ECUADOR, A COUNTRY FOR INVESTMENT OPENS ITS DOORS TO THE WORLD

Ecuador 2019 | FINANCE | COMMUNIQUÉ

Since 2017, when President Lenin Moreno was elected, Ecuadorian trade policy has undergone changes. It took great effort to achieve a broad, profound dialogue between the public and private sectors, prompting the new administration to open the door of the Ecuadorian economy to the world and define attracting investment as a state policy. The government has gradually started to build up the productive sector, supporting it with rules and public policies pillared on three fundamental objectives: to guarantee the legal stability of investments, to offer incentives for investment projects, and to facilitate Ecuador's cooperation and integration in the region and the world.

This new commercial perspective, triggering greater confidence and interaction with the private sector, has resulted in Ecuador signing 137 investment contracts with private companies for USD10.3 billion, out of which 84 investment contracts are under execution. In addition, the country will end the year 2018 with private investment amounting to USD17 billion, representing an increase of USD4 billion YoY. In quantitative terms, Ecuador plans to receive USD10.3 billion in new private investments by 2021. From a mostly neoliberal focus, the country's new trade policy is guided by three key principles: equity, justice, and productivity. These principles are reflected in Ecuador's effort to create global commercial ties, as well as in the issuance of new laws promoting investment and productivity. With regard to trade alliances, last year the country signed the Free Trade Agreement with the European Union, resulting in a trade increase for both sides of 20 to 25%, thanks to the progressive tariff reduction. As a consequence of the agreement, European brand cars sell six times more than they did two years ago. Similarly, imports of European wines and spirits rose by 1,000%. For next year, Ecuador has set out the goal to become part of the Organization for Economic Cooperation and Development (OECD) and to join the Pacific Alliance, a block that promotes free trade among Mexico, Colombia, Peru, and Chile. The country also looks to sign trade agreements with the US, in view of the recent reactivation of the Council for Trade & Investment Promotion.

With regard to the enactment of laws encouraging investment and productivity, in August 2018, the National Assembly issued the Law for Promoting Production, Attracting Investment, and Creating Jobs (hereinafter, the "Law for Promoting Production"). Highlights of the Law:

INVESTMENT BENEFITS UNDER THE LAW FOR PROMOTING PRODUCTION:

Income Tax Exemption:

Progressive Income Tax on Gains from the Alienation of Shares or Rights Representing Capital:
The Law for Promoting Production establishes a Sole Income Tax with progressive rates applicable to the gains on the alienation of shares, ownership interests, rights representing capital, or other rights, as described below:

Exoneration of the Capital Outflow Tax (ISD):

• Exoneration of ISD on offshore payments
new production investments under signed investment contracts are exempt from paying the ISD: i) importation of capital goods and raw materials needed for developing the project, in the amounts and time defined in the contract; and, ii) dividends distributed by companies domiciled in Ecuador to the actual beneficiaries who are shareholders in the companies distributing them, so long as the currency comes from abroad.
• Exoneration of ISD on offshore payments:
of dividends distributed to the actual beneficiaries residing in Ecuador. Companies reinvesting at least 50% of profits in new productive assets are exempt from paying ISD on dividends distributed to the actual beneficiaries, as long as they are residents of Ecuador. It is important to note that dividends are deemed to be revenue exempt from income tax, provided the company reports on its stock composition. Furthermore, companies must increase capital accordingly.

Rules for applying incentives:

The following rules must be met for incentives related to Income Tax and Capital Outflow Tax:
• In all cases, the term will run from the first
year in which revenue stems only and directly from the new investment.
• Incentives will be valid for 24 months and
that period may be extended for up to another 24 months.
• In the case of existing companies, the
exoneration will be in proportion to the new investment.
• For investments from tax havens, the
benefit will apply so long as the company's corporate information is transparent.

Investment Contracts:

As of the issuance of the Organic Code of Production in 2010, the State of Ecuador provides the possibility of entering into investment contracts with the state. The importance of investment contracts is that they guarantee the legal stability of the investment and establish the treatment that the state will ascribe to the investor.

The new Law for Promoting Production modified certain elements of investment contracts. One example is that the state has the obligation to agree on national or international arbitration for resolving disputes related to the performance of investment contracts. In addition, in the case an investment contract is priced at over USD10 million, the state will be obligated to agree on national or international arbitration ruled by law. If the state agrees on international arbitration ruled by law, it can opt to follow the rules of the UNCITRAL, the ICC, or the Inter-American Convention on Commercial Arbitration.

Incentives for the Tourism Sector:

The Law for Promoting Production authorizes the establishment of Special Economic Development Zones (ZEDEs) to provide tourism services. ZEDEs are customs destinations set up in geographical areas delimited in Ecuador in pursuit of new investments through tax incentives and custom clearance simplification.

In addition, income tax exoneration is granted for 20 years to tourism undertakings by community/associative tourism and to tourism investments in areas declared as priority investment areas.

Investment Project Catalogue:

The Ministry of Foreign Trade and Investment has drawn up the USD33 billion Investment Catalogue aimed at informing the world about investment opportunities in Ecuador. The catalogue serves as a guide for national and foreign investors wishing to invest in the country.

Each project describes the management model to be used for carrying the project out (private investment, public-private partnership, international cooperation, or social responsibility). In addition, different data are provided, such as project objective, investment amount, location, and so on, giving the investor a first glance at potential investments.

The Investment Project Catalogue contains around 50 projects classified by sectors: environment, industries, tourism, social responsibility, real estate, and so on. The catalogue can be found at the following link: http://investecuador.ec/es/catalogo-de-proyectos-d...

1. CONTRACTS WITH THE STATE:

To do business or invest in Ecuador, companies must execute a contract depending on the type of economic activity they will carry out: purchase or lease of goods, execution of works, and provision of services. In Ecuador, public procurement is regulated by the Organic Law of the National System for Public Procurement and managed by the National System for Public Procurement (SNCP), an entity in charge of defining the principles, rules, procedures, mechanisms, and budgets, as well as managing and carrying out the procurements made by the administration.

The National Service for Public Procurement is the entity in charge of planning and overseeing public procurement. The entity's objectives include warranting the quality of public spending; guaranteeing the full performance of contracts; warranting transparency and preventing discretionary decisions in procurement; encouraging the participation of reliable, competitive vendors, and so forth.

For companies to gain access to the National System for Public Procurement, they must register in the Sole Vendor Register (RUP), which consists of a public system of information enabling individuals and companies, whether national or foreign, to enter into contracts with the state. The RUP registration can be suspended if the company is declared to be a breaching contractor, fails to update required information for registration, or becomes disqualified.

Public procurement in Ecuador is managed through the Public Purchases Portal, which contains the RUP, electronic catalogue, list of institutions and contractors of the SNCP, information about the status of public procurement and projects, as well as goods and services that the state requires. It is important to note that the portal is the only means for following all electronic procedures related to a public procurement process.

General Procurement Procedure:

Public procurement processes involve a series of phases implemented by the administration. In the first place, public entities draw up an Annual Procurement Plan and budget each year. The plan is published on the webpage of each institution and on the Public Procurement Portal.

Furthermore, each public ministry must prepare studies to ensure the feasibility of the projects to be carried out and to certify the availability of funds for covering the obligations of each procurement. At the end of that phase, the entity will draw up procurement lists containing appraisal criteria encouraging and promoting local and national participation.

Contract Requirements:

The Organic Law of the National System for Public Procurement requires the following for entering into contracts:
• The contracting entity must have
competence
• The winning bidder must have the
required capacity
• The budget for the financial resources
necessary for performing obligations
must be available
• Contract must be formalized

Types of Contracts:

Contracts for the procurement of goods and services, execution of works, and consultancy:
The objective of this kind of contract is to satisfy social and institutional needs covered by public sector entities. The participants or bidders may be individuals or companies, whether national or foreign.

For selecting the company that will provide the goods or services, the administration employs two filters: 1) First, only tenders meeting the technical specifications are selected; 2) Out of those tenders, the one with the lowest prices is chosen.
Dispute resolution mechanisms for this type of contract can include arbitration ruled by law, with the prior approval of the Attorney General of Ecuador. If the contract does not stipulate arbitration, disputes will be resolved by the local justice system.

Investment Contracts

The purpose of investment contracts is to encourage national and foreign investment in the country. In exchange, the state promises to guarantee the right to property, stability, and the tax incentives agreed in the contract.
No bidding process is required for executing an investment contract. The interested individual or company need only state their interest in the investment, meet certain statutory requirements, negotiate, and sign the investment contract with the relevant state entity.

Concession Contracts

The purpose of concession contracts is to delegate the management of strategic sectors and public services to the private sector, under a restricted system. This kind of contract is performed in exceptional cases when the State cannot directly carry out activities.

In this case, the election of concessionaires is subject to a public tendering process and to bases prepared in advance that will govern in the pre-contractual and contractual stages. The winning bid will be the one that complies with the specifications and is the lowest priced.

Public-Private Partnerships

Since 2015, the State of Ecuador has put into effect a model permitting the participation of small-, medium-, and large-scale industries in public works projects. Through public-private partnerships, the government develops and finances public projects, as well as provides goods, works, or services, in exchange of consideration for the investment, risk, and work involved.

The types of projects that can be carried out under public-private partnerships are:
• Construction of, provision of equipment
for, or maintenance of a public work;
• Rehabilitation or enhancement of a public
work for the provision of a service of general interest;
• Construction and commercialization of
real estate projects;
• Execution of productive, research, and
development activities in which the state participates.

Benefits of Public-Private Partnerships:

Legislation grants a series of benefits to companies created or structured in Ecuador for developing public projects through public-private partnerships. The advantages are:
• 10 years of exoneration from paying
income tax, as of the first fiscal year in which operating revenue is generated.
• The companies are VAT withholding
agents in the same terms and conditions and under the same percentages as those for state-owned enterprises.
• Before public-private partnerships can
operate, the administrative processes will be simplified by the President of the Republic and Decentralized Autonomous Governments.

2.DEVELOPMENT OF THE MINING SECTOR:

The mining industry in Ecuador has gained importance not only in the domestic economy, but also in the state budget. This year, Ecuador has decided to reform the goals of the National Mining Development Plan in order to guarantee the development, competitiveness, and sustainability of this economic activity. By 2021, the country expects to receive approximately USD10 billion in revenue from executing large-scale mining projects.

The government, through the Law for Promoting Production, has eliminated the windfall tax and has managed to reduce the percentage of mining royalties. Prior to the enactment of this law, royalties percentages ranged from 5 to 8% on sales. The Law for Promoting Production, however, provides up to a 2% reduction on the royalties percentage for mining, resulting in a range between 3% and 8%. In addition, a new method for calculating royalties is stipulated, which is based on the criterion of progressivity, the concessionaire's production volumes, and mineral prices.

Additionally, the government has issued ministerial decrees promoting mining. One example is Ministerial Decree No. 2018-0034, which permits the drilling of test or reconnaissance boreholes in up to forty platforms in each mining concession during the initial exploration stage. Previously, the initial four-year exploration phase had to be completed.

3. MERGERS AND ACQUISITIONS:

In recent years, we have seen a boom in mergers and acquisitions market transactions in Ecuador. Foreign investors have shown interest in acquiring shares in large Ecuadorian companies with a long market track record, due to the economic climate offering legal security and encouraging investment. The prior tax rate on capital gains in Ecuador was 35%, in contrast to the extremely reduced rates that the recent law grants by establishing a gradual rate capped at 10%. This significant change has been key in catching the attention of foreign investors.

4. WHAT'S NEXT?

Ecuador is in a period of productive transformation. The country's commercial opening up to, and integration in, the region and the world, through the negotiation of commercial agreements, will unfold an array of opportunities for all sectors of the economy. The possible accession to the Pacific Alliance and the OECD will boost Ecuador's levels of productive competitiveness and introduce economic standards favoring equity and development among nations.

The government continues to make gradual changes. By bolstering the private sector, investment incentives, and trade agreements, the country is better positioning itself in the global economy. Next year, we will begin to see the fruits of its productive transformation.

In this time of economic transformation, the country will experience increased investment, as well as greater development in the tourism, real estate, and infrastructure sectors. This is an optimum opportunity for investors and our law firm would be honored to walk you through the different promising investment alternatives for reaping the best results.