In 2018, the Ecuadorian National Assembly passed additional incentives in the Law of Productive Development, Attraction of Investment, Employment Generation and Fiscal Stability (“Investment Law”) to improve the incentives and conditions established in the Organic Code of Production, Commerce and Investment (“COPCI”).
As a current policy and through the Investment Law, the Government promotes investors to enter into investment agreements for a period of 15 years, in which the Ecuadorian Government guarantees legal stability, the partial or total reduction of customs duties, grants ISD tax exemption for the import of capital goods, raw materials, and payment of dividends, amongst other incentives.
Purpose of the Investment Law
The purpose of the Investment Law in Ecuador is to increase productive investments. This law also seeks to promote and encourage the production of greater added value, establishing the conditions to increase productivity, and promote the transformation of the productive matrix.
The COPCI has stated that amongst other objectives, the following:
- Transform the productive matrix of the country to one with a greater value with enhanced services based upon innovation, eco-efficiency and environmental sustainability,
- Promote national production, trade and sustainable consumption of goods and services,
- Generation of employment,
- Generation of a comprehensive system for innovation and entrepreneurship,
- Encouragement and regulation of all forms of private investment in productive activities and services,
- Regulation of productive investments in strategic sectors of the economy and in accordance to the National Development Plan,
- Promote the productive development of the country.
The current Government in accordance to their foreign policy, pushed through the National Assembly a law that enhanced and improved the conditions established in COPCI. Through the Investment Law, the Government seeks to boost the economy, to promote investment and employment, as well as guarantee a fiscal sustainability through the adjustment of the legal framework that governs the economic, financial and productive activity of the country.
With this law, Ecuador has given legal certainty and incentives to national and international investors as a mechanism to promote investments with the sole objective to increase the country’s competitiveness and employment.
Who is this Investment Law directed to?
The benefits of this law are addressed to all private investors without any difference on nationality. There are differentiated levels of benefits and requirements, depending the type, amount and targeted investment.
Private investments are also considered in the investments involving the public sector as a party such as in Joint Ventures, Private Public Partnerships and similar, could also take the benefits of this laws.
Are there real benefits for the investor?
Yes. This is the first effort that effectible provides sensible benefits to the investor. Also, the Investment Law provides different solutions in accordance to the type of investment, size, needs of the type of business, however these benefits cannot the applied to all investments.
The Investment Law and COPCI benefits are directed to those investments that meet the criteria of new productive investments in prioritized sectors of the economy. The differences in requirements depend on whether the target business is small (just one requirement) or a large business, which shall meet at least two of the required conditions.
There is also a difference in benefits depending on the location the new investment will be made. The new investments located on the cities of Quito and Guayaquil are limited to 8 years of tax benefits, new investments located outside these cities are entitled to 12 years of tax benefits, while and new investments business located in borders with Colombia or Peru can have up to 15 years of tax incentives.
The benefits, if granted, will be contained in an investment contract that must be executed with the Ecuadorian Government. There could be, concurrent applicable benefits from other laws but those benefits will not be included in the investment contract, as those are specific form other laws, in the fields of tourism, mining, aviation, marine etc.
The fundamental benefits of the Investment Law are:
- Income tax reduction from 25% to 15% and exceptionally reduction to 0% income tax for the applicable term mentioned above.
- Remittance Currency Tax (“ISD”) exception for the payment of imported items.
- Tax stability for up to 15 years of the current applicable income tax rate. This provision does not provide stability for municipal, customs nor VAT Taxes.
- Temporary exception of custom duties may also be granted for specific projects.
- International Arbitration is made available for investors should one chooses to request an international venue for possible solution of discrepancies between the parties, such as possible cases of breach.
It is important to remember that provisions for the payment of 15% profit sharing participation are not affected and will continue to apply as per the general provisions.
In summary, the benefits are effective and do not require further approvals beyond the signing of the investment contract.
Are there counterpart commitments?
Contrary to prior laws that imposed step commitments, the current law just requires the investor to comply with the commitments proposed on its application. Therefore the main obligations are those related to making the US$ 1,000,000.00 investment required and any other condition contained in the application, such as, the increase the total number of employees in at least 3% of its current average payroll, implement environmentally friendly technology, or such commitment proposed in he application.
The Government has not requested to include other obligations than those self-imposed by the applicant of the benefits, which makes this new effort appealing to investors.
What happens if the commitments are not met?
If the contractual commitments are not meet by the investors, the COPCI states the Government may terminate the contract, revoke the tax benefits granted and will pursue to collect all taxes that were not collected as a result of the application of tax benefits with their corresponding interests.
What is the application process?
The application process has been made easy; the company only needs to file the application form and the corresponding annexes depending on the amount and type of inversion to be made.
Who can apply to this process?
In the last year, Ecuador’s governmental policy has been directed to attract investment to the country and hence nowadays the country presents great opportunities for investors. The Ecuadorian Constitution establishes equal conditions and non-discriminatory treatment for both, local and foreign investors, with regards to the administration, operation, expansion and transfer of their investments, granting them the same protection and security for their activities in the Ecuadorian territory.
Therefore, any local or international investor, in order to apply to an investment contract must comply with the following general requirements:
- A new productive investment in prioritized sector, basic industry, strategic sectors or in commercial activities that generates added value.
- The investment to be made should at least be of US$1,000,000.00.
- Increase the total number of employees in at least 3% of its current average payroll.
- Economic Transparency.
What is the different between new and old companies?
There is a slight difference to the metrics which will be used to be analyzed the new company as for the old companies who apply for an investment contract. For example, new companies will be categorized and analyzed after the first fiscal year in which they generate operating income, and they will be required to gradually generate net employment in at least the minimum amounts determined for each category.
Can benefits of other laws apply in addition to the ones mentioned above?
Yes, in our experience, we have been able to combine applicable benefits from other laws (ie. Lefortac for the importation of new vessels) besides the benefits applicable in accordance to the COPCI and the Investment Law.
Do you need to enter into an Investment Contract?
Yes, in order to apply the benefits granted by COPCI and the Investment Law an investment contract with the Ecuadorian Government, an investment contract must be negotiated and executed.
What are the benefits of an Investment Contract?
In accordance with the dispositions of the COPCI and the Investment Law and its regulations to attract new investments, an investor in Ecuador can access the following benefits:
- Tax stability conditions and tax incentives required for the development of the new investment project.
- Tax incentives may vary depending on the sector and industry:
- General incentive: Tax incentives that apply for all investment projects executed in the country regardless the sector and industry in which the investment is made.
- Sectorial Incentive: tax incentives established for sectors that contribute to the change of the energy matrix, the strategic substitution of imports, the promotion of exports and others.
- Incentives for Depressed Zones: the incentives for these zones include a 100% deduction of the cost to hire new employees for a period of 5 years, besides the incentives applicable to general investment projects.
- Incentives for Public Projects to be developed through a Public-Private Association: Income tax and ISD exemptions are granted for this type of investments as well as payment facilities for the payment of taxes abroad, amongst other incentives.
- The investment agreement can be negotiated for a period of 15 years and may be extended for a period of 15 years more. Tax exemptions granted will apply for the same period of validity of the investment agreement.
- The investor and the Ecuadorian State can agree to a national or international arbitration clause. The rules applicable to arbitration may be those of the UNCITRAL Arbitration Rules administered by the Permanent Court of Arbitration of The Hague, the Arbitration Rules of the International Court of Arbitration of the International Chamber of Commerce with headquarters in Paris (ICC) and the Inter-American Commercial Arbitration Commission (CIAC).
The aforementioned incentives, especially in relation to the income tax exemption may be extended for a longer period depending on the economic sector and the location of the investment project:
Can past investment be considered as part of the new investment?
Yes, but subject to meeting certain conditions. Investments made before the respective investment contract is signed and as well as those made after its subscription will be covered by the investment contract, under the terms, conditions and limitations stipulated therein and in accordance with COPCI and the Investment Regulations of the COPCI. Thus, past investments may be covered by the investment contracts however clear evidence that those past investments are directly related and have become part of the new investment is needed. Therefore this issue needs to be carefully reviewed with the Ministry.
Since the promulgation of the Investment Law, the Ecuadorian Government has executed 29 investment contracts, 38 applications are waiting for approvals. The Government has announced the commitment of a total investment of US $ 1.363.195.731,53 by the end of 2019.
Investment Law, article 26 (New productive investments, in accordance with the definitions established in subparagraphs a) and b) of article 13 of the Organic Code of Production, Commerce and Investments, which start from the effective date of this Law, in the prioritized sectors established in the article 9.1 of the Internal Tax Regime Law).
COPCI, article 13 (Definitions.-… a. Productive Investment.- understood as productive investment, regardless of the types of property, the flow of resources destined to produce goods and services, to expand the productive capacity and to generate sources of work in the national economy; b. New Investment.- For the application of the incentives provided for new investments, understand as such the flow of resources destined to increase the capital stock of the economy, through an effective investment in productive assets that allows to expand the future productive capacity, generate a higher level of production of goods and services, or generate new sources of work, under the terms set forth in the regulations. The mere change of ownership of productive assets that are already in operation as well as the credits to acquire these assets does not imply new investment for the purposes of this Code. For the non-tax aspects provided for in this Code, any investment made for the execution of public projects under the modality of public-private partnership is also considered new investment…)
Internal Regime Tax Law, article 9.1 (… economic sectors considered priority by the State: a. Agricultural Sector , b. Forest and agroforestry chain, c. Metalworking, d. Petrochemical and oleochemical, e. Pharmaceutical, f. Tourism, cinematography, audiovisuals and international events, g. Renewable energy, bioenergy or energy from biomass, h. Foreign trade logistic services, i. Biotechnology and applied software, j. Export of services, k. Development and software services, production and development of hardware, digital infrastructure, computer security, products and digital content and online services, l. Energy efficiency, m. Materials industries and sustainable construction technologies, n. Industrial, agro-industrial and agro-associative sectors, o. Strategic substitution of imports and promotion of exports)
COPCI, article 32 (Without prejudice to the civil or criminal actions that may take place, the commission of any of the causes established in the preceding article will generate the revocation of the benefits granted and will give the right for the State to arrange the collection of the taxes that were left behind. receive as a result of the application of tax benefits. The revocation provided for in this chapter will be provided by reasoned resolution of the Strategic Committee for Promotion and Attraction of Investments. The sanctioned investor may judicially appeal decisions that affect him, following the corresponding legal procedures. )
As stated on footnotes number 2 and 3. In conclusion, a new productive investment is any economic contribution that allows increasing the productive capacity of a business or that generates employment.
Maria Elisa Holmes - [email protected]
Jorge Paz Durini - [email protected]witz.com