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Tax Treaty between Ecuador and Russia has Entered into Force

According to a notice published in Russia's Official Gazette, the income tax treaty between Ecuador and Russia entered into force on 16 November 2018. The treaty, signed 14 November 2016, is the first of its kind between the two countries.

Taxes Covered

The treaty covers Ecuador income tax on individuals and income tax on companies and similar entities and covers Russian tax on profits of organizations and tax on income of individuals.

Residence

If a company is considered resident in both Contracting States, the competent authorities of both States will determine its residence for the purpose of the treaty through mutual agreement. If no agreement is reached, the company will not be entitled to any relief or exemption from tax provided by the treaty.

Service PE

The treaty includes the provision that a permanent establishment will be deemed constituted when an enterprise furnishes services within a Contracting State through employees or other engaged personnel if the activities continue for a period or periods aggregating more than 1 month within any 12-month period.

Withholding Tax Rates

  • Dividends - 5% if the beneficial owner is a company directly holding at least 25% of the voting shares of the paying company; otherwise 10%
  • Interest - 10%
  • Royalties - 10% of the gross amount of royalties paid for the use of, or the right to use, industrial, commercial, or scientific equipment; otherwise 15%

Capital Gains

The following capital gains derived by a resident of one Contracting State may be taxed by the other State:

  • Gains from the alienation of immovable property situated in the other State; and
  • Gains from the alienation of movable property forming part of the business property of a permanent establishment in the other State.

Note - Unlike most tax treaties, Article 13 (Capital Gains) of the Ecuador-Russia treaty includes a provision that the article does not affect the application of domestic legislation of a Contracting State to tax capital gains from the alienation of any other type of property not mentioned in the article.

Other Income

Unlike most treaties, Article 21 (Other Income) includes that income of a resident of a Contracting State not mentioned in the preceding articles of the treaty and derived from the other State may be taxed in the other State.

Double Taxation Relief

Russia applies the credit method for the elimination of double taxation, while Ecuador generally applies the exemption method. However, for income covered by Articles 10 (Dividends), 11 (Interest), and 12 (Royalties), Ecuador applies the credit method.

Limitation on Benefits

Article 24 (Limitation of Benefits) provides that a person (other than an individual) will only be entitled to the benefits of the treaty if such person is a resident of a Contracting State and is either:

  • A Governmental entity; or
  • A company incorporated in any of the Contracting States that, where at least 50% of the voting power or value of shares of the company is owned directly or indirectly by one or more individuals resident in either Contracting State and/or by other persons incorporated in either Contracting State that are owned directly or indirectly by one or more individuals resident in either Contracting State; or
  • A partnership or association of persons, where at least 50% or more of the profit-sharing is owned by one or more individuals resident in either Contracting State and/or by other persons incorporated in either Contracting State that are owned directly or indirectly by one or more individuals resident in either Contracting State; or
  • A charitable institution or other entity that is exempt for tax purposes and whose principal activities are carried out in either of the Contracting States.

Article 24 also provides that a resident of a Contracting State will not be entitled to the benefits of the treaty if more than 50% of the gross income is paid, directly or indirectly, to persons who are not residents of either Contracting State through payments deductible for the purpose of income tax determined in accordance with the treaty in the person's State of residence.

However, a resident of a Contracting State may be entitled to the benefits of the treaty if the competent authority of the other State determines that the resident carries out economic activities in the other State and that the establishment or acquisition or maintenance of said person and the carrying out of said activities did not have as one of its main purposes the obtaining of the benefits of the treaty.

Further to Article 24, specific limitation on benefits provisions are included in Articles 10 (Dividends), 11 (Interest), and 12 (Royalties), which provide that the benefits of those Articles will not apply if obtaining the benefits was the main purpose or one of the main purposes of any person concerned with creation or assignment of the shares, debt-claims, or other rights in respect of which the income is paid.

Effective Date

The treaty applies from 1 January 2019.

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