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Ecuador Simplifies Business Incorporation with New Joint-Stock Corporation Form

In a move aimed at encouraging entrepreneurship and economic growth, Ecuador has introduced a new simplified joint-stock corporation form that is significantly cheaper to incorporate than other business entities. The change is expected to attract more startups and small businesses to the country.

Taxes on Dividends and Capital Gains

Ecuadorian corporations pay lower tax rates compared to individual professionals
No restrictions preventing individuals from earning income at corporate rates
Dividends paid by companies to individuals are taxed at individual rates, with a withholding rate ranging from 0% to 25%
Individuals can deduct the withheld taxes from their final tax liability

Accumulating Earnings for Investment Purposes

Closely held corporations in Ecuador are allowed to accumulate earnings for investment purposes
Loans granted by businesses to shareholders or partners are considered taxable dividends

Sales of Shares

Dividends paid by Ecuadorian corporations to individuals abroad are subject to a 10% income tax withholding
Those received by resident individuals are taxed at individual rates
Capital gains on the transfer of shares in publicly traded companies may be exempt from taxes, but this depends on the specific circumstances

Key Features of Taxation on Inbound Investments

Ecuador has entered into 20 double taxation treaties and a general treaty with the Andean Community of Nations, which includes Colombia, Peru, and Bolivia
The country’s tax authority prioritizes tracking entities that benefit from these treaties and ensuring economic substance in transactions

Withholding Taxes

Dividends paid to non-resident corporations and individuals are subject to a 25% withholding tax rate
Interest payments made to foreign financial institutions related to foreign loans are exempt from withholding taxes, but royalties and technical service fees are subject to a 25% withholding rate

Primary Tax Treaty Countries

Spain
Uruguay
Germany
Brazil
Mexico
Canada

Use of Treaty Country Entities by Non-Treaty Country Residents

Ecuador does not challenge the use of treaty country entities by non-treaty country residents, but requires local taxpayers to file a yearly report on their shareholders’ beneficial owners
The tax authority may analyze transactions that benefit from treaties for lack of economic substance

Transfer Pricing Issues

Ecuador applies the transfer pricing parameters contained in the OECD guidelines, which are part of Ecuadorian tax law and regulations
Local entities can file a consultation with the tax authority to determine transfer pricing valuation parameters

Local tax authorities have not challenged the use of related-party limited risk distribution arrangements for local sales or provision of goods or services
However, transactions between related parties should follow the arm’s-length principle

Comparing Local Transfer Pricing Rules and Enforcement with OECD Standards

Ecuador is not a member of the OECD, but its transfer pricing principles and methodologies generally follow OECD guidelines
The country’s tax authority prioritizes ensuring economic substance in transactions and enforces transfer pricing rules to prevent tax evasion