The Internal Revenue Service issued the Circular NAC-DGECCGC22-00000012 on December 19, 2022, to clarify the application over time of the deductibility limit applicable to expenses for royalties, technical, administrative, and consulting services paid to related parties (hereinafter the "Deductibility Limit").
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Background
The President of the Republic issued the Executive Decree 304
published in the Second Supplement of the Official Gazette 608 of
December 30, 2021, which contained the Regulations to the Law of
Economic Development and Fiscal Sustainability after the COVID 19
Pandemic by means of. Said regulations eliminated the Deductibility
Limit established in article 28 #16 of the Internal Tax Regime Law
Regulations.
The President of the Republic issued the Executive Decree 586
published in the Third Supplement to Official Gazette 186 of
November 10, 2022, which amended several regulations and
incorporated once again the Deductibility Limit established in
article 28 #16 of the Internal Tax Regime Law Regulations.
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Consequences:
Considering the amendments detailed above, the Internal Revenue Service issued Circular NAC-DGECCGC22-00000012 whereby it clarifies:
- Considering the amendments detailed above, the Internal Revenue Service issued Circular NAC-DGECCGC22-00000012 whereby it clarifies:
- The advance pricing agreements that have been notified to the taxpayer and which approved an increase in the deductibility limit in force until December 31, 2021, will maintain its legal effects for the year 2022.
- For the calculating the income taxable base for the fiscal year
2023 and subsequent years, a deductibility limit equal to 5% of the
taxable income of each fiscal year will apply, except in the
following cases:
- Taxpayers that are in the pre-operative cycle of the business, the limit will be equivalent to 10% of the total assets.
- Taxpayers whose only activity is to provide technical services to independent parties if the operating margin indicator (operating profit over operating sales) is equal or higher than 7.5%. If the indicator is lower, a specific deductibility limit will be applied.
- Taxpayers that carry out operations with related parties in Ecuador, as long as the taxpayer that incurs the cost or expense has an effective tax rate equal to or lower than that of its related party with which it carries out the operation.
- When the total of royalties, technical, administrative, and consulting services operations with related parties within a fiscal year does not exceed 20 basic fractions taxed at zero income tax rate for individuals.
- For the fiscal year 2023, the taxpayer may request a higher limit of deductibility through an advance pricing agreement with the Tax Authority, until the last business day of February 2023.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.