Micro-enterprises: New ways to tax

January 28, 2021

Tax Manager
Kreston AS, Ecuador

In 2020, a new tax regime for micro-enterprises was established in Ecuador, affecting income tax, VAT and tax on special consumption. To qualify as a micro-enterprise, a taxpayer (whether a company or an individual) must have an annual income below US$300,000 and up to nine employees. The amount of income will prevail over the condition of number of workers. The following activities are excluded from the regime: those related to the banana sector, construction contracts, transportation activities, fuel traders, professional service provision, liberal occupation, dependency relationship, and capital income, among others.

Micro-enterprises remain in this regime for up to 5 years, as long as they do not exceed the specified limits in terms of income and number of employees. Subsequently, they will be subject to the general regime.

Among the obligations of taxpayers who avail themselves of this regime are:

  • Keep accounting under the International Financial Reporting Standards for SMEs.
  • Present declarations and annexes when appropriate.
  • Keep the sales receipts that support its operations for a period of no less than 7 years.
  • Provide information to the Tax Administration when required.

The Tax Administration publishes on the institutional website the registry of taxpayers subject to the tax regime for micro-enterprises in force for each fiscal year. Those who are in this regime are subject to a tax rate of 2% on gross income (without deducting costs and expenses). Before, they were taxed 22% on net earnings.

The tax on special consumption, income tax and VAT declarations are made twice a year. If the taxpayer has unrecognised income in this regime, they must also file an annual income tax return; this regime allows filing every 6 months (rather than monthly). Also, these small businesses will not be withholding tax agents, unless they are qualified as such.

New micro-enterprises starting their economic activity since 2018 enjoy the income tax exemption for 3 years from the first fiscal year in which operating income is generated. Therefore, they must generate net employment and incorporate national added value in their production processes.