ECUADOR Law and Practice Contributed by: Sebastian Corral Guevara, Miguel Pizarro Páez, María Fernanda Mencías Pérez, José Cisneros Pazmiño, Roque Bustamante Espinosa and Jorge Pizarro Páez, Flor Bustamante Pizarro & Hurtado
5.4 Tax Consolidation Ecuadorian tax legislation does not provide for a tax consolidation regime. Each legal entity is treated as an independent taxpayer and must determine, file and pay its taxes separately, regardless of whether it forms part of a corporate group or has affiliated enti - ties within or outside Ecuador. Consequently, taxable profits and tax losses cannot be consolidated or offset among different companies within the same group for Ecuadorian tax purposes. Likewise, Ecuador does not permit the filing of con - solidated corporate income tax returns. Each com - pany must prepare and submit its own tax returns and comply individually with its tax obligations. Although Ecuador recognises the concept of econom - ic groups and related parties for certain tax and report - ing purposes, particularly in connection with transfer pricing, disclosure obligations and anti-avoidance rules, these rules do not create a tax consolidation regime or allow the consolidation of taxable results among group companies. 5.5 Thin Capitalisation Rules and Other Limitations Ecuador does not maintain a traditional thin capitalisa - tion regime based on a statutory debt-to-equity ratio. Instead, the deductibility of financing costs is primar - ily governed by the Internal Tax Regime Law ( Ley de Régimen Tributario Interno – LRTI) and its Regulations. However, an exception applies to financing granted by entities in the banking sector to related parties within the Ecuadorian banking sector, regulated by specific thin capitalisation rules. Interest paid on financing granted by related parties in other sectors is deductible if it is below 20% of the annual profits of the debtor entity. In the case of foreign financing, interest is generally deductible and exempt from withholding tax only to the extent that the applicable interest rate does not exceed the referential interest rate periodically pub - lished by the Central Bank of Ecuador ( Banco Central del Ecuador – BCE). Interest exceeding the applicable BCE referential rate may be treated as non-deductible
and may also trigger additional withholding tax conse - quences under Ecuadorian tax legislation. As a general rule, interest expenses are deductible provided that they are incurred for the generation of taxable income, are properly supported by docu - mentary evidence and comply with the arm’s length principle where the financing is obtained from related parties. Financing transactions between related par - ties are also subject to Ecuador’s transfer pricing rules where the applicable thresholds are met. Interest paid to non-residents may also be subject to withholding tax and may benefit from relief under an applicable double taxation treaty, provided that the relevant statutory requirements are satisfied. Ecuadorian tax legislation also contains general anti- avoidance rules, empowering the SRI to challenge financing arrangements lacking economic substance or entered into principally to obtain an undue tax advantage. Accordingly, intra-group financing struc - tures should be supported by genuine commercial purposes and arm’s length terms. 5.6 Transfer Pricing Transfer pricing rules apply in Ecuador to transactions carried out between related parties, whether domestic or foreign. They also apply to transactions with per - sons or entities located in tax havens, low-tax jurisdic - tions or preferential tax regimes, regardless of whether a related-party relationship exists. Under the Internal Tax Regime Law, such transactions must comply with the arm’s length principle. Ecuado - rian tax legislation recognises internationally accepted transfer pricing methods and uses the OECD Transfer Pricing Guidelines as a supplementary interpretative source, to the extent they are consistent with domes - tic law. Taxpayers exceeding the applicable statutory thresh - olds for related-party transactions must file the Relat - ed-Party Transactions Annex and, where applicable, the Comprehensive Transfer Pricing Report. They must also maintain supporting documentation evi - dencing compliance with the arm’s length principle, including local file documentation and, where appli -
297 CHAMBERS.COM
Powered by FlippingBook