ORGANIC LAW OF SOCIAL TRANSPARENCY

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• September 2, 2025

The Official Gazette No. 112, dated August 28, 2025, publishes the ORGANIC LAW OF SOCIAL TRANSPARENCY. The following is a synopsis of the tax reforms provided for in such Law.

1.- In the second paragraph of numeral 15 of Art. 9 of the Internal Tax Regime Law – LRTI, the phrase in bold type is eliminated:

15.- Income obtained by commercial trusts, provided that they do not develop business activities or operate businesses in progress, according to the definition established in Article 42.1 of this Law, or when any of the constituents or beneficiaries are individuals or resident companies, incorporated or located in a tax haven or jurisdiction of lower taxation. Likewise, income obtained by investment funds and complementary funds shall be exempt.

In order for the aforementioned companies to benefit from this exemption, it is an indispensable requirement that at the time of the distribution of the benefits, yields, earnings or profits, the trustee or fund manager has made the corresponding income tax withholding at source. in the same percentages established for the distribution of dividends and profits, in accordance with the provisions of the Regulations for the application of this Law. the beneficiary, constituent or participant of each mercantile trust, investment fund or complementary fund, and, in addition, submit an informative declaration to the Internal Revenue Service, in magnetic media, for each mercantile trust, investment fund and complementary fund it manages, which must be submitted with the information and periodicity indicated by the Director General of the IRS by means of a general Resolution.

If it is established that these commercial trusts, investment funds or complementary funds do not comply with the above requirements, they must be taxed without any exemption.

Art. 39.2 of the LRTI is amended.

Single tax on dividends

Income received from dividends or profits will be subject to a single income tax. This means that such income will not be included in the taxable income of individuals or legal entities, but will be taxed individually, with its own tax rate and withholding scheme.

Signature Clarification: Until before the reform, this income was part of the global income tax base. Taxable income was equal to 40% of the gross dividend distributed. The withholding applied constituted a tax credit for the beneficiary of the dividend. However, please refer to the Second Final Provision, which clarifies the regime applicable to the liquidation of income tax on dividends distributed prior to the enactment of this Law.

The company distributing the dividends will act as withholding agent for 100% of the tax incurred, and must withhold the tax at the time of distribution, regardless of the date of actual payment.

Definition of dividend distribution

Dividends are considered to be distributed when the shareholders’ meeting, or the competent body depending on the type of company, adopts the corresponding resolution.

In the case of permanent establishments of non-resident companies, any surplus remitted to the parent company will be considered an effectively distributed dividend. The value must be determined annually, in accordance with accounting principles and the arm’s length principle, considering the income, costs and expenses attributable to the operation in Ecuador, after deducting the labor participation and the income tax incurred.

Determination of the tax rate

(a) Distribution to non-tax residents in Ecuador:

10%, which is increased to 14% if the following conditions are met: (i) at any level of the chain of ownership there is participation of a resident in a tax haven or lower tax jurisdiction; and, (ii) the final beneficiary of the dividend is a tax resident in Ecuador.

(b) Distribution of dividends by companies that did not report their shareholder structure:

14%.

(c) Other cases:

12% in all those not contemplated in the preceding paragraphs.

Exemption for individuals residing in Ecuador

Individuals who are tax residents in Ecuador will be entitled to an exemption equivalent to 3 unified basic salaries of the worker in general, for each company that distributes dividends, within the same fiscal year.

Tax treatment of dividends received from abroad

Dividends received from abroad by individuals or companies resident in Ecuador will be integrated to the global income, being subject to taxation according to the tax rate applicable to each of them. To this effect, the tax paid abroad may be imputed as a tax credit, up to the limit of the tax caused in Ecuador for such income.

3.- Article 39.2.1 is included after Article 39 of the LRTI.

Tax on retained earnings

Obligated parties

• Companies resident for tax purposes in Ecuador.

• Permanent establishments in Ecuador of non-resident companies.

Taxable event, taxable base and rate

The non-distribution, up to July 31 of the current fiscal year, of the accumulated profits corresponding to previous fiscal years. These will pay in the manner and within the terms provided in the resolution issued by the IRS, a tax rate on the balance, in accordance with the following table:

The rate will be applied on 100% of the balance of undistributed profits, without deducting the amount corresponding to the first exempt tranche.

Compensation and/or refund

• This value may be offset against the obligation to pay withholdings, in cases where the distribution of dividends implies an income tax withholding at source.

• This amount may be offset against income tax obligations as of the year in which the distribution of dividends or capitalization of earnings is made.

The balance not offset may be refunded as from the deadline for filing the tax return for the fiscal year in which the dividend was distributed or the capitalization was completed; and up to the deadline for the undue payment (Art. 305 of the Tax Code).

• The compensation or refund of this credit will be made in the same proportion in which the profits are distributed and/or capitalized.

No distribution

• Companies that do not distribute or capitalize retained earnings during the two fiscal years following the year in which the obligation is paid (up to 2.50%) cannot offset it, nor can they obtain a refund.

In such cases, the balance of the amounts paid will be recorded as a non-deductible expense in the fiscal year in which such period expires.

Complementary regulations

• Companies that at the end of the fiscal period have recognized their income from investments in other companies by applying the equity method, shall be subject to the specific provisions established in the regulations.

• Holding companies or holders of shares may offset this credit against withholding tax obligations for dividend distributions (when applicable), or may claim a refund as from the first day of the month following the month in which the distribution was made, and up to 3 years from now, to the extent that they distribute dividends or capitalize profits.

Exceptions

• Investment funds and trusts;

• Mixed economy companies, with respect to the part belonging to the State; and,

• Institutions of the financial and insurance system. For these, the amount of profits that they are prevented from distributing by provision of the corresponding control entity will not be taken into account.

Final Provisions

First – The provisions of Arts. 39.2 and 39.2.1 of the LRTI shall be applicable as from the first day of the month following publication in the Official Gazette (September 1, 2025).

Second: Dividends received by individuals resident in Ecuador, between January 1, 2025 and August 31, 2025, will be consolidated with the global income and will be subject to taxation in accordance with the corresponding progressive table.

Quito D.M./Guayaquil, September 2025