If you are interested in entering the Ecuadorian market or are already active there, you will benefit from having an understanding of tax filing in Ecuador. Because while you will likely hand over your tax affairs to a reliable firm of accountants in Ecuador, it is worth having a grasp of the responsibilities your local company will have to meet.
Following the recent election of pro-business President Guillermo Lasso, Ecuador stands to become an even more attractive destination for foreign investors, with Lasso recently announcing plans to promote greater investment in the likes of mining, oil, and tourism.
However, Ecuador was already an enticing place for doing business, given the significant growth it has seen since the turn of the century, recording a gross domestic product (GDP) of $107.4 billion in 2019 (all figures in USD).
That makes it Latin America’s seventh-largest economy, and the country has seen a corresponding rise in prosperity over the past two decades, with gross national income (GNI) reaching $6,090 in 2019 — a figure that places Ecuador as an upper-middle-income country according to World Bank classifications.
The country is also a regional trade hub, with its principal port of Guayaquil handling the seventh-highest throughput of containers in Latin America and the Caribbean in 2018. While foreign direct investment (FDI) inflows have been variable over recent years, they have followed a generally upward trajectory, meaning that the $948.6 million of FDI registered in 2019 was the third-highest amount seen in over half a century.
Ecuador’s export economy includes many agricultural products, such as bananas, fruits and nuts, plants and trees, and wood. Yet, the country is also a significant oil producer, with production never dropping below 500,000 barrels per day since 2014. The country’s main trade partners include Chile, China, Panama, Peru, and the United States.
In terms of tax filing, since 2008 Ecuador has applied the International Financial Reporting Standards (IFRS) — an international benchmark for tax and other financial declarations — meaning that businesses must submit annual financial statements to the country’s tax authorities.
If you are interested in doing business in the Ecuadorian market, read on to learn about different taxes you will have to manage, how double taxation treaties (DTTs) will affect your tax filing in Ecuador, and what social security obligations entail.
Or go ahead and contact us now to discuss your business options.
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Tax filing in Ecuador: types of taxes
When doing business in Ecuador, you will have to manage the following tax obligations:
Corporate income tax (CIT): Non-resident entities are taxed on income earned inside the country. Nonetheless, Ecuadorian entities which are located in non-tax haven jurisdictions are taxed at a CIT rate of between 25% and 28% on income earned within Ecuadorian borders.
Ecuador’s tax year follows the standard calendar year, beginning on 1 January and ending on 31 December that same year.
Sales Tax: Value-added tax (VAT) is levied on local transfers or import of movable goods, in all their commercialization stages, as well as on the value of services provided. At the time of publication, VAT in Ecuador was set at 12%. However, certain products, including exports, agricultural supplies, food, medical products, books, and government purchases have a zero rate of VAT, meaning they are currently exempt from the tax.
VAT tax returns must be filled monthly, with an exact date established according to the ninth digit of the filing entity’s Ecuadorian tax ID number.
Income tax: This type of tax applies to all citizens or residents of Ecuador on revenue earned inside of the country. Income tax ranges from 5% to 35% of average income earned beyond the annual tax-free threshold $11,212. Foreigners with resident visas who temporarily work abroad must still file their taxes as if they were within the country.
For tax filing in Ecuador, the employer is in charge of making monthly income tax declarations on behalf of its employees, and to deal directly with local authorities in order to meet relevant obligations. Self-employed people must file income tax declarations twice annually — once in July and once in September.
Property tax: Residential property taxes are based on a percentage of the value of the property, with urban and rural properties taxed at varying rates, ranging from 0.025% to 0.3% for rural properties and from 0.025% to 0.5% for urban properties. Even for large estates, it is unusual to pay more than $200 per year in property taxes.
Property owners over the age of 65 are exempt from paying taxes for properties appraised at less than $183,000. In the case of married couples, if only one of them is 65 or older, the tax bill is reduced by half.
Capital gains tax: For tax filing in Ecuador, capital gains tax is set at 10% of the difference between the purchase price and the sale price of a property. If the time elapsed between the purchase and sale of the property is one year or more, discounts can be applied to the tax. Similarly, when the time lapse is shorter, a larger capital gains tax will be applied to the property sale. Discounts are applied for any improvements on the property.
How do DTTs affect tax filing in Ecuador?
Ecuador has a number of double taxation treaties (DTTs) in place, including with the likes of Argentina, Brazil, Canada, France, Germany, Mexico, and Russia. DDTs prevent resident taxpayers from being taxed on the same income in two different jurisdictions.
Ecuador establishes a maximum benefit from DTTs via standard tax filing, which in 2021 stood at $560,600 per year. DTT benefits that exceed this amount must be applied for through local tax authorities in a process that can take 60 days to complete.
Social security obligations in Ecuador
Companies based in Ecuador must pay the equivalent of 12.15% of each employee’s salary to the Ecuadorian Social Security Institute (IESS) in order to cover their general health insurance, occupational health insurance, and pension. The employee, meanwhile, has 9.45% of their salary deducted.
At 65 years old, workers who have contributed to IESS for at least 15 years are eligible to retire. Early retirement can be taken from the age of 55, but only when the individual has contributed to IESS for at least 30 years.
Biz Latin Hub can assist you with tax filing in Ecuador
At Biz Latin Hub, our multilingual team of accounting & taxation experts is equipped to provide you with all the support you need with tax filing in Ecuador. We have a complete portfolio of back-office solutions, including legal services, recruitment, and commercial representation, meaning we can be your single point of contact for entering the market and doing business in Ecuador, or any of the other 17 jurisdictions around Latin America and the Caribbean where we are present.
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