Lay of the Land
The Overall Climate for Foreign Investors
Reports from the Economic Commission for Latin America and the Caribbean show that direct investment grew by 6% in Ecuador from 2013 to 2014, reaching $774 million. Ecuador is committed to promoting international investment by implementing different mechanisms to attract investors. One such mechanism is the Organic Code for Production, Trade, and Investment, which aims to ensure that domestic and foreign investors have legal security and equal conditions for investment.
Organic Code for Production, Trade, and Investment Incentives
– Defer payment of income tax for up to five years by opening the capital of the company for workers.
– Advance on income tax exemption for five years.
– 10% reduction on the income tax rate for amounts reinvested in productivity.
– 100% additional deduction in depreciation expenses for acquisition of cleaner production machinery for the income tax calculation.
Taxes On Foreign Trade
100% additional deduction in depreciation expenses for acquisition of cleaner production machinery for the income tax calculation.
Cash Outflow Tax
– Cash outflow tax exemption for the payment of the principal and interests on foreign loans granted by financial institutions to finance investments stipulated in the Production Code.
Sectoral Incentives: Income tax exemption for five years for income generated in priority sectors and import substitution:
– Metal mechanics, agroforestry, tourism, petrochemicals, fresh, frozen and industrialized food, renewable energy, biotechnology and applied software, pharmaceutical and foreign trade logistic services.
– Basic chemical substances, pesticides and products for agricultural use, soaps, detergents and perfumes, radios, televisions and mobile phones, ceramics, textiles, leather and footwear, appliances.
Income tax exemption for 10 years for income generated in Basic Industries:
– Smelting and refining of copper and/or aluminum, Steel foundry for the production of flat steel, oil refining, petrochemicals, cellulose industry and Construction and repair of naval vessels.
LEGAL FRAMEWORK FOR MININIG ACTIVITIES
Mining is beginning to play a pivotal role in the Ecuadorian economy and the government’s policies are gradually attracting foreign investment. Ecuador’s Constitution and Mining Law establishes that non-renewable natural resources are the property of the state and private entities are allowed exploration and exploitation of mining resources through concessions. The mining activity can be developed in four different volumes: (a) artisanal mining, (b) small scale mining, (c) medium scale mining, and (d) large scale mining. Every concession holder needs two main permits to conduct mining activities; an Environmental License issued by the Environment Ministry, and a Water usage License, issued by the National Secretary of Waters. Also, mining activities could be subject to additional permits; depending on whether they affect patrimonial goods, military camps, highroads, oil installations, or others.
An amendment to the Mining Law made in December 2014 grants private entities located in tax havens the right to participate in the mining industry. This amendment has allowed for the development of several mining projects, and there is a tendency towards greater investment. In 2015, the Ministry of Mines was created in order to prioritize this sector and attract national and foreign investment.
NEW TELECOMMUNICATIONS FRAMEWORK FOR ECUADOR
After a long wait, Ecuador has finally adopted a new legal framework for its telecommunications sector. In effect since February 2015, the Organic Law of Telecommunications offers a new scheme for local operators and anyone wishing to invest in the sector that enables local users to enjoy the technological advances that the 21st century has to offer.
Presently, the main change brought by the new law is the merger of the three entities, which have been traditionally defined as the regulators, into a new organ of legislation, administration, and oversight of operators. As its main objective, the Telecommunications Regulation and Oversight Agency (ARCOTEL) will expedite and coordinate the management of the sector. Additionally, the new law redefines the scheme for enabling titles by introducing the “Registration of Services,” which will facilitate the granting of concessions and permits for various services. Enabling titles will be granted not only for providing services, but also for setting up and operating telecommunications networks. Individuals and companies who are residents or domiciled in the country may be granted the use of the radio spectrum. Although the new specific rules for each one of these activities have not been entirely defined, positive changes throughout the sector are expected.
Antitrust regulation in Ecuador is relatively new considering that the Organic Law for Market Power Control and Regulation (LOCPM) was enacted on October 13, 2011. This law created the Superintendence of Control of Market Power, the governmental authority in charge of enforcing the LOCPM. The LOCPM establishes an ex ante system for requesting authorization for mandatory economic concentration operations. According to the LOCPM, Mandatory Economic Concentration Operations are: Operations where the total turnover exceeds 2,000 basic salaries ($70,800,000 for 2015); and operations where economic operators that are engaged in the same economic activity obtain a market share of 30% or more.
According to the LOCPM, the Superintendence of Control of Market Power can authorize, condition, or deny the operation. To assess the possible effects of the operation in the Ecuadorian market, the Superintendence of Control of Market Power will bear in mind the following criteria in order to resolve:
1. The condition of competition in the relevant market.
2. The degree of market power of the economic operators involved and its main competitors.
3. The necessity of developing and mantaining free competition for the economic competitors in their specific market, considering its structure and potential competitors.
4. The main effect of the economic operation in the market, if it increases and strengthens market power or if it diminishes, distorts of obstaculizes free competition.
5. The contribution the operation could provide to:
a. the improvement of production or commercialization systems.
b. the promotion of technological or economic advancement of the country.
c. the improvement in the competitivity of national industry in international markets.
d. the national consumer welfare.
e. to counter possible restrictive effects on competition.
f. divirsify the capital stock and worker participation.
Mergers & Acquisitions
Ecuador is an attractive market for mergers and aquisitions since its currency is the US dollar and this diminishes exchange rate risks; additionally there are several alternatives to implement merger and aquisition transactions such as stock purchase transactions, asset purchase transactions, joint ventures, corporate restructurings, among others. Additionally, Due Diligence processes are becoming more efficient due to the ability to obtain good standing certificates online from the main regulating entities.
The Ecuadorian law regulates certain cases in which the target company must request an authorization or must notify the competent authorities in order to be able to transfer its shares.
Regarding the applicable tax regimen in stock purchase transactions, an important modification was implemented on December 2014. The capital gain on the transfer of shares is subject to income tax in accordance with the Act of the Production Incentives and Prevention of Fraud enacted on December 29, 2014 which reformed the Ecuadorian Internal Tax Regime Act. This tax is applicable to the vendor, however the mentioned law provides that in case the vendors do not pay the correspondent tax, the company from which the shares are being sold will be responsible for the payment.
Most Relevant Recent Labor Reforms
– Fixed Term Contracts Removed: The possibility of fixed term hiring is removed, and replaced as the standard mode for hiring by the indefinite term contract. The implication of this reform is the inability of the employer to terminate the employment contract without incurring in the severance costs established by law.
– Employee Hiring Per Project Modified: The Per Project Hiring method has been amended, increasing severance costs towards the employer.
– Considerations of the Reform:
· Once the Project is finished, the employee is entitled to receive termination severance.
· The employer is obliged to hire the same employee for any future projects.
· In case the same employee or employees are not hired for future projects, they will be entitled to sudden dismissal severance.
– Cap on Profit Sharing in favor of Employees: Profit sharing for employees is capped to 24 basic salaries or the equivalent of $8,496 per employee in 2015.
– Additional Remunerations Modified: There are two additional remunerations granted by the Ecuadorian labor legislation, the 13th and 14th salaries. The recent reform obliges the employer to pay on a pro rata monthly basis instead of lump sums. Employees may request maintaining the prior payment method.
– Ineffective Dismissal Installed: The dismissal of women at any stage of pregnancy or nurture is consider as ineffective, and therefore not allowed.
– Wage Gap Limit Installed: The Ecuadorian state reserves the right to establish the boundary between the maximum and minimum remuneration within a company, any amount exceeding the maximum compensation will not be deductible for purposes of payment of income tax. The wage gap could vary depending on the industry and any other particularities the governing organ determines as applicable at any particular time.
The recent enactment of the General Code of Procedures is expected to rebuild a judicial system that has been characterized by processing delays, unpredictable judgments, and limited access to courts. The reforms aim to improve its efficiency and provide investors with a judicial system that will facilitate contract enforcement.
Furthermore, in the midst of political debate, the National Assembly will be debating the adoption of two very controversial tax bills that increase taxes on inheritances and capital gains. President Rafael Correa announced he would temporarily withdraw these fiscal measures from the legislature but there is uncertainty on whether the withdrawal will become permanent.
Overall, the investment climate shows an upward tendency and Ecuador is determined to position itself amongst Latin American Economies—2016 will be a crucial year for the Ecuadorian economic and legal panorama.