This Doing Business in Ecuador Guide has been prepared by  TOBAR ZVS C.L.1, and is intended to provide with general information for the knowledge of potential investors interested in acquiring an existing business or before starting operations in Ecuador.

The information included in this Guide is not exhaustive, and any  in‐depth and detailed information shall be consulted with experts.

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Blockchain is not only the technology that made possible the creation of cryptocurrencies or the one that will radically transform the operations related to any digitizable value, including not only the registry but also the automatic execution of obligations derived from contracts, property titles, trusts, compensation and settlement of stock transactions, corporate bylaws, corporate governance rules, electronic voting, clinical history for personalized medicine by means of sensors connected to the Internet, to aircraft flight plans or drone itineraries or self-driven vehicles. Although this would seem yet enough, Blockchain is even more, it is one of the most powerful tools currently available to society to organize politically without centralized authorities, especially given the convergence with other technologies related to Big Data and Artificial Intelligence.

Countless sources explain in detail the operation of Blockchain for those who want to delve into its technical aspects.  However, to understand the implications of this article, it is enough to remember that, in essence, it is a distributed data record–which prevents from altering a record without doing so simultaneously in all the digital, scattered, anonymous and innumerable files—which are structured in blocks of sequentially linked or chained mathematical operations, in order to trace and verify the history of a value to its very origin.  Complex algorithms of encryption also ensure all of this.

However, for the purposes of these notes, the greatest beauty of this invention is that its structural architecture imposes the absence, even the impossibility, of management, control or any other form of direction, by either a private manager or by a public authority, turning the spontaneous exchange of society immune to any form of supervision, intervention or manipulation—the irresistible temptation of regulators, authorities and governments.

It will be said that authority—I mean the hypothetical authority in Alice in Wonderland—provides some guarantee. How is it explained then that US$ 84 trillion is the sum of total money circulating in the world, including bank deposits, if the total of bills and coins officially issued is, however, US$ 31 trillion? That means that 63% of the total money, corresponding to currencies “issued” by central banks or reserve of the countries, magically appeared in the electronic records of the banks without its counterpart.

Let’s go back to the currency, one of the most appreciated expressions of state sovereignty that, however, today circulates with liberating power through multiple cryptocurrencies that emerged without intervention, regulation, permission or validation from any political authority. Regardless of the growth of the circulation of cryptocurrencies, perceived as a threat by both, public regulators who see how spheres of action of the private initiative in which they were so accustomed to stick their noses and nails evaporate, and by traditional banking that loses a space of intermediation, we are already faced to the proof of a concept:  people can organize themselves to give life to legal goods that previously depended on a public arbiter, and can even incorporate algorithms to cause legal effects automatically—a payment, the transfer of a record, the liquidation of a value, etc. –effects whose realization, in case of infringement of one of the parties, today is in the hands of judges, arbitrators or, in the best cases, of trustees.

The day will come when in the Republic of Absurdistan—in this name I include 95% of universal citizenship, since only 5% of the world population, according to The Economist study, lives in full democracies, understood as much by their political organization how much for the extent of the exercise of civil liberties—will replace paper records of real estate, with their signatures and seals, everything so susceptible to adulteration, deterioration or the will of the duty officer, by digital records on Blockchain platforms, and then there will be no need for a certificate from the property registrar to prove the domain chain or register the transfer, or for the intervention of a notary public to solemnize a sale.  Then Juan will be able to click on an iPad, while sunbathing on the shores of the Caribbean Sea, and transfer the ownership of an apartment in Absurdistan to Jorge, who had been able to verify the authenticity of the registry on his computer.

A process that takes several weeks or months and consumes a lot of money from taxpayers to finance the operation of property registries, municipal cadasters, tax collection offices and its court of auxiliary servers and processors will have been replaced by one that concludes in seconds without any intermediation of the public authority or its notaries.

Even in the electronic transfer act, self-executing instructions could be included for the necessary payments, including the transfer of the price and the value of the taxes, so that with one click several operations that conclude with one click would have been consented, perfected and executed. Simultaneous transfer of real estate and money. The process of acquiring a property will be as expedite as the purchase of an electronic book on Amazon.com.

Mayors and aspirants to Mayors, do it, propose it! It will happen anyway. In Moscow, the original home of the creator of Ethereum, a program to load all real estate titles into Blockchain registers is already underway.

Another example of Blockchain application, among many, with the variations of each jurisdiction, is the institution of the government license, whether in the form of prior permission, registration, cadaster, ex-post authorization, audits and renewals, which condition an infinity of acts, from the registration of a vehicle, the validity of a contract, the approval of plans for a civil construction, the registration of a commercial product, the foundation of a legal entity or commercial company through the obtaining or transfer of a mining concession.

Regardless of the fact that many of these licenses should not exist insofar as these submit to bureaucratic approvals the exercise of freedoms that should be exercised without any restriction, for acts that require compliance with some norm or criterion to satisfy the legitimate interest of other members of the community—not the whim of the regulator on duty—, technology could do all the work.   A plan could be digitized and loaded online in a server configured with the constructive parameters and automatically detect deviations or inconsistencies. But if there are not, the electronic validation of the plan, the construction license or any other necessary permission would be executed with the delivery of a token to the constructor, verifiable in its Blockchain file by any developer, investor or buyer of the future building.   Needless to mention that in such a system, bureaucratic bottlenecks and consequent corruption would disappear.

The examples go as far as imagination allows, since Blockchain is a technology that allows converting the Internet into a virtual vault of any valuable object that can be digitized.   It transforms a network of information exchange in one of generation, storage and circulation of value. But, above all, it is a technology that makes possible the recovery of personal autonomy, hijacked today by multiple forms of intermediation and state supervision, although for us to reach this state of emancipation of a citizenship in a state of minority, because it is subject to increasingly unlikely aspects of public tutoring; we will have to face a challenge that is more cultural than technological.

The Law to Develop Production, Attract Investments, Generate Employment, Fiscal Stability and Balance (“Law of Productive Development”) was published in the Official Registry and is consequently in force.

This law has three main chapters: 1) First Chapter, that regulates the remission of interests and fines; 2) The Second Chapter contains incentives to attract private investment; and 3) Third Chapter contains several amendments to different legal bodies.

A. Incentives to attract investments

1. Income Tax Exemptions

a) For Prioritized Sectors

The Law of Productive Development stipulates that new productive investments initiated on or after the date of the enforcement of the law in the prioritized sectors, shall be entitled to the income tax exemption and the income tax advance during 12 years, counted from the first year that direct income only attributable to the new investment is generated. For those investments in the urban areas of Quito and Guayaquil, said exemption will be during 8 years.

In order for societies to benefit of this exemption, these shall generate net employment under the terms to be defined in the by-laws of the Law of Productive Development.

New productive investments in agro industrial, industrial and agro-associative prioritized sectors, within the cantons located in the boundaries, will benefit with a 15 years’ exemption.

Prioritized sectors are the following:

1. Agriculture sector: production of fresh, frozen and industrialized food.
2. Forestry and agroforestry chain and their processed products
3. Metal-mechanical
4. Petrochemical and oil-chemical
5. Tourism, film industry, audiovisuals and international events.
6. Renewable energies
7. Foreign commerce logistic services
8. Applied biotechnology and software
9. Exports of services
10. Software development and services, hardware production and development, digital infrastructure, computer security, digital products and contents, on-line services.
11. Energy efficiency
12. Industry of sustainable construction materials and technologies
13. Sectors of strategic replacement of imports and development of exports.

2. For Basic industries:

New productive investments that initiate on or from the date of the entering in force of the Law of Productive Development in the economic sectors determined as basic industries, shall be entitled to the income tax exemption during 15 years. The term of the exemption shall be counted from the first year with direct income only attributable to the new investment is generated.

In case those investments are made in cantons located at the borders, the tax exemption term will be of 20 years.

In order for societies to benefit of such exemption, these shall generate net employment, under the terms to be defined in the by-laws to the Law of Productive Development.

In this context, the following are considered basic industries:

1. Copper and aluminum smelting and refining
2. Steel smelting for the production of plain stainless steel.
3. Hydrocarbons refining
4. Petrochemical industry
5. Cellulose industry
6. Ships’ construction and repair

3. Exemption of the tax on the remittance of currencies

New productive investments for which an agreement had been entered into with the Ecuadorian government, for either sector of the economy, shall be entitled to the exemption of the tax on the remittance of currencies in their payments for:

a. Import of capital goods and raw materials for the development of the project, up to the amounts and in accordance with the terms that shall be defined in the investment contract.

b. Dividends distributed by local companies or foreign companies domiciled in Ecuador, in favor of effective beneficiaries that may be either individuals or corporations, during the terms stipulated in the investment contract.

For companies that reinvest in Ecuador at least 50% of its return, in productive assets, these will be exempt of the tax on remittance of currencies for payments abroad, for payment of dividends to effective beneficiaries residing in Ecuador.

B. Remission of Interests, Fines and Surcharges

a. Tax and Fiscal Obligations handled by the IRS

The Law of Producitve Development orders the remission of 100% of interests, fines and surcharges over the balance of tax obligations handled by the IRS. Such remission does not apply for tax obligations due after April 2, 2018, or for obligations derived from the annual income tax statement of fiscal year 2017.

In order to benefit from the remission, the taxpayers shall pay the total principal within the following deadlines:

1. Within 90 days after the publication of the Law of Productive Development, in case of (1) taxpayers with average gross income for the three latest fiscal years exceeding US$ 5 million; (2) individuals belonging to economic groups according to the IRS’ cadaster as of the date of enforcement of the Law; and (3) taxpayers holding obligations corresponding to withheld or perceived taxes.

2. The rest of taxpayers shall file applications requesting payment facilities or to pay the principal within 90 days from the entering into effect of the Law. Payment facilities for a term of up to 2 years can be granted.

b. Vehicle Registration and Transit violations

1. It is ordered the remission of interests on taxes on vehicles handled by the IRS and due as of April 2 2018, provided that the outstanding total shall be paid within 90 days from the date of entering in force of the Law.

2. It is ordered the remission of surcharges set forth by the National Transit Agency for lack of vehicle registration, due as of April 2 2018, provided that the total is paid within 90 days counted from the date of entering in force of the Law.

3. It ordered the remission of additional 2% fines under the Organic Transit Law, on transit violations, which payment is pending as of April 2 2018, provided that the total penalty is paid within 90 days from the date of entering in force of the Law.

c. Overdue Employers’ IESS obligations in law-suit

It is ordered the reduction of interests, fines and surcharges corresponding to obligations of employees’ affiliation at law-suit, arising from invoices or determination actions, glosses and credit titles issued by the IESS, as long as the payment is made within the following deadlines:

1. Payments within 90 days from the date of entering into effect of the Law may benefit of 99% of reduction of interests, fines and surcharges.

2. Payments made 91 to 150 days from the date of entering into effect of the Law may benefit of a 75% reduction of interests, fines and surcharges.

3. Payments made 151 to 180 days from the date of entering into effect of the Law may benefit of a 50% reduction of interests, fines and surcharges.

Such reduction is not applicable for obligations at law-suit for reserve funds, affiliation for non-remunerated work at home, collections, health extension, unsecured loans, collateral credits. Interests, fines and surcharges for the delayed affiliation filed after April 2, 218 are also excluded.

C. Amendment of several legal bodies

In addition, the Law to Promote Production includes important amendments to several legal bodies, among them:

a. Organic Law of the Internal Tax Regime
b. Law Amending the Law for the Tax Equity in Ecuador.
c. Organic Production, Commerce and Investments Code
d. Organic Monetary and Financial Code
e. Mining Law
f. Hydrocarbons Law
g. Labor Code
h. Social Security Law
i. Companies’ Act

In the next issue we will publish an analysis of the amendments that the Law to Promote Production will bring to general regulations.

Court Decision rejects the petitioner’s submission on procedural technicalities, and doesn’t reflect on the merits.

Any project in any industrial sector with potential environmental impacts should be consulted to communities as part of the licensing process (prior consultation). This is not the kind of consultation at issue; instead, petitioners resorted to the public consultation process, a mechanism contemplated for quite different political participation purposes.

Under the Ecuadorian Constitution (EC), public consultation requests should be approved by the Constitutional Court (CC) before the National Electoral Council calls for a local or national vote, in order to ensure that the subject matter proposition is consistent with constitutional provisions. Respondents -including mining companies, business associations, government agencies, business chambers and other stakeholders- argued thorough amicus curiae that public consultations should not be allowed by the CC to the extent it calls into question constitutional or legal rights or would otherwise contradict constitutional provisions. Also, to the extent a given consultation is not intended to amend the law -there is a very specific and qualified national process in that regard-, the CC must also ensure that consultation requests do not attempt to by-pass the legal constitutional process that would otherwise be necessary in order to change the legal framework.

In case 0002-19-CP, where the consultation’s question would have called fora vote on whether mining is accepted or not, the CC could have rule out, once and for good, public consultation requests of the sort, particularly as the EC provides for specific mechanisms of prior consultation designed to ensure community participation. The CC avoided dealing on the case merits and limited itself to reject the petition on legal standing grounds and further technicalities. Given this outcome, the industry should expect anti-mining groups to reformulate their legal approach and come back in the short term with a number of public consultation requests to be heard by the CC.

It should be stressed that the threat the mining industry is facing as a result of the abuse of the consultation mechanism may extend to any other industry, so it can be also expected that other business sectors will get organized and join the defence of the rule of law.

The mining industry has still a number of legal and communication initiatives to advance its cause and deal with the upcoming wave of political consultations, this time hopefully through a proactive strategy.

For more information and deeper understanding of this ruling or of the legal and political battle ahead, please contact INFO@TZVS.EC.