Special regime for micro enterprises offers beneficial tax rate
A tax regime for micro enterprises in Ecuador, introduced in 2020, applies for income tax, VAT and excise tax purposes. A micro enterprise is defined as an enterprise that has annual gross revenue not exceeding USD 300,000 and no more than nine employees. Qualifying micro enterprises are subject to a reduced tax rate of 2% on gross income (i.e., with no deductions for expenses), rather than a 22% rate on net earnings.
The main features of the micro enterprise regime are as follows:
- Micro enterprises in certain sectors are excluded from the regime, e.g., financial institutions, public entities, international organizations, professional services, fuel commercialization, construction contracts, urbanization activities, etc.
- Micro enterprises can still qualify for the special regime if they meet the annual gross income requirement but not the employee requirement.
- Ecuador’s tax authorities publish the registry of qualifying taxpayers for each fiscal year.
- A qualifying enterprise must remain subject to the special tax regime for at least five years as long as it continues to meet the income and employment requirements.
- Micro enterprises falling within the scope of the regime must file tax returns and pay tax on a bi-annual basis (i.e., in January and July).
- New companies commence their activities under the general regime until they are included in the micro enterprise regime.
- Micro enterprises subject to the special regime will not be withholding agents for income tax or VAT purposes unless they are designated as special taxpayers or withholding agents.
Nelson Morales
nmorales@bdo.ec