LEGAL-POLITICAL SYSTEM
Ecuador is a democratic republic ruled by a constitution enacted in 2008. It recognizes the classic division of powers: a legislative branch, an executive branch, and a judicial branch. The president is elected for a period of four years, with the possibility of immediate reelection. The National Assembly consists of 125 representatives, also elected for terms of four years. The judges of the National Court of Justice are appointed for a period of nine years, and one-third of them are reappointed every three years. There is a Constitutional Court, which is responsible for interpreting the rules of the Constitution and reviewing the acts of the state, including judgments of courts and tribunals that may violate constitutional rules.
CURRENCY EXCHANGE SYSTEM
Ecuador has enjoyed a free exchange market for over 70 years. The currency of legal tender is the US dollar. Ecuador does not have its own currency. An absolutely free exchange system has prevailed during this time, whereby Ecuadorean 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.
FOREIGN INVESTMENT
The rules and regulations applicable to foreign investment currently in force in Ecuador include the following:
•Decisions 291 and 292 enacted in March 1991 and issued by the Commission of the Andean Community (Colombia, Ecuador, Peru, and Bolivia).
•Code on Production, Trade, and Investments and its regulations.
•Regulation 921-95 dated March 1995 as amended and issued by the Central Bank of Ecuador, which regulates the registration of foreign investment.
•Law on Companies.
As a general principle, the Constitution of Ecuador provides that foreigners enjoy the same rights as Ecuadoreans.
Decision 291 provides that foreign investors have the same rights and obligations as local investors, with the exceptions provided for in the law of each member country.
Foreign investors do not require prior authorization to invest in Ecuador, whether to invest in the capital of a company or as a financial investment through the stock exchange. Foreigners are only required to register their investment with the Central Bank, mostly for statistical purposes.
Foreign investors may freely remit to their country of origin—or to any other country—the profits deriving from their investment as well as any proceeds obtained from the sale thereof. No authorization from any organization is required.
Both foreign individuals and entities may acquire real property in Ecuador.
Generally all sectors of the economy are open to foreign investment without limitation. There are only certain specific restrictions for foreign investment in areas relating to strategic sectors (namely oil, power, potable water), national defense and security, and newspapers.
VEHICLES FOR INVESTMENT
The vehicles usually used for local or foreign investment are corporations (“sociedad anónima-SA”), limited liability companies (“compañía de responsabilidad limitada–SRL”), and
branches of foreign companies, all mainly regulated by the Law on Companies. Below is a comparative list of the main characteristics and requirements of each type of entity.
SRLs are commonly used by US investors as this entity qualifies as a pass-through entity for US tax purposes. SAs are more commonly used by Ecuadorean and non-US investors as they permit a more flexible transfer of shares. Branches of foreign entities are commonly used for government procurement purposes, as they benefit the financial and technical capacity of the head office.
Certain activities require a specific type of entity. For example, an SA is required for establishing a financial services entity, while a SRL is required for rendering private security services.
MERGERS & ACQUISITIONS
In Ecuador, it is possible to merge two or more companies when one or more (of those taken over) are taken over by another company, or if the merging companies disappear in order to create a new company. In all cases, the company that takes over or the new company succeeds the rights and obligations of those taken over.
A company can also purchase all or the majority of the shares of other company that does not disappear but becomes the property of the buyer.
It is also possible to purchase all the assets and liabilities, or most of them, in what is known as a “business purchase” (purchase of a going concern). In this case, the buyer does not acquire all of the seller's obligations, but only those specifically designated. This alternative is beneficial when there are any doubts concerning hidden or contingent liabilities of the seller. The purchase can also involve the assets exclusively, or any part thereof.
Ecuadorean law does not contemplate unsolicited (hostile) transactions, and therefore there are no tactics of defense to oppose or block a takeover.
Ecuador enacted, for the first time, a Law on Competition in October 2011. Under the Law on Competition any business combination that meets the following criteria is subject to prior approval by the competition authority: (i) when the combined volume of business in Ecuador within the prior fiscal year is higher than the threshold that is yet to be set by the competition authority (known as “Regulatory Board”) or (ii) when, as a result of the combination of entities involved in the same type of business, a 30% or more of the relevant market is obtained or increased.
LABOR ISSUES
Forms of recruitment and duration. The minimum duration of stable or permanent contracts is one year, whether for fixed-term or indefinite-term contracts.
A fixed-term contract is one whose duration is set in the contract. The duration cannot be less than one year nor more than two years. These contracts cannot be renewed. If the employment relationship continues upon the end of the contract term, the contract automatically becomes an indefinite term contract.
An indefinite term contract is that which the duration is not determined and remains in effect until terminated due to one of the reasons established by law.
There are exceptions to the above rules regarding special contracts, such as temporary contracts, contracts for specified works or services, occasional contracts, part-time contracts, and seasonal contracts.
Trial period: In fixed-term or indefinite term contracts, it is possible to establish a one-time initial trial period of up to 90 days during which either party may terminate the contract without any compensation.
Work time: Safe for certain exceptions, the ordinary working time consists of eight hours per day and 40 hours per week, divided into five days. The workday may consist of one shift with a short break for lunch, or two shifts of four hours each.
Saturdays and Sundays are mandatory rest days, unless the nature of the activity does not allow for interruptions during those days. Work time between 1900 and 0600 has a surcharge of 25% over the total ordinary remuneration.
Vacations and holidays: Every employee is entitled to enjoy a 15-day uninterrupted vacation leave each year. After the fifth year of work for the same employer, the employee is entitled to an additional day of vacation, up to 15 days for each year beyond the fifth year. The right to vacation leave starts after completing one year of service. The employer may determine the date of the employee’s vacation.
Vacation time is paid in the amount of one-24th of the worker’s earnings during the previous year.
The law provides for nine mandatory holidays, including Christmas Day, New Year’s Day, Independence Day, and other national celebrations. There are also local holidays in each province.
Compensation: Compensation may be stipulated per week or per month. In periodic or seasonal work, it can be agreed per days or hours. The compensation is freely agreed between the parties. There is a general minimum wage of $292.00 per month, although higher minimum wages may apply to certain activities.
In addition to the monthly salary, the following benefits must be paid:
•Thirteenth salary. Equivalent to one-12th of the amount earned by the employee during the period from December 1 of the previous year to November 30 of the current year.
•Fourteenth salary. Equivalent to one minimum wage, currently $292.00.
•Reserve fund. Paid after the first year of employment, and equivalent to one-12th of the salary or wages. It must be deposited monthly with the Ecuadorean Institute of Social Security (IESS) or paid directly to the worker when so requested.
Profit sharing: The employer must distribute among its workers 15% of the year’s net profits. This amount is deductible for tax purposes.
Social security and retirement by the employer: The employer is obliged to enroll its employees with the IESS. The employer contributes an amount equivalent to 12.15% of the employee’s monthly salary and the employee contributes 9.35% thereof.
The basic risks covered by the IESS are: illness, maternity, retirement, work accidents, occupational illness, unemployment, and death.
When an employee completes 25 years of service for the same employer, the latter is obliged to undertake the employer’s retirement that is calculated actuarially.
Termination of the labor relationship: The employment relationship between the parties may terminate due to one of the following causes:
•Mutual agreement between the parties
•Expiration of the labor contract
•Termination by the employer (“eviction”)
•“Visto Bueno” (termination for cause as established in the law)
•Unjustified dismissal
When the employer unilaterally terminates the relationship with the employee without cause, it must pay the severance provided by law that is generally equivalent to 1.25 monthly salaries per each year of service.
TYPES OF Investment Incentive Schemes |
FEATURES | CORPORATION | SRL | BRANCH |
Minimum number of shareholders | Two shareholders are required for the incorporation and maintenance of a corporation. | Similar to a corporation. | Not applicable. |
Maximum number of shareholders | No maximum number of shareholders. | A maximum of 15 members. Otherwise needs to be transformed into another type of company or dissolved. | Not applicable. |
Shareholders’ liability | Up to the amount of their capital contributions, except in case of bad faith or willful misconduct. | Similar to a corporation. | Not applicable. |
Disclosure of shareholders’ information | Foreign entities that participate as shareholders of a corporation must appoint an attorney in fact resident in Ecuador. The identity of the first level of shareholders of the foreign entity participating as a shareholder of a corporation needs to be disclosed. | Similar to a corporation. | Not applicable. |
Capital structure | The capital is divided into registered shares. Ordinary and preferred shares may be issued. Preferred shares have no voting right, but may grant special rights in relation to dividend payments and in case of the liquidation of the corporation. Bearer shares are not allowed. | The capital is divided into quotes of a single class. | Not applicable. |
Transfer of shares | Shares may be freely transferred. Any statutory or contractual limitation to the transfer of shares shall be rendered null and void. Shares are transferred by means of an assignment notice executed by the assignor. The assignment shall be executed in the share certificate or in a document attached thereto and recorded in the Register of Shareholders. | Shares may only be transferred with the unanimous consent of all the members. The assignment shall be executed in the form of a public deed, duly registered with the Commercial Registry, and further recorded in the Register of Members. | Not applicable. |
Attachment of shares | Shares are subject to attachment by seizing the share certificates and recording the attachment in the register of shareholders. Shares may be pledged. | No attachment of quotas is permitted. Quotas may not be pledged. | Not applicable. |
Minimum subscribed capital | $800 Specific minimum amounts may be required for conducting certain activities. | $400 Specific minimum amounts may be required for conducting certain activities. | $2,000 Specific minimum amounts may be required for conducting certain activities. |
Minimum paid-in capital | At the time of incorporation at least 25% of the subscribed capital must be paid in. The remaining balance must be contributed in a maximum two-year period. | At the time of incorporation at least 50% of the subscribed capital must be paid in. The remaining balance must be contributed in a maximum one-year period. | 100% of the allocated capital must be paid in at the time of establishing the branch. |
Preemptive right | Absolute right. The shareholders shall always have a preemptive right to participate in a capital increase, pro rata to their current participation in the paid in capital of the company. Right may be waived. | Relative right. It needs to be determined in the by-laws of the company or resolved accordingly by a shareholders’ meeting. | Not applicable. |
Highest corporative body | Shareholders’ meeting. | Shareholders’ meeting. | The corresponding body pursuant to the law and the by-laws of the head office. |
Shareholders’ meeting venue | The shareholders’ meeting must take place at the legal domicile of the company, except for universal shareholders’ meetings—participation of all the shareholders that may take place anywhere within the territory of Ecuador. It is not possible to hold shareholders’ meetings outside of Ecuador. | Similar to a corporation. | Not applicable. |
Meeting quorum | At least 50% of the paid-in capital in a first call. In a second call the shareholders’ meeting may take place with the number of shareholders present. Certain exceptions apply. The quorum may be reinforced in the company’s by-laws. | Similar to a corporation. | Not applicable. |
Resolution quorum | Simple majority of the paid-in capital participating at the meeting, except for those exceptions determined by law. | Similar to a corporation. The unanimous vote of all the shareholders is required for: (i) transforming into another type of company; and, (ii) authorizing the transfer of shares and admitting new partners. | Not applicable. |
Statutory auditor (“comisario”) | Mandatory. | Optional. | Not Applicable. |
Stock market | Public subscription of shares through the stock market is permitted. Convertible bonds may also be issued. | Not possible. | Not Applicable. |
Management
& legal representation | A Board of Directors is not mandatory. The by-laws shall provide for a legal representative and an alternate legal representative. The legal representative shall reside in or at least carry a resident visa. | Similar to a corporation. | Must designate a general attorney in fact with full powers, domiciled in Ecuador. |
Capital reduction | Allowed. | Not allowed when it involves a refund to the shareholders of capital contributions made, with the exception of the exclusion of a shareholder. | Not Applicable. |
Legal reserve | Obligation to create a legal reserve with at least 10% of net yearly profits, until the reserve reaches 50% of subscribed capital. | Obligation to create a legal reserve with at least 5% of net yearly profits, until the reserve reaches 20% of subscribed capital. | Not Applicable. |
Name | To be authorized by the Superintendence of Companies. | Similar to a corporation. | Carries the same name as the head office. No alternate name allowed. |
Time to incorporate / establish | Approximately 30 days. | Similar to a corporation. | Similar to a corporation. |
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
TBY would like to thank Corral & Rosales Abogados for compiling this analysis.