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.

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