THE SET UP

Ecuador 2012 | EXECUTIVE GUIDE | REVIEW: LAW

Xavier Rosales, Head of Corporate and Head of M&A at Corral & Rosales, underlines the legal framework for investment in Ecuador.

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:

•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.