The Law for Economic Development and Fiscal Sustainability Post-COVID-19 was published in the Third Supplement to the Official Register 587 of November 29, 2021.
The law includes tax, customs, investment, hydrocarbons, banking, and financial reforms, among others.
Among the main additions introduced by this law is the creation of two temporary contributions for the post-COVID-19 economic stimulus:
- The contribution on the net worth of companies whose net worth is equal to or greater than US$5,000,000 as at December 31, 2020. Companies must pay this contribution for two consecutive years until March 31, 2022, and until March 31, 2023.
- Tax on the net worth of individuals whose personal net worth as at January 1, 2021 is equal to or greater than US$1,000,000 or whose community property net worth is equal to or greater than US$2,000,000. The law establishes special rules for cases of marital contracts or divorce/property settlements.
Additionally, the law introduces the RIVUT (Voluntary, Single and Temporary Tax Regime for Regularization of Assets), by which, in exchange for the payment of a single tax with a progressive rate that varies from 3.5% to 5.5% (depending on when the tax return and payment occurs), past tax obligations may be waived with respect to assets abroad that have been obtained with money on which income tax should have been paid in Ecuador but was not, on which ISD (International Money Transfer Tax) has not been paid, or which represent an unjustified increase in net worth. To be eligible for the RIVUT, a sworn statement must be filed stating the irrevocable will to be eligible for the regime and a statement acknowledging that there are no other assets, income, or property abroad that have not been declared.
It also includes important amendments to the Internal Tax Regime Law related to, among others, income tax, inheritance tax, value added tax (VAT), excise tax (ICE), and the single tax on profits from the sale of shares.
For individuals, three amendments stand out:
- Progressive income tax rate ranges are modified.
- Deduction of personal expenses is replaced by a rebate mechanism, applicable before tax credits.
- Inheritance tax is eliminated for the children of the decedent, or for the surviving spouse when there are no children entitled to the estate. This benefit is extended to heirs of decedents that died between March 15, 2020 and December 31, 2021 who have not paid the tax.
For corporations, the main amendments include the elimination of certain deductions, the replacement of the exemptions applicable to new productive investments by an income tax rate reduction regime, the elimination of the limits to the automatic application of agreements to prevent double taxation and the introduction of new additional deductions for calculating income tax. Likewise, the modification to the single tax on profits from the sale of shares, whereby the progressive rate is eliminated and replaced by a single rate of 10%, is also noteworthy.
Another notable change in the Organic Law for Economic Development and Fiscal Sustainability is the elimination of the Microenterprise Regime and the Ecuadorian Simplified Tax Regime (RISE), which are replaced by the Simplified Regime for Entrepreneurs and People’s Businesses (RIMPE).
Regarding VAT, the sale of certain products, such as masks, oximeters, sanitary products, oil products, among others, are taxed at a 0% rate. On the other hand, LED lamps, electric stoves, web page domain supply, clouding and hosting, etc. are taxed at a 12% rate. As a stimulus to tourism, the President of the Republic is allowed, through an Executive Decree, to reduce the VAT rate to 8% for services defined as tourist activities, for a maximum of 4 times a year during holidays or weekends.
With respect to ICE, mobile phones and video games, among others, are eliminated from the list of taxed products and services. The ICE rates applicable to alcohol and industrial beer are modified, and the President of the Republic is allowed to reduce the ICE rates through regulations, subject to a favorable report from the public finance governing entity.
As part of the reform to the Ecuadorian Fiscal Equity Law, the requirements to apply the ISD exemptions for repatriation of capital and dividends are eliminated and transfers made by qualified financial auxiliary entities incorporated in Ecuador for payment or refund of amounts collected for payment processing are exempted from this tax.
Important reforms are introduced in the Tax Code:
- The settlement in tax matters is introduced and a remission of interest and surcharges regime is included for taxpayers who, within judicial proceedings, accept the mediation procedure with an immediate payment offer of 25% of the capital.
- A chapter on legal certainty is added.
- Criteria are created for classifying the legal and economic substance in procedures for the determination and resolution of claims or appeals, among other reforms.
In addition, the law includes amendments to the COPCI and the Organic Law for the Promotion of Production involving the regime applicable to investment contracts, tax exemptions for foreign trade, modification of the basis for calculating customs duties, among others. It includes the possibility of making prior consultations on customs valuation and rules of origin. It also contains other relevant reforms to laws such as:
- (i) Hydrocarbons Law: association and marginal field contracts are eliminated and product sharing and service contracts for exploration and/or exploitation are set forth, as well as other forms of delegation currently in force in the legislation and other contractual forms of delegation provided for in the international industry.
- (ii) Organic Monetary and Financial Code: Shareholders holding less than 25% of the shares of a financial system entity may hold more than 6% of non-financial entities’ shares, interests, or property.
Furthermore, it includes other significant amendments to the Organic Planning and Public Finance Code, the Organic General Code of Procedure (COGEP), the Organic Code of the Judiciary, the Ecuadorian Quality System Law, the Organic Entrepreneurship and Innovation Law, among other laws.
It is important to consider that the entry into force of the reforms set forth in this law will depend on the nature of each amendment. Some of the tax reforms will become effective as of the first day of the following fiscal year (January 1, 2022), such as those related to income tax; others will become effective on the first day of the month following its publication (December 1, 2021), such as those affecting monthly taxes like VAT or ICE. Finally, there are reforms affecting non-tax matters which have become effective with the publication of the law in the Official Register.
If you have any questions about the Organic Law for Economic Development and Fiscal Sustainability and its potential impact on your business, you can contact us by e-mail at mguevara@pbplaw.com.
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