Expat taxes in Ecuador in 2021 – that will be the topic of today’s article.
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The best time to consider your financial situation is when you are moving to a new country.
Everyone knows that the equator is a conditional line that divides our planet into the Northern and Southern Hemispheres. This strip is more than 40 thousand km long. crosses 2 continents and passes through 14 states of the world. But only one thing made it its main attraction, and its name borrowed from it. This, Ecuador – “the center of the world”, as it is called by the locals.
What do you know about this beautiful land of mountains and volcanoes? Ecuador is a small and poor state, which is the world’s largest exporter of bananas. The main income of the country comes from oil production and export. The majestic Andes grow from here, ancient medieval temples are frozen in time here, and the amazing Galapagos Islands are hidden nearby.
Ecuador is like medieval Europe. And this is no accident, because historically, for almost 300 years it was a colony of the Spanish crown. The beauty of Ecuador is in all its diversity. The main state language here is Spanish, and the currency is the American dollar. Even after trying traditional Ecuadorian cuisine, you will immediately notice its special national flavor.
Everyone knows that the national cuisine depends on the location of the country. Half of all Ecuadorians live near the ocean, so they love seafood. The other half live in the mountains and cannot imagine their life without meat. In order not to offend anyone in Ecuador, they even came up with a unique dish – Mary Tierra, in which both meat and seafood were combined.
You can talk about this amazing and unique “center of the world” for a long time. We will ask other questions. And what about the everyday life of ordinary Ecuadorians? What are the pros and cons of living and working in this country?
The advantages of living in Ecuador:
- Comfortable climate for living
For fans of stable hot weather, Ecuador will seem like a paradise. In this country, there is no difference between winter and summer, and there are no hurricanes, typhoons, cyclones, or anticyclones. The average temperature in July is + 25 ° C, and in January + 24 ° C. In the mountains, of course, it is much cooler, on the coast, it is hotter. In general, choose the temperature that suits you and enjoy.
- Housing affordability, low prices
It should be said that the price of real estate in Ecuador is quite affordable for an ordinary European. The average price per square meter of housing in large centers (Quito, Guayaquil) is about $ 500. In small towns, of course, it is much lower.
- The amazing diversity of the natural world
It is enough to say only about one amazing place in Ecuador and everything will become clear. Since 1832, the Galapagos have been part of Ecuador.
The Galapagos Islands is a huge nature reserve in the middle of the Pacific Ocean, it is a unique nature, rare exotic animals that can be found only here and nowhere else in the world. Here, only 3% of the territory is inhabited by people – there are only 10 small villages on 19 islands. Everything else belongs to the animals, and not a single person has the right to enter their territory without special permission and a personal guide.
Here, comfort and coziness for animals has been created, and for people, there are many prohibitions: you can only walk in strictly designated places, take pictures only without a flash. And it is strictly forbidden to make loud sounds so as not to scare one of the animals. It got to the point that it was strictly forbidden to feed the birds here. The fact is that the birds on the Galapagos are so lazy that they have ceased to get their own food on their own. And in order to somehow return them to the regime of the wild, they decided to ban their feeding.
It is also forbidden to touch any animals here, so as not to infect them with human disease. The animals feel quite comfortable – fur seals lie on benches on the embankment next to people. But what can I say, here even a turtle cannot be removed from the road, you need to stand two meters from it and wait for it to clean itself.
Compliance with these rules on the islands is monitored by special authorities. For violation of the rules – immediate deportation from the islands and a ban on entry for a year.
The disadvantages of living in Ecuador:
There are also disadvantages of living and working in Ecuador, and in our opinion, they still outweigh the advantages. Here are the main ones:
- Low living standards
The standard of living in Ecuador is low. According to the United Nations Organization, the country ranks 74th in the world in terms of living standards. The average monthly salary in Ecuador is $ 550 per person
- Seismic activity
Ecuador is prone to natural disasters – volcanic eruptions and earthquakes. This country is home to one of the highest active volcanoes on the planet – Cotopaxi (height 5,911 meters), and their total number reaches 40. Every year, about 200 earthquakes of various strengths occur in the country.
Suffice it to recall the 2016 disaster in the city of Muisne, when an earthquake with a magnitude of 7.8 killed 660 people, 32 went missing, and more than 51 thousand were injured of varying severity.
- High crime rate
Latin American crime is known in Europe, the Colombian drug mafia is famous all over the world. It must be said that the Ecuadorian is not far behind her. The rate of violent deaths in this country is well above the European average. The underworld is organized and has a significant impact on some of the decisions of the current government.
In conclusion, it should be recognized that the disadvantages of living and working in Ecuador are significant and, of course, in general, prevail against the background of the existing advantages. Yes, and to be honest, you don’t really want to live at the foot of 40 volcanoes.
Tax system. Government tax authorities.
At the state level, all responsibility for the administration of the tax system rests with the President of the country, who oversees its activities, through the Internal Revenue Service, the State Office of Appraisal and Land Taxes, and the Ecuadorian Customs Corporation. Any institution that has the right to establish taxes at the state level, which are determined by the Law as necessary, is also under the auspices of the executive branch.
At the local and municipal levels, all responsibility for the establishment of taxes is borne by: Local Prefect, Mayor, Chairmen of Local and Municipal Councils. Their power extends to the local tax system through the establishment of lower administrative corps dealing with the payment and collection of taxes.
Tax inspectorates are government agencies that handle claims and appeals filed by taxpayers in relation to amounts of money improperly collected by government auditors during financial audits.
The main types of taxes
Income tax, income tax and assets tax
• Income tax
• Tax on the amount of the asset (in the balance sheet)
• Tax levied by the Regulatory Offices
• City property tax
• Special tax on the net profit of companies
• Value Added Tax
• Tax on special consumer goods
• Capital tax
• Tax on the transfer of securities to immovable property
• Customs taxes
Currently, the State of Ecuador is analyzing reforms aimed at reducing or eliminating various taxes that are counterproductive. At the same time, the possibility of increasing the rate and the estimated base amount of other taxes, which are of great importance for the state budget, is being considered.
In Ecuador, taxpayers are divided into residents and non-residents. The resident will be taxed on all income, including earned abroad. For non-residents, tax is levied only on income earned in Ecuador.
This includes any income earned by an Ecuadorian or foreign citizen as a result of working in Ecuador. Income from professional, commercial, industrial, agricultural, mining services, and from any other employment of an economic nature is subject to taxation. For non-residents, 24% of earned income is withheld at source.
Personal income tax
Personal income tax rates in Ecuador are progressive, up to 35%. Income tax is paid by a natural person resident in Ecuador on tax-free income derived from all sources. Non-resident individuals are required to pay tax only on income from Ecuadorian sources.
Residence is determined on the basis of common law or residence, or if the person has spent more than half of the eligible income year in Ecuador unless he or she has a habitual residence outside Ecuador and does not intend to settle in Ecuador. Ecuador.
Income tax is payable on taxable profits less permitted deductions. Estimated income includes business income, employment income, certain capital gains, rents, and interest. Eligible deductions include interest and certain other expenses payable in obtaining measurable income and gifts to designated entities.
For most individual taxpayers, tax payments are deducted from each salary and salary payment made by their employer. Self-employed entrepreneurs and individuals with non-wage and salary income usually pay input tax, which is an interim payment during the year pending tax calculation after the end of the income year.
The corporate income tax rate ranges from 22 to 28%. The capitalized income tax rate ranges from 12% to 18%. The tax year runs from January 1st to December 31st. The tax is payable from April 2 to April 28, depending on the tax identification number. However, taxes for the first year oblige the company to pay 50% of taxes for the first year in two equal quotas: July 30 and September 30 of the second year. The remaining amount is expected to be paid before the third year deadline, including the liquidation of the second year.
Corporate tax is paid by Ecuadorian companies on tax-free income derived from all sources. Non-resident companies are required to pay tax on income earned in Ecuador.
Resident companies are companies that are incorporated in Ecuador or do business in Ecuador and have either central management and control in Ecuador or voting rights controlled by shareholders who are residents of Ecuador.
Most of Ecuador’s tax revenue is generated by the IVA, which in English translates as Value Added Tax (VAT). This tax rate is currently 12% and is added to most purchases. However, if you are 65 or older, you can apply for reimbursement up to $ 92.64 per month.
Beware of merchants trying to add tax after a price has been negotiated. If, in accordance with the store’s policy, the price does not include VAT, which is rare, this should be marked with a corresponding plate. It’s the same with prices in restaurants – the menu should have a note that the tax will be added to your total amount.
Residential property taxes are based on a percentage of the municipal property value, and urban and rural properties are taxed at different rates. Even in the case of large real estate, it is unusual to pay more than $ 200 a year in real estate tax. Homeowners over 65 are exempt from taxes on properties under $ 183,000. For married couples, if only one of them is over 65, the tax bill is reduced by 50%.
Capital gains tax
Capital gains tax is based on the change in municipal value from the time the property is purchased to the time it is sold. Technically, the percentage is 10% of the difference between the municipal value at the time of purchase and at the time of sale. Discounts may apply to this fee depending on the time between the purchase and sale of the property. The discount also applies to any improvements to the property, including the addition of furniture, appliances, etc. A short time between purchase and sale will result in a higher capital gains tax.
Social Security System
The social security system in Ecuador is governed by the Social Security Institute, which also administers it. Almost all employees in Ecuador, either private or public, foreign and even self-employed, are subject to the laws that manage the social security system. American expats are also expected to contribute to Social Security and should ask their employer in Ecuador to properly register them when starting work. Once an emigrant starts making payments to Ecuador’s social security system, he may not receive any benefits or payments from his country of origin.
If you have a business in Ecuador or want to open one there, you should have a RUC number received from the Ecuadorian IRS, which will be your taxpayer identification number. After receiving the RUC number, it will then be used for tracking your purchases and your sales to customers so that the IRS can ensure that all parties are following the IVA properly.
In that time when tax law is not difficult, the administrative process can be very difficult. Hiring a local specialist to manage your business records pays off at a low cost is enough changing. The penalty for failing to keep your records or for not paying the applicable tax is to close your business for seven days for the first violation.
Every businessman who opens a company to trade in something pays 15-35% of the declared income. Various installations of cash registers, registrations, etc. are absent here. And no one will indicate at what price and what to sell, what sample to put price tags on the goods. How to work and how to service, only you have the right to decide.
The import of goods into the country is quite simple. The company earns at least $ 3000 from the sale of one car. Although recently they have been actively fighting Korean and North American models collected in Brazil and Argentina.
For everything else, the duty is as follows: if you are carrying goods for a company (firm), pay 15-35%, depending on what you are carrying. If you are lucky as a private person, then, as a rule, do not pay anything. For some very exceptional check, you pay 5% of the declared value (or $ 100 in cash to the customs officer).
Typically, many business owners buy from Colombia. The border is open. Also, many people buy goods in Miami (USA). There are major wholesalers targeting trade with Latin America. The trip there is worth it, as a round-trip ticket costs between $ 300 and $ 635.
Opening your business in Ecuador: is it worth it?
Doing business in Ecuador is a fun process. The American and European business models are also rigidly organized. In our opinion, it is worth competing with them if there is already a successful experience of working according to international standards.
Taxation and the very system of inspections in the country is much more loyal than in many other developed countries. Compared to the legislation of some European countries, even without using the optimization system, in Ecuador, you will pay almost half of the taxes with equal business profitability.
The distinctive features of doing business in this jurisdiction are low tax payments. VAT is at 12%. Its upper limit is 30%. It is a mistake to consider Ecuador as a country with special preferential economic conditions for entrepreneurs. The fiscal burden is small here. But the South American country is unfamiliar to most businessmen. This is due to the low incomes of the population of Ecuador and a decrease against this background in the prestige of opening banking and financial organizations here. The profits of companies, regardless of their legal entity type, are taxed at a rate of 25%.
Opening a company for a non-resident in Ecuador is a promising direction. There is no high enough corruption, which is usual for post-Soviet countries. The economy has high growth potential. Therefore, it makes sense to invest in a South American country.
Ecuador is not very well known as an offshore zone. The fiscal system of this jurisdiction is based on the rules of direct action. Therefore, there are rarely amendments to government decrees.
Company registration in Ecuador
- Collective enterprise. A minimum of two founders are required to create a company. Founders can be non-residents of the country.
- Joint company. Created as a partnership with a local firm. This significantly reduces the risk of losing your investment. The main advantage of a joint organization is the availability of various tax incentives. But finding a competent Ecuadorian businessman in the required business line can be challenging.
- Limited liability company. The minimum authorized capital for opening an organization of this form is $ 400. At the stage of creating a company, it is necessary to contribute at least half of this amount. At the beginning of the 21st century, the local currency was abolished in Ecuador. Instead, the US dollar is used today.
- Individual enterprise. A businessman can be not only a founder, but also an employee of an Ecuadorian company. After the creation of the company, it is allowed to issue a tax deduction.
- Representative office of a foreign company. To open this legal entity, you will need an authorized capital of at least 2,000 USD. This is disadvantageous for novice businessmen. It is more expedient for non-resident entrepreneurs to create a company in the form of an individual entrepreneur or LLC.
- Holding firms, corporations. They are organizations, groups of enterprises, the shares of which are freely traded.
- Simple limited partnership. Its peculiarity lies in the different status of the founders. Some are fully responsible for debts, others – partially. The degree of influence on the activities of the partnership depends on the status of the founder of the organization.