July 16, 2018 2018-1418 Ecuador enacts new law on deductibility of interest derived from 'back-to-back' credit transactions Under the new law, taxpayers may deduct interest derived from "back-to-back" credit transactions. Under an Administrative Resolution, however, taxpayers will no longer be able to deduct expenses related to "back-to-back" loans. Ecuador has enacted a new law (Law for Productive Development) that allows taxpayers to deduct interest derived from "back-to-back" credit transactions, provided certain conditions are met. In addition, Ecuador's IRS issued an Administrative Resolution with guidance on "back-to-back" loans. New law The new law will allow taxpayers to deduct interest derived from "back-to-back" credit transactions, if the following conditions are met: — The credit is granted for purposes of the core business, working capital or for purposes of continuing business operations. — The interest rates do not exceed the maximum rate established by the Ecuadorian Central Bank. — The financial institution's actions as an intermediary are supported by economic substance. Administrative Resolution According to the IRS, "back-to-back" loans have been used to artificially decrease the payment of taxes. Back-to-back loans are considered indirect indebtedness, obtained from national or international financial entities, when a person transfers funds to the financial entity and then receives a loan from the same entity. In the Administrative Resolution, the Ecuadorian IRS identified "back-to-back" loans as a way for taxpayers to create a supposed financial expense when the real economic substance of the loans is self-financing. As a result, the Ecuadorian IRS will no longer allow taxpayers to deduct expenses related to "back-to-back" loans. ——————————————— Contact Information For additional information concerning this Alert, please contact: Ernst & Young Ecuador | • Javier Salazar | 593-2-2555-553 | • Carlos Cazar | 593-4-2634-500 | • Alex Suarez | 593-2-2555-553 | • Alexis Carrera | 593-2-2555-553 | Latin American Business Center, New York | • Ana Mingramm | (212) 773-9190 | • Enrique Perez Grovas | (212) 773-1594 | • Pablo Wejcman | (212) 773-5129 |
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