Ecuador is a beautiful South American country that is home to approximately 17 million people. The country has a tax system that is similar to many other countries in the world. The tax system in Ecuador is governed by the Internal Revenue Service (Servicio de Rentas Internas or SRI) and is administered by the Ministry of Finance. In this article, we will discuss how the taxation system works in Ecuador, double taxation agreements, the main taxes expats need to be aware of, special tax breaks that could apply to expats, how and when to file a tax return as an expat, and tax exit procedures for anyone leaving Ecuador to move abroad.
The Taxation System in Ecuador
The taxation system in Ecuador is a progressive system, meaning that the more you earn, the higher your tax rate will be. The tax year in Ecuador runs from January 1st to December 31st, and taxes must be filed by April 15th of the following year.
There are several taxes that individuals and businesses in Ecuador are required to pay. These include income tax, value-added tax (VAT), inheritance and gift tax, property tax, and social security contributions.
Double Taxation Agreements
Ecuador has signed double taxation agreements with several countries, including the United States, Canada, and Spain. These agreements are designed to prevent individuals and companies from being taxed twice on the same income.
If you are an expat living in Ecuador and your home country has signed a double taxation agreement with Ecuador, you may be able to avoid being taxed twice on your income. However, it is important to check the terms of the specific agreement as they can vary between countries.
Main Taxes in Ecuador
Income tax
All residents in Ecuador are required to pay income tax on their worldwide income. The tax rates range from 5% to 35%, depending on income levels.
If you are a non-resident in Ecuador, you will only be taxed on income earned within the country. The tax rate for non-residents is a flat rate of 22%.
Value-added tax (VAT)
The VAT rate in Ecuador is currently 12%. This tax is applied to most goods and services, including imports.
Inheritance and gift tax
Inheritance and gift tax is levied on the transfer of property or assets within Ecuador. The tax rates range from 2.5% to 35%, depending on the value of the property or asset.
Property tax
Property tax is levied on the value of real estate property located in Ecuador. The tax rate is 0.025% of the assessed value of the property.
Social security contributions
All employees in Ecuador are required to make social security contributions. The employer and employee each contribute 9.35% of the employee’s salary to social security.
Special Tax Breaks
There are several special tax breaks that could apply to expats living in Ecuador. These include:
Foreign earned income exclusion
If you are a US citizen or resident alien living in Ecuador, you may be eligible for the foreign earned income exclusion. This exclusion allows you to exclude up to $108,700 of your foreign earned income from US income tax.
Expat tax benefits
The Ecuadorian government offers several tax benefits to expats who live and work in the country. These benefits include a 50% reduction in income tax for the first five years of residency, exemption from import duties on household goods and personal effects, and a one-time exemption from VAT on the purchase of a new vehicle.
Filing a Tax Return in Ecuador
If you are an expat living in Ecuador, you are required to file a tax return if you meet certain criteria. If you are a resident in Ecuador and your income exceeds $11,170 per year, you are required to file a tax return. If you are a non-resident and earn income within Ecuador, you must also file a tax return.
The tax return must be filed annually by April 15th of the following year. The SRI provides an online platform where you can file your tax return, and it is recommended that you seek the assistance of a tax professional to ensure that you file correctly and take advantage of any applicable tax breaks.
Tax Exit Procedures for Ecuador
If you are leaving Ecuador to move abroad, you must complete a tax exit procedure with the SRI. This procedure involves filing a tax return for the year in which you leave, paying any outstanding taxes, and obtaining a certificate of tax compliance.
The certificate of tax compliance is required to obtain a residence permit or visa in another country. Failure to complete the tax exit procedure can result in a fine and other legal consequences.
In conclusion, Ecuador has a tax system that is similar to many other countries in the world. The tax system is progressive, and individuals and businesses are required to pay several taxes, including income tax, value-added tax, inheritance and gift tax, property tax, and social security contributions. Expats living in Ecuador may be eligible for special tax breaks, and it is important to file a tax return correctly and complete the tax exit procedure if leaving the country.