from 25% to 15% and reduction to 0% income tax (with certain exceptions). For new companies, the exemption could be 100% of income tax.
- Currency Remittance Tax (known locally as ‘ISD’) exemptions for the payment of imported machinery and raw materials.
- Tax stability for up to 15 years of the current applicable income tax rate. This provision does not provide stability for municipal, customs nor VAT taxes.
- Temporary exception of custom tariff may also be granted for specific projects.
- International or domestic arbitration is available for investors.
Future reforms that could impact the Ecuadoran taxation system
Ecuador’s president Lenin Moreno recently announced a series of economic measures that seek to stimulate the economy and address the current crisis in certain economic sectors of the country.
One of the most important measures was the elimination or reduction of the outflow tax, a situation that generated many obstacles to foreign investment.
Although it is still not clear what immediate effects these measures will take, especially as the government is reviewing some of these decisions, in the long term the intent is to generate a much more attractive internal environment for businesses international investments.
Connect with the local accounting experts
For investors interested in starting a business in Ecuador, understanding and complying with local taxation regulations require the assistance of a certified public accountant in Ecuador. Without a trusted local partner, your business won’t be able to comply with local tax laws.
Reach out to an international company that supports likeminded multinationals. At Biz Latin Hub, our local and expatriate team of professionals have the experience to guide you through the company formation and tax registration process, and support you on an ongoing basis.
Contact our Ecuador team here at Biz Latin Hub for personalized assistance.
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