Offshore Tax Summaries-Part Two(Ecuador)

Offshore Tax Summaries-Ecuador

Most of the tax revenue generated in Ecuador is by a value-added tax (VAT). The rate for this tax is currently 12%, and it's added to just about everything a person buys.

Since Ecuador taxes individuals only on Ecuadorian-source income, expatriates won't need to file any type of return unless they have a business there, which buys from or sells to Ecuadorians. If they do, they will need to obtain a tax ID (RUC) number from the Ecuadorian IRS. Your RUC will then be used to track the purchases from suppliers and their sales to customers, so that the IRS can verify that the taxes are being handled appropriately by all parties. While the Ecuadorian tax laws aren't very complicated, the administrative process for this is a nightmare, so it is advised that the expatriate pay a small cost to hire a local accountant to manage his business records. The penalty for not having proper records, or for not collecting the appropriate tax, is a seven-day closure of the business for the first offense.

Property tax

The expatriate will be likely to have to pay property taxes rather than income taxes, which are minimal in Ecuador. This costs between $20 and $200.

Transfer tax

There is a registration tax which is levied for recording the transfer of any real property. The amount charged is 1% of the municipal value shown in the deed, and it is payable by the buyer. Rental income derived in Ecuador is subject to regular income tax. This is charged at progressive rates that range from 10% to 25%.

Capital gains tax

A capital gains tax is based on the change in the Municipal Value between the time the property was purchased and when it was sold. Technically, the rate can go as high as 25%, but it typically runs less than 3% of the difference. Since the Municipal Value is so low when compared to the sales price, the sellers, in practice, pay little capital gains tax.

Inheritance tax

The inheritance tax is levied on a graduated scale at the regular income tax rate of between 10% and 25%. Unless the gift requires a legal transfer of property, there is no gift tax. For example, if a person gives someone half of his house, and goes to the city to put it in his name, the recipient has to pay tax on his portion of the property's municipal value. Cash or other property gifts are not taxed.