TAX

AGREEMENT BETWEEN ECUADOR AND THE UNITED KINGDOM FOR THE ELIMINATION OF DOUBLE TAXATION AND THE PREVENTION OF TAX EVASION

The government of Ecuador and the United Kingdom of Great Britain and Northern Ireland have signed an agreement whose primary objective is to eliminate double taxation on income and capital gains affecting individuals and legal entities operating in both countries. Additionally, it aims to prevent tax evasion and avoidance through information exchange and the implementation of anti-abuse regulations. Finally, the agreement seeks to promote investment and bilateral trade by ensuring a predictable and fair tax treatment.

Scope and Application of the Agreement

The agreement covers individuals and legal entities residing in Ecuador and the United Kingdom, including territories under the fiscal control of these states. Income and capital gains taxes are considered to include all taxes levied on total income, including those derived from the disposal of movable and immovable property. The taxes covered by the agreement are:

• Ecuador: Income tax
• United Kingdom: Income tax, corporate tax, and capital gains tax

Methods for Eliminating Double Taxation

To prevent double taxation, the following measures are established:

• In Ecuador, the tax credit method will be adopted, allowing taxes paid in the United Kingdom to be deducted from Ecuadorian tax liabilities.

• In the United Kingdom, a tax credit mechanism will be implemented, enabling taxes paid in one country to be deducted in the other. Additionally, an exemption method will be applied in certain cases, depending on the type and origin of the income. This method will apply to dividends from Ecuador and profits generated by permanent establishments in the country.

Methods for Eliminating Double Taxation

To prevent double taxation, the following measures are established:

• In Ecuador, the tax credit method will be adopted, allowing taxes paid in the United Kingdom to be deducted from Ecuadorian tax liabilities.

• In the United Kingdom, a tax credit mechanism will be implemented, enabling taxes paid in one country to be deducted in the other. Additionally, an exemption method will be applied in certain cases, depending on the type and origin of the income. This method will apply to dividends from Ecuador and profits generated by permanent establishments in the country.

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NEW GUIDELINES FROM ECUADOR'S TAX AUTHORITY FOR THE APPLICATION OF THE FOREIGN CURRENCY EXIT TAX STARTING IN 2025

The Ecuadorian Internal Revenue Service (IRS) has issued new rules regarding the Foreign Currency Exit Tax (FCET), which are taking effect this year. Here are the key points:

• Elimination of tax credits: As of January 1, 2025, FCET paid in the past can no longer be used to reduce Income Tax.

• Options for FCET paid until 2024: Those who paid FCET until the end of 2024 may use it to reduce Income Tax, deduct it as an expense, or request a refund, according to previous regulations.

• Requirements for reduced rates: Taxpayers wishing to apply reduced FCET rates (2.5% or 5%) must complete a form and submit it to the financial institution or withholding agent.

• Obligations for withholding agents: Those responsible for withholding FCET must issue electronic receipts and ensure compliance with the regulations.

• IRS system updates: The IRS will update its systems to ensure the correct FCET rates (0%, 2.5%, 5%) are applied to money transfers abroad.

These measures are available this year and will impact both businesses and financial institutions.

ECONOMICS

Ecuador and Canada Conclude Negotiations for a Trade Agreement

The Free Trade Agreement between Canada and Ecuador strengthens trade relations between both countries following a negotiation process that began in April 2024. The conclusion of the negotiations resulted in a comprehensive agreement covering goods, services, and investment treatment, with provisions in key areas such as the environment, labor rights, Indigenous peoples, dispute resolution, agriculture, intellectual property, financial services, gender equality, and support for small and medium-sized enterprises. Below are the main aspects of this agreement:

Investment

The Investment chapter ensures a fair and predictable environment, including non-discrimination rules, protection against expropriation without fair compensation, and minimum standards of treatment. The Parties retain the right to regulate strategic sectors such as health, security, the environment, Indigenous rights, and cultural diversity. Additionally, it establishes rules for investor-State dispute settlement (ISDS), with strengthened commitments to transparency and fair access to procedures.

Dispute Resolution

The treaty includes a binding dispute settlement mechanism, prioritizing consultations and alternative solutions before arbitration. It ensures clear rules for panel selection, report implementation, and public access to proceedings for transparency.

Cross-Border Trade in Services

The agreement ensures market access, non-discriminatory treatment, and legal certainty for service providers. It includes an Annex on Professional Services to facilitate future Mutual Recognition Agreements and adopts a negative-list approach for non-conforming measures, ensuring regulatory predictability and transparency.

Competition Policy

The agreement fosters a fair and predictable business environment, ensuring due process and transparency in law enforcement. It encourages cooperation between competition authorities and protects confidential information. While not subject to dispute resolution, it allows for bilateral consultations on competition concerns.

Industrial Goods

The agreement eliminates tariffs on all Canadian industrial exports, with 89% of tariff lines becoming duty-free immediately and full liberalization within ten years. Key exports include metals, chemicals, machinery, textiles, fertilizers, and natural gas, averaging $316.7 million annually (2019–2023). Tariff removal on products like helicopters, drilling machinery, chemicals, cosmetics, and IT technology enhances Canada’s competitiveness in Ecuador.

Fish and Seafood Products

The agreement eliminates all tariffs on Canadian fish and seafood exports, with 95% becoming duty-free immediately and the remaining 4.9% phased out within three years. Between 2019 and 2023, Canada’s exports to Ecuador in this sector averaged $68,000 annually, while imports from Ecuador to Canada averaged $45.1 million, highlighting growth potential for Canadian exporters.

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PRIVATE INVESTMENT IN ECUADOR REACHED $1.304 BILLION IN 2024

According to the Ministry of Production, Foreign Trade, Investments, and Fisheries, private investment in Ecuador reached $1.304 billion in 2024 through 39 investment contracts across various productive sectors.

At the beginning of 2025, the Strategic Committee for Investment Promotion and Attraction (CEPAI) confirmed this amount, including contract approvals, amendments, and transitions to the new Free Zone regime.

In comparison, investment contracts in 2023 amounted to $1.161 billion. The main sectors for investment in 2024 included commerce, renewable energy, mining, real estate, and aquaculture. Additionally, amendments to investment contracts in the last quarter of 2024 increased investment by $93.5 million.

CEPAI also approved the transition of two Special Economic Development Zones (ZEDE) in Santa Elena and Guayas into Ecuador's first Free Zones, under the Economic Efficiency and Employment Generation Law. These projects involve over $2 million in investment and will create 69 direct jobs over 30 years.

On October 17, 2024, the Ministry of Production issued a ministerial agreement outlining the transition process for ZEDEs and free zones under the new legal framework.

Foreign Direct Investment (FDI)

Ecuador recorded $120 million in FDI in the first half of 2024, a 12.2% decrease compared to the same period in 2023. The main sectors for FDI were mining, transportation, and manufacturing, with $92 million in positive flows. The top investing countries were the U.S., Switzerland, and Peru, contributing $78 million.

Meanwhile, 100% of approved investment contracts in early 2024 focused on agriculture, manufacturing, and real estate/construction.

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ECUADOR STARTS EXPORTING CANNED TUNA TO CHINA

Ecuador began exporting canned tuna to China, following the implementation of a free trade agreement that removed the 5% tariff on the product. The deal, which came into effect last year, has also enabled other Ecuadorian products like shrimp, coffee, cacao, and bananas to enter the Chinese market without tariffs. Bilateral trade between Ecuador and China has grown by an average of 23% annually over the past five years, with China overtaking the United States as Ecuador's top non-oil trading partner in 2022.

However, Ecuador's exports to China fell nearly 12% by November 2024, largely due to a drop in shrimp prices (with China being Ecuador's main shrimp buyer) and an electricity crisis that led to daily blackouts and halted industrial mining activities. As of November 2024, Ecuador's exports totaled $2.97 billion, a 17.3% decrease from the previous year. Copper exports were also down by 7.7%.

Tax

Important regulations related to the family economy and taxes

Executive Decree 876, which contains a series of important regulations related to the family economy and the tax regime. These regulations cover several crucial aspects, such as:

Income Tax Withholding:
A procedure is established for employers to calculate the income tax withholding of their workers, taking into account the projection of personal expenses.
In addition, Executive Decree 876 modifies the Regulations for the Application of the Internal Tax Regime Law, with notable changes, such as:

Deduction of Losses on Sale of Portfolio and Commercial Credits:
Losses generated in the sale of portfolio and commercial loans between unrelated parties are allowed to be deducted, within certain limits.

Income Tax Rate Reduction:
The reduction of the income tax rate is regulated for those taxpayers who reinvest their profits in sports, cultural, responsible scientific research, or technological development programs.

New Regulations for the Mining Sector:
Regulations related to control processes and tax obligations in the mining sector are included. It’s important to highlight that the entry into force of these regulations varies depending on the type of tax to which they refer. Those related to income tax will come into effect on January 1, 2024, while those related to the RIMPE regime and formal duties will begin to take effect from the first day of the month following the publication of the Decree in the Official Registry.

Environmental

New Redeemable Tax Law on Non-Returnable Plastic Bottles in Ecuador

Decree Law of Economic Urgency for the Creation of the Redeemable Tax on Non-Returnable Plastic Bottles. This decision came after a favorable ruling issued by the Constitutional Court on September 18, 2023, and the new law was published in the Fifth Supplement of the Official Registry 401 on September 21, 2023.

The main features of this tax are the next:

Generating Fact: The act of bottling beverages in non-returnable plastic bottles used to contain alcoholic, non-alcoholic, carbonated, non-carbonated beverages and water. In the case of imported beverages under the consumption regime, the tax is generated at the time of customs clearance.

Subjects: The State, through the Internal Revenue Service, acts as the active subject, while the bottlers and importers of beverages in non-returnable plastic bottles are the passive subjects.

Tax Base: It is calculated based on the number of units bottled or imported, with a rate of two cents (0.02 USD) per bottle.

Tax Refund: The tax will be returned only to recyclers and transformers, following specific criteria for collection, traceability and limits established in the Regulations that must be issued by the President within a period of 30 days.

Exemptions: Dairy products and medicines bottled or imported in non-returnable plastic bottles are exempt from the tax.

Declaration and Payment: The tax settlement will be carried out by multiplying the number of units bottled or imported by the corresponding rate. In the case of imports, the IRBP settlement will be carried out before the goods are cleared through customs.

Non-Deductibility: The tax cannot be considered as a deductible expense for the settlement of income tax.

Transition Period: Until the Regulation comes into force, the regulatory provisions and other secondary regulations related to the existing IRBP return process will continue to apply.
This new law seeks to promote environmental responsibility and sustainability by encouraging the collection and recycling of non-returnable plastic bottles, while contributing to State revenue.
These measures are expected to have a significant impact on waste management and environmental preservation in Ecuador.

Tax

New Tax Reform in Effect

The tax reform came into effect on June 20, 2023, modifying matters related to the payment of income tax, deductible expenses, and value-added tax. Some of the key changes include:

Increased deductible expenses: The tax reform increases the amount of expenses that households can deduct from income tax. Individuals can now deduct up to US$15,294 per year for personal expenses, based on the number of family responsibilities they have. The maximum number of family responsibilities is five.
Therefore, a person with five dependents could deduct multiple expenses and receive the largest reduction in income tax payments, which is US$2,753 per year. Finally, those who have no family responsibilities, on the other hand, benefit from a reduction in their income tax payment of US$964 per year.

New income tax table: The new law regulates the income tax rate from 5% to 37%, but it makes it easier for beneficiaries to determine their payment rate. This means a reduction in tax payable.

Changes for popular businesses and microentrepreneurs: Popular businesses previously paid a single income tax of US$60 per year. The new tax reform establishes a progressive payment table, which means that popular businesses with less than US$2,500 in annual income are exempt from income tax. This benefits 340,000 producers. The new reform also establishes a rate of 0% valueadded tax for these businesses and excludes 500,000 artisans from the Simplified Regime for Entrepreneurs and Popular Businesses. Taxpayers with sales between US$2,500 and US$20,000
per year will pay between US$5 and US$60 per year in tax.

Environmental

Ministry of the Environment strengthens wildlife protection

The Ministry of the Environment has officially launched the Ecuadorian Biodiversity Information System (BIS-EC), which is designed to be an information system for supporting the control and management of biodiversity in the country. BIS-EC provides connection services that enable access and use of information and collaboration on specialist topics using state-of-the-art technologies.

This collaborative approach aims to improve access to biodiversity data and information while helping to improve research, exploitation, monitoring, control, traceability, and decision-making processes. BIS-EC is an important part of the Single Environmental Information System led by the Ministry of Environment, Water Ecology and Transition, in response to the need for updated data and statistics that reflect the management and protection of natural heritage objects from Ecuador.

Data Protection

The Personal Data Protection Law enters the Penalty Regime

The new regulation focuses on broadly protecting personal data, ensuring its security and confidentiality. Additionally, it establishes a system of sanctions that applies to both national and foreign companies operating in Ecuador. In this way, the objective of guaranteeing the exercise of the right to the protection of personal data is fulfilled, which includes access and decision-making regarding information and data of this nature.

The recently enacted regulation includes a system of sanctions for those who fail to comply with the provisions regarding the use and processing of personal data. These companies are obligated to implement data protection programs and systems that enable data subjects to exercise their rights. Among the sanctions, fines ranging from 0.1% to 1% of the total sales of the last annual billing exercise are established for companies that fail to responsibly handle user data, depending on the type of violation. Also, the public entities will be subject to fines of up to 20 minimum
wages.

In the case of recurring or serious violations or misuse of personal data, the temporary or permanent closure of the offending entity is also contemplated, in addition to the possibility of suing those who misuse data, both within and outside Ecuador. The severity of the infringement and the type of sanction depend on its intentionality, recurrence, nature, and repetitiveness.