December 6, 2019
Ecuador's president proposes another tax reform bill
The current tax reform bill would repeal the tax exemption for dividends and would subject dividends distributed by Ecuadorian companies to nonresident entities to dividend withholding tax. It also would add certain goods to the list of transferred or imported goods that are subject to a 0% VAT rate and impose a 12% VAT rate on digital services when the consumer is an Ecuadorian resident. Taxpayers should continue to follow the progress of the bill through the legislative process.
After the Ecuadorian National Assembly recently rejected and archived the tax reform bill proposed by President Moreno, he has proposed a second tax reform bill that is shorter but maintains many of the income tax and value-added tax (VAT) rules proposed in the first bill with some modifications.
This Tax Alert discusses certain provisions of the current proposed tax reform bill, which could be modified by the National Assembly.
The bill would repeal the tax exemption for dividends distributed by Ecuadorian entities, unless the dividends are paid to other Ecuadorian entities. The bill also would include a tax exemption for gains derived from the sale or administration of real estate. Leasing payments would be deductible if the lease is not part of a back-to-back transaction.
Income from agricultural activities would be taxed at a rate from 0% to 2%.
The bill would subject dividends distributed by Ecuadorian companies to nonresidents to income tax withholding. The effective dividend withholding tax would be 10% (tax base of 40% taxed at a 25% rate), which may be reduced under applicable tax treaties assuming eligibility requirements are met.
Additionally, the bill would set the thin-capitalization threshold for cross-border, intercompany loans at 20% of income, before mandatory employee profit-sharing, interest, depreciation and amortization. For banks, the threshold would be 300% of the entity's equity.
The bill would add certain goods to the list of transferred or imported goods that are subject to a 0% VAT rate. The bill also would amend the list of VAT withholding agents.
In addition, the bill would impose a 12% VAT rate on digital services (e.g., supply of web domains, web hosting and cloud computing), when the consumer is an Ecuadorian resident.
The bill would allow nonresidents to act as collection agents for VAT by registering with the Ecuadorian tax authority. For the VAT payments on digital services:
Outflow tax modifications
The bill would eliminate the 360-day requirement to exempt from the outflow tax principal and interest paid on loans made by international financial institutions or non-specialized financial institutions. Also, the bill would eliminate the 360-day requirement for publicly traded debt in the Ecuadorian stock market.
Additionally, the bill would exempt from the outflow tax dividends distributed to foreign corporations and nonresident individuals located in low-tax jurisdictions or tax havens. The outflow tax, however, would be triggered when dividends are distributed to foreign corporations owned directly or indirectly by individuals or entities resident in Ecuador that are shareholders of the company distributing the dividends.
The bill would simplify the outflow tax exemption for principal and interest payments on loans made to acquire housing, "microcredits" and productive investments and would eliminate the 360-day requirement.
The bill would eliminate the period during which fixed-term certificates of deposit would be exempt from the outflow tax. It also would not allow the outflow tax exemption to apply to payments made between related parties.