A tree or shrub occurs in Ecuador and Peru where it occurs at 3,150–4,550 m elevation. The population of this species is severely fragmented. It has an extent of occurrence (EOO) of 408,313 km² and area of occupancy (AOO) of 104 km², both are inferred to be declining. It is found within protected areas throughout its range. At many of its 19 locations, the species grows in habitats that are strongly affected by human activities including grazing and burning and there is a decline in habitat quality. The population trend is inferred to be declining, and there are inferred declines in the number of locations and number of mature individuals. It is assessed as Endangered B2ab(i,ii,iii,iv,v).

Originally considered endemic to Mount Chimborazo, Bolívar Province in the Ecuadorian High Andes, this species also occurs in Peru. Polylepis microphylla occurs in small, isolated subpopulations in the central Ecuadorian Andes on the slopes of Volcán Chimborazo, in northwestern Peru in the high Andes of Cajamarca, the Cordillera Blanca and the adjacent Cordillera Huayhuash at the boundaries of Ancash and Lima and in Arequipa and Cusco (Boza Espinoza and Kessler 2022). Records from Cusco seems as it might represent a historical transplantation.

One subpopulation has 100 individuals in an area of 6 km². The two forests patches in Ecuador form a single genetic population (Bastidas-León et al. 2021). The population trend is inferred to be declining. It occurs in small and isolated subpopulations that are severely fragmented.

A cloud forest shrub or small tree of 3–8 m in height. It grows mainly in arid zones at 3,150–4,550 m elevation where it usually forms small groves (Boza Espinoza and Kessler 2022). In the Cordillera Huayhuash, extensive stands with trees about 3–5 m tall can be found. The subpopulations in Cusco are close to Incan ruins and might represent historical transplantations (Kessler and Schmidt-Lebuhn 2006).

Cattle grazing is a threat to this species in the vicinity of the village of Achupallas in the province of Chimborazo (Ridback 2008). Many subpopulations are strongly affected by human activities, such as burning (Boza Espinoza and Kessler 2022).

There is no information on use or trade for this species.

In Peru, P. microphylla occurs in Huascarán National Park and Cordillera Huayhuash Reserved Zone (within Huayllapa Private Conservation Area) in Peru (Boza Espinoza and Kessler 2022). In Ecuador, it occurs in El Reserva de Produccion Faunistica Chimborazo and Sangay National Park. This species is not recorded in ex situ collections, but attempts at ex situ conservation have been made in the past (Palacios and Alfonso 2006, BGCI 2023). The species was categorized as Vulnerable (B1+2c) in the World List of Threatened Trees (Oldfield et al. 1998). Lately, based on its restricted distribution in Chimborazo, P. microphylla was categorized as Critically Endangered B2ab(iii) in Ecuador (León-Yánez et al. 2011, Tejedor et al. 2014, 2015). In Peru, where it is more widespread, P. microphylla was categorized as Endangered (SERFOR 2006).