Associate Paz Horowitz Abogados
When making an investment, three main factors should be analyzed: return on investment, the risk and the period for return on investment. This is, what we gain, what we could lose and the time in which we recover the invested value and generate profits.
Starting with this concept, and highlighting that natural essence of the investment is systematized through the risk assumed by the investor; it is important to take into account that from the hand of the investments, legal and tax obligations are created in relation to such risk. On a number of occasions, the nature of the obligations acquired by the investor, and the fear that they generate may overcome the future benefit that the investor acquires.
Among the destination countries with high demand to invest despite the existing risk, Ecuador belongs to one of the most attractive jurisdictions to make a productive investment, because the Law to Promote Development and the Organic Code of Territorial Organization, grant incentives to investors such as exemption from currency remittance tax and income tax of up to 15 years.
Although Ecuador provides these incentives through current laws and regulations, the greatest concern of investors lies in the minimum amount required as a qualified productive investment, as well as the legal stability of such incentives; and is here, where our country, in addition to the established laws and regulations, has shielded this concern by entering into investment contracts with investor.
Investors can qualify their productive investments and make use of the incentives proposed in current legislation provided that the following parameters are met: i) The investment amount must be at least US$250,000.00 on the first year, and in total US$1,000,000.00, and in addition, previous investments made since August 21, 2018 are attributable to such amount, provided that it is shown that the previous investments are part of the investment project, which with respect to the investor’s financial flow, is an interesting advantage; and ii) that mainly generate net employment which is beneficial for the country.
Investment contracts are contractual commitments entered into by the Ecuadorian state and the investor, through which an express and binding legal stability is obtained, through a legal stability clause, which achieves certainty of compliance in the application of the tax regime and the exemptions provided for in the years applicable to investment which can last up to 15 years.
Regarding the subscription of investment contracts with the Ecuadorian state, initially it was expected that such incentives would be applicable until August 21, 2020; however, through Presidential Decree No. 1130, issued on August 19, 2020, this term has been extended to 24 months; that is, until August 21, 2022, which generates a significant time for new investors to have these tax benefits that facilitate productivity, in relation to the risk to be assumed.
Ecuador is a productive country enriched with economic sectors prioritized for investment, so as long as tax incentives exist, economic recovey and reactivation of net employment will increase, assisting government policies in fighting the economic effects of the pandemic.