When a company decides to move their business into a new market and open up a new office in a new country, one of the first things to be considered is the country’s tax system. Around the world every country has different tax and accounting systems – some are easier to manage than others. Therefore, when moving into a new market, companies have to determine and understand the country’s corporation tax, sales tax, dividend tax, and other applicable tax rates. Additionally, a company must be aware of the accounting standards to be applied in a particular country.
Before moving a business into a new market, it is important that a company fully evaluates these matters to determine if the company’s existing accounting, finance and tax professionals can manage this or if it is necessary to engage a local professional accounting services provider for their business.
Hence, when making the management decision to move into a new market, the new country’s tax regime is of high importance and must be taken into consideration.
This article gives further insights on taxation and accounting requirements in Ecuador.
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What are the Tax and Accounting Requirements in Ecuador?
The Ecuadorian tax system is friendly for foreigners since they are only taxed on income earned within Ecuador.
In Ecuador, International Financial Reporting Standards (IFRS) are applied and financial statements must be submitted annually to the Internal Revenue Services and the superintendence of companies. Ecuador has 19 tax treaties and the national tax authority responsible for taxation matters within Ecuador is the Internal Revenue Service’s (SRI).
The tax authorities have three years from the date of filing to review tax returns and make changes if deemed necessary. If a tax return was filed incomplete or not at all, the period of review can be extended for up to 6 years.
Usually, when an economic activity is carried out in Ecuador, companies as well as individuals, have to register before the national tax authority. Once the national tax identification number has been registered for, the RUC can be obtained.
The Ecuadorian Tax System: Corporate Tax & Value Added Tax Rate (IVA)
All companies that reside in Ecuador, are incorporated in Ecuador, or have operations and a management center in Ecuador are subject to a corporation tax rate of 25% on their worldwide income, and have discounts when disabled or senior staff are hired. Companies which are non-resident in Ecuador (all companies not incorporated in Ecuador) only have to pay income on their income sourced within Ecuador. The end of the Ecuadorian tax year is the 31st of December and taxes must be filed in April, the exact date it needs to be filed depends on the 9th digit of the Ecuadorian tax identification number.
Companies which are non-resident in Ecuador (all companies not incorporated in Ecuador) only have to pay income on their income sourced within Ecuador. The end of the Ecuadorian tax year is the 31st of December and taxes must be filed in April, the exact date it needs to be filed depends on the 9th digit of the Ecuadorian tax identification number.
Value Added Tax – IVA
The tax from which most income is generated in Ecuador is IVA, which is the Ecuadorian Value Added Tax. Currently, the tax rate for the IVA is 12% and is paid on almost all purchases of goods, imports and the provisions of services. The tax rate for exports, food, agricultural input, medical goods, popular personal hygiene products, import of fuels derived from hydrocarbons, leasing of land for agricultural and livestock use, tourist accommodation services to foreigners, digital services for the creation of audio-visual content, books and government purchases is 0%. VAT returns must be filed monthly, between the 10th and the 28th of the following month of the transaction – the exact day depends on the company’s tax identification number, RUC.
Other Relevant Taxes in Ecuador
Apart from the normal taxes that have to be paid within the country, such as the corporation and value added tax, additional tax rates are applied and therefore have to be taken into account. Additional taxes in Ecuador are taxes on property, capital gains tax, foreign money transfer tax, and others.
Property taxes in Ecuador depend on the municipal value of the property and the exact tax percentage of the property tax depends on the city in which the property is situated in. A special part exemption applies for this tax which allows owners over the age of 65 years to pay half of the applied property tax rates. In general, it can be mentioned that the property tax rate at the moment ranges from 0.025% to 0.3% for rural property and from 0.025% to 0.5% for urban property.
Income Tax on the occasional sale of real estate
Any person or company that sells its offices, commercial premises or industries, must pay a tax on the difference between the purchase price and the sale price of the property (profit). The rate ranges between 5% and 37% on the capital gain.
This tax will not be applicable for the first sale of a property. That is to say, the tax must be paid from the second sale of offices or commercial premises.”
Foreign Money Transfer Tax (ISD) – Capital Outflow Tax
This tax applies to all monetary transactions and operations which are carried out abroad in a foreign currency. The applied tax rate is 3.5% and has to paid by all foreign and local companies, as well as all individuals and foreign banks when doing monetary transactions.(1)
Penalties & Fines
As in most other countries, in Ecuador, fines, and penalties have to be paid when taxes are filed late or incorrectly. If a tax return is not filled at all, companies, as well as individuals, are subject to prosecution.
If the tax is paid late, penalties have to be paid for late payment at a fixed rate of 3% of the value of the tax generated, for each month of delay.
In addition, a penalty of USD 30 to USD 60 must be paid for not having declared the tax on the due date.
If taxes have been filed incorrectly, a “substitute form” must be filed as determined by the Internal Revenue Service (SRI) for each year.”
Frequency of Tax Declarations
In Ecuador, the end of the tax year is the 31st of December. Following the tax year, from the 2nd to the 28th of April corporation taxes have to be filed and paid. The exact filing date depends on the taxpayer’s identification number.
Tax on Employment Income for Individuals
In Ecuador all residents are taxed on their original Ecuadorian income and on their income obtained from abroad, which means that taxes must be paid on all income received from any activity inside and outside the country.
However the amount of tax paid abroad may be used as a tax credit for income tax in Ecuador
All income taxes are taxed at progressive rates with a personal allowance of USD$11.722,00. If income is generated in a low-tax jurisdiction country, such as Panama, taxes have to be paid in the low-tax jurisdictions country and in Ecuador. Also if foreigners have a resident visa but work abroad for a temporary period and do not work in Ecuador during this period, they are still obliged to pay taxes on their income earned abroad in Ecuador.
Personal Income Tax
All residents have to pay income tax. In order to be considered a resident, you have to be in the country for more than 183 days within a year. The tax rate for all residents depends on their income and is therefore taxed at progressive rates from 0% when receiving low income to up to 37%, this is paid once a year in the month of March according to the table published by the Internal Revenue Service.
The employer has to file the monthly income tax for all employees, so employed individuals don’t have to deal with the tax office themselves. As mentioned before, the exact date of filing depends on the 9th digit of the tax identification number. When foreign individuals decide to move to another country they have to make sure to have paid all their income taxes as well as cancel their taxpayer identification number (RUC) if they have received one during their stay.
Personal Income Tax Table for 2023-2024
|Taxable Income (USD $)||Tax on excess (%)||Tax||%Excedent|
|$ 0,00||$ 11.722,00||$ 0,00||0%|
|$ 11.722,00||$ 14.930,00||$ 0,00||5%|
|$ 14.930,00||$ 19.385,00||$ 160,00||10%|
|$ 19.385,00||$ 25.638,00||$ 606,00||12%|
|$ 25.638,00||$ 33.738,00||$ 1.356,00||15%|
|$ 33.738,00||$ 44.721,00||$ 2.571,00||20%|
|$ 44.721,00||$ 59.537,00||$ 4.768,00||25%|
|$ 59.537,00||$ 79.388,00||$ 8.472,00||30%|
|$ 79.388,00||$ 105.580,00||$ 14.427,00||35%|
|$ 105.580,00||en adelante||$ 23.594,00||37%|
Other Employee Contributions – Pension & Health
In Ecuador, there are three different agencies for the social security system; the agencies include IESS for employees and workers employed in the private or public sector, ISSPOL and ISSFA for members of the police and the military. IESS covers health, pension and work risk insurance for all employees and workers. All three systems work independently and do not coordinate with one another.
The Social Security System in Ecuador
The social security tax for employees will automatically be discounted from their monthly salary, this tax rate is based at 9.45% on their monthly income. The responsible agency for the system is the ministry of social welfare (IESS) – contributions to social security have to be made by both employer and employees. Generally speaking, all workers and employees have to pay monthly contributions which are deducted from their monthly salary. Additionally, all employers have to make an 11.15 % of the value of the monthly salaries of their workers. This amount is assumed by the employer as they cannot discount it from the salary of the worker. When an employee reaches the age of 65, a pension can be claimed, as long as he has contributed to social welfare for a minimum of 15 years. When the employee wants to retire early at 55, he has to prove a minimum contribution to the social welfare of 30 years. Regarding maternity, this insurance is covered when the employee has worked at least 360 days before leaving for maternity.
Additionally, all employers have to make additional contributions to the Ecuadorian professional training service (SECAP) and to the Ecuadorian institute of education and educational credit (IECE), each additional contribution is 0.5% of each employee’ salary, but this amount has to paid by the employer.
Contribution Rates for Workers in Private Sector in Ecuador
This table gives further insight to the contribution rates of workers of the private sector.
|INVALIDITY INSURANCE, OLD AGE, AND DEATH
(12 monthly pensions, thirteenth, fourteenth and funeral assistance)
|ORGANIC LAW OF DISABILITIES LOD
(General Insurance for sickness and maternity, financial allowance, health care for work accidents and occupational diseases, orthoses and prostheses)
|WORK RISK INSURANCE
(Subsidies, indemnities, 12 monthly pensions, thirteenth, fourteenth, promotion and prevention)
Common Questions when understanding accounting and taxation in Ecuador
Based on our extensive experience these are the common questions and doubts from our clients when looking to understand accounting and taxation in Ecuador.
The corporate tax rate in Ecuador is the de (25%)
Taxable income obtained by companies incorporated in Ecuador, as well as by branches of foreign companies domiciled, will be taxed at a rate of 25% of their taxable income, which works based on paying tax on the difference between revenue minus deductible expenses.
The IRS in Ecuador is called the Servicio de Rentas Internas (SRI) or in English Internal Revenue Service and is responsible for administering the country’s tax collection and executing fiscal policy.
Ecuador’s accounting standards require companies to prepare their financial statements in Spanish and according to the Generally Accepted Accounting Principles or PCGA or NIIF. Accounting registries and books of account must be recorded in Spanish.
The equivalent of a CPA in Ecuador is a Certified Public Accountant registered at the Association of Public Accountants of Ecuador.
All listed companies must follow IFRS Standards including financial institutions and insurance companies.
Manage your taxation and accounting compliance in Ecuador with expert support
Understanding taxation and accounting requirements in Ecuador will make it easier for you to budget. Additionally, it will help you understand what you will have to deal with when it’s time to declare your taxes.
If you would like more information about accounting regulations or tax laws in Bolivia, Biz Latin Hub’s group of experts offer you legal and accounting assistance for your business in Ecuador. Take advantage of our large range of multilingual market entry and back-office business solutions to meet your company’s incorporation and compliance needs.
Contact us now for help in establishing a successful business in Ecuador.
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The information provided here within should not be construed as formal guidance or advice. Please consult a professional for your specific situation. Information provided is for informative purposes only and may not capture all pertinent laws, standards, and best practices. The regulatory landscape is continually evolving; information mentioned may be outdated and/or could undergo changes. The interpretations presented are not official. Some sections are based on the interpretations or views of relevant authorities, but we cannot ensure that these perspectives will be supported in all professional settings.