On December 18, 2018, in Executive Decree No. 617 the President issued Regulations for Applying the Law for Productive Development, Investment Attraction, Job Creation and Fiscal Stability and Balance (“Development Law”). These Regulations have been sent to the Official Register for publication.
The Regulations include rules on applying tax incentives under the Development Law, and specifically:
- Refer to the COPCI for the definition of new productive investment, including investments made for the development of commercial activities.
- Define how to calculate net job creation for the purposes of applying income tax exemptions for new investments in production and basic industries.
- Establish the formula for calculating proportionality the income tax exemption for companies operating as at the date of issue of the Development Law.
- Set the conditions for applying the Currency Remittance Tax exemption on the import of capital assets and raw materials for companies that have signed investment agreements as of 2018.
- Set the conditions for applying the Currency Remittance Tax exemption on dividends distributed abroad to beneficiaries who are resident in Ecuador.
- Establish parameters for applying the benefits arising from the re-investment of profits.
- Define what is understood by transparency and economic substance criteria, stating that compliance with these conditions is obligatory for a taxpayer to able to resort to tax benefits and incentives.
The Regulations contain several amendments to other laws, including:
- Regulations for the Internal Tax Regime Law. The most important amendments are:
- Include criteria for effective participation as a method to calculate the actual participation in rights representing the capital of a company.
- Define what is understood by distribution of dividends and profits, and distributed dividends and profits.
- Clarify the income tax exemption applicable to net profits or gains distributed to investors, companies, collective funds or trusts that invest in real estate projects.
- Introduce rules for applying the income tax exemption that applies to administrators and operators of Special Economic Development Zones (“ZEDEs” in Spanish); the income tax exemption on tourism and associated enterprises; the reduction for re-investment of profits in sports, science, cultural or technological programs, and for other tax benefits included in the amendments introduced by the Development Law into the Internal Tax Regime Law.
- Clarify in which cases individuals have the obligation to keep accounting records.
- Establish in which cases the income tax rate must increase to 28% due to the presence of entities in tax havens in the corporate chain, whose effective beneficiaries are resident in Ecuador.
- Establish the parameters for a ZEDE administrator or operator to be able to obtain 10% reduction in income tax after expiration of the exemption.
- Define what is understood by the duty to report the corporate structure.
- Clarify how profits are to be calculated for application of the single tax on profits on sales of shares and other capital representative rights.
- Determine how the single tax on sale of shares is to be applied.
- Fix a procedure to request the refund of an advance when it is greater than the tax incurred.
- Introduce changes into the rules determining how withholding at source is applied on dividends and on earlier paid dividends.
- Regulate the use of a tax credit for VAT during five years fixed by the Development Law.
- Establishes conditions to refund VAT to exporters, including a system for refund of coefficients.
- Regulate VAT refunds to exporters of services in favor of persons or companies performing housing projects for public benefit, for audio-visual, movie and TV productions, and in the event of purchases or imports of fixed assets.
- For purposes of applying 0% VAT rate, define what is understood as insurance and pre-paid medicine services, LED lamps, electro lines and newly built fishing vessels in shipyards.
- Introduce rules for application of the ICE tax imposed on artisanal beer.
- Fix rules to apply ICE tax exemption on electric vehicles.
- Regulate the process for obtaining exemption of the environmental tax on vehicular pollution.
- Introduce rules for application of the amendments introduced by the Law on the Ecuadorian Simplified Tax Regime (“RISE” in Spanish).
- Amend the treatment granted to accumulation of tariffs not actually paid by the State to service companies for exploration and exploitation of hydrocarbons.
- Regulations to the Currency Remittance Tax:
- Introduce rules establishing the cases when this tax is not applied on payments for foreign financing established in the amendment of the Productive Development Law.
- Clarify when ISD is not applied on payments for maintenance of vessels in shipyards abroad.
- Establish what is understood as compensation, and determine that ISD is incurred only on the net balance transferred abroad-
- Regulate the use of the right to ISD refund on export activities.
- Regulations on the Structure and Institutionality of Productive Development and Mechanisms and Instruments for Productive Development established in COPCI.
- Define as productive investment the one made abroad by residents in Ecuador when it involves returning the currency through dividends, royalties or exports of goods and services.
- Establish conditions for strategic import substitution sectors to be able to obtain the tax incentives set forth in COPCI.
- Define priority sectors as follows: Agriculture; fresh, frozen and industrialized foods; oleochemistry; tourism; cinematography, audiovisuals and international fairs; export of services; development of technological hardware, information security, and digital products and contents; energy efficiency; materials industry and technologies for sustainable construction; industrial, agro-industrial and associative sectors.
- Determine which must be considered as the place of the investment for purposes of applying tax incentives.
- Establish the possibility of executing investment contracts for projects developed according to the APPs system in strategic sectors and in public services.
- Fix the requirements for being administrator and operator of a ZEDE.
- Establish the possibility of executing contracts for engineering, procurement and construction during ZEDEs design and construction phases, and introduce other amendment into ZEDEs regulations.
Besides, the following have been amended through Decree 617: Regulations for Application of the Annual Tax on Motor Vehicles; the General Regulations to the Mining Law; Regulations to the Taxpayer Registration; Regulations to the Organic Law on Human Mobility; Regulations to Customs Facilitation for Trade in the COPCI; General Regulations for Application of the Tourism Law; General Regulations for Application of the Organic Law on Incentives for Apps and Foreign Investment; and the General Regulations to the Organic Code on Planning and Public Finances.
The impact of these important Regulations on the different areas included in it will be analyzed in future publications.
Warning: This newsletter by Pérez Bustamante & Ponce is not and cannot be used as legal advice or opinion since it is merely of an informative nature.