ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
• Royalties and technical service fees paid to a foreign entity are subject to a 25% income tax withholding. • Where there is no specific rate, payments made to residents in tax havens are withheld at a 37% rate. The Ecuadorian tax authority is determined to collect taxes in all transactions. Overall, expenses are tax- deductible whenever the relevant tax is withheld by the payor (unless a specific exemption applies). The Ecuadorian tax authority has a particular interest in determining whether the benefits provided for by tax treaties are in fact applicable to transactions conclud - ed by Ecuadorian residents with entities domiciled abroad. Indeed, tax treaties provide for exemptions and reductions on withholding rates. Therefore, the Ecuadorian tax authority analyses whether the provi - sions of the tax treaties are applicable. Another aspect on which the Ecuadorian tax authority focuses is the economic substance of the transaction (see 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices ). Nevertheless, the Ecuadorian tax authority faces certain challenges regarding international taxa - tion (see 9.3 International Tax ). 4.2 Key Treaty Jurisdictions for Inbound Investment Ecuador has entered double taxation treaties with the following countries: Argentina (limited to air transpor - tation), the Andean Community (Bolivia, Peru and Colombia), Belarus, Belgium, Brazil, Canada, Chile, China, Germany, France, Italy, Japan, Mexico, Qatar, Romania, Singapore, South Korea, Spain, Russia, Switzerland, the United Kingdom and Northern Ire - land, the United Arab Emirates and Uruguay. Ecuadorian double taxation treaties generally follow the Organisation for Economic Co-operation and Development (OECD) model, except for the Andean Community Treaty, certain elements of which follow the United Nations’ Model Double Taxation Conven - tion. Under most of the double taxation treaties, Ecuado - rian-source income is taxed locally except for corpo - rate profits (for treaties that follow the OECD model). However, certain income sources – such as dividends,
royalties, interests – are subject to tax at lower rates (between 5% and 15% compared to the general 25% rate). Despite the fact that Ecuador has entered into various double taxation treaties and a general treaty conclud - ed within the Andean Community of Nations (which includes Colombia, Peru and Bolivia), the primary tax jurisdictions that foreign investors use to invest in local corporate stock or debt are Spain, Uruguay, Germany, Brazil, Mexico and Canada. 4.3 Tax Authority Scrutiny of “Treaty Shopping” Practices Ecuador does not challenge the use of treaty country entities by non-treaty country residents. Nevertheless, Ecuador has implemented provisions in order to track the entities that benefit from the provisions of tax trea - ties and other exemptions. Indeed, local taxpayers are required to file a yearly report on their shareholders to their beneficial owners. Likewise, in order to apply lower withholding rates pursuant to tax treaties, tax - payers must hold a certificate of tax residence of the beneficiary of the payments issued by the competent authority. The Ecuadorian Tax Administration may analyse whether the transactions that benefit from the trea - ties lack economic substance. In such case, the pay - ments that benefited from the tax treaties will not be considered deductible for income tax purposes for the local corporation. Benefits provided by certain tax treaties concluded with countries such as Uruguay, South Korea and China are conditional. Namely, a corporation may benefit from the tax treaty whenever a specific per - centage of its beneficial owners are residents in such countries, or if the corporation’s shares are listed on a stock exchange. 4.4 Transfer Pricing Issues for Inbound Investors Even though Ecuador is not a member of the OECD, the country applies the transfer pricing parameters contained in the guidelines issued by the organisa - tion. Indeed, its general provisions have become part of Ecuadorian tax law and its regulations.
144 CHAMBERS.COM
Powered by FlippingBook