January 2020

The Ecuadorian Congress, on December 9, approved a bill proposing tax law changes (‘the Bill’), which the President of Ecuador had submitted on November 21, 2019. The Bill includes amendments relating to financial expense deductibility, dividend distribution tax treatment, and the creation of a temporary tax that would apply to entities with taxable revenues exceeding USD 1 million in 2018. The President will review the Bill, and if he approves, it will be published in the Official Gazette. If these steps happen before year end – most of the proposed changes would become effective in January 2020.

Under the Bill, 40% of dividend distributions to foreign shareholders would be subject to withholding tax at a 25% rate (generally), although dividends distributed to resident entities would remain exempt. Under current law, post-tax dividends are subject to withholding tax only if the beneficial owner is an Ecuadorian resident or if the local company has not shared fully its shareholder/beneficial ownership structure with the Ecuadorian tax authority. Additionally, the Bill would change the rule on financial expense deductibility with respect to related and unrelated party debt. The current thin-capitalization ratio is 3:1. However, under the Bill, interest would be deductible only up to 20% of the fiscal-year’s profit before compulsory labor profit sharing, interest, depreciation, and amortization.