As a general rule, payments on operations that exceed USD 1,000 should be made through an institution of the financial system; otherwise, such operations will become non-deductible.
Depreciation and amortization
Straight-line depreciation applies at rates specified by law. The Director of the Internal Revenue Service (Servicio de Rentas Internas) of Ecuador can authorize higher depreciation rates in cases such as obsolescence, excessive use, and faster than expected wear-out of assets.
Annual depreciation rates are as follows:
|Asset||Depreciation rate (%)|
|Real estate (except land), aircraft, naval crafts, and similar property||5|
|Facilities, machinery, equipment, and furniture||10|
|Vehicles, trucks, and tractors used for construction||20|
|Computer equipment and software||33.33|
Depreciation rates apply to the cost of assets.
In the case of vehicles, if, at the time of purchase of the vehicle, its appraisal exceeds USD 35,000, the deductibility on the excess will not apply, unless it is an armored car or a vehicle exempt from the tax on vehicles. The limitation on the deductibility will not apply to car rental companies or taxpayers.
Intangible assets are amortized either within the terms specified in the contract or over a 20-year period.
Goodwill cannot be amortized in Ecuador, but there are limited exceptions.
Organizational and start-up expenses
Organization, experimentation, and pre-operational expenses can be amortized over five years at the rate of 20% per year.
Interest on debts incurred for business purposes are deductible.
In general, foreign loan interests are deductible for CIT purposes to the extent that the credits are registered before the CBE and the interest rates do not exceed the referential rates established by the CBE.
If the above-mentioned criteria are not met upon registration of the loan before the CBE, the excess will not be deductible for CIT purposes.
Interest paid on loans obtained from non-resident financial institutions and other approved entities is deductible and not subject to withholding tax (WHT) unless the interest rate is higher than the referential interest rate established by the CBE. In such cases, the excess is subject to 25% WHT (in all cases where a 25% WHT is applicable, please refer to the Withholding taxes section for more information).
Interest paid for loans granted by a non-registered related party are subject to WHT at 25% over the gross amount.
If the bad debt provision is less than 1% of the portfolio granted in the year, it will be deductible. Any excess will be non-deductible.
Payments for charitable contributions are non-deductible for CIT purposes.
Fines and penalties
Interest, fines, and penalties imposed on late payments of any tax obligation are not deductible for CIT calculation purposes.
Taxes, rates, and levies related to the generation of taxable income, as well as contributions to the Social Security system, are deductible.
Other significant items
Advertising, pension plans, severance, travel, and foreign related-party expenses are subject to deductibility limits.
Net operating losses
The carryforward of losses is allowed to a maximum of five years, with an amortization limit of 25% per year over the taxable base. There is no loss carryback.
Payments to foreign affiliates
In most cases, payments made abroad are deductible, as long as income taxes have been withheld (at the rate of 25% or 35% over the taxable base) and do not exceed some maximum limits. Professional fees, royalties, commissions, or any payment made abroad is subject to WHT at a rate of 25% or 35% over the taxable base. Payments on imports are deductible and not subject to WHT.