ECUADOR Trends and Developments Contributed by: Diego Almeida-Guzmán, Andrés Álvarez-Toapanta, Cesar Molina-Delgado and Ignacio Jijón-Chiriboga, Almeida Guzmán & Asociados
Progressive rate structure Upon occurrence of the taxable event, a progressive rate shall apply to the entirety of undistributed profits in accordance with the following schedule based on the amount of undistributed profits: • from USD0 up to USD100,000 – 0% rate; • from USD100,000.01 up to USD1 million – 0.75% rate; • from USD1,000,000.01 up to USD10 million – 1.25% rate; • from USD10,000,000.01 up to USD100 million – 1.75% rate; • from USD100,000,000.01 up to USD500 million – 2.25% rate; and • from USD500,000,000.01 and onwards – 2.50% rate. Tax credit mechanism The regulations authorise using the tax referred to herein as a tax credit against various tax obligations, provided that two requirements of a factual and tem - poral nature are satisfied: • factual requirement – a dividend distribution charged to undistributed profits or a qualifying capital increase must occur; and • temporal requirement – either of the foregoing factual events must occur within the two fiscal years following the year in which payment of tax on undistributed profits was made. Distribution scenarios The distribution of dividends charged to undistributed profits enables the company to utilise the tax credit to offset the amount to be remitted to the IRS pursuant to the withholding obligation applicable to its sharehold - ers as referenced in the preceding section. It is important to emphasise that the tax credit to which the distributing company is entitled can be used with respect to the withholding that must be remitted to the tax authority; that is, it does not obviate or eliminate the withholding obligation referenced in the preceding section. The withholding must be performed; however, upon remitting the amount withheld from shareholders or beneficial owners to the tax authority, the company may deduct such amount by crediting the payment
previously made for having registered undistributed profits (which were subsequently distributed). In instances where the amount paid on account of undistributed profits cannot be fully offset against withholdings applied to distributed dividends, the dis - tributing company may offset the tax credit against income tax accrued in the fiscal year in which the payment becomes a tax credit – namely, in the year in which dividends are distributed and up to the fol - lowing two fiscal years. Finally, if the credit cannot be offset in the manner indicated, the entity that paid the tax on undistrib - uted profits may request a refund of the balance within three years from the close of the fiscal year in which the credit became enforceable. Capitalisation scenarios Because capitalisation of profits does not constitute a triggering event for income tax on dividend distribu - tion, this scenario gives rise to a tax credit that may be utilised directly against accrued income tax. However, the capitalisation must satisfy one of the following conditions for the tax paid to qualify as a tax credit: • allocation of the profits for the acquisition of assets related to the company’s economic activity; • allocation of the profits for the acquisition of new inventories related to the taxpayer’s economic activity; or • allocation of the profits for employment generation – provided a net increase of 5% in employment positions is verified. The credit may be used in the year in which capi - talisation occurred and up to the following two fiscal years, or a refund may be requested in accordance with the timeframes referenced above with respect to the credit for dividend distribution. Publication of the Double Taxation Treaty Between Ecuador and the United Kingdom and Northern Ireland On 17 January 2025, the double taxation treaty between Ecuador and the Government of the United Kingdom of Great Britain and Northern Ireland came into effect. The tax treaty adheres to the OECD Model
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