ECUADOR Law and Practice Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Guillermo García-Mendoza and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
6. Taxation of Foreign Income of Local Corporations 6.1 Foreign Income Exemptions Ecuadorian corporations are taxed on their worldwide business income. As such, foreign income is taxed in Ecuador. However, Ecuadorian law states that the tax paid abroad on foreign income may be used as a tax credit in the local corporation’s annual tax return. The tax credit may be applied only to the foreign-source income, and cannot exceed the relevant tax due. 6.2 Non-Deductible Local Expenses In general, expenses incurred to generate exempted income are non-deductible. This also applies to for - eign exempt income. 6.3 Dividends From Foreign Subsidiaries Dividends paid by subsidiaries located abroad are regarded as foreign income (see 6.1 Foreign Income Exemptions ) and taxed accordingly. 6.4 Taxation of Intangibles Developed by Local Corporations Intangible assets developed by local corporations can be used by non-local subsidiaries in their busi - ness. However, under transfer pricing principles, the local entity is obliged to charge for such use under the arm’s length principle. All related income is taxable in Ecuador. 6.5 Controlled Foreign Corporation-Type Rules Ecuadorian tax law provides a Controlled Foreign Cor - poration (CFC) regime. Pursuant to such regime, the income of foreign companies whose final beneficiaries (individuals) are residents in Ecuador will be subject to taxation in the country. However, if the relevant income was already taxed under another applicable regime in Ecuador (eg, dividends or payments to non- residents), it will not be subject to the CFC regime. The final beneficiary (individual resident in Ecuador) will be responsible for paying the relevant tax. A foreign entity and its income will be subject to the CFC regime whenever the following conditions are met.
on the indirect transfer of shares are taxed whenever certain conditions are met. Double taxation treaties may eliminate taxation of both direct and indirect transfer of shares. 5.4 Tax Implications of Change of Control There are no change of control provisions that could apply to trigger tax or duty charges, and, in particu - lar, there are no such provisions that could apply to the disposal of an indirect holding much higher up in the overseas group. All issues related to the direct or indirect transfer of shares are included in previous sections of this chapter. Nevertheless, taxpayers are obliged to inform the Internal Revenue Service ( Ser- vicio de Rentas Internas or IRS) of any change in the chain of ownership. 5.5 Formula-Based Income Attribution There are no formulas used to determine the income of foreign-owned local affiliates selling goods or pro - viding services. However, transfer pricing guidelines and the arm’s length principle apply to them. 5.6 Deductibility of Intra-Group Management and Administrative Charges Ecuador allows for the deduction of payments made to foreign companies, including foreign affiliates, whenever income tax is withheld and payments do not exceed certain limits. Ecuadorian entities may only deduct 5% of their taxable base on foreign allocated expenses and costs paid to a non-local affiliate. Roy - alties, and technical, administrative and consulting services fees paid by local affiliates to their head office and related entities, will be tax-deductible up to a limit equivalent to 5% of the taxable income of each fiscal year. However, the limit may increase when certain requirements are met. 5.7 Restraints on Related-Party Borrowing The general provisions applicable to interest related to foreign loans are explained in 2.5 Deduction of Interest . Additionally, the net amount of interest paid on loan transactions with related parties (for tax pur - poses) should be no greater than 20% of EBITDA of the given fiscal year.
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