- Current Regulatory Framework
- Basic Principles
- Types of Companies
- Taxation on Companies
- Guarantee For Investment

Ecuador has traditionally enjoyed a free exchange regime for more than seventy years and remains so after the implementation of the so called "dollarization process" (adoption of the US dollar as the currency for local transactions instead of the sucre). An absolutely free exchange system has prevailed during this time whereby Ecuadorian and foreign companies and individuals in Ecuador may freely bring foreign currency into Ecuador and remit it abroad, invest in securities in other countries, and maintain bank accounts in any foreign currency in this country or abroad without needing any authorization or registration.

Even within the legislation of the Andean Pact (current Andean Community of Nations) dealing with foreign investment that ranges from the restrictive Decision 24 of 1970 to the flexible Decision 291 of 1991, Ecuadorian internal rules have always been most favorable to foreign investment - with the limits set thereof.

1. Current Regulatory Framework

1.1 The legislation applicable to foreign investment currently in force in Ecuador is basically the following:

1.1.1 Decisions No. 291 and No. 292 of March 1991 issued by the Commission of the Andean Community (Colombia, Ecuador, Peru and Bolivia).

1.1.2 Law on Foreign Trade and Investments.

1.1.3 Law on Promotion and Guaranty of Investments.

1.1.4 Regulations to the Law on Promotion and Guaranty of Investments.

1.1.5 Regulation No. 921-95 of March 1995 and its amendments from the Central Bank of Ecuador that regulates foreign investment registrations.

1.1.6 Law on Companies.

2. Basic Principles

2.1 As a general rule, the Political Constitution states that foreigners enjoy the same rights as Ecuadorians.

2.2 Decision 291 establishes that foreign investors will have the same rights and obligations applicable to national investors, except as stipulated in the legislations of each member country.

2.3 Foreign investors do not require a prior authorization to invest in Ecuador whether in a permanent association with the capital stock of a corporation or as a financial investment through the stock exchange. Foreigners are only obligated to register their investment with the Central Bank basically for statistical purposes.

2.4 A foreign investor may remit to his country of origin - or to any other country - the profits deriving from his investment as well as any proceeds obtained from the sale thereof. No authorization from any organization is required.

2.5 Be they individuals or corporations, foreigners may freely acquire real property in Ecuador.

2.6 There are only certain specific restrictions for foreign investment in areas relating to national defense and security, and in newspapers.

3. Types of Companies

Corporations ("sociedades anónimas"), limited liability companies ("sociedad de responsabilidad limitada") and branches of foreign companies are the most frequently used vehicles for local and foreign investment.

3.1 Corporations ("sociedades anónimas")

3.1.1 Corporations may be established with two or more shareholders who are liable up to the amount of their contribution to the company's capital stock.

3.1.2 Corporations issue freely negotiable shares of stock. Even if the buyer is a foreigner, no prior authorization is required.

3.1.3 At the time of incorporation, 100% of the capital stock of such corporations must be subscribed to and at least 25% should be paid-in. The balance can be paid within a period of up to two years. The current minimum capital stock is US$800.

3.1.4 At least 10% of the net profits must be credited to a legal reserve, until the reserve amounts to 50% of the subscribed capital. The legal reserve may be used to compensate losses or to increase the stock capital, but it may only be distributed in case of liquidation.

3.1.5 Generally, Shareholders' meetings could take place at first call if more than 50% of the paid-in capital is present. If second call, no minimums apply. The quorums may be reinforced in the by-laws. Shareholders' meetings should necessarily take place within the territory of the Republic of Ecuador.

3.1.6 Generally, the resolutions of the shareholders' meeting are adopted by simple majority of the paid-in capital represented at the meeting. Supermajorities are required for decisions regarding: (i) Not to distribute profits, (ii) Capital raised by increasing the face value of the shares, (iii) Any other issue determined in the by-laws.

3.1.7 Public subscription of shares through the stock exchange is permitted. There is also the possibility of issuing bonds that can be converted into shares.

3.2 Limited liability companies ("sociedades de responsabilidad limitada")

3.2.1 Limited liability companies may be created with two or more partners, to a maximum of fifteen. They are liable up to their contribution to the capital stock. At the time a company is established, the capital stock must be fully subscribed to and at least 50% should be paid-in. The balance may be paid in a period of up to one year.

3.2.2 The capital stock is divided into shares that can only be transferred to another partner or to a third party upon the prior authorization of the other partners. The current minimum capital stock is US$400.

3.2.3 Unless the by-laws provide otherwise (increasing the minimum), al least 5% of the net profits must be credited to a legal reserve, until the reserve amounts to 20% of the subscribed capital.

3.2.4 Rules regarding shareholders' meetings are similar to those applicable to corporations.

3.3 Branches of foreign companies

3.3.1 It is permitted to establish branches of foreign companies. To this effect, authenticated copies of the documents evidencing the incorporation of the foreign company, its by-laws, a resolution from the board of directors (or the competent body) authorizing the branch, and a current certificate of legal existence and good standing to conduct business abroad must be submitted to the Office of the Superintendent of Companies and a minimum capital of US$2,000 must be allocated to the branch. It is also necessary to designate an attorney-in-fact with residence in Ecuador with full powers to represent the company in every business carried out in this country.

3.3.2 The Office of the Superintendent of Companies analyzes the legality of the documents, approves the establishment of the branch, and orders that the authorization be published and registered with the Mercantile Registry.

3.3.3 There are no limitations on the type of business that may be conducted by branches of foreign companies.

3.4 Incorporation of companies

3.4.1 The incorporation charter and the by-laws are included in a public deed with attendance of all the shareholders. Once the Office of the Superintendent of Companies has approved the incorporation and the public deed is registered with the Mercantile Registry, the company begins its legal existence.

3.4.2 Appointments of administrators are also registered with the Mercantile Registry. The administrators may be Ecuadorians or foreigners. By being designated administrator of a company, a foreigner may obtain a resident visa.

3.5 Management

3.5.1 Companies are managed by a legal representative, the shareholders' meeting and any other body or officer determined in the by-laws. A board of directors is not mandatory. Branches of foreign companies should be managed by attorneys-in-fact with ample powers.

3.5.2 Officers may be appointed for terms of up to five years and may be freely re-elected.

4. Taxation on Companies

4.1. C4.1 Companies are subject to a single fixed 25% tax rate on their profits or 15% if the profits are capitalized. Deductions of all expenses necessary for the company's operation are allowed.

4.2. Dividends of a company that already paid the single 25% tax on its profits are tax-exempt whether distributed to shareholders resident in Ecuador or abroad.

4.3. When dividends are remitted abroad, the 25% tax paid in due course by the company is deemed to have been paid by the shareholder concerned, so he may use it as a tax credit in his country of origin.

4.4. Profits deriving from an occasional purchase-sale of shares or other securities are not subject to taxation. An occasional purchase-sale is the one carried out by individuals or corporations whose main activity does not involve the purchase and sale of securities.

4.5. Remittances of considerations other than dividends, such as royalties or similar payments, are generally subject to a single 25% tax on the amount remitted or credited abroad. This amount must be withheld by the company or person who makes the payment abroad at the time the payment or credit on account is made.

4.6. There are agreements for purposes of preventing double taxation among Andean Community member countries and with third countries such as Argentina, Brazil, Germany, Spain, France, Italy, Switzerland, Belgium and Mexico. As a general rule, taxes paid in Ecuador may be totally or partially deducted by the parent company in countries such as the United States, Canada and almost all the European countries.

5. Guarantee For Investment

5.1. Ecuador has executed investment guarantee agreements with countries such as: United States, Canada, Germany, Switzerland, the United Kingdom, France, Spain, Belgium, Argentina, Chile and Uruguay.

5.2. These agreements allow companies from those countries to resort to a regime for purposes of insuring their investments whereby the relevant government may directly bring a claim to another government in the case of expropriations or arbitrary treatment suffered by its companies.

© CORRAL & ROSALES, 2009

PLEASE NOTE: These comments are intended to provide general information only. Corral & Rosales cannot accept any responsibility for loss suffered by any persons acting or refraining from action as a result of information contained herein. Any specific legal questions should be addressed to the firm in Quito, Ecuador.