Tax Guide for US Expats Living and Working in Ecuador
Who Is Liable For Income Taxes in Ecuador
Ecuadorians and foreign nationals resident in Ecuador are subject to tax on their worldwide income. Nonresidents are subject to tax on Ecuadorian-source income only, regardless of where it is paid. Both Ecuadorians and foreign residents who receive income for business activities or professional, commercial or other services performed in Ecuador are subject to income tax.
Individuals are considered resident for tax purposes if their stay in Ecuador exceeds 183 days, consecutive or nonconsecutive, within a calendar year.
Income subject to tax. The taxation of various types of income is described below. For a table outlining the taxability of income items.
Employment income. Taxable income includes income from services rendered under a verbal or written contract of employment, regardless of whether the income is received in cash, in services or in kind.
In general, all employees receive the following annual bonuses, which are exempt from income tax:
- Christmas bonus, known as the thirteenth salary, which equals approximately one-twelfth of their annual compensation
- Education bonus, known as the fourteenth salary, which equals one Unified Basic Remuneration (US$264 for 2011)
Compensation for industrial accidents and death, payments for out-timed dismissal (dismissal without legal notice or legal cause), severance payments and amounts received from pension and retirement funds are also exempt from tax.
Self-employment and business income. Individuals are subject to tax on income from business activities conducted within Ecuador and on income arising from goods and assets located in Ecuador.
Business income includes the income of individuals who are sole proprietors or active members of a partnership in a commercial, industrial, mining or agricultural business in which they have in vested capital. Income is taxed at the rates.
Investment income. In general, dividends are exempt from tax if they are distributed after corporate income tax. However, dividends paid to Ecuadorian or foreign nationals resident in Ecuador are subject to additional income tax withholding. The progressive rates of this tax are set forth in the following table provided by the Internal Revenue Service (IRS).
In general, dividends remitted abroad to Ecuadorian and foreign individuals and companies are not subject to income tax withholding. However, dividends remitted to companies located in tax havens are subject to an additional withholding tax, equal to the maximum income tax rate applicable to individuals (35%) less the current corporate income tax rate (24% for 2011), which results in an additional withholding of 11% for 2011.
The above rules also apply to trust funds.
Royalties received from investments in Ecuador are treated as ordinary income. Royalties received from abroad are exempt from tax if they were subject to tax in the source country.
Interest paid to residents is added to the taxpayer’s taxable income and taxed at the rates.
Interest paid to residents is subject to withholding tax at a rate of 2%, which is credited against the taxpayer’s annual tax due.
Taxation of employer-provided stock options. In general, benefits derived from stock options are taxed as other income (income that is different from salary or professional wages). Each case must be analyzed separately.
Capital gains. Capital gains derived from the occasional sales of shares are exempt from tax.
Deductions
Deductible expenses. Social security contributions paid by employees are deductible for income tax purposes.
Personal deductions and allowances. For 2011, individuals can deduct personal, spouses’ and dependents’ expenses up to 50% of total annual income, subject to a maximum deduction of US$11,973. Deductible expenses include housing, education fees, medical expenses, food costs and clothing. The maximum deductible amount for each of these expenses is US$2,993.25, except for medical expenses which may be up to US$11,973.
Business deductions. The following business expenses are deductible for income tax purposes:
- Costs and expenses directly incurred in the generation of taxable income.
- Interest paid on business debts. The interest rate may not exceed the rate fixed by the Central Bank of Ecuador.
- Certain taxes levied on the business (not including income tax or taxes that give rise to a tax credit).
- Insurance premiums paid to secure employees’ work risks and the assets of the business.
- Losses as a result of force majeure or criminal acts.
- Necessary travel expenses and lodging.
- Depreciation and amortization.
- Amortization of losses (for individuals who have accounting books).
- Wages, salaries and compensation in general, fringe benefits,
- 15% profit-sharing, severance indemnities and other expenses under the Labor Law.
- Provisions for uncollectible receivables.
- Income tax and social security for employees if assumed by the employer.
- Provisions for retirement pension funds for employees with at least a 10-year relationship with the employer.
- Expenses that are payable at the completion of an activity, that are exclusively identified with the normal course of business and that are properly endorsed in contracts or invoices or other obligatory legal instruments.
Relief for losses. Losses may be carried forward to offset profits in the following five tax years. Losses may only offset the business income of individuals who maintain accounting books. The amount offset cannot exceed more than 25% of the taxable income in the current fiscal year.
B. Inheritance and gift taxes
Income derived from inheritance and gifts are taxed at the following progressive rates for 2011.
C. Social security
Coverage. The Social Security Institute of the government manages the social security system, which covers health benefits, pensions and certain social payments. All private, public and foreign employees and self-employed professionals are covered by social security legislation.
Expatriates engaged in a labor relationship must make social security contributions. They must ask their Ecuadorian employer to register them with the social security system beginning with their first day of work. Foreign residents who contribute to the system may not continue to receive coverage from their home countries.
Totalization agreements.
Ecuador has entered into totalization agreements with Chile and Spain.
We have been preparing US income tax returns for US Citizens and permanent residents living in Ecuador for over 15 years. As a US Citizen or permanent resident (green card holder) you are required to file a US return each year regardless of the fact that you file and pay taxes in your residence country. The expatriate earned income exemption ($100,800 for 2015) can only be claimed if you file a timely tax return. It is not automatic if you fail to file.
We have scores of clients located in Ecuador and know how to integrate your US taxes into the local income taxes you pay. Any income tax you pay there can be claimed as a dollar for dollar credit against the tax on your US return on the same income.
As an expat living abroad you get an automatic extension to file until June 15th following the calendar year end. (You cannot file using the Ecuador tax fiscal year for US tax purposes). You must pay any tax that may be due by April 15th in order to avoid penalties and interest. You can get an extension to file (if you request it) until October 15th.
There are other forms which must be filed if you have foreign bank or financial accounts; foreign investment company; or own 10% or more of a foreign corporation or foreign partnership. If you do not file these forms or file them late, the IRS can impose penalties of $10,000 or more per form. These penalties are due regardless of whether you owe income taxes or not.
There are certain times you may wish to make elections with respect to your Ecuador Corporation or Investment Company which will give you US tax benefits. There are other situations where forming a US corporation to receive your business income may be more advantageous than using a corporation in your resident country. We can help you with these decisions.
If you are self-employed while working in Ecuador, you will have to pay US self-employment taxes (social security). If you are a bona-fide employee you do not have to worry about paying US social security on your wages earned in Ecuador.
We have helped hundreds of expats around the world catch up because they have failed to file US returns for many years. Unfortunately, unlike India, Canada, UK, etc. you must also file so long as you are a US citizen or resident. You can if you follow proper IRS and State Department procedures surrender your US Citizenship and therefore cut off your obligation to pay US taxes in the future. You must surrender that Citizenship for non-tax avoidance reasons and then can usually not return to the US for more than 30 days per year for the subsequent ten years.
Let us help you with your US tax returns, US tax planning and other US tax and legal concerns. Download our expat tax questionnaire or request a request a consultation by phone, skype or email