“Back to back” credit operations

In Executive Decree 617 published on December 20, 2018, in the fourth general provision it states that for the operations considered as “Back to Back” all the limits and obligations generated by the operations with related parties and regarding the deductibility of The expenses and treatment of withholdings will obey the characteristics of the person who originally loaned the funds. The standard states the following:

“Taxpayers who, as debtors. carry out credit operations called “back to back”, with respect to these operations they must comply with all the regulatory provisions corresponding to operations: between related parties including the obligations to report on this type of operations, the deductibility limits established with respect to external credits granted directly or indirectly by related parties and the transfer pricing regime.

When the economic situations or relations that actually exist or are established by the interested parties, regardless of the legal forms used, delimit the generating event to obtain interests by a related party of the recipient of a credit, said related party having provided the funds necessary to a financial institution prior to the latter granting the credit such a recipient of the credit must make the respective mention of income tax to its related party. For this purpose, in order to identify the fulfillment or not of the conditions legally established so that the respective interest is deductible and not subject to income tax in Ecuador, the withholding agent must consider the situation of his related party, which originally provided the funds, and not that of the financial institution.

The Tax Administration must adapt its procedures to what is established in the Law and in this General Provision. in order to avoid evasive or elusive behaviors through this type of operations and promote transparency in its execution.

It should be noted that on June 5, 2018, the SRI Circular NAC-DGECCGC18-00000004 was published, which indicated that interest expenses from Back to Back operations were not considered as deductible for SRI purposes.

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