Up until December of 2016, capital gains taxes in Ecuador were quite reasonable. Rural properties were entirely exempt and urban properties were taxed at 10%, with half a percent reduction each year, meaning after 20 years of ownership urban properties could also be sold free of capital gains.
In May of 2015, Former President Rafael Correa proposed a set of new tax laws, including proposals for new capital gains and inheritance taxes that could only be described as wealth confiscation.
The capital gains tax, justified as a way to stop speculation, proposed to tax gains on real estate at 75%. The inheritance law proposed to tax inheritances above $34,500 at a similar rate.
The backlash against the proposals was massive and swift. Nationwide protests erupted overnight and forced the administration to shelve the proposals indefinitely.
Then, in December of 2016, with Rafeal Correa’s approval rating in the 30’s and in the last days of his presidency, just prior to the holidays and upcoming presidential elections, Correa quietly announced he would be sending the capital gains legislation (La Ley de Plusvalia) to the Assembly for a vote.
On December 27th, 2016, between Christmas and New Years, with the country distracted by the holidays and upcoming elections, the Alianza Pais controlled Assembly passed the legislation.
Below is an outline of the legislation and a few thoughts on potential ramifications.
'Extraordinary' gains on real estate sales for any property purchased on or after December 30th, 2016 are taxed at 75%.
Despite promises to exempt builders, the law was ultimately passed without the exemption. The law does however exempt direct foreign investment, approved NGO’s and projects of ‘social interest’.
Changes of ownership resulting from; inheritance, donations, sweepstakes, state sales and company profits distributions are also exempt.
To calculate the tax, you take the purchase price, plus improvements (all of which must be proved via a tax receipts (Facturas)) to come up with a cost basis. Then ad the value of 24 basic salaries (2 years of minimum wage, currently $9,000), which are not taxed and a compounding interest rate equal to the rate you would receive keeping your money in a CD at a financial institution, currently 7.37% annually – also not taxed and that gives you the full amount exempt from the tax.
The sale price, minus the cost basis, 24 basic salaries and annual interest rate are then taxed 75%.
The SRI (Ecuador's tax collection agency) provides a calculator to calculate potential gains.
The affects of this law are yet to be felt. Most Ecuadorians are not even aware of what’s in it. And since so few sales have been realized for properties that were purchased after December 30th, 2016, the affects will not be fully understood for some time.
The ramifications on real estate value, the construction industry and the country could be significant.
The biggest blow will be to developers and investors as the turn around period from a projects initiation to realization is short – that being said there are work-a-rounds for developers which I expect to become common practice.
For people looking to purchase property and hold longer term, the effect will be significantly less.
For example, under current calculations, should you purchase a piece of land for $100,000, build a $50,000 house and hold it for 5 years and then sell at $250,000, you would pay taxes of $20,215.90 or 20.22% of profits.
There is a common belief among Ecuadorians that the law will be repealed, however to date the recently elected successor to Rafael Correa, Lenin Moreno has made no signal that any change is forthcoming.