President submits Bill for Controlling Abnormal Capital Flows to the National Assembly as an urgent economic matter

On July 29, 2025, Ecuadorian President Daniel Noboa Azín, submitted the Bill for Controlling Abnormal Capital Flows to the National Assembly as an urgent economic matter.

According to the constitution of Ecuador, the National Assembly has 30 calendar days from the date of receipt to approve, modify or reject the bill.

As stated in the bill, its purpose is to prevent, detect, and control abnormal capital flows, as well as promote tax responsibility and ensure the timely fulfillment of tax obligations.

The bill contains several provisions, but, due to their potential impact, the following tax reforms intended to be incorporated are highlighted. According to the first final provision of the bill, if approved, the Executive Branch expects these reforms to take effect on the first day of the month following the law’s enactment:

1. Income tax on the distribution of dividends or profits

The bill seeks to modify the existing regulations that govern the withholding of income tax at source on dividends distributed by resident companies or permanent establishments in Ecuador. According to the bill, dividends will be subject to a single income tax in the fiscal year in which the corresponding corporate body approves them, in accordance with the following rules:

i. Any dividend distribution is considered taxable income, regardless of the beneficiary’s tax residence, except for distributions to another company resident in Ecuador.

ii. The company distributing the dividend will act as the withholding agent for 100% of the tax due at the time of the distribution, regardless of the dividend’s actual payment date.

iii. The distribution of dividends is defined as the decision made by the shareholders’ meeting (or the corresponding body depending on the type of company), which decides on the obligation to distribute the dividends.

iv. The amount and date of the effective dividend distribution shall be those stated in the corresponding minutes or similar document.

v. For permanent establishments, any surplus of remittances to their parent companies will be considered effectively distributed dividends. The amount shall be established annually based on the income, costs, and expenses attributable to the operation in Ecuador, after subtracting profit sharing and income tax, in accordance with the accounting method and the arm's length principle.

vi. If the dividend distribution is made in favor of:

1. 1. Individuals residing in Ecuador, a 12% withholding will be applied to the dividends.
   2. Non-resident individuals or companies, a 10% withholding rate will apply. However, the rate will be 14% if both of the following conditions are met:
      1. At any level in the chain of ownership there is a resident of a tax haven or a jurisdiction with lower taxation; and,
      2. The beneficial owner of the dividend is an Ecuadorian resident.
   3. If the company distributing the dividends does not comply with its duty to report on its corporate structure, the tax rate will be 14%.

vii. When a resident company or permanent establishment in Ecuador lends money to its capital rights beneficiaries or grants non-commercial loans to any of its related parties, this transaction will be considered an advance payment of dividends. Consequently, the company must also withhold the corresponding tax at a rate established for companies (25%) on the amount of the transaction.

viii. If the dividend recipient is an individual residing in Ecuador, they will be exempt from taxes on up to three basic salaries for general workers (USD 1,410) from each company that distributes dividends, and within the same fiscal year.

ix. Dividends received from abroad by individuals or companies residing in Ecuador will be consolidated with the Ecuadorian resident’s overall income and will be subject to taxation in accordance with a table of progressive rates or with the corresponding rate. In these cases, the amount paid abroad on such dividends will be offset as a tax credit up to the equivalent amount of the income tax incurred in Ecuador.

x. Dividends distributed by resident companies or permanent establishments to individuals residing in Ecuador between January 1, 2025 and the first day of the month following the effective date of the law will be combined with their total income and will be subject to the corresponding rate in the table of progressive income tax rates.

2. Proposed tax on undistributed profits

The bill seeks to include an article in the Internal Tax Regime Law that establishes a new tax on undistributed profits.

According to the bill, resident companies and permanent establishments of non-resident companies in Ecuador that have not distributed the accumulated profits of previous fiscal years by July 31 of the current fiscal year will pay the following rates on such profits. The Internal Revenue Service will set forth the form and terms by means of a Resolution:

The tax incurred under this table shall not be refundable but may be offset by the company that retains the accrued dividends during the two subsequent fiscal years. If the credit has not been offset by the end of this period, it must be recorded as a non-deductible expense in the corresponding fiscal year.

Commercial trusts with no business activities or that do not currently conduct business, non-profit companies, state-owned companies and mixed-economy companies are exempt from this provision regarding the part that pertains to the State.