Ecuador Enacts New Financial Regulations

The Ecuadorian government has issued a presidential decree that brings significant changes to the country’s financial regulations, particularly with regards to income tax and asset depreciation.

Income Tax Rate Reduction for New Investments

As of November 10, companies that make new investments or sign an Investment Agreement with the Ecuadorian government can benefit from a reduced corporate income tax (CIT) rate. The general CIT rate is currently 25%, but this can be reduced by three percentage points to 22% for new investments and by five percentage points to 20% for companies with an Investment Agreement.

To qualify for the reduced CIT rate, companies must demonstrate that the investment is a new addition to their non-current assets.
The benefit will only apply to the taxable income generated by the investment, and not to the entire company’s taxable basis.

Asset Depreciation

The decree also modifies the rules for asset depreciation in Ecuador. Previously, companies could request accelerated depreciation on imported assets, but this is no longer allowed. Instead, depreciation must be calculated using deferred taxes.

Depreciation of imported assets will only be deductible if the value-added tax (VAT) has been paid.
This change aims to simplify the process and reduce potential errors in calculating depreciation.

Deductibility Limit for Royalties and Technical Services

The decree establishes a deductibility limit for royalties, technical services, administrative services, and consulting fees paid to related parties. The total sum of these expenses will be deductible up to 5% of the taxable income in the respective fiscal year, unless certain exceptions apply.

For taxpayers in the pre-operating cycle or with an operating margin below 7.5%, the deductibility limit is set at 10% of total assets.
However, if the taxpayer’s only activity is providing technical services and their operating margin is 7.5% or higher, there is no deductibility limit.

Exceptions to Deductibility Limit

Other exceptions to the deductibility limit include:

Operations with related parties that are Ecuadorian residents
Total operations with related parties that do not exceed US$226,200 in a fiscal year
Assets for which royalties have been paid and belonged to the taxpayer for over 20 years

Advance Pricing Agreement

The decree also provides an opportunity for taxpayers to request a higher deductibility limit through an Advance Pricing Agreement authorized by the Ecuadorian Tax Authority.

Conclusion

These changes aim to simplify the tax environment and provide more clarity on the rules for income tax, asset depreciation, and deductibility limits. It is recommended that companies with investments in Ecuador consult with a tax professional to ensure they understand and comply with the new regulations.