ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
1.3 Tests for Determining Tax Residence Overall, whenever an entity is domiciled and/or incor - porated within Ecuadorian territory, it is regarded as a tax resident in the country. Under Ecuadorian law, tax residency is determined as follows. • Primary criteria: (a) the entity’s residence; and (b) the entity’s incorporation under Ecuadorian law, as well as its main place of business being within Ecuadorian territory. • Secondary criteria (if the primary criteria cannot be determined): (a) the location where the entity’s economic activi - ties are performed; and (b) the location where the taxable event occurred. Pursuant to most double taxation treaties concluded by Ecuador, construction projects executed during a specific period, a factory, an industrial or assembly plant, or an industrial or assembly workshop may be regarded as a permanent establishment and there - fore as a tax resident where the relevant activities are executed. 1.4 Applicable Corporate and Individual Tax Rates Entities are subject to a 25% income tax levied on their net taxable profit. However, a 28% income tax rate applies whenever: • one or more shareholders are residents of a tax haven territory, and the beneficial owner is a tax resident in Ecuador; and • the entity does not report to the tax authority its chain of ownership up to the beneficial owner. Ecuadorian law provides for 15% employee profit- sharing, meaning that the entity is obliged to distribute 15% of its accounting profits among its employees. This expense is tax-deductible when determining the taxable base. Income tax is paid in a single instalment during the first quarter of the fiscal year following the fiscal year that the profit corresponds to.
Since 2022, micro businesses are subject to up to 2% income tax levied on their net income. Regarding transparent entities, see 1.1 Corporate Forms and Their Tax Treatment and 1.2 Use and Taxation of Transparent Business Structures . Individuals are taxed at progressive rates. The payable income tax bands and rates for 2026 are as follows: • up to USD12,208 – exempt; • over USD12,208 and up to USD15,549 – 5% on the balance in excess of USD12,208; • over USD15,549 and up to USD20,188 – USD167, plus 10% on the balance in excess of USD15,549; • over USD20,188 and up to USD26,700 – USD631, plus 12% on the balance in excess of USD26,700; • over USD26,700 and up to USD35,136 – USD1,412, plus 15% on the balance in excess of USD35,136; • over USD35,136 and up to USD46,757 – USD2,678, plus 20% on the balance in excess of USD46,757; • over USD46,757 and up to USD62,005 – USD4,965, plus 25% on the balance in excess of USD62,005; • over USD62,005 and up to USD82,679 – USD8,823, plus 30% on the balance in excess of USD82,679; • over USD82,679 and up to USD109,956 – USD15,025, plus 35% on the balance in excess of USD109,956; and • over USD109,956 – USD24,572 plus 37% on the balance in excess of USD109,956.
2. Corporate Tax Regime 2.1 Taxable Profits
Ecuadorian commercial entities are obliged to keep their accounting records in accordance with Inter - national Financial Reporting Standards (IFRS) and International Accounting Standards (IAS). However, accounting profit is subject to adjustment for tax pur - poses. The main adjustments (accounting profit versus tax - able profit) are as follows.
139 CHAMBERS.COM
Powered by FlippingBook