Alternatives for the Taxation of Undistributed Dividends in Ecuador

Abstract

In Ecuador, the taxable event for income tax on the dividend is the distribution of the profits generated by the company to the individual shareholder. Thus, prior to the entry into force of the Organic Law on Social Transparency, when profits were not distributed, their taxation was deferred and the coffer was undermined. This tax scheme was modified and now the undistributed profits of companies are also subject to income tax. Despite its current “regulation”, this paper analyzes different alternatives applied in other jurisdictions, such as the United States, that avoid the problem of tax deferral and could be implemented in Ecuador. These mechanisms are: 1) the pass-through regime, 2) a tax applied to accumulated earnings, and 3) a regime inspired by the controlled foreign company concept. An analysis of their potential application in Ecuador has made it possible to evaluate and grade these alternatives according to their feasibility. Thus, it has been concluded that a tax on retained earnings is the alternative that best regulates the issue, followed by the creation of a regime inspired by the controlled foreign company and, finally, the pass-through regime.