Written and Revised by Sara Chaca, Attorney – Abogada
January 31st, 2020
In their excitement about moving to Ecuador, a large percentage of foreigners are at the same time either concerned or just generally curious about taxes when contemplating their relocation to our beautiful country. Rest assured though, if you as a foreigner aren’t planning to start a business or company in Ecuador with paying clients who will pay you or your company in Ecuador (i.e. as opposed to you or your company [still] continuing to be paid in your country of origin such as the US, Canada, Europe, etc.), and also you won’t have a formal job in Ecuador working for an Ecuadorian business or company, then you have absolutely nothing to worry about in that regard, as in such case you will owe/pay ZERO income taxes to the Ecuadorian Government (i.e. income taxes being the most common type of tax that comes to mind per a foreigner relocating to Ecuador) and thus they (you) have no need whatsoever to even file an Ecuadorian tax return in such case, let alone pay a single penny in income tax to the Ecuadorian Government at that!
For a more detailed explanation of ALL the realistic/reasonable everyday type taxes that one can be liable for in Ecuador based on their own particular circumstances, purchases and/or holding periods for assets, see as follows for more details regarding the tax system of Ecuador and how (if/when) it relates to foreigners (though once again the big one of income taxes is simply NOT one that in any way affects the typical foreigner moving to Ecuador).
Ecuadorian Income Taxes
Foreigners living in Ecuador ONLY pay tax on the income that they specifically earn in Ecuador from their Ecuadorian domiciled business, company or job at/with an Ecuadorian business or company – NEVER on their income earned or received from outside of Ecuador. The Ecuadorian income tax system utilizes progressive rates for taxing income (again ONLY on income earned in Ecuador from income producing activities occurring specifically in or per Ecuador and NOT from things such as foreigners’ pensions or foreigners’ domiciled businesses/companies, nor foreigners’ externally derived/received alimony, investment income, settlement payments or even freelance jobs that they do over the internet or via international calls from Ecuador), that typically being between 5-35% (when applicable for Ecuadorian earned income specifically). As of the publication date of this article, the first $11,000 or so of an individual’s Ecuadorian income is NOT taxed by the Ecuadorian Government, and once again this tax exemption limit for income tax purposes ONLY relates to income which again is specifically earned by the foreigner in Ecuador and NOT to the foreigner’s income earned in any other country outside of Ecuador for any reason or way.
Ecuadorian Sales Taxes
The Ecuadorian Government receives the majority of its tax dollars from IVA, that being known as a Value Added Tax (VAT), similar to how is the case with most European countries. The IVA tax rate presently is set at 12% in Ecuador, and at checkout or purchase it’s added to the total cost the buyer or consumer pays. That said though, and beneficially for Seniors of age 65+, the amount of IVA you pay each month can be refunded to you by the Ecuadorian Government (and will be so upon you properly filing for it) up to a maximum refund of around $90 in IVA each month (i.e. as a Senior you can spend up to nearly $800 of monthly expenses on items and services that incurred IVA which you are entitled to that IVA back as a refund from the Ecuadorian Government).
There are some unscrupulous sellers and stores that may attempt to put the IVA as an additional cost following you and them reaching an agreement on any good’s or service’s price, and so if the person or shop has a policy that their prices don’t factor in the cost of the IVA (thankfully NOT a common practice in Ecuador these days), then you can request that they show you a notice on the wall or at their point of sale (i.e. their cash register area) stating that specifically in Spanish and/or in English. Restaurants as well are supposed to state in their menus if IVA is to be added on top of your bill at the end of your dining session.
Ecuadorian Property Taxes
Taxes paid on residential real estate each year are calculated as a specified percentage of the municipally determined value (i.e. the tax assessed value), and there is a separate rate structure for properties located within any city limits versus rural zones, respectively. It’s atypical to owe anything more than $100-300 per year in property taxes, really no matter where you own property in Ecuador. Plus, Seniors aged 65+ are exempt from annual property taxes on any real estate having a value of under $183,000 as of this writing. And per married couples where one is a Senior but the other isn’t yet a Senior, then the amounts of annual taxes owed are cut in half (i.e. a reduction of 50% year after year until both are Seniors and then their real estate becomes exempt from annual property taxes how specified above).
Ecuadorian Capital Gains Taxes
Capital Gains Taxes in Ecuador are calculated with respect to the difference in the municipally determined value (again as with Ecuadorian Property Taxes referenced above this is the “tax assessed value”) in comparison to the year that you had purchased your real estate in and the actual year that you officially sell that same property. Generally speaking, the tax amount you pay at the time of sale is denominated as 10% of the difference between the tax assessed value that was originally assigned to your property when you had purchased it (i.e. years ago) and at the moment of selling (i.e. present day). Reductions to this tax are possible as well, depending on the time period that has/had elapsed between the date of you buying and the date of you selling the property. The amount of tax owed can also be reduced in the case of improvements you made/make to your real estate, such as adding household equipment, furnishings and the like. Naturally, a briefer hold period between the respective dates of buying and selling your property shall cause a larger amount of taxes to be paid on any capital gains you had/have.
Ecuadorian Inheritance Taxes
As per Ecuadorian property held/owned in Ecuador by foreigners, currently that is ONLY subject to Inheritance Tax in Ecuador in the case of any amount above $72,000, and the rate of that tax, when applicable, is just 5-10% per most foreigners (i.e. for those foreigners having total combined assets in Ecuador of not more than around $300,000). Foreigners’ assets in any other country(ies) outside of Ecuador are NEVER subject to any form of Ecuador Inheritance Taxes, period.
Ecuadorian Business/Company Taxes
As first stated at the beginning of this article, once more, Ecuadorian income taxes are generally ONLY needing to be filed and paid for if/when you as a foreigner get an Ecuadorian Tax Identification number (“RUC”) from Ecuador’s own Internal Revenue Service of Ecuador (“SRI”), whether for you personally working at self in your specific business activity in Ecuador and/or for any formal company (i.e. corporation) that you choose to open in Ecuador. Yours or your business’/company’s RUC is utilized by SRI to keep an accounting on the items you buy for your business/company (i.e. from your servicers and suppliers) as well as of course the things that you sell to your business’/company’s buyers or clients, for purposes of SRI confirming that any and all IVA taxes are being paid and remitted as and how Ecuadorian law requires.
Ecuadorian tax law isn’t all that complex or difficult to comprehend, but the requirements and ways of filing for it as well as how/when to pay any taxes due is an entirely different animal (often a tiger or wolverine to boot!), thus Ecuadorian CPAs are quite worthwhile in doing your business’/company’s monthly and yearly bookkeeping. In the event that your accounting/tax filings aren’t current, and if you aren’t charging for IVA or remitting it to SRI correctly or at all, then your business/company can be closed down by SRI for a week or more with a bright red sign ceremoniously taped on your door by SRI saying so to the public, just to make sure that everyone on the street and/or in your building knows and sees that you didn’t/don’t comply with Ecuadorian tax collection and payment procedures.
Bottom line per the above not such taxing items overall (at least relatively speaking in comparison to the likes of, say, US tax law!), while most aspects of the Ecuadorian tax system are easy, fair and generally without issue (even partyly to wholly inapplicable at that for a large percentage of foreigners living in Ecuador), other areas and parts of it (particularly for business/company owners in Ecuador) can still at times cause one to figuratively (or literally) pull their hair out. Hence, I hope/trust that this article has clarified the finer points of Ecuadorian tax law for your knowledge and understanding of the system that applies here, and made clear to and for you which areas do and which areas don’t (or won’t) apply to you as a foreigner residing in Ecuador.
Sara Chaca (Attorney – Abogada) is a seasoned Ecuadorian Lawyer, who principally serves Expats in making their moves to Ecuador, as well as for any legal issues that arise or become actionable for her Expat clients to undertake in their new lives here in her beautiful country. Sara resides in Cuenca with her family, which consists of her American husband and 2 daughters (as well as her parents and siblings), and when not working, she enjoys spending time with her family in Cuenca’s majestic Cajas Mountains and local parks & fairs of Cuenca, plus visiting the coast as well as the many gem towns of Ecuador. Sara’s personal email address is email@example.com and her law office’s fully informative website is www.ecuadorvisas.com for you to visit at any time of day or night – plus, her personal Ecuadorian cell phone number is 099-296-2065 and her Toll Free “800” phone number for US & Canadian callers is 1-(800)-655-1581. Sara has a less than 24 hour first response policy, in that if you email or call her, she WILL return your first email or first phone call in less than 24 hours (more typically in closer to 24 minutes). Most importantly, all first time consultations with Expats for any type Visa or Legal matter(s) are always FREE OF CHARGE.