Foreign Investment: Incentives & Financing

Ecuador is a member of the Andean Community, along with Bolivia, Colombia, Peru and Venezuela. In 1992, the Andean Community decided a common regime for the treatment of foreign capital and trademarks, patents, licenses and royalties. These decisions where then incorporated into Ecuadorian legislation.

Ecuador maintains a policy of open foreign investment, and foreign investors have the same rights and are subject to the same duties as national investors. Companies legally established in Ecuador –limited liability companies, corporations and joint ventures, regardless of whether they are foreign or domestically owned, have full access to all available sources of financing.

Incentives take the form of loans at favorable interest rates granted by public and semipublic entities, such as the National Development Bank (Banco Nacional de Fomento) and the National Finance Corporation (Corporación Financiera Nacional), to approved enterprises and individuals operating in special development areas such as agriculture and industry.

In the year 2000, the government established the US dollar as the country’s currency, giving rise to monetary stability and single-digit inflation.

Ecuadorian companies wholly owned by foreigners are free to operate in all economic sectors, without prior authorization, except those reserved for the state unless the State delegates the activities to the private sector. Such permission can be granted for the following activities:

• The production, transportation, storage, and commercial use of hydrocarbons and minerals
• The generation, distribution, and commercial use of electric power
• Telecommunications
• Drinking water & sewer systems

All foreign investments must be registered with the Central Bank within thirty working days following registration at the Commercial Registry (Registro Mercantil) of the articles of association or of any capital increase. A copy of the corporate document must be presented to the Central Bank at the time of registration.

No control approval is required for the remittance of dividends, interest, or profits abroad. Foreign loans and renewals must be registered with the Central Bank, and are not taxed, provided interest rates stipulated in the loan agreement do not exceed maximum reference rates issued by the Central Bank. If the loan is not registered, a withholding tax of 25% applies on the interest payment abroad. The amount of funds remitted for royalties, licenses, or technical fees is not limited, once income tax has been paid.

Foreign portfolio investors may freely invest in Ecuadorian government bonds, other bonds, or shares. Portfolio investments are treated in the same way as other investments.

The Investment Promotion Law stabilizes income tax rates at the investment date or the date on which the investment is registered in the investment holder’s name. New investment in established companies not intending to expand or extend production are granted 10 years’ stability, while new investments destined to develop new investment projects or expand production are granted 20 years’ stability. Both these periods can be extended by five years. This benefit is only available for investments exceeding the value of US $500,000.

In order to guarantee these rights, foreign investors can negotiate legal security contracts with the government. This vehicle ensures compliance with the conditions on which investments decisions are based.

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Foreign Investment Guarantees In sum, Ecuadorian legislation currently provides multiple guarantees to foreign investors such as:

Guarantees

• Reinvestment of non-distributed profits in the same firms in which such profits were generated.
• Remittance abroad (in legal tender) of all proven net profits derived from registered investments, upon payment of local taxes.
• Repatriation of any amounts resulting from the liquidation or sale of an entity in which an investment was made, upon payment of local taxes and deduction of net losses. Transfers of shares to foreign investors are not deemed capital repatriation
• Unrestricted property ownership and transfers of investments.
• Customs and excise duty preferences granted by the USA and member countries of the Andean Community and the European Union.
• Unrestricted access to both national and foreign financial markets. Foreign loans must be registered with Ecuador’s Central Bank in order for interest payments to be tax exempt.
• Foreign investment contracts entered with the state so as to ensure that investment terms and conditions are duly enforced.
• Unrestricted access to promotion and technical assistance mechanism plus incentives in less developed areas and national interest projects.