Employers in Ecuador have specific tax responsibilities related to social security contributions. They are required to contribute 12.15% of the employee's gross salary to the Ecuadorian Social Security Institute (IESS). This contribution covers various benefits like pensions, healthcare, and disability insurance.

Depending on the nature of a business and its activities, the employer may also be obligated to contribute a small percentage towards unemployment insurance.

Reporting and Payment

Employers must register with IESS, withhold employee contributions, add their own, and remit payments on a monthly basis.

Contribution Caps

It's important to note that social security contributions are calculated on a monthly salary with an established maximum limit. For the latest figures, it's advisable to consult the IESS website.

Ecuador's tax system for employees involves income tax and social security contributions. Here's a breakdown of the main deductions from an employee's salary:

Income Tax

Income tax on employment income is levied on a progressive scale, ranging from 5% to 37%. An annual income of up to USD 11,310 is exempt from income tax. Any income exceeding this threshold is subject to tax according to the progressive brackets. Non-residents are taxed at a flat rate of 25% on their employment income in Ecuador.

Social Security Contributions

Ecuador has a mandatory social security system called Instituto Ecuatoriano de Seguridad Social (IESS). The employee contribution rate is currently 9.45% of their gross salary. These contributions fund social security benefits like healthcare, pensions, and unemployment insurance.

Additional Notes

Employees can deduct certain personal expenses from their taxable income, but with limitations based on their annual gross earnings. As of 2022, there's no longer a general deduction for personal expenses, but they are considered for a tax discount.

In Ecuador, the Value-Added Tax (VAT), also known as Impuesto al Valor Agregado (IVA), is applicable to the transfer of goods and services within the country, as well as imports.

VAT Rates

The standard VAT rate in Ecuador is 12%, which applies to most taxable services rendered within the country. However, a 0% VAT rate applies to specific goods and services deemed essential, including most basic foodstuffs, public transportation, healthcare, and educational services.

VAT Registration

Businesses providing taxable services in Ecuador must register for VAT if their annual income exceeds a specific threshold set by the Servicio Nacional de Rentas Internas (SRI) - the Ecuadorian Internal Revenue Service. As of 2024, the registration threshold is USD 12,000 in annual income. VAT-registered businesses are obligated to charge VAT on their taxable sales, file VAT returns, and pay any VAT due to the SRI.

VAT Treatment for Businesses

VAT-registered businesses are required to charge 12% VAT on their taxable sales of services to customers within Ecuador. This VAT is collected from the customer and remitted to the SRI. On the other hand, businesses can typically deduct the VAT they pay on their purchases (e.g., supplies, equipment) used for providing taxable services, helping to avoid double taxation.

Important Considerations

Businesses providing services to non-resident customers may be exempt from charging VAT, depending on the nature of the service and the location of the customer. Additionally, there are specific rules for the VAT treatment of cross-border services and digital services provided electronically.

The Organic Production Code (COPCI) offers a variety of tax incentives for new investments in different sectors. These incentives include income tax exemptions for up to 12 years for new investments in specific priority sectors. The exemption periods can vary depending on the region and industry type.

Investment Incentives for Specific Sectors

In the tourism sector, businesses investing in new projects in designated areas may qualify for income tax exemptions and other benefits. For renewable energy, tax incentives and deductions are available for businesses investing in these projects. Companies engaging in export promotion in various high-value segments may be eligible for income tax deductions and other benefits.

Regional Incentives

Businesses investing in the Amazon Region may benefit from longer income tax exemptions and other advantages. Companies established within designated border development zones, also known as Border Development Zones (ZEDE), may qualify for tax reductions and benefits like partial income tax exemptions or customs duty exemptions.

Other Incentives

Companies reinvesting earnings in Ecuador may be eligible for income tax credits.

Important Considerations

Specific eligibility requirements and conditions apply to different incentives. It's crucial to ensure your business and proposed activities meet the criteria. Tax incentives often require formal application and approval processes.