ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
3. Corporations and Non-Corporate Businesses 3.1 Form of Closely Held Local Businesses Most closely held local businesses operate using a corporate form. Commonly, the preferred corporate form is a corporation or a limited liability company. New businesses are expected to be incorporated as a simplified joint-stock corporation, as it is significantly cheaper to incorporate this type of entity. 3.2 Individual and Corporate Rates Even though corporate rates are lower than individual rates, there are no rules to prevent individual profes - sionals from earning income at corporate rates, as dividends paid by companies to individuals are, in most cases, subject to a 12% income tax on distri - bution (see 3.4. Taxation of Individuals on Shares in Closely Held Corporations ). The income tax with - held by the entity distributing the dividends may be recorded as a tax credit by the individual, who then deducts such credit from their final tax. 3.3 Restrictions on Retention of Earnings by Closely Held Corporations There are no legal provisions that prevent closely held corporations from accumulating earnings for invest - ment purposes. However, Ecuadorian law considers loans granted by a business to shareholders or part - ners as taxable dividends. 3.4 Taxation of Individuals on Shares in Closely Held Corporations As a general rule, the 12% rate applies to dividend distributions to individual residents of Ecuador. Con - versely, dividend distributions to individuals or entities resident abroad are subject to a 10% rate on the dis - tributed amount – a rate that, for practical purposes, is equivalent to that in effect prior to the reform. However, the 12% rate shall apply to distributions abroad if the beneficial owner is determined to be a resident of Ecuador. Moreover, if the ownership chain of the distributing company includes a resident in a tax haven jurisdiction and the beneficial owner of the dividends is a resident of Ecuador, the applicable rate shall be 14%. The same 14% rate shall apply to dividend distributions in the event that the distributing
company has failed to comply with its obligation to report its ownership structure or chain, irrespective of the identity of the beneficial owner. In all such cases, the exemption of up to three unified basic salaries does not apply. Regarding capital gains on the transfer of shares, see 2.7 Capital Gains. 3.5 Taxation of Individuals on Shares in Public Corporations Dividends paid by publicly traded corporations are subject to the same treatment applicable to dividends in general; see 3.4 Taxation of Individuals on Shares in Closely Held Corporations . As for capital gains on the sale of shares of publicly traded corporations in Ecuadorian stock exchanges, some exemptions may apply. Regarding the exemp - tions on the transfer of shares, see 2.7 Capital Gains . If a transaction is not made through an Ecuadorian stock exchange, capital gains are subject to a tax rate of 10%. 4. Taxation of Inbound Investments 4.1 Application of Withholding Taxes Where no double taxation treaties are applicable, the following tax withholding rates apply. • Dividends paid to non-resident corporations and individuals are subject to a single income tax at the rate of 10% on the amount distributed; however, if the beneficial owner of the company distributing the dividend is a tax resident in Ecuador, the rate shall be 12% (see 3.4 Taxation of Individuals on Shares in Closely Held Corporations ). • Interest paid to foreign financial institutions related to foreign loans duly registered before the Ecuado - rian Central Bank, when required and not exceed - ing the maximum rate established by the Ecua - dorian authorities, is not subject to an income tax withholding. Where no registration has taken place and/or the amount exceeds the maximum rate, a 25% income tax withholding applies.
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