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November 23, 2022
Ecuador enacts new regulations on Income Tax, including lower income tax rates for new investments
Lower Corporate Income Tax (CIT) rate for new investments and Investment Agreements
Currently, the general CIT rate is 25%. Companies triggering new investments or entering into an Investment Agreement can benefit from a reduction of this tax rate.
New companies or existing companies that develop new investments can benefit with a three-percentage point reduction of the Income Tax rate (22% CIT). This reduction must be applied as follows:
Also, for Companies with an Investment Agreement, the benefit is a reduction of five percentage points on CIT (20%). For the application of this benefit, the following must be considered:
Tax benefits accumulated during the investment period shall in no case exceed the amount of the investment or the term of the benefit stipulated in the investment contract and/or its addendums.
Depreciation of Assets
The request for accelerated depreciation on assets is no longer applicable since such effects will have to be treated through deferred taxes.
Depreciation of assets imported into Ecuador shall be deductible if the value-added tax (VAT) has been paid.
Deduction of royalties, technical, administrative, and consulting services with related parties
It is established by Law that payments between related parties related to royalties, technical services, administrative services and/or advisory are deductible for income tax purposes up to a limit that is established by the Regulations to such Law.
The last reform precisely set forth the regulations for considering the limit on deductibility, as follows:
There is no deductibility limit in the following cases:
If an asset for which a royalty has been paid belonged to the Ecuadorian taxpayer for over 20 years, the expense is not deductible at all.
The taxpayer may request a higher limit of deductibility, under an Advance Pricing Agreement authorized by the Ecuadorian Tax Authority.
For additional information with respect to this Alert, please contact the following:
EY Addvalue Asesores Cia. Ltda., Quito
EY Addvalue Asesores Cia. Ltda., Guayaquil
Ernst & Young LLP (United States), Latin America Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific