1 Give an overview of the country’s economy, its structure and main characteristics, and prevailing government economic policy, particularly as regards foreign investment.
Ecuador has a free market economy, where the government is in charge of regulating activities, and participates with public entities in some aspects alongside with the private sector.
Ecuador’s GDP in 2016 was approximately US$98 billion, with a GDP per capita of US$5,820 (data obtained from World Bank statistics: http://datos.bancomundial.org/pais/ecuador).
In Ecuador’s economic structure, commerce is the main activity with 53.93 per cent of the economic spectrum; manufacturing industries come in second with 10,36 per cent.
The main exports are oil and agricultural products such as bananas, shrimp, flowers, cocoa, tuna.
The local currency is the US dollar.
The government policy is built around constitutional principles of free trade and freedom of association. Certain aspects of the local economy are more heavily regulated for being deemed as strategic sectors.
Foreign investment is welcomed in the country with important legislation being enacted in the past few years to grant incentives to foreign investors. Bilateral investment treaties with some countries are in force, as well as other international agreements that give special protection to such investments.
2 Describe the legal framework and legal culture in your jurisdiction as regards business and commerce.
Ecuador is a unitary country and a civil law jurisdiction with similarities to other Latin American legal systems, all influenced by the French Civil Code tradition.
The political system is based on the Constitution approved on 20 October 2008. The country can be defined as a Presidential Republic.
The public sector is divided into five powers:
- presidency – executive power, public administration, defence, foreign policy.
- national assembly (legislature) – law making;
- judiciary – court system;
- national electoral council – regulation of electoral process; and
- transparency and social control function – appointment of control authorities.
The law-making process falls within the National Assembly’s power. The legislature is unicameral. The President, legislators and the people may present bills before the National Assembly for approval. Law making process requires initial acceptance of the bill by the Legislature Administrative Council and two subsequent debates. Bills need endorsement of at least 0.25 per cent of the registered voters of a jurisdiction. Constitution article 103. If a bill is passed the President has the power to sign it into law, or partially or totally veto it. The National Assembly may accept a partial or total veto, or reaffirm the original version, for which it needs a special majority.
The rule of law is respected and expressly recognised as a constitutional principle (article 82 of the Constitution). There is a culture of litigation, with settlements being less common than in other jurisdictions. In general, for civil, labour and commercial issues the court system is organised at trial level within each canton (every province is divided into one or more cantons that are governed by a municipal council); provincial courts (courts of appeal) have provincial jurisdiction, and the National Court functions in Quito exclusively as a cassation court.
For administrative and tax litigation, special District Courts adjudicate cases on trial level, and the National Court may review cases via a cassation recourse.
The Constitutional Court has jurisdiction over all cases were violation of constitutional rights may be involved and has the authority to overrule judicial decisions if such violations are proven.
In 2015 a complete reform of the civil procedure legislation was enacted in order to change a mainly written litigation system to an oral system in order to speed up processes for all parties.
Administrative control agencies have ample powers to regulate economic activities and to initiate investigations. Some of the most important agencies are: Superintendency of Companies, Internal Revenue Service, Superintendency of Market Power Control, Environment Ministry, among others.
Every decision of a control agency or a public authority may be contested by local or foreign investors at the administrative level and before the courts.
3 What are the main sources of civil and administrative law applicable to companies?
Companies should be especially aware of the provisions of the following local laws:
- the Companies Law: regulates incorporation, management and general obligations of all types of private companies;
- Commerce Code: regulates commercial transactions;
- the Civil Code: main source of regulation of private contracts;
- the Organic Law of Market Power Regulation and Control: Antitrust regulation;
- the Organic Code of Production, Commerce and Investment: Investment regulatory framework and customs regulations;
- the Organic Law of Incentives to Public-Private Associations: Special incentives for investment alongside the public sector;
- the Organic Law of Consumers: Consumer rights;
- the Organic Law of Internal Tax Regimen. Regulates main taxes: VAT, income tax, currency remittance tax, among others; and
- the Organic Tax Code: Internal Revenue Service powers.
4 How does the court system operate with regards to large commercial disputes?
Large commercial disputes, when submitted to the jurisdiction of local courts are heard in first instance by specialised civil and commercial trial courts. Regularly cases take most time at the trial court level, where the majority of evidence is produced. On appeal a specialised tribunal on a provincial court works as a second instance. In large disputes it is common for parties to submit a cassation recourse before the National Court after the provincial court’s ruling. The cassation recourse is limited and may not be regarded as a third instance, as the National Court adjudicates in regards to law violations, it does not re-examine the evidence.
Constitutional actions are available after the National Court’s ruling if during the judicial process constitutional rights were violated.
5 What legal recourse do consumers typically have against businesses?
Consumers may present complaints against sellers, distributors and producers of goods and services. The complaint is similar to a suit before a civil judge. While the Organic Law of Consumers (article 88) recognises the possibility of submission of a ‘popular action’, which is somewhat equivalent to a class action, that mechanism is very uncommon.
Access to justice is relatively easy; consumers’ complaints may be heard in two instances in the local court system. Small-claims judges have jurisdiction at trial level, while criminal judges work as court of appeals.
It is also common that before submitting a judicial complaint, the consumer proposes mediation procedures whether before the People’s Defender Office (Equivalent to the Ombudsman in local legislation) or the Production Ministry.
6 How significant is arbitration as a method of dispute resolution?
Arbitration is significant as a method of dispute resolution and has grown in popularity on recent years. Current arbitration and mediation law was enacted on December 2006 and has set clear rules regarding arbitration clauses, arbitrable disputes and procedure.
Arbitration clauses are most commonly used in important civil and commercial contracts in which parties are more sophisticated.
Local arbitration is commonly administrated by specific arbitration centres. Ad hoc arbitration is also available for the parties.
Arbitrators are usually regarded as very qualified and experienced professionals which are able to settle complex disputes.
7 What other methods of dispute resolution are commonly used?
Mediation, whether within an arbitration procedure or separately, is used for settling commercial disputes. The court system has, in the last years, set up mediation centres that provide assistance to the general public with qualified mediators.
Arbitration centres also provide mediation services with mediators that are registered before the Judiciary National Council.
If a conflict is solved within a mediation process, that resolution is binding and has the same effect as a definitive judicial ruling for the parties.
8 How easy is it to have foreign court judgments and foreign arbitral awards recognised and enforced in your jurisdiction?
Ecuador has ratified the New York Convention (1958), which sets the rules in order to recognise foreign arbitration awards.
Local legislation regulating the procedure for recognition of foreign arbitral awards is set out in General Procedure Organic Code (COGEP).
Recognition of foreign arbitral awards in COGEP requires review of the competent Provincial Court, which examines if the award complies required formalities on the state of origin; that it is final according to foreign legislation in the country where the award was issued; and that the respondent was dully notified and was able to defend itself (COGEP article 104).
A recognised foreign arbitral award can be executed as a local – definitive – ruling would.
Foreign investment and trade
9 Outline any relevant treaty organisations, economic or monetary unions, or free trade agreements.
Ecuador has been a member of the WTO since June of 1996 and thus bound by the General Agreement on Tariffs and Trade (GATT 1994).
Ecuador is also part of the Andean Community of Nations (CAN). CAN was created by the Cartagena Agreement of 26 May 26 1969. Other current members are Peru, Colombia and Bolivia. CAN nations form a customs union that dictates conditions on tariffs and imports among members.
Ecuador entered in free trade agreement with the European Union as of November 2016. The agreement is very similar to that in place between the European Union and Colombia and Peru.
10 Are foreign exchange or currency controls in place?
No controls are in place; however, there is a 5 per cent remittance tax on every transfer or payment abroad. Ecuador has been using US dollars as the local currency since 2000.
11 Are there restrictions on foreign investment?
No, foreign investment is welcomed and treated equivalently to national investment, but in order to apply incentives set out in local laws a local company must be created.
12 Are there grants, incentives or tax reliefs for foreign investors or businesses?
Ecuadorian legislation offers a wide variety of facilities for foreign investment in a wide range of activities. Ecuador offers flexible, clear, stable norms that ensure a very attractive climate of economic freedom. Modern regulatory structure opened stock market trading to banks and other firms, and encouragement to the development of mutual funds.
Investors can incorporate companies whether as local entities or as branches of foreign companies. They may also establish joint ventures, trusts or holding companies in order to link their interests to already established companies. They may also assume new activities, taking advantage, for instance, of the special governmental deals legally granted to the Free Zone system (Special Zones of Economic Development).
The Organic Code of Production, Commerce and Investment includes incentives intended to encourage economic development. The main incentives are as follows:
New investments and companies are exempt from paying income tax advances for the first five years.
The Free Zone system exempts investors from payment of:
- tax on profits;
- value added tax (VAT);
- customs duties;
- special consumption tax (ICE);
- municipal taxes and export fees;
- exemption from paying the tax for the outflow of currency for operations of foreign financing (ISD);
- exemption on dividend inflow; and
- replacement of imports, the promotion of exports and rural development around the country, are exempt from paying income tax for the first five years.
This Code also provides that investors may enter into investment contracts with the government whenever starting a project in the country (article 25). Such contracts provide for tax stability and have up to a 15-year term.
If an investor is interested in projects participating alongside the government, the Organic Law for Incentives to Public-Private Associations provides additional incentives, among which are:
- stability of contracts;
- exemption to remittance tax for payment of imports, loans, dividends;
- exoneration of income tax for up to 10 years;
- exemption to tariffs for imports of goods and services devoted to the project; and
- international arbitration (within the Latin American region).
Public-private associations include the execution of specific public projects, concessions of public works or services.
13 What are the main taxes that apply to cross-border or foreign-owned business and investors?
No specific taxes are construed to target foreign business and investors. The main general taxes applicable to investors are:
- Remittance tax on transfers or payments sent abroad, which applies to local or foreign-owned business. Transfers may be exempted from this tax in cases like the remittance of dividends (when not sent to a tax heaven) and payment of foreign loans.
- Income tax: the regular tariff is 22 per cent for companies incorporated in Ecuador or branches of foreign companies.
14 Which industry sectors are regulated or controlled by the government?
The Constitution defines the following as ‘strategic sectors’:
- Energy; telecommunications; non-renewable natural resources; transportation; oil refining; biodiversity; radio spectrum; water.
- Public services, which in principle should be provided by state owned agencies or companies are: potable water, irrigation, telecommunications, roads, port and airport infrastructure.
Even if such sectors and services are defined as strategic and public respectively, and the government has more control over them than in other aspects of the economy, participation of public investors is not forbidden and the private sector can be delegated to perform such activities (article 316).
15 Who are the key industry regulators, and what are their powers?
The key industry regulators are:
- Internal Revenue Service – Regulations of all internal tax issues.
- Exterior Commerce Committee – Regulations of tariffs and imports-exports;
- Regulation Board (antitrust) – Regulations and manuals for application of antitrust law;
- Monetary and Financial Policy and Regulation Board – Regulations of monetary, credit, currency exchange and financial policies;
- Environment Ministry – Regulations of environment protection policies and industry requirements;
- Health Ministry –Regulations of consumer products, food, medicine quality and pricing, health industry;
- Superintendency of Companies – Regulations regarding duties of companies;
- Superintendency of Banks – Regulations for the banking industry, banking services;
- Ministry of Telecommunications – Regulations for concession of radio spectrum;
- Mining Ministry – Regulations for issuance of mining concessions
- Hydrocarbons Ministry – Regulations for the oil industry and contractors
- Labour Ministry – Regulations of employer–employee relations; and
- National Normalisation Service– Regulations on quality of goods and services, technical regulations for industry in general.
16 What are the other main enforcement authorities relevant to businesses?
Some of the key regulators act also as enforcement authorities in regards to sectorial laws and their own regulations, examples of these entities are: Internal Revenue Service, Environment Ministry, Health Ministry, Superintendency of Companies and Superintendency of Banks.
Other notable enforcement authorities are:
- the Superintendency of Market Power Control (antitrust);
- the Hydrocarbons Regulation and Control Agency;
- the National Customs Service; and
- the Ecuadorian Intellectual Property Institute.
17 On which areas have regulators particularly focused their recent enforcement activities?
Enforcement activities have been particularly focused on tax, labour, antitrust, international trade and corporate issues in the past few years.
18 What are the principal bribery, corruption and money laundering concerns for businesses?
While no specific law addresses all those concerns altogether, various laws refer to these issues:
- Interamerican Convention Against Corruption: Outlines prohibitions directed to public workers in regards to receiving advantages, money, favours to influence their public functions. These are regarded as acts of corruption;
- Organic Law of the Public Service: Prohibits acceptance or solicitation any form of advantages, privileges, money or contributions of other kinds to any public worker;
- Law for prevention of money laundering and criminal activities financing: Sets obligations to report activities and transactions that may be suspect of money laundering, with special focus on the banking, construction, stock exchange, car sales, courier services; and
- Criminal Organic Code: Contains criminal penalties related to corruption, bribery and money laundering offences.
Within this legal framework, Ecuador has made big efforts to tackle money laundering activities in recent years and information requirements for businesses are frequent.
19 What are the main data protection and privacy risks for businesses?
The Constitution provides the right to keep personal information and correspondence private (article 66).
Whenever companies compile databases they are legally required to safeguard such information (Law of the National System for Public Data Registry, article 4). Compiling personal data requires respect to the constitutional rights of privacy and confidentiality. Using and transferring data requires authorisation of the owner of such data (Law on E-commerce, Electronic Signatures and Data, article 9).
Some entities have powers to require information of businesses within their investigations, such as the Internal Revenue Service and the Superintendency of Market Power Control.
20 What are the main anti-fraud and financial statements duties?
Comprehensive financial statements are submitted every year to the Superintendency of Companies, companies are also required to submit Income tax declarations yearly. Companies that operate in the local stock market have additional duties to report.
Some companies that operate in what are deemed as risk sectors need to submit statements to the Financial and Economic Analysis Unit, which functions as the authority in charge of compiling financial information and investigating suspect activity related to money laundering (by virtue of the Law for prevention of money laundering and criminal activities financing, see question 18). Obligated subjects need to appoint a compliance officer in charge of informing the control authority of unusual transactions, transactions over US$10,000, among others.
21 What are the main competition rules companies must comply with?
Competition rules mainly regulate:
- market power abuse;
- anticompetitive agreements (cartels);
- deceptive practices; and
- merger control.
The Organic Law of Market Power Regulation and Control was enacted on 18 August 2011. The Regulation Board is able to issue additional regulations. Market Power Control Superintendency has also enacted specific guidelines for certain economic sectors.
22 Outline the corporate governance regime.
Stock corporations and limited liability companies are governed by shareholders or partners directly. A board of directors may be appointed and given specific powers by the shareholders or partners, but is not required by law.
General managers are appointed by shareholders or partners and have administrative duties and legal representation of the companies.
Some limited liability companies, must appoint commissars, who oversee operations and submit annual reports.
23 Can business entities incur criminal liability? What are the sanctions for businesses, related companies and their directors and officers for wrongdoing and compliance breaches?
Yes, article 49 of the Integral Organic Penal Code provides that national or foreign legal entities may be responsible for criminal offenses ordered or executed by their representatives or those who control them. Criminal liability of legal entities can coexist with that of the people co-responsible for the felonies.
That criminal liability, however, is not applicable to every felony, but to those in which such liability is expressly recognised.
Types of criminal sanctions imposed on legal entities include the following:
- temporal or definitive closure of establishments;
- community service;
- remediation of environmental damage;
- dissolution of the legal entity;and
- prohibition of entering into contracts with the government.
Directors and officers may face imprisonment for their offences notwithstanding sanctions against the legal entity.
24 What types of business entity are most commonly used by foreign investors and why? What are the main requirements for their establishment and operation?
The main local business entities are the limited liability company and the stock corporation. Foreign investors may also opt for incorporating a branch of the foreign company.
The following steps are needed to incorporate a limited liability company or stock corporation are:
- securing a name (denomination) before the Superintendency of Companies;
- drafting by-laws and signing a deed of incorporation before a notary in Ecuador. The company requires at least two partners or shareholders. The company requires a minimum starting capital of US$400 or US$800 depending if it is a limited liability company or a stock corporation;
- registration of the incorporation deed before the competent mercantile registry;
- appointing a legal representative;
- obtaining a tax registration number; and
- registering foreign investment before the Ecuadorian Central Bank.
25 Describe the M&A market and the merger control regime. How easy is it to complete deals in your jurisdiction?
The M&A market is active. As in other jurisdictions, depending on the size of the merger in regards to the volume of operations of the parties involved, or if the market concentration surpasses certain levels as a consequence of the merger, issuance of a notification to the Superintendency of Market Power Control will be required.
If the merger is approved by the Superintendency of Market Power Control, or in any other case were such approval is not necessary, the parties are required to register transfer of shares in the Superintendency of Companies for legal validity of the operation, or to comply with similar registrations or authorisations depending of the nature of the operation.
26 Outline the corporate insolvency regime. Is bankruptcy protection available for corporates?
Yes, bankruptcy protection is available in our legislation by virtue of the Preventive Contest Law.
The insolvency regimen consists in requiring the Superintendency of companies to organise creditors in order to conclude an agreement, while the company temporarily stops payment of debts. Such request shall be approved by the company’s shareholders or partners.
If the Superintendency accepts the request, creditors will be notified as well as other competent authorities. Creditors need to come forward with proof of their credit.
Some credits are privileged by law, especially those related to debts with workers.
27 How easy is it to enter into and terminate employment contracts?
Entering into employment contracts is relatively easy, regularly requiring drafting a written contract between the employer and employee. It also requires notification to the Social Security System. In the case of foreign employees, they need a work visa.
Contracts are terminated mainly by three ways:
- mutual agreement;
- discharge; and
- for-cause termination.
Discharge (without cause) entails payment of indemnification to the employee depending on the duration of the contract.
Discharge may be ineffective if the worker is pregnant or an officer of a workers union.
28 What are the key rights of local employees?
Key rights include:
- stability: contracts regularly cannot be made to last a fixed amount of time, being indefinite by nature;
- remuneration: worker remuneration may not be diminished by the employer unilaterally;
- ‘intangible’ labour rights: labour rights may not be surrendered by the employee;
- position: workers may not be demoted to a lesser positon by the employer unilaterally;
- profit participation: workers as a whole are entitled to a 15 per cent of the employer’s annual profits;
- vacation: starts with two weeks with pay annually;
- maternity leave: 12 weeks with pay; and
- minimum wage: no full-time worker shall receive less than the minimum wage (for 2017 the minimum wage is US$ 375).
29 What are the main restrictions on engaging foreign employees?
Foreign employees require issuance of a ‘12VI’ category visa in order to be able to enter into an employment contract in Ecuador. To request this visa a company shall justify having a minimum working capital of US$12,500 or assets whose value is, at minimum, US$50,000.
Some industries require a minimum percentage of Ecuadorian workers as high as 80 per cent. Examples are: mining industry and marketing agencies.
30 What are the other key employment law factors that foreign counsel, investors and businesses should be aware of?
Social security obligations are a very important factor in employment relations. Employers have a duty to notify the Ecuadorian Social Security Institute (IESS) whenever hiring a worker or terminating an employment relationship. Employers have to pay a monthly contribution of 11.15 per cent of every worker’s salary to IESS.
Employers need to respect local norms on worker’s safety and provide safety measures in the work environment.
31 Describe the intellectual property environment. How effective is enforcement and what are the key current issues?
Intellectual property is regulated by international treaties, Andean Community Decisions and local legislation. Ecuador is a member of the World Intellectual Property Organization and has ratified a number of its treaties.
Industrial property rights are protected by the Andean Community Decision No. 486.
The Local Intellectual Property Law encompasses protections for:
- industrial property;
- trademarks; and
- vegetable obtentions.
The control authority is the Ecuadorian Institute for Intellectual Property (IEPI). Registration submissions are presented before IEPI.
Whenever there is a violation of an intellectual property right, rightholders may submit claims before IEPI or competent judges.
Enforcement is effective in relation to copyright, patents and trademarks.
Legal reform and policy
32 What are the key issues in legal reform, government policy and the economy?
Legal reform is not at its most active point at this time; however, specific tax reforms are expected in the following months, mainly related to the income tax rate for corporations.
Government policy is focused on taking advantage of the newly constructed hydroelectric plants, and what has been deemed as the ‘energy revolution’; this is alongside long-standing objectives of productive transformation and competitiveness with big public investment in infrastructure.
Foreign investment is promoted by the public-private associations legal framework and the Organic Code of Production.
The economy has faced challenges in relation to low oil prices,
for which the government promotes an increase of exports of non-traditional products.
Efforts are also being made in order to launch exploration and exploitation of mineral resources. Mining industry is expected to grow in the following years.
33 Are there any significant legal developments ongoing or pending? What are their effects on the business environment?
No significant bills that may affect business environment are being discussed at this time.
Resources and references
34 Please cite helpful references, for example sources of law, websites of major regulators and government agencies.
Published November 2017