As of this year, another mechanism governs the income on dividends distributed by Ecuadorian companies, in favor of companies or persons not residing in Ecuador. The Organic Law of Tax Simplification and Progressivity establishes the new dynamics.
An adjustment to the exoneration of dividends in favor of non-residents in the country is active from January 1, 2020. Basically, the difference lies in the following:
- Before: The dividends in shares that are distributed as a result of the reinvestment of profits were exempt from Income Tax (IR) in the terms defined in Article 37 of the Internal Tax Regime Law.
- Today: The capitalization of profits (even due to the effect of reinvestment of profits in the terms defined in Article 37 of the Internal Tax Regime Law) is not considered as a distribution of dividends.
Exemption cases
- Before: The national or foreign company resident in Ecuador distributed dividends to national companies, foreign companies and individuals not resident in the country.
- Today: The national or foreign company resident in Ecuador distributes dividends to national companies.
Distribution of dividends
As of 2020, any distribution of dividends to all types of taxpayers is considered taxed income, except to resident companies or permanent establishments in the country of a non-resident company.
The taxable income is equal to 40% of the dividend actually distributed. Example: a company resident in Ecuador, through a Shareholders’ Meeting, decides to distribute USD 1 million in dividends:
In the distribution to resident individuals, the taxable income will form part of their global income. The company that distributes the dividend applies a retention rate according to the following table.
Considerations
- In the event that the distribution is made to non-residents in Ecuador and the beneficial owner is a natural person residing in Ecuador, up to 25% withholding will apply.
- In the event that the company that distributes the dividends fails to comply with the duty to report on its corporate composition, the dividends corresponding to said non-compliance will be withheld with the maximum rate of Income Tax for natural persons: 35%.
At UHY Assurance & Services we are experts in this matter, if you want more information do not hesitate to contact us through our WhatsApp or via mail: m.arroyo@uhyecuador.ec