Ecuador - Income Tax

Ecuador - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Tax return filing is due between 10 and 28 March following the end of the tax year. The exact date depends on the ninth digit of the individual taxpayer’s identification number or individual’s ID. Where Ecuadorian activities have been terminated, an income tax return should be filed prior to departure. Extensions to the filing date are not allowed.

What is the tax year-end?

31 December.

What are the compliance requirements for tax returns in Ecuador?

Residents

Husbands and wives must file tax returns separately in respect of employment income, business income, and income received from assets, which are owned individually. Income from jointly owned property and all other joint income are divided with each spouse reporting half.

Prepayments in respect of income, except income derived from dependence relationships, are due in two periods. Fifty percent is payable between 10 July and 28 July and the remaining 50 percent is due between 10 September and 28 September. Consequently, this does not apply only if the expatriate is under a dependency labor relationship (no more income from other source) since the income is subject to monthly withholding where the employer acts as the withholding agent.  

Except for those working under dependence relationships (no more income from additional source), individuals liable to income tax should determine the income tax prepayment based on the tax return presented in the prior fiscal period. This prepayment would be equal to 50 percent of the income tax payable less withholdings made for income tax purposes.

Penalties are incurred in respect of late filing, an incorrect return, and incorrect or late payment of tax.

Non-residents

According to the Internal Tax Regime Law, individuals in any of the following conditions are considered as resident:

  • When their permanency in the country, including sporadic absences, is one-hundred eighty-three (183) calendar days or more, consecutive or not, in the same fiscal period;
  • When their permanency in the country, including sporadic absences, is one-hundred eighty-three (183) calendar days or more, consecutive or not, in a period of twelve months within two fiscal periods, unless their tax residency is verified for the corresponding period in other country or jurisdiction.
  • The core of their activities or economic interests is in Ecuador, in a direct or indirect manner.
  • Their permanency in another country or jurisdiction is not higher than one-hundred eighty-three (183) calendar days, consecutive or not, in the fiscal period and their closets family ties are in Ecuador.

Non-resident individuals will be subject to a withholding at the source of income tax at a rate of 22 percent over the income amount.

Tax rates

What are the current income tax rates for residents and non-residents in Ecuador?

Residents

Income tax table for 2015

Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From USD To USD USD Percent
0 10,800 0 0
10,800

11,730 0 5
13,770

17,210

149 10
17,210

20,670

493 12
20,670

41,330

908 15
41,330

61,980

4,007 20
61,980

82,660

8,137 25
82,660

110,190

13,307 30
110,190

Over 21,566 35

Non-residents

The current income tax rate for non-residents is 22 percent. 

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Ecuador? 

According to the Internal Tax Regime Law, individuals in any of the following conditions are considered as resident:

  • When their permanency in the country, including sporadic absences, is one-hundred eighty-three (183) calendar days or more, consecutive or not, in the same fiscal period;
  • When their permanency in the country, including sporadic absences, is one-hundred eighty-three (183) calendar days or more, consecutive or not, in a period of twelve months within two fiscal periods, unless their tax residency is verified for the corresponding period in other country or jurisdiction.
  • The core of their activities or economic interests is in Ecuador, in a direct or indirect manner.
  • Their permanency in another country or jurisdiction is not higher than one-hundred eighty-three (183) calendar days, consecutive or not, in the fiscal period and their closets family ties are in Ecuador.

Is there, a deminimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

See comments in previous paragraphs (rules of residence).

What if the assignee enters the country before their assignment begins?

See comments in previous paragraphs (rules of residence) . 

Termination of residence

Are there any tax compliance requirements when leaving Ecuador?

Before leaving the country, the corresponding income tax (Form 102) should be settled; and in case of having obtained a RUC (Taxpayer Identification Number) to issue invoices, the corresponding VAT returns should be presented until the last month of stay and the RUC should be cancelled.

What if the assignee comes back for a trip after residency has terminated?

It will depend on the reasons for coming back. If returning for tourism, there would not be any requirement. If returning for professional reasons, the requirements previously indicated for occasional or permanent services will apply.

Communication between immigration and taxation authorities

Do the immigration authorities in Ecuador provide information to the local taxation authorities regarding when a person enters or leaves Ecuador?

 Not presently; however, tax authorities indeed provide information to the migration authorities regarding those individuals having taxes pending of payment; the consequence of that information is that said individuals are not allowed to leave the country until all their taxes pending of payment have been paid.    

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate? 

No, migratory authorities do not require any filing on tax compliance.

Economic employer approach

Do the taxation authorities in Ecuador adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Ecuador considering the adoption of this interpretation of economic employer in the future?

If an employee is assigned to Ecuador and gets paid by his/her employer abroad, the host country employer will not be considered an economic employer. It is the liability of the employee to comply with the tax filling and payment.

Deminimus number of days

Are there a deminimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the deminimus number of days?

No.

Types of taxable compensation

What categories are subject to income tax in general situations?

  • salary and bonuses
  • employer contributions to home country pension schemes
  • medical insurance premiums paid by an employer
  • home leave
  • cost-of-living allowances
  • housing allowances and employers’ contributions to rent and for payment of utilities
  • tuition.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Ecuador? If so, please provide a general definition of these areas.

  • Interests
  • Prizes
  • thirteenth and fourteenth remunerations
  • scholarships
  • Bonuses
  • Occasional disposal of property
  • reimbursements of relocation expenses
  • travel and per diems (provided that they are business related) stock options 

Interests

Received by individuals for their demand deposit savings paid by entities in the financial system of the country.  

Prizes

From lottery or raffle prizes sponsored by the Junta de Beneficencia de Guayaquil and Fe y Alegría.

Thirteenth and fourteenth remunerations

These are additional remunerations paid at law to employees under dependence relationship. 

Scholarships

Allocations of scholarships for study financing of specialization or training in Institutions of Higher Education and local or foreign government institutions.   

Bonuses Bonificaciones

For severance indemnity, not exceeding what is determined by the Labor Code.

Occasional disposal of property

It is considered as occasional that which is not in the ordinary course of business or regular activities of the taxpayer. 

Reimbursements of relocation expenses

The expense refunds are not subject to income tax withholdings, when their supporting sales receipts are issued under the name of an intermediary; i.e., in favor of the person to whom those refunds are made and fulfill the requirements established in the Ruling for Sales Receipts and Withholding.  

In case the refund intermediary is an employee under the reimburser’s dependence relationship, this may issue a settlement of goods acquisition and rendering of services instead of the refund invoice. 

Travel and per diems

The amounts received by officers, employees and workers from the employers in the private sector in order to cover travel expenses, lodging and food, for travels to be performed for reasons inherent to their function or role, inside or outside the country related to the company’s economic activity which assumes the expense are not subject to income tax.  

Stock options

Stock options are not subject to tax in Ecuador; however, contributions by a company to the stock option plan may have tax consequences where the local operation takes a deduction for the contribution as an operational expense.

Expatriate concessions

Are there any concessions made for expatriates in Ecuador?

No.

Salary earned from working abroad

Is salary earned from working abroad taxed in Ecuador? If so, how?

All individuals residents in Ecuador receiving foreign income, which have been taxed in other State, are excluded from the taxable base in Ecuador and therefore will not be subject to taxation.  In case of income from tax havens the exemption will not be applied and income will be part of the taxpayer’s global income.  

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Ecuador? If so, how?

Capital gains are generally taxed as ordinary income. 

Royalties are treated as ordinary income. A 22 percent tax is withheld from payments of royalties abroad. This withholding tax rate also applies to payments for services and technical assistance payments remitted abroad. Royalties and other payments paid to residents of countries that have entered into double taxation treaties with Ecuador could have a lesser withholding percentage.

Dividends, interest, and rental income

No tax is levied on dividends paid by Ecuadorian companies to non-resident individuals and resident and non-resident entities, except for those domiciled in tax heavens, if the company has paid tax on underlying profits.

Interest on savings deposits paid to individuals by Ecuadorian financial entities is tax-exempt, likewise, time deposits and yields obtained from investments in fixed term securities, in both cases the term should be one year or more. Other interest income forms part of taxable income.

Gains from stock option exercises

Residency status

Taxable at:

  Grant Vest Exercise
Resident N Y N
Non-resident N Y N
Other (if applicable) N Y N

Foreign exchange gains and losses

There is no special regulation for gains/losses. However, working income under dependence relationship could not be affected with losses, whichever is their origin.

Principal residence gains and losses

There is no special regulation for gains/losses. However, working income under dependence relationship could not be affected with losses, whichever is their origin.

Capital losses

Capital losses are not deductible. 

Personal use items

Losses or destruction of jewelry, art collections, and other personal use items are not deductible.

Gifts

Donations are not deductible form income tax.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Ecuador? If so, please discuss?

There is a municipal tax on royalty which consists of applying 10 percent over earnings resulting from the sale of urban properties. Certain deductions are applicable (cost of acquisition, improvements, 5 percent over earnings in each year elapsed from the acquisition of the property).

Are there capital gains tax exceptions in Ecuador? If so, please discuss?

Capital gains are generally taxed as ordinary income. Occasional gains from the disposal of property are considered as exempt.  

Pre-CGT assets

No.

Deemed disposal and acquisition

No.

General deductions from income

What are the general deductions from income allowed in Ecuador?

  • housing expenses: rental of property used for housing, interest on mortgage loans, and property
  • taxes of the principal residence
  • tuition expenses: those paid including those incurred by dependents older than 18 years economically dependent of the taxpayer
  • health expenses: services in clinics, hospitals, medical fees, medicines, and insurances
  • food expenses: purchase of foods for human consumption and consumption in restaurants
  • clothing expenses: incurred in any type of clothing (not including accessories).

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Ecuador

In the event of any circumstances, a withholding in excess had been made on any employee, the withholding agent could not make any compensation or liquidation with the withholdings made on other employees.

Calculation of estimates/prepayments/withholding

How are estimates/prepayments/withholding of tax handled in Ecuador? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

Pay-as-you-go (PAYG) withholding

Employers will make the withholding on a monthly basis, for that purpose, they should add all remunerations except the thirteenth and fourteenth remunerations and will deduct amounts on individual contribution to the social security (when it is assumed by the employee), as well as, personal expenses.  

PAYG installments

On the taxable basis obtained, the income tax rate for individuals will be applicable; the result will be divided into 12 to determine the monthly installment to be withheld.

When are estimates/prepayments/withholding of tax due in Ecuador? For example: monthly, annually, both, and so on.

Monthly and reliquidation at the end of year.

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Ecuador? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

Ecuador has double taxation treaties with: Canada, Uruguay, Mexico, Chile, Brazil, Switzerland, Romania, Italy, France, Spain, Germany, Belgium, Korea and China, and is a member of the Andean Community of Nations (CAN). Also members are Bolivia, Colombia, and Peru.

General tax credits

What are the general tax credits that may be claimed in Ecuador? Please list below.

The executives in Ecuador under dependence relationship could only claim the excess of income tax, but the executives under professional fees in addition to income tax, could claim VAT.

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Ecuador with two children whose three-year assignment begins 1 January 2013 and ends 31 December 2015. The taxpayer’s base salary is USD100,000 and the calculation covers three years.

  2013

USD
2014

USD
2015

USD
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Housing allowance 12,000 12,000 12,000
Company car 6,000 6,000 6,000
Moving expense reimbursement 20,000 0 20,000
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Other assumptions

  • All earned income is attributable to local sources.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to Ecuador.
  • The company car is used for business and private purposes and originally cost USD50,000.
  • The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income

 

Year ended 2013

USD
2014

USD
2015

USD
Days in Ecuador during year 365 365 365
Earned income subject to income tax      
Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Net housing allowance 12,000 12,000 12,000
Company car 0 0 0
Moving expense reimbursement 0 0 0
Home leave 0 5,000 0
Education allowance 3,000 3,000 3,000
Total earned income 145,000 150,000 145,000
Other income 0 0 0
Total income 145,000 150,000 145,000
Deductions

to the Ecuadorian Social Security 

13,558

14,175

13,703

Deductions for personal expenses  13,234 13,533 14,040
Total taxable income 118,209

122,292

117,258

Calculation of tax liability

  2013

USD
2014

USD
2015

USD *
Taxable income as above 118,209

122,292

117,258

Ecuador tax thereon      
Less: 0 0 0
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Total Ecuador tax 25,357

26,418

24,040

Footnotes

1Certain tax authorities adopt an "economic employer" approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee's salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the economic employer approach.

3Sample calculation generated by KPMG del Ecuador Cía. Ltda., the Ecuador member firm of KPMG International, based on Art. 36 of Ley Orgánica de Regimen Tributario Interno.

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© 2016 KPMG del Ecuador Ca. Ltda., a Ecuador limited liability corporation and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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