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%.
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