🕹 On December 20, 2023, the Asamblea Nacional del Ecuador approved their Organic Law for Economic Efficency and Job Creation (“Ley Orgánica de Eficiencia Económica y Generación de Empleo”). One of the many amendments made by this law to the Ecuadorian Internal Revenue Code (LRTI) is the addition of CFC rules, the first of their kind in the country. You can find the full text of the law (in Spanish) here: https://shorturl.at/pSTY2
Unlike most of its neighbors in LatAm, Ecuador is neither a member of the OECD – OCDE nor a member of the BEPS Inclusive Framework. The fact that the country decided to enact CFC rules – recommended by BEPS Action 3, but not as a minimum standard – is noteworthy. Here are some of the highlights of the new Ecuadorian CFC rules (which are subject to future regulations):
✅ Art. 51.1(a) of the LRTI says that CFCs include non-resident PEs.
✅ Art. 51.1(b) of the LRTI says that a CFC’s profits shall be taxable in Ecuador if it has an “ultimate beneficial owner” (UBO, or “beneficiario final” in Spanish) that has a direct or indirect “effective stakeholding” of at least 25% of its equity, voting rights or similar rights. Percentages of ownership of related parties shall be added up for testing whether they are in control of the CFC. It should be noted, of course, that 25% does not vest anyone with control of a foreign entity (unless a facts-and-circumstances assessment shows otherwise). This was highlighted in one of our recent publications: https://shorturl.at/lBI34
✅ Art. 51.1(c) says that in-scope CFCs shall be those subject to an effective income tax rate of less than 60% of the Ecuadorian income tax rate (which is nominally 25%, therefore the threshold is 15%, which just so happens to be the minimum tax rate applicable under Pillar Two rules).
❌ No part of the new Ecuadorian CFC rules says anything about their interaction with existing tax treaties. Today, Ecuador is a signatory party to around 20 tax treaties following the OECD and the United Nations Model Conventions.
As said by Andrea Moya, a member of the Latin American Tax Policy Forum (LATPF), “Ecuador is not a capital exporting country. It is still early to say whether the new CFC rules will represent an increased burden for the few (or future) multinationals that have investors or stakeholders in the country. Startups and their financing structures might be particularly affected. In the end, the Ecuadorian tax regime poses many other challenges to taxpayers, most of which are left unaddressed by the new CFC rules.” 🌍
