The warm climate on the shore, cool mountain inland and cost of living make Ecuador an attractive destination for American expats. As a result, we receive a large number of questions from clients regarding how the tax system is structured, social security benefits, methods of minimizing US expat taxes and whether we are able to provide expat tax assistance to American expats living in Ecuador. Here we will clarify the answers to these questions, along with others you may be concerned about.
12 Top Expat Tips for Americans Living in Ecuador
Does Your Firm Provide US Expat Tax Services to Americans Living in Ecuador?
Yes, we provide a full range of expat tax services to American expats in Ecuador.
Are American Expats Living in Ecuador Required to File US Expatriate Tax Returns?
American expats living in Ecuador still have an obligation to file their expatriate tax return with the Internal Revenue Service (IRS) at the conclusion of each tax year. The tax return must reflect all of the income they had earned during that period, including any income from foreign employment even if the government of Ecuador had also applied taxes to it. However, the US expat could possibly reduce their taxes with the use of tax credits and deductions from the Ecuador earnings.
How Can Americans Working in Ecuador Minimize US Expat Taxes and Avoid Double Taxation?
A US expat has a few methods to consider that could work towards avoiding double taxation of their earnings. These methods include:
- Foreign Earned Income Exclusion (FEIE): An expat in Ecuador can use the FEIE to reduce the foreign earned income by the first $101,300 for the 2016 tax year and $100,800 for the 2015 tax year.
- Foreign Tax Credit: For earned income that is subject to taxation in both the US and Ecuador, this foreign tax credit may be applied.
- Foreign Housing Exclusion or Deduction: Foreign housing expenses incurred in Ecuador by the US expat may be excluded or deducted if a certain threshold is met.
For the Purpose of Taxation, Who is Considered a Resident of Ecuador?
In Ecuador, tax payers are classified as being a resident or non-resident. A resident is going to be taxed on all earnings, including those made abroad. For non-residents, tax is applied only to the income that was earned in Ecuador. This includes any income received by an Ecuadorian or foreign national stemming from employment inside of Ecuadorian territory. Earnings from professional, commercial, industrial, agricultural, mining services and any other employment of an economic nature are all taxable.
For non-residents, there is a withholding of 24% of the earned income at its source. This tax rate percentage for 2012 was 23% and 22% in 2013.
Is Foreign Income Subject to Taxation in Ecuador?
Any income earned by a resident of Ecuador outside of its borders is taxable by their government. A non-resident will not be taxed on their foreign earned income as long as there is no connection between those earnings and activities that were carried out in Ecuador.
What are Personal Income Tax Rates?
Personal income tax rates for residents of Ecuador are progressive, going as high as 35% of the earnings. As of tax year 2013, non-residents are subject to an income tax rate of 22%, regardless of the amount of earnings.
The minimum income earned to qualify for taxation is as follows for the noted tax years:
• 2008: Annual income greater than $7,850 USD
• 2009: Annual income greater than $8,570 USD
• 2010: Annual income greater than $8,910 USD
• 2011: Annual income greater than $11,973 USD
Non-residents who perform temporary services will have their income taxed at a rate of 24%. This tax percentage was 23% in 2012 and 22% in 2103. For those who are employed on a permanent basis, their income will be taxed at the same progressive rate as a resident.
When are Tax Returns Due in Ecuador?
In Ecuador, a personal income tax return must be filed between the 10th and 28th of March immediately following the end of the tax year. The individual’s exact date is determined by the 9th digit of their taxpayer identification number or ID. In instances where an expat departs the country before the end of the tax year, a tax return should be filed before their departure date. There are no extensions allowed for filing a tax return.
Married couples are required to file their tax returns separately, each listing their personal income, any business income and income from the assets owned individually. Any income that is generated by assets that are jointly owned will be divided equally between the spouses.
What is the Tax Year End for Tax Payers Living in Ecuador?
Like in the United States, the Ecuador tax period runs from the 1st of January to the 31st of December.
Which Income is Considered Taxable Income in Ecuador?
Income earned during the normal course of employment is subject to tax. This includes any salary or bonuses, employer contributions to a home country pension scheme, employer paid medical insurance premiums, home leaves, and cost of living allowances are among others are all sources of income subject to being taxed in Ecuador.
Are Dividends, Investment Income and Capital Gains Taxed in Ecuador?
Capital gains are considered a standard source of income, and taxed as such. Capital gains on investment shares and any permanent property are tax exempt. Payments derived from either of these sources will not be subjected to any withholding tax at its source; rather the recipient will receive the full amount. Any capital loss may not be used as a deductible.
Like capital gains, royalties are considered the same as taxable personal income. There is a 25% tax withheld from payments from royalties abroad. The same withholding rate is used for services and technical assistance payments sent overseas. Royalties that are being paid to a resident of a country which has entered into a double taxation treaty with Ecuador could qualify for a lower withholding percentage.
Dividends that are paid by an Ecuadorian company to a non-resident individual as well as both resident and non-resident entities will not be taxed. The only exception is for individuals in domiciled tax havens, but only if the company has paid tax on its underlying profits.
Interest earned from a savings deposit that is held by an Ecuadorian financial institution is exempt from taxation. For time deposits and yields with terms of at least one year, taxation is also waived. Any other earned interest is considered part of personal taxable income.
What is the Social Security System in Ecuador?
The social security system in Ecuador is governed by the social security institute, which also manages it. All employees in Ecuador including, private, public, foreign and self-employed are covered under the legislation which governs the system. American expats are also expected to contribute to the social security system and should ask their employer in Ecuador to properly register them at the start of employment. Once an expat begins to make payments into the Ecuador social security system, they may not receive any benefit or payment from their country of origin.
Is There a Social Security Agreement Between the USA and Ecuador?
There is no tax treaty or social security agreement between the United States and Ecuador. As a result, a US expat is risking being taxed twice on the same income. Specialized tax planning is required and should be done with the assistance of an expat tax professional.
Are There Other Taxes in Ecuador?
Capital gains will be taxed as a part of the recipient’s regular earned income. There is also the possibility of capital gains on investment shares being tax free income. A tax on an inheritance or gift will range from 0 to 35% based on its total value or amount.
What are the FBAR and FATCA Requirements for Americans in Ecuador?
Legislation in the United States requires that all of their citizens report balances that are being held in foreign banking institutions. This law applies regardless of the nation the citizen is residing in. The Foreign Bank Accounts Report (FBAR) also states that a US expat is obligated to file FinCEN form 114 if they have a balance of over $10,000 in a foreign account. If the expat does not file this form before the 30th of June, they could be subject to a large fine. There are no extensions permitted with the filing of this form.
The Foreign Account Tax Compliance Act (FACTA) was enacted to uncover those US expats who have been avoiding filing their US tax returns. The law requires US expats and banking institutions who work with them to report the accounts of US persons. FATCA filing threshold varies per the filing status and residency. Married couples will have higher thresholds under this law. Any expat who meets the conditions of FACTA must complete and submit form 8938 with their US tax return.
Do you need Expatriate Tax Help while living in Ecuador?
With the absence of any tax treaties between the US and Ecuador, it is imperative that an American who is planning to relocate to Ecuador understand all of the laws regarding income taxation. Any additional help should be sought with an expert in expat tax returns.