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17 July 2018

Ecuador enacts new law on deductibility of interest derived from "back-to-back" credit transactions

Ecuador has enacted a new law (Law for Productive Development) that allows taxpayers to deduct interest derived from "back-to-back" credit transactions, provided certain conditions are met. In addition, Ecuador's Internal Revenue Service (IRS) issued an Administrative Resolution with guidance on "back-to-back" loans.

New law

The new law will allow taxpayers to deduct interest derived from "back-to-back" credit transactions, if the following conditions are met:

  • The credit is granted for purposes of the core business, working capital or for purposes of continuing business operations.
  • The interest rates do not exceed the maximum rate established by the Ecuadorian Central Bank.
  • The financial institution's actions as an intermediary are supported by economic substance.

Administrative Resolution

According to the IRS, "back-to-back" loans have been used to artificially decrease the payment of taxes. "Back-to-back" loans are considered indirect indebtedness, obtained from national or international financial entities, when a person transfers funds to the financial entity and then receives a loan from the same entity.

In the Administrative Resolution, the Ecuadorian IRS identified "back-to-back" loans as a way for taxpayers to create a supposed financial expense when the real economic substance of the loans is self-financing. As a result, the Ecuadorian IRS will no longer allow taxpayers to deduct expenses related to "back-to-back" loans.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Addvalue Asesores Cia. Ltda., Quito

  • Javier Salazar
    javier.salazar@ec.ey.com
  • Alex Suárez
    alex.suarez@ec.ey.com
  • Alexis Carrera
    alexis.carrera@ec.ey.com

Addvalue Asesores Cia. Ltda., Guayaquil

  • Carlos Cazar
    carlos.cazar@ec.ey.com

Ernst & Young, LLP, Latin America Business Center, New York

  • Ana Mingramm
    ana.mingramm@ey.com
  • Enrique Perez Grovas
    enrique.perezgrovas@ey.com
  • Pablo Wejcman
    pablo.wejcman@ey.com

Ernst & Young LLP (United Kingdom), Latin America Business Center, London

  • Jose Padilla
    jpadilla@uk.ey.com

Ernst & Young Tax Co., Latin America Tax Desk, Japan & Asia Pacific

  • Raul Moreno, Tokyo
    raul.moreno@jp.ey.com
  • Luis Coronado, Singapore
    luis.coronado@sg.ey.com

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ATTACHMENT

PDF version of this Tax Alert

 

Document ID: 2018-5865

 
 

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