Ecuador’s New Immigration Law: Snowbirding Just Got Easier

Ecuador’s National Assembly voted unanimously on January 5, 2017 to pass a new immigration law called “La Ley Orgánica de Movilidad Humana.” The law (number 60 of  the 2013-2017 legislative period) has not yet been published in the official registry so we haven’t yet been able to access the full 90 page version. This post will summarize what information we have been able to gather until the law is officially published.

Ecuador National Assembly

Ecuador’s National Assembly passed the new immigration law on January 5, 2017. Photo from El Telegrafo

Some broad-sweeping points of this new law (as translated from the opening arguments from the head of the Committee who helped draft  the new law) are that it will recognize the equality of rights between Ecuadorians and foreigners and emphasizes that no human being can be qualified as illegal in Ecuador because of their migratory status. The new law largely addresses Ecuadorians living abroad, Ecuadorians returning home after living abroad, and refugees, stateless persons, and victims of trafficking.

However, there are also changes that will affect foreign residents in Ecuador, either as tourists or permanent residents.

My in-laws have been enjoying their Ecuadorian residency since 2012.

My in-laws have been enjoying their Ecuadorian residency since 2012.

A notable change that has implications for foreigners is the extension of a tourist visa from the previous 90 days to 180 days. This “tourist visa” is simply the stamp you receive in your passport upon entering the country. This extension for up to 6 months is great news for folks who want to split their time between living in Ecuador and their home country (grandparents, snowbirds, and many others will no doubt celebrate this change!). Previously, acquisition of another visa was required to extend one’s time in Ecuador beyond 90 days (for example a 12-IX visa which is fairly costly and can be time-consuming). There is apparently the option now to also obtain a special tourist visa that would be good for up to 1 year (but which will be limited to using once every 5 years).

And for foreign residents of Ecuador who are excited about exploring other regions of South America, they will now be able to do so as part of the Union of South American Nations (UNASUR) by only presenting their Ecuador ID card (“cédula”) instead of being required to show both their passport and cédula.

Another significant change is that proof of health care insurance will be required for tourists entering Ecuador. It will be interesting to see how this rule is actually enforced and applied; however, this change will NOT apply to foreigners who are permanent residents in Ecuador.

Once we have access to the public record of this new immigration law, we will add the link here.

Information Sources:

New Ecuador “Capital Gains Tax” Explained

The Ecuadorian government just passed a new law titled “Tax on Speculation on the Value of Land” (“El Impuesto a la Especulación sobre el Valor de las Tierras”) which takes effect now in the new year (2017).  This law has been referred to as “The New Capital Gains Tax” or the “Ley de Plusvalia”.  The concept behind the creation of this law is to prevent a future speculative bubble in real estate prices (which many of us from the US can attest might be useful).

For retirees who plan to live here for 3+ years, investors who plan to own and rent over a 3+ year period, or for those who buy land and build a home, this new law will generally save them quite a bit of money as fairly substantial gains can be realized tax-free.  Even those purchasing relatively inexpensive lots in the $39,000 range and flipping the land in less than a year can receive up to a 22% return on investment before they would have to pay a single cent of Capital Gains or Appreciation Tax under the new law.

For those planning to buy large pieces of land to flip over a short time period without making improvements… this tax is meant to make you think twice and advice from a lawyer on how best to structure your purchase and sale is recommended.  Creative short term investors will still find solutions such as buying and selling “purchase options” on a property, transferring their rights via a “promise of sale agreement”, or by creating development partnerships with project developers to be paid upon completion and final sale of the developed property.

Whether or not this new law will actually stick after the presidential elections in February remains to be seen but, not surprisingly, various interpretations of the law are being spun by different parties for their own interests.  This is especially the case as election day nears in Ecuador.

The purpose of this post is to provide you with a detailed, cut and dry summary taken directly from the government website and includes a translation of their sample calculation.  This is the scoop on the new tax law minus the sensationalism.

capital-gains

The “sensational talking point” of the new law is that sellers will be taxed 75% on their “illegitimate” capital gains. What the whaaat?!?  That was our initial response as well. But let’s take a closer look.

If you purchased your Ecuador property prior to 2017 when the law goes into effect, this new capital gains law will not apply to you when you sell.

For properties purchased in 2017 and beyond (assuming the law remains in place), here are some standards used for determining the basis for the new capital gains tax:

  1. There is a standard allowance of $8,784 of profit that is not taxable on any purchase and sale over any time frame.
  2. There is an allowance of 7.52% compounding annual appreciation that is not taxable and that appreciates on the total of your purchase value PLUS improvements.

Let’s take a look at the example provided by the government website (see our translated image below). For this example, a property is purchased for $85,000 in 2017 and sold for $135,000 in 2020.  Property tax (“Plusvalia”) due at the time of sale would only be $1,437.72, not 75% of the total difference in purchase and sale price. In fact, the capital gains tax for this example is actually less expensive than what it would have been based on the previous law ($2,975 versus $1,437).

Let’s find out the specifics for how this new capital gains tax gets calculated.

  • Purchase Price in 2017 of $85,000
  • Sum of renovations, improvement costs, etc. = $15,000
  • Initial investment ($100,000) plus interest compounded at 7.25% over 3 years = $124,299
  • Plus a set profit allowance of $8,784 brings us to a total NON-TAXABLE property value of $133,183.
  • Sales price in 2020 is $135,000
  • Difference between the sales price of $135,000 minus the non-taxable property value of $133,183 is $1,917.
  • 75% of $1,917 is $1,437.72.

plusvalia

The government provides a capital gains calculator here. It should be noted that the property value used for calculating capital gains is the amount shown on the property title (“escritura”).  In many cases, the property value on the title is the municipal value, which tends to be significantly lower than the actual purchase or sale price.  It’s worth discussing options with your accountant or lawyer prior to sale to make sure that you are making the best decision for your given situation.

So will this new law affect foreign investments in Ecuador?

capital-gain

The new law will discourage those looking to do relatively large, short-term (less than 1 year) flips with no investment in improvements and who seek to earn significantly more than the standard tax-free profit allowance of $8,784.

The new law will actually tend to benefit most others, in particular, those who own their property for any length of time.  Property value plus money spent on improvements can appreciate at a rate of 7.52%, compounded annually, tax-free.  The accumulated compounded appreciation is above and beyond the automatic $8,784 of allowable tax-free appreciation.  Based on the 7.52% compounding interest rate, the property can double in value over 10 years and the owner would pay ZERO in capital gains tax or “Plusvalia” upon sale.

The new law also does not apply to the first sale of a property. In other words,  those who build their own homes (either as individuals or companies), or develop their properties will be completely exempt from paying capital gains tax when they sell their homes.  That means that if you purchase a beachfront lot at a great price and build a home, you will pay zero capital gains tax upon the sale of that property.

In addition, there are no capital gains collected on the transfer of a property as a result of an inheritance, prize winnings, or donations. There is also a statement in the new law that foreign institutions and international organizations are exempt from paying capital gains, something warranting further investigation.

Overall, the law allows for solid tax-free gains via property appreciation and should help to limit the speculative appreciation of prices.  While this new law may temper gains from short-term, high-value property flips, it should also prevent the formation of a real estate bubble that would leave buyers underwater.

Perks for Being 65 and Over in Ecuador

Ecuador was ranked as the #1 retirement destination in the world in 2014 and again in 2015 (and #2 in 2016). Apart from the great weather, inexpensive cost of living, and a host of other attractive advantages, Ecuador also boasts some great perks for people aged 65 and over.

beach retirement

Photo from the US News and World Report, “The 5 Best Places to Retire on the Beach in 2016.”

While government-mandated incentives for people of “tercera edad” (the equivalent of “senior citizens”) are geared towards its own citizens, foreign residents are afforded the same rights as nationals so all of these advantages apply to expats with Ecuadorian residency.

 

Here are some of the benefits you are eligible for as a senior citizen living in Ecuador:

No Waiting in Lines

Senior citizens automatically may go to the front of lines. Isn’t that great? The same applies to pregnant women and women with infants in their arms (which has been quite handy in my case!).

50% off Certain Forms of Transportation

This discount applies to public service transportation via buses and flights. My in-laws usually have to “remind” the money collector on local buses to get their 50% discount: “Disculpe, soy de tercera edad.” (“Excuse me, I’m a senior citizen”).

For flights, you must purchase your plane ticket at one of the in-country agency offices (Avianca, Tame, Copa). Unfortunately, you are not able to get the senior discount if you make your purchase online. Even if the tickets are on sale, you are eligible for the discount. The discount is NOT applied to taxes and fees.

When making your reservation you will need to show your cedula (the national ID card that you will receive once you are a resident).

It’s worthy to note that these flight discounts include trips to the Galapagos as well as round trip international flights initiating in Ecuador.

Note: This discount does NOT apply to other forms of transportation such as taxis, rental vehicles, boats, and trains.

Discount

Your 50% discount includes airfare to the Galapagos.  As residents (of any age) you will also enjoy $6 park admission compared to $100 for non-residents.

 

50% Off Utility Bills and Free Landline Telephone Service

Senior citizens are eligible for discounts on their electric, water, and landline telephones. To sign up to receive the discount, you must go to the service provider and show your cedula when you set up your account. The discount will then be automatically applied to your future monthly bills with the following usage limits:

  • 50% off electric on one electric meter up to 120 kWh/month
  • 50% off water up to 20 cubic meters/month
  • Free basic landline telephone services on one landline (does not include long-distance calls and other services)

If you exceed any of these monthly limits, you will still receive the discount up to the specified limit and then you will pay 100% on the excess consumption.

You may receive this benefit as a renter as long as your name is on the utility bills.

 

50% Off Entertainment Events

Folks who are 65 and over also receive 50% off tickets for cultural and sporting events, including movies. Again, you will likely be required to present your cedula as proof of age and residency status.

Quito-FootballFlag

Attending a game of soccer (“fútbol”) in Ecuador is an experience to be remembered!

 

Reimbursement of Sales Tax

Senior citizens are eligible to receive an reimbursement of their sales tax. Ecuador’s sales tax on most goods and services is 12%. It is called IVA (“impuestos de valores agregados”) and is the equivalent of “value-added tax” or VAT. You will see this IVA charge added to your restaurant, grocery, hotel bills, etc..

There is another sales tax, ICE (“impuestos de consumos especiales”), whose value varies significantly, from 10% for soft drinks to 300% for firearms.

Senior citizens are eligible to receive a reimbursement of their IVA and ICE; for 2016 the maximum annual amount is currently $1,830.

Seniors can submit their reimbursement forms online and receive their monthly reimbursement in a matter of days as a direct deposit to their Ecuadorian bank account.

Senior citizens are eligible to get sales tax back up

Senior citizens are eligible to get their sales tax reimbursed each month for their food, housing items, clothing, transportation, communication, and cultural and sporting events.

To set up your account with the SRI (the equivalent of the IRS), you are required to have a cedula, a copy of your Certificate of Visa Registration (“Certificado de Empadronamiento”) and proof of an Ecuadorian bank account in your name. When you register, you will be given a pin to access the website. Your receipts (“facturas”) must be in your name with your cedula number. Details can be found on SRI’s website (in Spanish).

Note: If you are renting, you shouldn’t be charged IVA. Nor are you charged IVA for purchasing property. You do need to pay IVA if you rent out a space for commercial use.

 

Reduction of Income Tax

Income tax rates in Ecuador are based on one’s annual salary. This tax is paid when an individual’s net yearly income exceeds a certain limit and is called the “Impuesto a la Fracción Excedente.” For people over 65, the minimum income limit is doubled. For example, the minimum limit for 2016 is $11,170. In other words, senior citizens with a yearly income under $22,340 will not be required to pay any income taxes.

 

Exemption of Municipal Taxes

When selling property, the seller is typically responsible for paying a municipal capital gains tax called “Alcabalas.” Senior citizens have the advantage of being exempt from paying alcabalas for the sale of a property valued at $183,000 or less (the equivalent of 500 times the monthly minimum wage, which for 2016 is currently $366/month). If the property value exceeds this amount, taxes are paid on only the excess.

An interesting case study to be aware of is the example of a property owned by spouses, one of whom is 65+ and the other is under 65. According to Ecuadorian law, the property is automatically owned equally by each spouse, and thus each spouse in theory is responsible for paying 50% of the acabalas at closing. However, according to law, the 65+ spouse would be exempt so the actual cost of this tax would be half of the declared amount.

My in-laws have been enjoying their Ecuadorian residency since 2012.

My in-laws have been enjoying their Ecuadorian residency here on the coast since 2012.

 

Note: This post was created in April 2016 and any information provided here may be subject to change!

Bringing in Goods through Ecuador’s Airports Tax Free

As you make your travel plans to Ecuador, it’s important to be aware of current laws regarding what is allowed to be brought in duty-free to avoid paying hefty import taxes.

Below is a synopsis of duty-free items that can be brought in through airport customs. More information is available on Ecuador’s Customs website page for international airport travelers.

Ecuador customs

Summary of tax-free items that can brought into Ecuador, some with restrictions

 

If you bring in merchandise that is not considered to be a personal item and its commercial value is greater than $500, you will be required to pay import taxes at Customs in the airport.  The amount due is calculated based on the commercial value of the good plus the cost of freight (equivalent to  $ 1.50 per kilogram) plus the insurance value (calculated as 1% of the commercial value).

We recently learned about paying import taxes at the airport firsthand when Tom brought in a drone he had purchased in the US so we could capture aerial footage of Ecuador’s coast, properties and construction projects.

Airport customs officials determined that the drone was valued at over $5o0 and would not consider it to be a personal item despite Tom’s initial attempts at friendly persuasion. They asked Tom if he possessed a certified letter demonstrating that he was a professional who required use of a drone. He didn’t so they proceeded to move him over to an adjacent office to calculate the import tax due. They looked up the retail value of the drone from the internet. Their value nearly coincided with what he actually paid.

Here’s the breakdown of what was charged: the base import tariff (“arancel advalorem”) was determined to be $573.80. Plus, there were two separate taxes charged: The first tax was $14.35 to FONDINFA, a fund supporting infant development. The second tax was the IVA (Ecuador’s standard value-added tax) which came to $414.86. The grand total due was $1,003 or a whopping 35% of the retail value (ouch!). They gladly accept cash or credit cards.

Some insights gleaned from the experience: In this case, the value estimated by customs was pretty close to what we actually paid, but to be safe, it would be wise to bring in your own receipts to avoid being overcharged. Tom could have tried to fight their conclusion that the the drone was not for personal use and he could have filed an official complaint to try to avoid paying the tax. However, this would have required him to leave the drone in the Customs official’s care until the case was resolved. Never, ever a good idea! So, take your chances! In retrospect, Tom could have bought the same model here in  Ecuador for about $600 more than what he paid in the US. However, he was banking on the drone being considered a personal item in a similar manner that high-end digital cameras would be considered personal regardless of their cost.

VIDEO – Intro to obtaining your Ecuador resident visa by Dr. Miguel Andrade

We recently sat down with Dr. Miguel Andrade to discuss our options and the services he offers for obtaining a resident visa in Ecuador.  He was nice enough to let us record his explanation so that we can share it with you.  Please take a look at his video and his website http://www.lawyerecuador.com and http://www.baclaw.ec to learn more about his law firm.