Ecuador has a civil law system; nevertheless, as provided in Article 1 of the Ecuadorian Constitution of 2008, Ecuador is a constitutional state of rights and justice. Thus, it is important to mention that, even though the country’s legal system is classified as “civil law”, constitutional rights and principles possess higher hierarchical importance than civil laws. It is also important to note that according to the Ecuadorian Constitution, international treaties and agreements also possess higher hierarchical importance than domestic laws.
Ecuador is divided into 24 provinces, which in turn are divided into 221 cantons/cities. It is organised as a republic and governed in a decentralised manner; but the laws, acts and codes issued by the Ecuadorian National Assembly are applicable to all provinces and cantons (ie, the Criminal Code, Companies Act, Tax Code, Civil Code, Labor Code, etc). Decentralised governments (such as municipalities) may issue decrees and resolutions, which vary among each canton or province and are applicable only within such territories.
Regarding judicial power, it is important to note that even though Ecuador has a national judiciary system, it also recognises the Indigenous Justice System (Justicia Indígena), which, pursuant to Article 171 of the Ecuadorian Constitution, allows indigenous communities to apply, within their territory, traditional ancestral indigenous rules and procedures. Ecuador also recognises other mechanisms of conflict resolution, such as judges of peace, mediation, and arbitration.
The judiciary system is made up of jurisdictional bodies, administrative bodies, auxiliary bodies and autonomous bodies.
The Constitution expressly recognises the following as jurisdictional bodies.
The National Council of the Judicature is the administrative and disciplinary body of the judiciary system. Its role is to supervise the selection of judges and other workers of the judiciary system, as well as their evaluation, promotion, and sanctions.
The Public Defender’s Office is an independent body of the judiciary system, and it provides legal assistance to those who may not be able to afford the services of a private lawyer.
The State Attorney’s Office is another independent body and is responsible for the investigation and prosecution of criminal cases.
Public notaries are auxiliaries to the judiciary system, as well as judicial auctioneers and judicial depositors.
Finally, Ecuador has a Constitutional Court, which, although not part of the judiciary system, is the highest body of control, interpretation, and administration of constitutional justice. It is responsible for the interpretation of the Constitution and of international human rights treaties ratified by Ecuador.
Ecuador recognises free flow of investment and does not establish restrictions to repatriate profits and investments from abroad. Foreign investors can freely and directly set up their private business in Ecuador or acquire Ecuadorian assets (for example, shares of Ecuadorian companies) just as Ecuadorian nationals may.
An important advance in Ecuadorian legislation is the possibility of signing investment contracts. These contracts permit the establishment of tax stability clauses that allow an investment to be guaranteed over time, as well as to obtain certain tax incentives for investors. The contracts are entered into with the Ecuadorian State and are executed by public deed. Specific benefits will depend on the amount of the investment according to the investment plan submitted for approval by the investor.
Finally, in 2021, Ecuador became part of the ICSID again, which has made investment more attractive for foreign investors. This is because investors that sign investment contracts are allowed to resolve disputes through independent international arbitration tribunals, enabling investors to have their disputes resolved independently and efficiently.
As previously indicated, Ecuador does not require prior authorisations for foreign investment. Due to the application of the principle of transparency, foreign companies/investors in domestic companies are required to comply with the following conditions:
A foreign company/investor who does not comply with these obligations may not be able to attend, participate or vote in the shareholder meetings.
If the non-compliance occurs for two or more consecutive years, the foreign company/investor may be excluded as shareholder(s) of the domestic company, subject to the procedure set forth in the law.
In general, domestic and foreign investors have the same rights and obligations in Ecuador. In public procurement contracts, however, domestic investors may have preference in certain procedures over foreign investors (in particular, in contracts of lesser value).
In the case of investment contracts with the Ecuadorian State, both domestic and foreign investors are required to submit investment plans detailing the amount to be invested over a certain period, and the creation of new jobs goals, among others.
In certain industries such as oil and mining, particularly on a large scale, investors are also required to include certain “social commitments” in practice, such as infrastructure development in rural communities where they plan to operate.
Investment commitments in investment contracts are subject to follow-up and monitoring by competent authorities (investment authorities and tax authorities in particular) during the lifespan of the project. For this purpose, investors must submit reports on the proper execution of their projects at certain stages of the project, in accordance with the investment plan established in the investment contract.
Investors may challenge government decisions before administrative courts (Tribunal de lo Contencioso Administrativo) or tax courts (Tribunal de lo Contencioso Tributario), depending on the subject matter of the challenge.
There are many types of legal entities in Ecuador, the most common being the following:
Compañía de Responsabilidad Limitada (Cia. Ltda.)
The Cia. Ltda. is a type of corporate vehicle, mostly used for family businesses. It requires two or more partners for its creation, and the number of partners cannot exceed 15. It is created through a public deed and requires subsequent registration in the commercial registry of the company’s domicile. The minimum capital required for the creation of a Cia. Ltda. is USD400.
The company capital is divided into participation units, not shares. Transfer of participations requires the unanimous consent of the partners, must be made through a public deed, and requires subsequent registration in the commercial registry.
Amendments to the by-laws of a Cia. Ltda. are made through a public deed and require subsequent registration in the commercial registry.
It is governed by the partners’ meeting, and managed by one or more legal representatives, as stated in the by-laws of the Cia. Ltda.
The process of incorporation of a Cia. Ltda. generally takes a couple of weeks to be completed.
Sociedad Anónima (S.A.)
The S.A. is a type of corporate vehicle, mostly used for corporate business. It is the only type of corporate vehicle that can be used for banking purposes, insurance companies and public companies (those that trade their shares in the stock market). It used to be the favourite choice of corporate vehicles up until the Sociedad por Acciones Simplificadas (S.A.S.) was introduced in the Ecuadorian legal system in 2020.
It requires two or more shareholders for its incorporation and has no limit on the number of shareholders it may have. It is incorporated through a public deed and requires subsequent registration in the commercial registry of the company’s domicile. The minimum capital required for the creation of an S.A. is USD800.
The capital of this corporate vehicle is divided into shares, which can be freely negotiated. Transfer of shares requires only the endorsement of the share certificate and a notice to the legal representative of the company of such endorsement signed by both transferor and transferee, so that he may register the transfer in the shareholders’ ledger. The S.A. may subsist only with one shareholder after its incorporation.
Amendments to the by-laws of the S.A. are made through a public deed and require subsequent registration in the commercial registry.
It is governed by the shareholders’ meeting, and managed by one or more legal representatives, as stated in the by-laws of the S.A. The by-laws may include the creation of administrative bodies such as a board of directors.
Shareholders of the S.A. may enter into shareholder agreements, with certain limitations, in particular with respect to the negotiation of the shares.
The process of incorporation of an S.A. generally takes a couple of weeks to be completed.
Sociedad por Acciones Simplificada (S.A.S.)
Since its introduction into the Ecuadorian legal system in 2020, the S.A.S. has become the preferred choice for new business formation, including holding companies, start-ups, and any businesses in general. These companies may be used to carry out any type of business activity, excluding banking and insurance activities. An S.A.S. may not be a public company since their shares cannot be registered or negotiated in the stock market.
It requires only one shareholder for its incorporation and has no limit on the number of shareholders it may have. It is incorporated through a private document that is not required to be registered in the commercial registry, but instead in the Superintendence of Companies, free of incorporation fees. It has no minimum capital, but shares must have a nominal value of at least USD1 each.
The capital of this corporate vehicle is divided into shares, which can be freely negotiated. Transfer of shares requires only the endorsement of the share certificate and a notice to the legal representative of the company of such endorsement signed by both transferor and transferee, so that he may register the transfer in the shareholders’ ledger.
Amendments to the by-laws of an S.A.S. are made through a private document, which needs to be registered in the Superintendence of Companies, free of charge. The only case in which an S.A.S. needs to be incorporated through a public deed is if there is a capital contribution of real estate property. It may be incorporated with one or more shareholders.
The shares of an S.A.S. can be divided into different series of shares, each of different value, and with different rights attached to the different series of shares. Due to this flexibility, the S.A.S. is the preferred choice for venture capital operations and start-ups, family organisations, estate planning and holding companies.
It is governed by the shareholders’ meeting, and managed by one or more legal representatives, as stated in the by-laws of the S.A.S. The by-laws may include the creation of administrative bodies such as a board of directors.
Shareholders of the S.A.S. may enter into shareholders’ agreements, with the only limitation being that the agreements must have a maximum duration of 10 years, renewable for 10 more years. Limitations on the transfer of shares may be imposed, and other agreements such as rights of first refusal, rights of first offer, call and put options, drag along and tag along, etc, may be included.
The by-laws or shareholders’ agreement may include arbitration for disputes among shareholders.
The process of incorporation of the S.A.S. takes only a few days to be completed and is the cheapest in terms of costs/fees.
The process starts in all cases with the approval of the company name by the Superintendence of Companies.
The S.A. and the Cia. Ltda. are incorporated through a public deed and require subsequent registration in the commerce registry of the company`s domicile.
Both the public deed and the registration in the commerce registry require notary fees and registration fees to be paid accordingly. Both types of companies require a minimum of two partners for their creation, and both are considered to be duly incorporated from the moment of registration in the commerce registry.
The S.A.S. may be incorporated through a private document. It does not need registration in the commerce registry, but only in the Superintendence of Companies and such registration is free of charge. The S.A.S. is duly incorporated from the moment of registration in the Superintendence of Companies.
Finally, to complete the process in all cases, the company must obtain a taxpayer identification number (Registro Único de Contribuyentes, or RUC).
Ecuadorian companies are subject to the control of the Superintendence of Companies and as part of their reporting and disclosure obligations are required to submit to the authority the following documents every year:
In addition, foreign companies that are shareholders or partners of Ecuadorian companies must provide management with the list of their shareholders up to the final beneficiaries (individuals), must appoint a local representative in Ecuadorian territory and must provide the local company with supporting documentation evidencing the appointment (ordinarily, a power of attorney given to an individual with Ecuadorian residence).
Where the assets of a company exceed USD500,000, an external auditor must be engaged to issue an annual report on the financial statements.
It is important to note that the above-mentioned documents are freely and publicly accessible by anyone through the web portal of the Superintendence of Companies.
Additionally, when transferring shares or participations, the managements of Ecuadorian companies have the obligation to give notice to the Superintendence of Companies within eight days from when the transfer was dully registered.
Depending on the activity of the company (ie, involving real estate, vehicle commercialisation, jewellery and art merchants, trust companies, among others), additional reporting obligations for money laundering and compliance may be required. Also, activities such as regarding commercial credit to customers in retail stores have additional reporting obligations.
The governing body of Ecuadorian companies is the general shareholders’/partners’ meeting (Junta General de Accionistas/Socios). It is the highest authority within the company, and ordinarily holds power over most relevant corporate decisions, such as appointment of legal representatives, board directors (where the company has a board of directors), dividend distribution, by-law reforms, etc.
The executive body (management) of Ecuadorian companies is the “legal representative”. The legal representative represents and acts on behalf of the company. Ecuadorian law provides that the by-laws must include at least one position for the office of the legal representative. Ordinarily, this position is held by the office of the general manager, although it is common for the by-laws to include as legal representation both the general manager and the president of the company. The legal representative has absolute power and authority to act on behalf of the company, including in the disposition of (selling, transferring, placing under encumbrance, pledging, or mortgaging) the assets of the company, except in the case of real estate property of the company, where he/she requires approval from the general shareholders’/partners’ meeting, unless expressly allowed in the by-laws to do so without their approval. The legal representative is also required by law and responsible for keeping the books and registries of the company, including accounting books, shareholder ledgers, minutes of general shareholders’/partners’ meetings, among other corporate books.
Although not required, Ecuadorian companies may include in their by-laws additional management bodies, such as a board of directors or management committees, although they are only common in larger companies. Ordinarily, a board of directors may have oversight powers, and additional powers to appoint executive officer positions, including in some cases the legal representatives of the company, to approve budgets, approve transactions of amounts exceeding certain predetermined ceilings, etc.
Finally, it is important to note that in 2020, the Superintendence of Companies issued a non-binding Code of Good Corporate Governance Standards. This code includes rules and guidelines recommending the creation of a board of directors, compliance committees, family councils, and other bodies depending on the needs of different companies.
According to Ecuadorian law, legal representatives, managers, officers and directors have fiduciary duties to the company, and must act within the framework of the law and according to the by-laws of the company. Thus, legal representatives, managers, officers and directors are generally liable for breach of their obligations and duties, including wrongful conduct (negligence, wilful misconduct, abuse, fraud) with respect to corporate and business affairs, except where the “business judgement rule” may be applied. The business judgement rule was recently (in 2020) included in Ecuadorian legislation, but has not yet been tested judicially.
Aside from the governing liability of directors and officers (including legal representatives) towards the company, Ecuador extends liability (jointly and severally) to legal representatives for obligations of the company in social security cases (social contributions not paid by the company), and labour cases (obligations owed to workers derived from labour cases, including severance obligations). Until recently, liability for tax obligations was also joint and several for the legal representative, but this was abolished in 2021.
Finally, although Ecuador recognises the principles of corporate separation and limited liability for shareholders and partners, liability for company obligations may be extended to them in certain exceptional cases (fraud) by piercing the corporate veil. There have, however, been only a few exceptional cases where the corporate veil has been successfully lifted by Ecuadorian courts to extend liability of company obligations to their shareholders or partners.
Ecuador has developed regulations with the intention of protecting workers' rights, which are inalienable and intangible.
The main regulations that govern Ecuadorian labour law are:
According to the Ecuadorian Constitution, work is a right, a social duty and the basis of the State's economy; therefore, workers are guaranteed full respect of their dignity, a decent life, fair remuneration, and the enjoyment of a healthy and freely chosen job.
Furthermore, according to the Ecuadorian Constitution, it is the duty of the State to promote full employment and to value all forms of work, always respecting labour rights.
In recent years, Ecuador has issued labour reforms with the purpose of making labour regimes more flexible to promote employment.
Employment contracts may be verbal or written. They must be documented in writing in the following cases:
In all other cases, labour contracts may be verbal. All contracts that are documented in writing must be registered with the labour authorities within 30 days after being executed.
The indefinite-term employment contract is the default and most common kind of contract regulating formal labour relations in Ecuador. This type of contract can only be terminated for the reasons provided for in the law or in the employment contract itself (just cause).
A trial period of up to 90 days for a single occasion with each worker may be included in the labour contract. Once the 90-day period expires and if the contract is not terminated, it becomes an indefinite-term employment contract.
Ecuadorian law provides for other types of labour contracts, which may be applicable to certain types of operations in Ecuador.
In general, the working week includes 40 working hours, divided into five days of eight working hours each.
Weekends are considered days of mandatory rest. If the employer, because of the nature of its activity, cannot interrupt its work on Saturdays and Sundays, other days of the week (two subsequent days) must be established as days of rest for the worker. In addition to weekends, national and local holidays are also considered days of mandatory rest.
Exceptionally, considering the nature of the work, employers may agree with workers, in writing, to exceed eight hours of work per day, provided that the total amount does not exceed a maximum of 40 hours per week or ten hours per day, at times that may be distributed in rotation shifts within the five working days of the week. These special shifts must be authorised by the Ministry of Labour and included in each employment contract.
Supplementary and Extraordinary Hours
Labour law also recognises supplementary and extraordinary hours in addition to ordinary working hours. Supplementary and extraordinary hours may not exceed four hours a day or 12 hours a week.
Supplementary hours are those additional to the ordinary working day of eight hours and work week of 40 hours, and are paid at a higher rate than ordinary working hours. Supplementary hours worked before midnight must be paid at a rate 50% higher than the ordinary rate. Hours worked between midnight and 6am must be paid at a rate 100% higher than the ordinary rate. These higher rates are calculated based on ordinary hourly and daily rates, according to the remuneration of the worker.
Extraordinary working hours are those that an employer may request from workers to avoid great damage to the workplace or to the economic activity developed by the employer, to recover from unexpected accidents, or in the case of a force majeure. Extraordinary hours must be paid at the same rates as supplementary hours. Work performed on Saturdays and Sundays must be paid at a rate 100% higher than the ordinary rate.
Hiring by an hourly rate is prohibited in Ecuador.
In general, a labour relationship may terminate in any of the following events:
Mutual Agreement of the Parties
The worker and the employer may mutually agree, at any moment, to terminate the employment contract. In this case, the worker is still entitled to receive a bonus of 25% of his last monthly remuneration for each full year of employment (“eviction bonus”).
Termination by mutual agreement must be notified to the labour authority through the single labour system (SUT) together with proof of payment of dues, including the eviction bonus, within 15 days after the termination of the employment contract.
Will of the Employer
The employer may, at any time, terminate the employment contract unilaterally, of his own free will, by untimely dismissal (despido intempestivo). In this case, the worker is entitled to receive a severance payment, calculated based on the remuneration that the worker received at the time of dismissal, pursuant to the following formula.
In addition to severance payment for untimely dismissal, the worker is entitled to receive the eviction bonus.
Additional indemnifications may apply if the worker is handicapped (18 remunerations), pregnant (12 remunerations) or is a member or director of a union (12 remunerations). In particular, the untimely dismissal of pregnant workers and members or directors of unions is considered ineffective by law; thus, a judge may order the employer to reinstate the worker to his/her position and pay the worker the indemnification mentioned above.
The untimely dismissal must be notified to the labour authority through the SUT together with proof of payment of dues, including severance and the eviction bonus, within 30 days after the termination of the employment contract.
Fair cause or visto bueno
The employer may also terminate the labour relationship with just cause, through a proceeding called visto bueno, with no need to pay severance to the worker. This procedure may be used in the following cases, all of which require the approval of the labour authority:
Will of the Worker
The worker may, at any time, terminate the employment contract unilaterally, of his own free will, by notifying the employer with a termination notice in writing, where the worker lets his/her employer know his/her will to unilaterally terminate the employment contract with at least 15 days’ notice. This termination does not require authorisation from the labour authority.
Termination of the labour contract in this case still entitles the worker to receive the eviction bonus. The worker who leaves the job without giving the employer 15 days’ notice shall pay the employer a sum equivalent to 15 days of remuneration.
The worker may request the termination of the labour contract from the labour authorities, with the right to receive severance payment applicable for untimely dismissal, in the following cases:
Reasons Beyond the Will of the Parties
The labour contract may also terminate for the following reasons beyond the will of the parties:
In these cases, the worker is not entitled to receive the eviction bonus or severance payment. However, when liquidation of the company occurs by a decision of the employer as the reason for the termination of contracts, workers will be entitled to receive both the eviction bonus and severance payment.
Workers have the right to form professional associations or unions as they deem convenient, and to join them or to withdraw from them, pursuant to the law and the by-laws of such associations.
Workers' associations may be created for the following purposes:
Income Tax for Individuals
Individuals residing in Ecuador are subject to income tax on the income obtained in Ecuador and abroad from labour and capital. Non-residents must pay income tax on the income generated in Ecuador.
In relation to income from work, Ecuadorian law establishes that employers must withhold income tax derived from ordinary and extraordinary income obtained from work, minus the amount of individual social security contributions.
As of 2022, the personal deduction allowance must not exceed seven times the index of basic goods baskets per year (for the year 2022 the total amount is USD1,008.51). Individual social security contribution is also considered as an applicable deduction for individual income tax purposes. The employer must withhold income tax from the net salary of the worker based on a progressive scale which ranges from 5% to 37%.
Social Security Contributions
Social security contributions are made by both the worker and the employer. The worker's individual social security contribution amounts to 9.45% of the monthly income. The employer’s social security contribution amounts to 12.15% of the same base.
On an annual basis and until 15 April of each year, employers must distribute and pay to their workers 15% of net profits of the prior fiscal year (1 January to 31 December) (“profit-sharing tax”). The net profit is calculated based on accounting profits before the company’s annual income tax liquidation.
Profit-sharing tax must be paid and distributed among workers, as follows:
Corporate Income Tax
Corporate income tax is levied on companies domiciled in Ecuador and on permanent establishments of foreign companies located in Ecuador. Companies domiciled in Ecuador include those incorporated in Ecuador and companies incorporated in foreign countries that have been approved as domestic branches by the Superintendence of Companies. Companies incorporated in Ecuador are subject to tax on their worldwide income. Foreign companies are subject to tax on income derived from activities within Ecuador and from goods and assets located within Ecuador.
Rate of Corporate Tax
The standard rate of corporate income tax is 25%.
The corporate income tax rate is increased to 28% if either of the following conditions is met:
The 28% rate is applied to the tax base in proportion to the ownership affected by any of the events listed above. However, if the affected ownership is equal to or exceeds 50% of the local entity corporate capital, the 28% rate will apply to the entire tax base.
Until 31 December 2023, Ecuadorian banana producers and exporters will be subject to a flat income tax, which ranges between 1% and 2% on the gross income in the case of local production and marketing of bananas; and 3% on the gross income of export (FOB) minus the minimum supporting price set by the National Agriculture Authority, or the purchase price paid by the exporter to the producer if such an amount is higher, in the case of banana exporters.
Finally, income obtained from other agricultural activities may be subject to a flat income tax with a progressive rate of 0% applicable in the case of sales of up to USD20,000 per year, and up to 1.8% in the case of sales exceeding such an amount.
Capital gains tax on sales of tangible assets is not levied in Ecuador, with the exception of gains derived from direct or indirect transfers of shares (and other capital-representative rights) of Ecuadorian business entities, which are subject to flat capital gains tax of 10% on net income.
A 25% withholding tax is generally imposed on the following payments made abroad:
Income tax withholding at a rate of 25% applies to all reimbursements of expenses abroad.
Income tax withholding at a rate of 37% applies to cross-border payments made to recipients located in tax havens, low-taxation jurisdictions or preferential tax regimes.
Penalties are imposed for failures to comply with withholding requirements. Withholding agents who deliberately fail to provide taxpayers, totally or partially, with tax withholding receipts are subject to imprisonment and fines.
Dividends distributed to non-residents after the payment of corporate income tax are subject to an effective income tax or withholding tax of 10% (tax base of 40% taxed at a rate of 25%). The effective rate is increased to 14.8% (tax base of 40% taxed at a rate of 37%) if the beneficiary of the dividend is a tax haven resident. The rate may be reduced in accordance with an applicable double taxation treaty.
In the case of anticipated dividend distributions (before the annual income tax return), a withholding tax at a rate equal to the corporate income tax rate will be applied.
Dividends distributed to resident individuals are also subject to income tax withholding at a rate of 10% (tax base of 40% taxed at a rate of 25%).
Value-added tax (VAT) at a rate of 12% is levied on sales and commercial transactions, imports, provisions of services (including imported “digital services”) and intellectual property rights.
Certain products and services are subject to 0% VAT including food products in their natural state, drugs and veterinary products. Also, certain services such as education are subject to 0% VAT.
For VAT purposes, digital services are those provided and/or contracted for through the internet or any adaptation or application of protocols, platforms or technology used by the internet or other networks, or similar services that are automated and require minimal human intervention, regardless of the device used for downloading, viewing or use.
For digital services relating to the delivery and shipping of tangible movable goods, the tax is calculated on the commission paid in addition to the value of the goods; the payment of VAT generated on the digital services’ supply is paid by the Ecuadorian resident importer of the services.
Currency Outflow Tax (ISD)
ISD is levied on all cross-border payments or money transactions abroad, with or without the intervention of financial institutions, and on deposits made abroad through bank transfers.
ISD applies to payments made from foreign bank accounts of Ecuadorian entities if ISD was not levied on the same cash when it was initially transferred to the foreign bank account, and to exports of goods and services if the cash does not enter Ecuador within six months after the goods arrive at their destination or the services begin to be rendered.
ISD paid on the importation of raw materials, supplies and capital goods may be used as a tax credit for income tax purposes for the following five years if such goods are used in production processes and listed in a resolution issued by the Tax Policy Committee (Comité de Política Tributaria).
The President of the Republic recently ordered the progressive reduction of the ISD rate by a quarter of a percentage point (0.25%) per quarter during 2022, until it reached a rate of 4% (the ISD rate used to be 5% until 31 December 2021). As of July 2022, the rate is 4.25%. The rate will be reduced quarterly during the year 2022, on 1 January, 1 April, 1 July, and 1 October.
Reduction of the Corporate Tax Rate
As of 1 January 2022, new productive investments may be granted a reduction on the applicable corporate tax rate of (i) 3% reduction for up to 15 years applicable to the income directly related to the new investment and (ii) 5% reduction to entities that sign an investment contract, as discussed in 2.1 Approval of Foreign Investments.
In both cases, the new investment must meet the following requirements to benefit from the reduction:
Currency Outflow Tax – ISD
ISD exemptions apply in the following scenarios:
VAT incurred in the purchase and import of goods and services, and which has been incorporated in the production of goods and services that are exported, is subject to reimbursement. It is particularly beneficial to:
Tax consolidation is not available under Ecuadorian law.
Thin-capitalisation rules are applicable in Ecuador. Any interest paid on loans from related parties which exceeds 20% of income before profit-sharing tax, interest, depreciation and amortisation is not deductible.
For banks, insurance companies and other financial institutions of the popular and solidarity-based economy (co-operatives and union financial entities that are not controlled by the Superintendence of Banks, but by the Superintendence of the Popular and Solidarity Economy), the thin-capitalisation rule applicable for loans from related parties is a 3:1 debt-to-equity ratio.
In general, transfer pricing rules in Ecuador follow Organisation for Economic Co-operation and Development (OECD) rules. The general rule is that transactions between related parties must be at arm’s length. However, the IRS has certain technical preferences that are quite specific and may imply significant differences when measuring compliance with the rules. Special rules apply to oil, bananas and metallic commodities.
In addition to traditional ownership-control criteria to determine relationships between parties, since 2008, Ecuador considers as related parties entities domiciled in foreign jurisdictions listed as tax havens by the Ecuadorian Tax Authority even if there is no factual evidence of related ownership, administration or control between the parties.
Transfer pricing information must be documented by all companies having transactions with related parties, including domestic ones. Companies must file a report with the Tax Authority if certain conditions are met, as described below:
Taxpayers involved in transactions with related parties are exempt from the application of the transfer pricing regime if they meet all the following conditions:
Transactions covered by an advanced pricing ruling (APR) of the Tax Authority do not need to be reported. APRs may be requested at any time and for any transaction, but they are commonly used to eliminate deductibility restrictions that Ecuadorian tax law imposes on related-party transactions regarding administrative and technical services, royalties, consultancy, technical assistance and similar items.
Ecuadorian tax law recognises the principle of economic essence, by which the Tax Authority may recharacterise a taxable event by considering the substance of a transaction over the form employed by the taxpayer to avoid tax evasion and the abuse of economic benefits.
When applying the principle of economic essence, the Tax Authority must consider the following criteria:
Operations resulting in an acquisition of control are subject to prior approval of the Competition Authority when any of the following criteria are met.
Failing to comply with merger control regulation (gun-jumping) can lead to a fine of up to 12% of the incumbent’s turnover of the previous year.
When the transaction meets the thresholds mentioned in 6.1 Merger Control Notification, the acquirer of control must file a petition of approval within eight days of the execution of the agreement. Once the petition has been filed, the Competition Authority will ask the petitioner to pay an administrative fee before admission to proceedings. The transaction cannot be closed before the approval of the Competition Authority.
Merger control is divided into two stages: a first stage of investigation and analysis and a second one of resolution. Since 2020, the investigation stage is divided into two phases: (i) a preliminary phase where operations not raising competition concerns can be approved within 25 days of the initiation of the proceeding; (ii) a second phase where operations that require a more detailed analysis or more information can be approved within 60 days of the initiation of the proceeding.
The Competition Authority may approve the operation of economic concentration contingent on the implementation of remedies. When remedies are included, they are required to be implemented within 90 days of the approval. If remedies are not implemented in a timely manner, the Authority can deny the authorisation. In any case, decisions adopted by the Competition Authority are subject to judicial review at the request of the parties.
Agreements between competitors are severely sanctioned in Ecuador. Cartel agreements are prohibited per se regardless of the turnover or size of the business involved. They are considered as serious infringements and punishable with fines of up to 12% of the total annual turnover of the parties involved and may be subject to additional remedies and other administrative measures.
On the other hand, vertical agreements including exclusivity arrangements are subject to the rule of reason and may be justified under certain circumstances.
Abuse of market power is prohibited and can lead to drastic sanctions according to the Ecuadorian competition regime. Prohibited practices includes those that can restrict or distort competition by means of agreements or unilateral actions by those holding market power.
Abuse of market power is sanctioned according to the seriousness of the infringement, such as: (i) operators holding a market share close to monopoly or who are beneficiaries of special authorisations granted by the State may be fined with up to 12% of their annual turnover; and (ii) those who do not meet the prior criteria may be sanctioned up to 10% of their annual turnover.
In a recent development (in 2021), the Competition Authority established, pursuant to European competition case law, that there is a rebuttable presumption that undertakings holding a market share above 40% are considered dominant.
Patents of invention may be granted for all product or process inventions in all fields of technology. The invention must contain an element of innovation applicable for industrial and technological purposes.
Term of Protection
Patent protection in Ecuador is granted for a term of 20 years from the filing of the application. Within this term, the holder may exclusively exploit the rights granted and prevent third parties from producing, using or benefiting from the invention without the prior authorisation of the owner.
The patent application must be filed before the National Intellectual Property Authority (SENADI). An application fee must be paid, and then yearly maintenance, examination and issuance fees must also be paid. Upon filing of the application, the authority carries out a formal examination of the application. Once the formal examination is complete, the application will be published in the Intellectual Property Gazette, granting a 60-day term for oppositions. If no oppositions are filed, the Authority will conduct a patentability examination prior to granting the patent.
Trade marks or distinctive signs are any distinctive and graphically representable signs, such as: words; a combination of words; images; figures; symbols; letters; numbers; sounds; flavours; devices; emblems; holograms; colours; combinations of colours; three-dimensional images; representations of a good or its packaging; trade dress; sound and olfactory elements; and any combination of these. Trade marks may include product marks, service marks, trade names, slogans, collective marks, and certification marks.
Product and service marks identify and protect specific products and services established in the Nice Classification.
Trade names protect a business establishment or activity, upon its first use in commerce, publicly, continuously and in good faith in the country. Protection over trade names ends when the use of the trade name ceases or the activities of the commercial establishment that uses it cease.
Slogans are phrases or words used as accessory to a trade mark, and its protection is subject to the validity of the trade mark linked to the slogan.
Collective marks are those owned by more than one person, and certification marks are those whose purpose is to identify products or services whose quality, origin or other characteristics are certified by the owner of the mark.
Term of Protection
Protection of trade marks is granted from the date of acceptance of the registration and valid for 10 years from that date. The registration is renewable for periods of 10 years.
The application is filed online before the SENADI through its web portal. An administrative fee needs to be paid upon filing. A separate application needs to be filed for each international class. Foreign applicants may file an application through a local agent with a power of attorney attested by a notary and legalised by apostille, or to the Ecuadorian Consulate if the particular jurisdiction is not a member state of the Apostille Convention. Foreign applicants are not required to be domiciled in Ecuador. The registration process includes a formal examination where the authority reviews the content of the application, the publication of the application in the Intellectual Property Gazette, granting a 30-day term for oppositions, and an examination of distinctiveness against prior trade marks.
The registration process takes approximately between four and six months if no oppositions are filed, and where they are filed the process could take eight to twelve months.
Industrial designs are particular appearances of a product resulting from any combination of lines or colours, or from any two-dimensional or three-dimensional external shape, line, contour, configuration, texture or material, without changing the purpose of the product and as long as it has novelty.
Term of Protection
Industrial design protection in Ecuador is granted for a term of 10 years from the filing of the application.
The registration process for industrial designs is similar to patents.
Copyright protection is obtained by the mere fact of the creation of the work, without regard to the form, merit, purpose, or mode of expression of the work. Works eligible for copyright protection include: literary works expressed in books, letters, articles, novels, stories, poems, conferences, speeches, legal arguments, and other works of a similar nature, expressed in any form; collections of works, such as encyclopedias, anthologies or compilations and databases of all kinds, which constitute original intellectual creations; musical works and, in general, theatrical works; cinematographic works and other audiovisual works; sculptures and works of painting, drawing, engraving, lithography and other plastic works; projects, blueprints, models and designs of architectural and engineering works; illustrations, graphs, maps, sketches and designs related to geography, topography and, in general, to science; photographic works; works of applied art; and software.
Although protection is obtained by the mere creation of the work, it is possible and recommended to deposit the work before the SENADI for evidentiary purposes regarding the creation of the work.
Term of Protection
The copyright protection term, in cases where the author is an individual, covers the whole life of the author and 70 years after their death. In cases where the owner of the copyright is a legal entity, the term of protection is 70 years from the moment the work has been disclosed or published.
In general, the process to register or deposit the work protected by a copyright includes the filing of a form describing and attaching a copy of the work and the payment of an administrative fee. The registration/deposit process takes approximately five days.
Utility models, similar to patents, protect inventions of less technical complexity. A utility model is considered to be any new form, configuration, or arrangement of elements of an artifact, tool, instrument, mechanism or other object, or of any of its parts, which allows a better or different operation, use or manufacture of the object that incorporates it or which provides it with some utility, advantage or technical effect that it did not have before – as well as any other new creation susceptible to industrial application that does not have a sufficient inventive level to allow the granting of a patent.
Term of Protection and Registration Process
Utility model protection in Ecuador is granted for a term of 10 years from the filing of the application. The registration process for utility models is the same as for patents. The administrative fee for filing the application of a utility model is USD136. Additionally, yearly maintenance and examination and issuance fees for the utility model must be paid.
The Ecuadorian legal framework for the protection of personal data (“personal data regulation”) includes:
Personal data regulation applies to all data or information that identifies or makes an individual identifiable (“personal data”), regardless of the format. Personal data regulation does not apply to:
Personal data regulation, and in particular the Data Protection Law, applies in the following cases:
The Data Privacy Law defines “data processing” as any action performed on the personal data of a data subject (a natural person whose data is processed), whether automated or manual, including collecting, recording, organising, structuring, storing, using, erasing, consulting, transferring, and in general any use of personal data. The Data Privacy Law defines the “data controller” as the person who decides on the data processing of personal data (ie, an owner or worker in an organisation who handles data), and the “data processor” as a third party that processes personal data on behalf of a data controller.
The Data Privacy Law confers 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, the processing of personal data is legal with the prior consent of the data subject, but there are also seven specific legal bases that allow the processing of personal data.
Finally, the Data Protection Law sets forth a sanctions and penalties regime for violations related to the processing of personal data. The rules relating to the sanctions and penalties regime will enter into force on 26 May 2023.
The Personal Data Protection Law may have extraterritorial application when a data controller or data processor, not domiciled in Ecuador, is subject to national legislation due to contractual agreement or public international law regulations in force; or, when a data controller or data processor carries out the processing of data related to the offer of goods or services to residents of Ecuador.
As of 2022, the proposed Data Protection Authority has not yet been appointed, although the designation of its director is currently in process; this process is expected to end before May 2023.
The Data Protection Authority may initiate, directly or at the request of a data subject, actions to investigate the circumstances of a particular potential violation of the Data Protection Law. If a violation is found, corrective measures and sanctions may be imposed upon the breaching party.
Since the Personal Data Protection Law was recently enacted, the corrective measures and sanctions regime will only be applicable as of 26 May 2023.
New Investment Regime
On February 2022, the President of Ecuador submitted to the National Congress the Bill of Law for the Attraction of New Investments (Ley de Atracción de Inversiones, Fortalecimiento del Mercado de Valores y Transformación Digital) which aimed to attract foreign investment by facilitating public-private partnerships, promoting the creation of free trade zones and promoting the stock market in Ecuador.
This bill was repealed by the Ecuadorian National Assembly in March 2022. Nevertheless, the Ecuadorian government announced a new bill, to be submitted by the end of 2022, which will mainly address:
New Labor Code
The President of Ecuador has also announced that a new Labor Code is being prepared that should be submitted before the National Assembly before the end of 2022. The new Labor Code will include a more flexible employment regime to promote additional employment in Ecuador.
Amendments to the Companies Act
The Companies Act was significantly amended in December 2020 with various reforms that are currently in place. Nevertheless, on 20 October 2021, a new bill with additional reforms was filed in the National Assembly and is still pending discussion and approval.
Such reforms include the possibility to incorporate S.A. and Cia. Ltda. companies, and public/private companies (Compañía de Economía Mixta), through private documents instead of public deeds, just as with S.A.S companies.
Additionally, there are reforms within the bill that, if approved, would significantly change the nature of the Cia. Ltda. form of company. The Cia. Ltda. has historically been considered a type of corporate vehicle that prioritises people over capital, and ensures that the law incorporates several restrictions in transfer of participations or units of capital. For example, as previously indicated, transfer of participations or units currently requires the unanimous consent from all partners; the bill proposes to reduce this requirement to only 75% of the voting rights of the partners. Thus, if approved, this restriction will be severely limited.
Another significant change pertains to the board of directors of corporate vehicles in general, and minority rights. The bill proposes that minority shareholders will have the right to appoint at least one director in all cases.
Overall, the bill contains many reforms that could significantly change corporate governance for the different types of Ecuadorian corporate vehicles.
The health emergency caused by COVID-19 generated a deep recession and caused a spike in poverty in Ecuador. This crisis amplified the macroeconomic imbalances that the country had been trying to correct since the end of the boom in oil prices. In addition, the crisis revealed some structural weaknesses such as the lack of macroeconomic buffers, high levels of informality, an unprepared health system, and large gaps in access to public services.
Since mid-2021, the new government has tried to make the changes that the country needs to return to a path of growth. After vaccinating more than 85% of the population and getting back on track to get out of the recession, the challenge has been to obtain the support of the population and political actors so that, together, the immediate aftermath of the crisis is overcome, and the foundations are laid for a sustainable recovery.
From an economic perspective, the government seeks to establish a framework for investment and productivity, as well as to increase job opportunities and improve labour conditions. The government also seeks to improve tax collection, and fight against corruption and tax evasion to provide transparency to public financial accounts.
Co-operative Compliance Plan
The Ecuadorian Tax Authority implemented a co-operative tax compliance programme initially aimed at major taxpayers, in adherence to international best practices, and with the aim of strengthening the relationship between taxpayers and the Tax Authority and guaranteeing adequate tax compliance, as well as strengthening tax control and increasing collection revenues.
This programme promotes a new relationship scheme, through direct communication to verify compliance with taxes in a correct and timely manner. The programme applies risk management concepts, through behavioural analysis, compliance history and tax control. In addition, it has a systematic long-term approach (2022–25) for fiscal risk management, which is based on the guidelines for multinational companies, and strengthens fiscal transparency.
This new scheme seeks to improve the level of mutual transparency, thus increasing voluntary compliance, reducing administration costs, and as far as possible preventing controversies in the tax legal relationship.
Exchange of Information for Fiscal Purposes
In addition to the Convention on Mutual Administrative Assistance in Tax Matters, Ecuador signed the Multilateral Agreement between Competent Authorities on the Automatic Exchange of Information on Financial Accounts, which constitutes the first international agreement for the adoption of the automatic exchange of financial information under the protection of the Convention on Mutual Administrative Assistance.
By signing these key instruments, Ecuador launched bilateral exchange relations with more than 103 jurisdictions that have so far accepted the Common Reporting Standard (CRS) system. As of 2022, Ecuador issued the first CRS report to the Global Forum and received information from over 43 jurisdictions around the world.
Additionally, Ecuador and the United States entered into an Exchange of Information for Fiscal Matters agreement on 7 April 2021. The purpose of this agreement is to reinforce fiscal transparency and combat evasion through the exchange of information on tax matters that allows mutual assistance in the administration and application of national tax laws. This agreement is still pending ratification by the Ecuadorian Assembly.
Voluntary Disclosure Programme
The previously described international instruments impose as prerequisites to the application of the automatic exchange of information the following conditions:
Based on this background, Ecuador enacted the Organic Law for Economic Development and Fiscal Sustainability which included a special chapter for the voluntary regularisation of international assets. This is a one-time programme applicable to tax residents in Ecuador who fulfil, as of 31 December 2020, the following conditions:
The following aspects should also be considered:
Ecuador’s Return to the ICSID
The International Centre for Settlement of Investment Disputes (ICSID) is an international and autonomous organisation created through the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
This multilateral treaty was formulated by the executive directors of the International Bank for Reconstruction and Development (World Bank), to provide conciliation mechanisms and arbitration for the settlement of disputes relating to international investments.
Ecuador was a signatory country until 2010, when former President Rafael Correa officially withdrew Ecuador from the treaty. After 11 years of absence, on 21 June 2021, the ambassador of Ecuador to the United States signed the Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States on behalf of Ecuador, reaffirming the current intention of the Ecuadorian government to return to the Council of Administration and the framework of dispute settlement mechanisms under the ICSID.
This represents a first big step for the Ecuadorian State, since it opens up a range of opportunities for direct and indirect foreign investment, and sends a message to the international community and investors regarding the re-establishment of legal certainty in the country, along with trust and respect for international standards dealing with investment matters.
As of 1 January 2022, investment protection contracts can include provisions to submit to national or international arbitration. When international arbitration has been agreed on, controversies arising from international investment contracts will be settled, at the claimant’s choice, through arbitration following the international rules in force (UNCITRAL, ICC or CIAC rules).
E-commerce and Digital Markets Development
Amidst the pandemic, e-commerce expanded across the country’s economy leading to an increase in demand for digital services. Following this e-commerce boom, the Ecuadorian government implemented a strategy to increase internet access and promote digital services. One of its first moves was to enact the Data Protection Law in 2021, whose provisions will require an adjustment in compliance programmes. Data controllers and processors must adjust their operations to new standards of data protection, such as risk assessment-based policies, minimisation by design, proportionality, fairness, transparency, and confidentiality in personal data processing, as well as the guaranteeing of data subjects’ rights.
The Presidency is expected to provide regulation regarding the implementation of the law, and to clarify important aspects of the law regarding international data transfers, and designations of data protection officers. As of 2022, the proposed Data Protection Authority has not yet been appointed, although the designation of its director is currently in process; this process is expected to end before May 2023 when sanctions become enforceable.
Finally, in the upcoming months, an increase of financial digital markets is expected due to the Fintech Bill that is currently under discussion at the Assembly. Following the increase of e-commerce in Ecuador, digital financial services, especially electronic payments, have been in high demand. This has led the government to promote new legislation to allow the development of financial digital products and services, as well as third-party digital services (currently the only regulated digital market) by implementing sandboxes and designating regulators to oversee new projects in this market. The Fintech Bill is expected to pass following the approval of the Assembly in the coming months.