On January 12th, 2024, through Resolution No. NAC-DGERCGC24-00000003, the Internal Revenue Service (SRI), issued regulations applicable to the self-retention of Income Tax by corporations qualified as “Large Taxpayers.” A summary of the most relevant points is detailed below:
The chargeable base for self-retention encompasses all monthly received taxable income, except items related to:
For “Large Taxpayers” receiving income as commission agents, self-retention will be calculated considering only the margin of their commission.
SRI has established self-retention percentages based on the usual economic activity of the called “Large Taxpayers”, according to the following ranges:
ECONOMIC SECTOR | RANKS OF SELF-RETENTION PERCENTAGES |
AGRICULTURE, LIVESTOCK, FORESTRY, AND FISHING | From 1,25% to 5% |
AGROINDUSTRIAL AND EXPORT MANUFACTURING INDUSTRY | From 1,25% to 2,25% |
AUTOMOTIVE | From 1,25% to 4% |
WHOLESALE AND RETAIL TRADE OF GOODS | From 1,25% to 10% |
CONSTRUCTION | From 1,25% to 8% |
MANUFACTURING INDUSTRIES | From 1,25% to 7% |
INFORMATION TECHNOLOGY AND COMMUNICATION | From 1,25% to 10% |
INFORMATION TECHNOLOGY AND COMMUNICATION (MOBILE TELEPHONY) | From 4% to 5% |
DAIRY | From 1,25% to 3% |
NON-RENEWABLE RESOURCES: CEMENT INDUSTRY | From 2,25% to 7% |
NON-RENEWABLE RESOURCES: MINING | 7% |
NON-RENEWABLE RESOURCES: PETROLEUM DOWNSTREAM | From 3% to 8% |
NON-RENEWABLE RESOURCES: PETROLEUM FUEL SALES (SALE OF LIQUEFIED PETROLEUM GAS) | From 2% to 3% |
HEALTH | From 1,25% to 9% |
SERVICES | From 1,25% to 10% |
FINANCIAL SYSTEM (BANKS) | From 4% to 5% |
FINANCIAL SYSTEM (COOPERATIVES) | From 3% to 4,5% |
FINANCIAL SYSTEM (INSURANCE) | From 1,25% to 10% |
Self-retentions will be applied to the monthly taxable income, as a result of which, the corresponding withholding receipt will be issued. In the event that the large taxpayer cis not able to differentiate between taxable and exempt income, this self-retention will be calculated on the total of the monthly received income received.
As well, “Large Taxpayers”, under the regime of the banana, agricultural, or any other specific sector, are exempt from self-retaining Income Tax on their earnings. Consequently, Withholding agents are required to implement the relevant withholding in adherence to the established general regulations.
The declaration and payment of the self-retentions mentioned in this resolution will be done in the same way as the procedure implemented for the settlement and payment of withholding taxes on Income Tax and must be submitted on the dates stipulated in articles 102 and 254 of the “Regulations for the Implementation of the Internal Tax Regime” Statute.
The self-retention percentages for companies categorized as “Large Taxpayers” will be effective starting in January of the 2024 tax year.
SRI has the discretion to modify the self-retention percentages at any time, according to the economic circumstances of each sector or when it is anticipated that taxable income may decrease significantly in the current fiscal year, compared to the immediate previous one.
If a taxpayer fails to withhold or does so partially, they must pay the corresponding amounts with the applicable interest and a penalty of 100% of the withholding, as stipulated in article 21 of the “Tax Code” and in correspondence to article 50 of the “Internal Tax Regime” statute.
© TobarZVS
This publication contains information of general interest and does not constitute legal opinion on specific issues. Any analysis will require legal advice from the Firm.
In Resolution No. NAC-DGERCGC2300000020, the Internal Revenue Service (SRI) establishes the rules for applying an Income Tax (IR) reduction for personal expenses.
For more information do not hesitate to contact our Tax Practice Partner, Iván García (igarcia@tzvs.ec).
© TobarZVS
This article contains information of general interest and does not constitute legal advice about specific matters. Any particular analysis will require the Firm’s legal advice.
By ZVS Tobar in TAX CONSULTANCY
Through Resolution No. NAC-DGERCGC22-00000065 the Internal Revenue Service Amends the Resolution No. NAC-DGERCGC16-00000536, published in the supplement to Official Gazette No. 919 of January 10, 2017, in the following terms:
1. | The levels of the corporate composition are defined, as follows: First Level. – The direct relationship of the obligor with its holders or beneficiaries of rights representing capital. Second or Third Level. – The indirect relationship existing between them, according to the number of intermediary companies that exist until reaching the last level of the corporate composition, in which the natural persons that are final beneficiaries and/or tax residents of Ecuador are identified, excluding nominal or formal holders, depending on the business structure of the obligor or the intermediary companies. |
2. | The fifth numeral is added with respect to the subjects of last level, establishing a: A non-tax resident company with respect to the corporate chains that, from the same, end in one or several non-tax resident natural persons that, without being mere nominal or formal holders, maintain individually or jointly with their related parties, an effective participation in the capital of the obligated subject of less than 10%. When the corporate chains referred to in the preceding paragraph end in individuals who are tax residents of Ecuador, it will be understood that the latter constitute the last level, without prejudice to their percentage of effective participation in the obligated entity. |
3. | On the other hand, regarding the information related to companies that list their shares in stock exchanges, it is established that if the obligated entity has as a shareholder, direct or indirect, a company that lists its shares in recognized stock exchanges abroad: It shall have the obligation to identify the part of the capital that is not traded or that is reserved to a limited group of investors, and with respect to such part of the capital shall report on any shareholder that owns directly or indirectly 2%, or more, of its corporate composition, except in the case of tax residents in Ecuador, in which case it shall report without regard to such percentage. |
4. | However, the previous provisions shall not apply when the company that lists its shares in the referred stock exchanges is constituted at the last level of the corporate chain. |
5. | Finally, as a Transitory Provision, it is established that the Appendix of Shareholders, Participants, Partners, Members of the Board of Directors and Administrators for the fiscal period 2022, may be filed until March 28, 2023. |
For more information do not hesitate to contact our Tax Practice Partner, Iván García (igarcia@tzvs.ec).
© TobarZVS
This publication contains information of general interest and may not constitute a legal opinion on specific matters. Any particular analysis, shall require legal advice from the Firm.
By ZVS Tobar in TAX CONSULTANCY
Since August 2018, various criteria have been generated regarding whether or not the income received by employees from employment participation in profit sharing is taxable income subject to the payment of income tax.
According to the provisions of the second paragraph of article 108 of the Labor Code: “The participation in the profit sharing to which employees are entitled will not be considered as private income and is not subject to taxation of any kind” (emphasis added)
Until August 20, 2018, the last paragraph of article 9 of the Internal Tax Regime Law (hereinafter referred to as “LRTI”), established that:
“In the determination and settlement of income tax, no exemptions other than those provided for in this article will be recognized, even if other laws, whether general or special, establish exclusions or exemptions in favor of any taxpayer, with the exception of what is provided for in the Law of Tax Benefits for new Productive Investments, Employment Generation and Service Provision.” (emphasis added)
On August 21, 2018, the “Organic Law for Productive Development, Investment Attraction, Employment Generation, and Fiscal Stability and Balance” was published in the Official Registry Supplement, which eliminated said provision and thus began the discussion on the possibility of considering the income received by employees from employment participation in profit sharing as exempt from paying income tax.
Considering that article 9 of the LRTI does not establish employment participation in the profit sharing received by employees as tax-exempt income, it is necessary to analyze whether the labor standard – Labor Code – can establish a tax exemption.
In this situation, several criteria have been generated. Some, based on the provisions of article 425 of the Constitution of the Republic, establish that the standard hierarchy must be applied, the Labor Code is an organic norm, while the LRTI is an ordinary norm. On the other hand, there are those who point out that the specialty of the norm should prevail, in which case, the tax norm is in charge of regulating the relationship between taxpayers and taxes.
In this regard, the Internal Revenue Service (hereinafter referred to as “SRI”), in response to a query, through Official Letter No. 917012022OCON003142 dated March 10, 2023, made it clear that at its discretion: “the payment of profits in favor of the employee in Ecuador constitutes income of Ecuadorian origin from work, therefore, it is income taxed with income tax.”
In the context of the analysis carried out by the SRI to determine the applicability of article 108 of the Labor Code, the clear contradiction that exists between the provisions of article 2 of the Tax Code and the labor standard, which in law is known as a legal antinomy, was taken as a starting point.
Article 2 of the Tax Code determines that: “The provisions of this Code and THE OTHER TAX LAWS will prevail over all other general laws. Consequently, laws and decrees that in any way contravene this precept will not be applicable by the administration or by the jurisdictional bodies.” (emphasis added)
According to article 3 of the Organic Law of Jurisdictional Guarantees and Constitutional Control, if there are contradictions between legal norms to determine which norm prevails, “the competent one, the hierarchically superior one, the special one, or the later one will be applied.”
The Tax Code and the Labor Code are organic norms, therefore, to establish which norm prevails, the SRI established that it is not possible to apply the principle of standard hierarchy.
To resolve this contradiction, the SRI considered the specialty of the norm as a determining factor. The Tax Code in its article 1 determines that: “The precepts of this Code regulate the legal relationships arising from taxes (…)”. While article 1 of the Labor Code establishes that: “the precepts of this Code regulate the relationships between employers and employees (…)”.
In conclusion, although the position adopted by the Tax Authority does not establish specific reasons why the labor standard could not establish a tax exemption, I consider that the exemption contemplated in article 108 of the Labor Code is inapplicable, by virtue of the constitutional principle, which guarantees that the tax regime will be governed by the principles of generality and equity, accompanied by the constitutional guarantee that provides that people will enjoy the same duties, therefore, there are no elements that justify discriminatory tax treatment with respect to income that people under a contracted relationship receive from employment participation in profit sharing.
© TobarZVS
This publication contains information of general interest and does not constitute legal opinion on specific issues. Any analysis will require legal advice from the Firm.
 | Senior Tax Consultant https://www.tzvs.ec/inAlfredoSalazar +593 2 2986456 |
By ZVS Tobar in TAX CONSULTANCY
In Official Gazette Second Supplement No. 413 of October 10th, 2023, was published the Resolution No. NAC-DGERCGC23-00000026, amended the Resolution No. DGERCGC20-00000061 through which the percentages of Value Added Tax (VAT) withholding are regulated.
Here is what you should know about the Resolution:
For more information, do not hesitate to contact our Tax Practice Partner, Iván García (igarcia@tzvs.ec).
© TobarZVS
This publication contains information of general interest and does not constitute legal opinion on specific issues. Any analysis will require legal advice from the Firm.
By ZVS Tobar in TAX CONSULTANCY
