ECUADOR: An Introduction to Ecuador

In general terms, Ecuador expects to grow its economy in 2023. In particular, the International Monetary Fund (IMF) announced that it expects Ecuador’s economy to grow in 2023 around 3%, in line with other countries in the region, after its review of the economy made in December 2022, when Ecuador successfully finalised an agreement signed with the IMF in 2019, the first one in more than two decades.

Ecuador currently has the second lowest year-on-year inflation in the region, after Bolivia. This economic growth projection and inflation stability, together with the use of the US dollar as currency of legal tender (Ecuador has a “dollarised” economy”) contribute to create a convenient investment environment for both local and foreign investment.

With respect to investment, Ecuadorian law allows local and foreign investors to execute investment contracts with the Ecuadorian State under certain circumstances. These contracts include the possibility to reduce the income tax rate to five basis points, the exoneration of custom taxes and outflow currency tax payable in the importation of capital goods and raw materials, and in certain cases even the possibility to enjoy tax stability during the term of the investment. Investment contracts are executed before a Notary Public in a Public Deed after approval of the State of the investment plan submitted by the investor. The Ecuadorian government recently announced that investment contracts in excess of USD5,000 million were signed in the last couple of years.

Another important aspect to highlight is that since in 2021, Ecuador became, once again, part of the International Center for the Settlement of Investment Disputes (ICSID), a World Bank institution, to allow for international arbitration to be used as a means to resolve international disputes between foreign investors and the Ecuadorian State, thereby encouraging potential foreign investment into the country, which is a major contributor to economic growth and development of Ecuador.

In the international trade front, Ecuador is party to several International Trade Agreements with other countries, including recent agreements with China and Costa Rica, which were concluded at the end of 2022. Currently, Ecuador has reassumed negotiations with the United States; and its agreement with Mexico is stalled, because Mexico intended to exclude certain products (shrimps and bananas) from the agreement, which are Ecuador’s primary private exports. Ecuador announced that it will not sign the agreement if those products are excluded.

During the last few years, Ecuador has experienced significant growth in shrimp export (expected to exceed USD7,000 million in 2022) and certain mineral materials (gold, copper), which in 2023 combined became the third largest export products. Other traditional export products such as cocoa, bananas, flowers and fishery continue to generate significant export income and attract foreign and local investment. In the local market, real estate developments and retail commerce also have attracted significant new investment since the pandemic.

In relation to technology, the pandemic became a major factor that contributed to its growth. Since the pandemic, many services which were only previously provided on-site are now rendered online, which had a major effect on the demand of technology services. Thus, Ecuador has experienced the appearance of new technology and fintech companies, which used to operate in Ecuador without specific regulations, until the enactment of the Fintech Law in December 2022. This new law amended the Organic Monetary and Financial Code, the Organic Law of Entrepreneurship and Innovation, the General Insurance Law and the Securities Market Law, to provide for a legal and regulatory framework for technology and fintech companies to properly operate in the country.

As indicated before, Ecuador has an attractive, unique element that makes it appealing for international investors, which is the use of the US dollar as currently of legal tender. The elimination of foreign exchange risks, coupled with the fact that Ecuador recognises free flow of investment with no restrictions to repatriate profits and investments from abroad, allows foreign investors to freely and directly transfer in and out of Ecuador money without limitation, after paying in certain cases the outflow of currency tax.

On the labour front, Ecuador does not impose restrictions on employee’s nationalities. Thus, a company incorporated under Ecuador laws may freely engage foreign employees, which will be subject to the same legal provisions as local employees. A profit sharing tax of 15% is payable every year to employees, calculated out of company profits.

The Ecuadorian corporate tax regime is 25%, which can be reduced, as indicated before, to five basis points if the investor signs an investment agreement with the State. The corporate tax rate will be increased to 28% if the investor is located in a jurisdiction considered as a tax haven or of low imposition by the Ecuadorian tax authority (SRI for its acronym in Spanish).

On the corporate front, Ecuador has no restriction on ownership of company shares by foreign individuals, and the process to set up a corporate vehicle in Ecuador is relatively straightforward and simple and takes only a few days to complete.

There are different types of corporate vehicles in Ecuador. The most common are:

• “Compañía de Responsabilidad Limitada”, which is a limited liability partnership;

• “Sociedad Anónima”, which is a corporation; and

• “Sociedad por Acciones Simplificada”, which is a limited liability company that was recently introduced into the Ecuadorian legal system (2020) and has quickly become by far the most common corporate vehicle used by new investors and entrepreneurs.

As partners or shareholders of a local legal entity, a foreign investor has certain specific obligations, which include:

• having a local agent to receive notifications regarding obligations contracted locally and lawsuits that may be initiated against the foreign investor in Ecuador;

• providing a list of their direct and indirect shareholders up to the foreign individual beneficial owners; and

• certifying, each year, the legal existence abroad of the foreign legal entities that are partners or shareholders of the local legal entity.

Year 2020 and 2021 saw many significant changes to Ecuador’s Company Law, which have positively impacted the commercial and corporate sector in the country. Among them, the inclusion of the “Sociedad por Acciones Simplificada” discussed above, as well as the inclusion of new protections to minority rights and the inclusion of concepts such as the business judgement rule to protect management decisions from undue challenges, along with greater possibilities to exercise shareholders (derivative) actions to control management excesses.

Other relevant changes to the Company Law include the possibility to maintain a single shareholder or partner in an already existing “Sociedad Anónima” or “Compañía de Responsabilidad Limitada”, in order to keep its legal existence (previously, these types of companies required at least two or more shareholders/partners to maintain their legal existence). This change does not apply to the process of incorporation of both “Sociedad Anónima” and “Compañía de Responsabilidad Limitada”, since both still need to have two or more shareholders/partners for their creation.

The recent changes in the Law also include the incorporation of specific regulation for share premiums as part of processes of raising capital of companies to avoid dilution of existing shareholders, the possibility of having companies with an indefinite term of duration, and the possibility to redomicile companies abroad, among others.

Developments in Corporate Law have not stopped there. Currently, the National Assembly (Ecuador’s legislative body) is analysing new and additional amendments to the Law to continue to promote updated legislation in line with other countries in the region, which include the possibility to incorporate any type of company through private documents (as opposed to through Public Deeds), the possibility to incorporate any type of company with only one shareholder/partner, and changes in the negotiation of participation interests in partnerships, among others.

In regard to data protection, Ecuador recently enacted its own Data Protection Law (May 2021). Even though the Law was enacted in 2021, sanctions for non-compliance of the Law will only start to apply in May 2023. The Data Privacy Law provides for a higher degree of protection on certain categories of personal data, such as sensitive data, data of children and adolescents, health data and data of people with disabilities; and provides for special treatment of these categories of data.

In general, corporate and commercial sectors in Ecuador, just as in every other country, depend on the macro-economic environment and are greatly affected by it; however, improvements in the legislation, including the creation of tax incentives and subscription of international trade agreements, generally have positive impacts on both local and foreign investments. The fact that Ecuador foresees reasonable levels of economic growth in the coming years, and that it has incorporated investment tools such as investment contracts, and has a “dollarised” economy that eliminates foreign exchange risks, has rejoined the ICSID, is actively pursuing new international trade agreements with its main trade partners, has a tax regime consistent with other countries in the region, and is constantly updating its corporate and commercial regime, creates a convenient framework for domestic and foreign investment in the country.