Ecuador's legal framework, which supports domestic and foreign investment, had already undergone major changes since the beginning of this decade. However, the present government has gone further by removing those impediments that were affecting the smooth flow of resources to Ecuador. Basically, all limitations to the remittance of profits were also removed. Former President of the World Bank, Lewis Preston, acknowledged, "the Government has liberalized the foreign investment system, which provides equal treatment for Ecuadorian capital and for that of foreign companies in terms of tariffs, taxes and other fiscal incentives".

The Government has, in fact, eliminated barriers to the repatriation of profits and, at the same time is promoting investment in sectors that had previously been off limits for foreign investment and transfer technology have been drastically simplified. In mining, for example, thanks to the law governing that sector since 1991, the potential for foreign investment has grown considerably.

The results of this opening are clear to see: 12 of the 20 largest mining companies in the world are exploring and exploiting deposits of gold, silver and copper in various parts of Ecuador, with an initial investment of over 20 million dollars. The government estimates that, within no more than five years, the mining sector will be producing 500 million dollars annually.

A solid legal framework backs the policy of openness toward foreign capital in new, interesting areas of activity. The first legal guarantee for investors is the Constitution itself. Then there are other current laws and regulations supporting foreign investment, such as Decision 292 of the Cartagena Agreement, and the Regulations on Foreign Investment, Technology Transfer Contracts, Trademarks, Patents, Licenses and Royalties (January 1993), as well as other complementary provisions. Moreover, free remittance of profits and the possibility of repatriating assets without restrictions have stimulated foreign investment in sectors which had never received any significant input, such as exports of non-traditional products, forestry and tourism. This is partly due to the fact that, along with the opening up, procedures for foreign investment have been streamlined. For example, in most cases, it is no longer necessary to apply of authorization from the Ministry of Industry and Trade to invest in Ecuador.

Ecuadorian legislation offers broad facilities to establish foreign investment in a wide range of activities. From the type of business entities accepted in Ecuador corporations and branches of foreign companies to the special systems for investment in certain areas, Ecuador offers flexible, clear, stable norms that ensure a very attractive climate of economic freedom.

Investors can establish joint ventures or holding companies in order to link their interests with companies that are already established and successful. They can also undertake new activities, taking advantage, for instance, of the privileged treatment granted in the free zone system, which exempts them from payment of the value added tax (VAT), tax on profits, customs duty, special consumption tax (ICE), municipal taxes and export fees.

Another interesting alternative is in the Maquila Law, which authorizes exportation from Ecuador of goods with final added value incorporated in this country. This attractive mode of production is also exempt form the VAT and export fees, with the understanding that production is export oriented. The special system guarantees the conditions for these activities in the long term and, of course, free repatriation of profits, as with all foreign investment.

An executive decree issued in early 1994 by President Sixto Durán Ballén eliminated the system of political pricing. That is, at present, practically all goods and services, including many provided by the State itself fuel prices, for example are set according to market forces, in the free play of supply and demand. All subsidies for industrial and agricultural products and services have been swept away.

The objective of this policy is clear: to stimulate domestic production and develop a more competitive market through free pricing. This mechanism will also be useful for improving systems to redistribute resources, without the previous distortions caused, basically, by the government sector.

Ecuador has great capacity to supply investors with medium and highly skilled manpower. Hiring of workers is both free and voluntary. The minimum wage is set in Ecuador according to the macroeconomics policy established by the government. At present, it is 37 dollars per month; however, when all legal benefits are added, it totals an average of 148 dollars per month. There are many companies that pay more than this legal minimum, on the basis of direct negotiations between employers and employees.

Labor contracts generally last at least one year and include a three month trial period.

Contract modes may be:

• 1) For an indefinite period
• 2) For a defined period (at least one year), or
• 3) For a 90day trial period, after which the contract takes effect, unless:
• a) The work is not a normal part of the company's operations or
• b) There are requirement for special hiring.

In such cases, the investor may enter into contracts for a specific task, for occasional or temporary services, or for group or teamwork. The workday is eight hours, and 40 hours per week. The law establishes the right for workers to organize and form entities of different types. A minimum of 30 workers is required to create a labor union organization.

Ecuador's securities market rests on a legal framework that enables it to operate and to multiply. In fact, the Securities Market Law, associated with the Financial Institution Law, is the mainstay of Ecuadorian securities market growth.

The possibilities for an ever larger number of operations involving public divestiture and State enterprise privatisation to be handled through the Quito and/or Guayaquil securities markets have generated expectations that are very well received by the world's major investment banks, such as Merrill Lynch, Salomon Brothers and Lehman Brothers of the United States. The Modernization Law, geared toward privatising State enterprises, opens up interesting prospects for investment through the securities markets. This is an initiative seeking transparent development of the stock market", states a recent Merrill Lynch report.

Thanks to the ambitious plan of privatisation and government divestiture promoted by this administration, and major changes in the social security system (pension funds), the securities markets are becoming even more important; they are also strategic points from which to mobilize capital toward those companies that wish to enter new markets without necessarily borrowing from the bank.

Background

When speaking of foreign investments in Ecuador, reference must be made to the framework of the Andean Pact. The first rules dictated on this subject were contained in Decision 24 of the Cartagena Agreement Commission, approved in December 1970.

It is a fact that in the case of Ecuador, compliance with Decision 24 as of June 1971 meant an excessive control of foreign investments by the Slate; this was a negative factor in aspects such as technological contributions, new trade opportunities, generation of jobs, innovation in managing and administrative techniques, etc.

Later these rules were also challenged because they implied a series of restrictions that were incompatible with the trends observed in other countries around the world since the 70's. In this context, in the mid 80's Decision 24 was replaced with another provision that opens the possibility to channel foreign investments to each country in a wider and more flexible way.

The Andean Legislation

Under this open-door policy, the Cartagena Agreement Commission issued Decision 220 in May, 1987 later replaced by Decision 291 in March, 1991 which contains the Common Treatment Regime for Foreign Capitals and Trademarks, Patents, Licenses, and Royalties. This regime gave the Andean countries greater access to foreign capital and know-how.

Likewise, the Commission approved Decision 292 containing the Uniform Regime for Andean Multinational Corporations. These Decisions are part of the Ecuadorian legislation, after their publication in Official Registry N"682 of May 13, 1991.

Decisions 291 and 292 are the legal guidelines applicable to member countries of the Andean Group with respect to foreign investments and technological transfer within the sub region or from third countries.

The legal guidelines governing foreign investments in Ecuador are generally based on the provisions of Decisions 291 and 292 of the Cartagena Agreement, which are in force for the countries of the Andean Pact. Particularly, the legal framework that regulates foreign investments in Ecuador is that one approved by the Regulation on "Direct Foreign Investment and Contracts on Technological Transfer, Trademarks, Patents, Licenses, and Royalties", set forth by Executive Decree NO415 on January 8, 1993.

Following a trend of economic modernization and openness to foreign capital, substantial legal and economic reforms have taken place in Ecuador in the past years, in order to offer broader facilities and make foreign investment more attractive and profitable. The latest reforms on the matter Executive Decree NO415 give foreign capitals a wide range of investment possibilities, under the same conditions given to domestic capital; also, a series of restrictions and conditions that for long years limited the affluence of foreign capitals have been eliminated.

Pursuant to the provisions of the Constitution of the Republic, foreign investors enjoy the same rights and treatment as national investors.

Direct foreign investments can be made in any sector of the economy without prior authorization from any state entity, under the same conditions in which those investments can be made by Ecuadorian natural persons and corporations.

The owners of direct foreign, sub regional, and quasinvestments shall have the right to transfer, in freely convertible foreign currency, the net profits originating from their registered investment.

Foreign corporations will have access to all export promotion schemes encouragement mechanisms under the same conditions provided for national or joint ventures by foreign and national companies.

Goods produced by national or foreign companies that comply with special standards or specific requirements of origin, will enjoy all the advantages of the Free Trade Area of the Cartagena Agreement. Income originating from a local source earned by any domestic or foreign company is subject to a 25% income tax. The repatriation of profits that have previously paid the applicable 25% income tax is not subject to additional duties.

Foreign natural persons legally residing in Ecuador shall be able to invest as nationals, without need of prior qualifications; therefore, these investments are not subject to registration.

Likewise, investments made in a company existing or to be organized in Ecuador by Ecuadorian corporations qualified as foreign companies under the provisions of Decision 291 shall be considered as national investments. In no case shall prior authorization by any national agency be required.

Licensing agreements concerning technology, technical assistance, technical services, basic and detailed engineering, and other technological contracts shall be registered with the Ministry of Industries, Commerce, Integration and Fisheries.

Concerning the protection of intellectual property rights, in October 15, 1993, Ecuador signed an Agreement on the Protection and Enforcement of Intellectual Property Rights with the Government of the United States, being the first Latin American country to sign this type of agreement, which is expected to ensure a climate of transparency and security for foreign investors.

If you are interested in the English version of the Ecuadorian Intellectual Property Law, let us know and we will gladly send it to you via E-mail.

The Ecuadorian State shall be able to submit disputes arising from the enforcement of the Common Treatment Regime of Foreign Capitals and Trademarks, Patents, Licenses, and Royalties, to Arbitration Courts established under international treaties of which Ecuador is a Party.

Within the framework of its foreign investment policy, Ecuador aims at signing International Agreements that provide protection mechanisms against risks such as: inconvertibility of foreign currency, expropriation, political violence, suspension of payments to agents abroad.

Concerning the protection of foreign investments, the Ecuadorian Foreign Office has been promoting the signing of bilateral Agreements for the Protection and Promotion of Investments. Several such Agreements have been recently signed: with the United States (August 27, 1993), Chile (October 27, 1993), Venezuela (November 16, 1993), Paraguay (January 28, 1994), Argentina (February 8, 1994), China (March 21, 1994), Great Britain (May 10, 1994), El Salvador (May 16, 1994), and France (September 7, 1994); at the same time, similar agreements are being negotiated with several countries such as Germany, Belgium, Bolivia, Canada, Colombia, the Czech Republic, Denmark, the Dominican Republic, Finland, Japan, Korea, Kuwait, Malaysia, the Netherlands, Nigeria, Panama, Peru, Poland, Russia, Spain, Sweden Taiwan, etc.

Through these agreements, Ecuador intends to guarantee an equitable and fair treatment to foreign investors, while at the same time establishing clear and precise standards in matters such as: repatriation of investments and profits, settlement of controversies, just and fair compensation in case of expropriation, interpretation and enforcement of agreements, etc.

NOTE:

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Embassy of Ecuador
Västra Trädgårdsgatan 11 A, 1tr.
111 53 Stockholm
(46-8) 679 6070
Fax: (46-8) 611 5593
E-mail (Presione Aquí / Click Here)