The government of Ecuador (GOE) under President Moreno has taken a distinct path from the policies of his predecessor, focusing on reducing the size of the public sector and influencing the economy through private sector investment to drive economic growth. Facing budget deficits, the Moreno Administration is consolidating the size of government, including the merger of several ministries and state owned enterprises. Other cost cutting measures include reducing fuel subsidies and mandatory reductions in the number of public employees. Ecuador is still saddled with a very large public sector, and Moreno has committed to continue government spending on social welfare programs. To fund these programs and continue reforms, the GOE reached in February 2019 an agreement with the IMF and international financial institutions for financial assistance totaling USD 10.2 billion over three years. The IMF program is in line with the GOEs efforts to correct fiscal imbalances and to improve on transparency and efficiency in public finance.
As part of the efforts to increase private sector engagement in the economy, the GOE has taken some steps attract foreign direct investment (FDI) such as passing a Productive Development Law, a Public-Private Partnership law and changing tax and regulatory policies for mining. Despite these efforts, FDI inflow to Ecuador has remained very low when compared to other countries in the region.
Corruption is reported as a serious problem in Ecuador. Ecuador ranked in the bottom third of countries surveyed for Transparency International’s Corruption Perceptions Index. Two high-profile cases of alleged official corruption involving state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht illustrate the challenges that confront Ecuador in regards to corruption. Some report that numerous officials have been charged for corruption related offenses, and several have been convicted, including former Vice President Jorge Glas, who was sentenced to six years in prison in December 2017.
Economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador, according to many businesses. The 2008 Constitution established that the state reserves the right to manage strategic sectors through state-owned or controlled companies. The sectors identified are energy, telecommunications, non-renewable natural resources, transportation, hydrocarbon refining, water, biodiversity, and genetic patrimony. Foreign investors may remit 100 percent of net profits and capital, subject to a capital exit tax of 5 percent. Ecuadorian law requires private companies to distribute 15 percent of pre-tax profits to employees each year.
Table 1: Key Metrics and Rankings
|TI Corruption Perceptions Index||2018||114 of 175||http://www.transparency.org/research/cpi/overview|
|World Bank’s Doing Business Report||2019||123 of 190||http://www.doingbusiness.org/en/rankings|
|Global Innovation Index||2018||97 of 126||https://www.globalinnovationindex.org/analysis-indicator|
|U.S. FDI in partner country ($M USD, stock positions)||2017||$779||http://www.bea.gov/international/factsheet/|
|World Bank GNI per capita||2017||$5,920||http://data.worldbank.org/indicator/NY.GNP.PCAP.CD|
1. Openness To, and Restrictions Upon, Foreign Investment
Policies Towards Foreign Direct Investment
Ecuador is open to FDI in most sectors. The 2008 Constitution established that the state reserves the right to manage strategic sectors through state-owned or controlled companies. The sectors identified are energy, telecommunications, non-renewable natural resources, transportation, hydrocarbon refining, water, biodiversity, and genetic patrimony. Although Ecuador recently took some steps intended to attract FDI, foreign investors claim that Ecuador’s overall investment climate remains challenging as economic, commercial, and investment policies are subject to frequent change. In 2018, total FDI inflow doubled from 2017 numbers to USD 1.4 billion, or about 1 percent of GDP. Despite the increase, FDI inflow remains very low when compared to other countries in the region.
In general, companies complain that the legal complexity resulting from the inconsistent application and interpretation of existing laws and regulations increases the risks and costs of doing business in Ecuador. Disputes involving U.S. companies have been allegedly politicized, especially in sensitive areas such as the energy sector. Ecuador has been involved in several high profile investment disputes with U.S. companies. Chevron, Conoco Phillips, Occidental Petroleum Corporation, and Murphy Oil Corporation were awarded damages in international arbitration rulings against Ecuador in the last several years. Other companies such as Merck have received interim awards in international arbitration.
Limits on Foreign Control and Right to Private Ownership and Establishment
One hundred percent foreign equity ownership is allowed without the need for authorization or prior screening in sectors open to domestic private investment.
For license and franchise transactions, no limits exist on royalties that may be remitted, although financial outflows are subject to a five percent capital exit tax. All license and franchise agreements must be registered with the National Service for Intellectual Property Rights (SENADI). In addition to registering with the Superintendence of Companies, Securities, and Insurance, foreign investors must register investments with Ecuador’s Central Bank for statistical purposes.
Sectors of interest to Foreign Investors:
Automotive: the Ministry of Foreign Trade eliminated quotas of automobile imports January 1, 2017, and cancelled tariff surcharges in June 2017. This action removed an important restriction on U.S. automobile exports to Ecuador. In December 2018, Ecuador instituted COMEX Resolution 25 that eliminated tariffs on automobiles assembled in Ecuador based on new investments, with certain limitations.
Petroleum: per the 2008 Constitution, all subsurface resources belong to the state. The petroleum sector is controlled by two state owned enterprises (SOEs). In 2018, the government removed subsidies on all higher-octane gasoline and some subsidies on regular and diesel fuel, changing some fuel pricing.
Mining: the Ecuadorian government has taken steps to reduce taxes in the mining sector in order to attract FDI. Presidential Decree 475, published in October 2014, made minor reductions to the windfall tax and sovereign adjustment calculations. The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, included provisions to improve tax stability and lower the income tax rate in the mining sector. Former President Correa’s administration also developed mining sector incentives such as fiscal stability agreements, limited VAT reimbursements, remittance tax exceptions, and mechanisms for companies to recover their investments before certain taxes are applied.
Electricity: the Organic Law for the Public Service of Electric Energy, which took effect in January 2015, permits some private sector participation and foreign investment in Ecuador’s electricity sector. Per the 2008 Constitution, the electricity sector is a public service and strategic sector.
Telecommunications: in February 2015, Ecuador’s National Assembly passed a telecommunications law that requires telecommunications companies to pay a percentage of revenue to the government. This requirement applies to providers of cellular and fixed line telephone service, internet service, and subscription television with more than 30 percent of market share. The payments range from 0.5 to 9 percent of revenue.
Media: the 2013 Communications Law introduced a requirement that advertising disseminated in Ecuador must have 80 percent domestic content. It also requires that television and radio frequencies are distributed 33 percent to private media, 33 percent to public media, and 34 percent to community media.
The government controls a large share of radio, television, and other press holdings. Article 312 of the Constitution prohibits shareholders and representatives of financial institutions from media ownership. In addition, the 2011 Organic Law for Regulation and Control of Market Power prohibits anyone possessing more than a six percent interest in a media company from investing in any other business sector.
Other Investment Policy Reviews
In the past three years, Ecuador has not conducted an investment policy review with the Organization for Economic Cooperation and Development (OECD) or the United Nations Conference on Trade and Development (UNCTAD).
In 2018 Ecuador folded its ProEcuador ( ), the entity that is responsible for promoting economic development through exports, imports, and investment in Ecuador, into the Ministry of Production, Foreign Trade, Investments and Fisheries (MPCIEP). ProEcuador is now a Vice Ministry within MPCIEP, and has 31 offices in 26 countries, including four in the United States. Ecuador is ranked 123rd out of 190 countries on the World Bank’s Ease of Doing Business report for 2019, with particularly low rankings for Starting a Business (168), Resolving Insolvency (158) and Paying Taxes (143).
A newly created company will at a minimum be required to register with the Superintendence of Companies Securities, and Insurance (http://www.supercias.gob.ec/.), the municipal government, the Internal Revenue Service, and the Social Security Institute. The registry with the Superintendence of Companies is a completely online process as of April 2019.
Ecuador does not restrict domestic investors from investing abroad. ProEcuador is responsible for promotion of outward investment from Ecuador. Foreign investments are subject to a capital exit tax of five percent.
In February 2017, voters passed a government-backed referendum prohibiting elected officials and public servants from having financial interactions with official lists of tax havens and other suspect jurisdictions. The lists include several U.S. states and territories. The prohibition entered into effect in September 2017.
2. Bilateral Investment Agreements and Taxation Treaties
Ecuador’s National Assembly voted on May 3, 2017 to terminate 12 of its bilateral investment treaties, including its agreement with the United States. The Government of Ecuador notified the U.S. government of its withdrawal from our Bilateral Investment Treaty (BIT) on May 18, 2017, effective May 18, 2018. Investments made prior to withdrawal are covered for 10 years, but the BIT covers no new investments in Ecuador.
Ecuador signed on June 25, 2018 a Comprehensive Economic Partnership Agreement with the European Free Trade Association, which includes Switzerland, Norway, Liechtenstein, and Iceland. That agreement has yet to be ratified. The accession of Ecuador to the European Union’s Multiparty Trade Agreement with Colombia and Peru became effective January 1, 2017. Ecuador concluded two limited trade agreements in 2017, with El Salvador on November 16, 2017 and Nicaragua on November 19, 2017. Ecuador has been negotiating a Strategic Cooperation Agreement with South Korea.
Ecuador does not have a bilateral taxation treaty with the United States.
3. Legal Regime
Transparency of the Regulatory System
While there is a focus within the Moreno administration to improve transparency and government accountability, companies report that progress has been slow. Several foreign investors report that economic, commercial, and investment policies are subject to frequent changes and can increase the risks and costs of doing business in Ecuador. National and Municipal level regulations can be in conflict with each other. Regulatory agencies are not required to publish proposed regulations before enactment and rulemaking bodies are not required to solicit public comments on proposed regulations, although there has been some movement towards prior consultation processes. The ministries generally consult with relevant national actors when drafting regulations, but not always, according to some businesses.
The Government of Ecuador publishes regulatory actions in the Official Registry and posts them online at https://www.registroficial.gob.ec/. Publicly listed companies adhere to International Financial Reporting Standards (IFRS). While there are some transparency enforcement mechanisms within the government, it has been reported that they tend to be weak and rarely enforced. There are no identified informal regulatory processes led by private sector associations or nongovernmental organizations.
International Regulatory Considerations
Ecuador is a member of the Andean Community of Nations (CAN) along with Bolivia, Colombia, and Peru. Ecuador is an associate member of the Southern Cone Common Market (MERCOSUR). Ecuador is a member of the WTO and notifies draft regulations to the WTO TBT Committee. Ecuador has ratified the WTO Trade Facilitation Agreement on October 16, 2018.
Legal System and Judicial Independence
Ecuador has a civil codified legal system. Concerns have been voiced by some businesses over systemic weakness in the judicial system and its susceptibility to political and economic pressures, which may constitute challenges faced by U.S. companies investing in Ecuador. Enforcement of contract rights, equal treatment under the law, intellectual property protections, and unstable regulatory regimes continue to be concerns for foreign investors.
Laws and Regulations on Foreign Direct Investment
Ecuador does not have laws specifically on FDI, but two have effects on investment. The Organic Law for Production Incentives and Tax Fraud Prevention, passed in December 2014, includes provisions to improve tax stability and lower the income tax rate in the mining sector. The Organic Law of Incentives for Public-Private Associations and Foreign Investment from 2015 includes provisions to improve legal stability, reduce red tape, and exempt public private partnerships from paying income and capital exit taxes under certain conditions. ProEcuador’s website provides a guide for investors in English and Spanish and highlights the procedures to register a company, types of incentives for investors, and relevant taxes related to investing in Ecuador.
Competition and Anti-Trust Laws
The Superintendence of Control of Market Power reviews transactions for competition-related concerns. Ecuador’s 2011 Organic Law for Regulation and Control of Market Power includes mechanisms to prevent, control, and sanction market power abuses, restrictive market practices, economic concentration, and unfair competition. The Superintendence of Control of Market Power, can fine companies found to be in violation of the law up to 12 percent of gross revenue.
Expropriation and Compensation
The Constitution establishes that the state is in charge of managing the use and access to land, while recognizing and guaranteeing the right to private property. It also provides for the redistribution of land if it has not in active use for more than two years. The 2015 Telecommunications Law allows expropriation of private land in accordance with the rules and procedures of the law when necessary for the installation of network infrastructure. The Government of Ecuador’s past use of a 99 percent excess profits tax on some investments was determined by international arbitration panels to be an indirect expropriation.
Under the U.S.-Ecuador BIT, which expired May 18, 2018, expropriation can only be carried out for a public purpose, in a nondiscriminatory manner, and upon payment of prompt, adequate, and effective compensation.
ICSID Convention and New York Convention
Ecuador withdrew from the International Centre for the Settlement of Investment Disputes (ICSID Convention) in 2010. Ecuador is a signatory to the convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958 New York Convention).
Investor-State Dispute Settlement
Ecuador’s National Assembly voted on May 3, 2017 to terminate 12 of its bilateral investment treaties, including its agreement with the United States. The Government of Ecuador notified the U.S. government of its withdrawal from the BIT on May 18, 2017, with the effective date May 18, 2018. The treaty further specifies that all U.S. investments in place at the date of termination enjoy the protections of the treaty for the subsequent ten years. There have been numerous claims against Ecuador under the BIT that have gone to international arbitration. There are two active cases awaiting a final decision, Chevron and Merck.
International Commercial Arbitration and Foreign Courts
A number of U.S. companies operating in Ecuador, most notably in the petroleum sector, have filed for international arbitration due to investment claims. The GOE has reportedly treated these disputes as a political issue in some cases, speaking negatively about investors involved. Payment of arbitration awards has taken more than a year. The Ecuadorian Constitution from 2008 states that arbitration must take place either in Ecuador or in Latin America, and was the primary driver of the 2017 termination of BITs.
Ecuador is ranked 158 out of 190 in the category of Ease of Resolving Insolvency in the World Bank’s 2019 Ease of Doing Business Report. With the goal of protecting consumers and preventing a real estate bubble, the National Assembly approved in June 2012 a law that allows homeowners to default on their first home and car loan without penalty if they forfeit the asset. The provisions do not apply to homes with a market value of more than 500 times the basic salary (currently USD 197,000) or vehicles worth more than 100 times the basic salary (currently USD 39,400).
In cases of foreclosure, the average time for banks to collect on debts is 5.3 years, usually taking 4.5 years for courts to approve the initiation of foreclosures. After the appointment and acceptance of an auctioneer, it would take about six months for the auction to take place. World Bank’s Doing Business Report estimates that the foreclosure proceedings would result in costs equal to about 18 percent of the value of the estate in question.
4. Industrial Policies
In August 2018, the National Assembly approved the Productive Development Law that provides income tax exemptions and VAT exemptions to attract investments, good for 12 years in all areas except the cities of Quito and Guayaquil, where it is 8 years, and 20 years in border regions.
In December 2015, Ecuador’s National Assembly approved a Public-Private Partnership law intended to attract investment. The law offers incentives including the reduction of the income tax, value added tax, and capital exit tax, for investors in certain projects. It designates Latin American arbitration bodies as the dispute resolution mechanism. The law came into effect upon publication in the official registry on December 18, 2015. The Organic Law of Production Incentives and Tax Fraud Prevention, which took effect on December 30, 2014, provides tax incentives related to depreciation calculations and income tax rates, which could benefit some foreign investors.
Foreign Trade Zones/Free Ports/Trade Facilitation
The 2010 Production Code authorized the creation of Special Economic Development Zones (ZEDEs) that are subject to reduced taxes and tariffs. The government considers the extent to which projects promote technology transfer, innovation, and industrial diversification when granting ZEDE status; foreign owned firms have the same investment opportunities as national firms.
Performance and Data Localization Requirements
Nationally the government does not mandate local employment, however, the Organic Law of the Amazon approved by the National Assembly on May 21, 2018, mandates that any company, national or foreign, operating within the area covered by the law (the Amazon Basin) must hire at least 70 percent of their staff locally, unless they cannot find qualified labor locally.
There are no requirements for foreign IT providers to turn over source code and/or provide access to encryption. Companies can transmit data freely into and out of Ecuador, and there are no requirements to store data within the country.
On October 11, 2016, Ecuador’s National Assembly passed the Code of the Social Economy of Knowledge, Creativity, and Innovation, covering a wide range of intellectual property matters. Article 148 of the Code establishes that agencies must give preference to open source software with content developed in Ecuador when procuring software for government use.
Visa and residency requirements are relatively relaxed and do not inhibit foreign investment.
5. Protection of Property Rights
Ecuador ranks 75 out of 190 in the 2018 World Bank’s Doing Business Report’s category for Ease of Registering Property. Foreign citizens are allowed to own land.
Intellectual Property Rights
According to some sources, enforcement against intellectual property infringement remains a problem in Ecuador. In April 2016, the United States Trade Representative moved Ecuador from the Priority Watch List to the Watch List in its annual Special 301 Report on intellectual property where Ecuador has remained in 2017 and 2018. This decision was in recognition of Ecuador’s passage of an amendment reinstating criminal procedures and penalties for intellectual property violations. The government has drafted implementing regulations for the 2016 Code of the Social Economy of Knowledge, Creativity, and Innovation, which is the legislation that covers Intellectual Property Rights, and allowed for public input into the regulations; however, those regulations have not yet been approved.
Piracy of computer software and counterfeit activity in brand name apparel is widespread, and enforcement is weak. Pirated CDs and DVDs are readily available on many streets and in shopping malls and copyright enforcement reportedly remains a significant problem. The National Service for Intellectual Rights (SENADI – formerly Ecuadorian Intellectual Property Institute (IEPI)) was established in January 1999 to handle patent, trademark, and copyright registrations. SENADI reports information on its activities on its website at .
7. State-Owned Enterprises
The 18 SOEs in Ecuador are concentrated primarily in the petroleum, electricity, and telecommunications sectors. The government also owns an airline, a railroad company, a cement company, and a university. Two SOEs, Petroamazonas and Petroecuador, control the petroleum sector. The government has a rationalization and reorganization plan for some of these entities, reducing the total from an original of 22 to 15 by merging some and dissolving others.
The 2009 Organic Law of Public Enterprises regulates state-owned enterprises (SOEs). SOEs are most active in areas designated by the 2008 Constitution as strategic sectors. Ecuador’s Coordinator of Public Companies maintains a list of SOEs at . SOEs follow a special procurement regime with greater flexibility and limited oversight. The Law of Public Enterprises requires SOEs to follow generally accepted accounting principles; however, SOEs are not required to follow the same accounting practices as the central government, nor do they have to participate in the electronic financial management system used in most of the public sector for budget and accounting management. SOEs are eligible for government guarantees, and face lower tax burdens than private companies.
Ecuador is not party to the Government Procurement Agreement (GPA) within the framework of the World Trade Organization.
Ecuador is not implementing a privatization program, although the Ministry of Trade and Investment is touting a number of projects as potential public private partnerships.
8. Responsible Business Conduct
Article 66 of the 2008 Constitution guarantees the right to pursue economic activities in a manner that is socially and environmentally responsible. NGOs such as the Institute of Corporate Social Responsibility and the Ecuadorian Consortium for Social Responsibility promote responsible business conduct. Many Ecuadorian companies have programs to further responsible business conduct within their organizations. The GOE committed in March 2018 to implement the Extractive Industries Transparency Initiative, but has not yet joined the initiative.
Corruption is a serious problem in Ecuador, and one that the government has begun to confront. Numerous cases of corruption have recently been tried, resulting in convictions of high-level officials, including former Vice President Jorge Glas. U.S. companies have cited corruption as an obstacle to investment, with concerns related specifically to dispute resolution and payment of arbitration awards.
Ecuadorian law provides criminal penalties for corruption by public officials, but the government has not implemented the law effectively, and officials engaged in corrupt practices. Ecuador ranked 114 out of 180 countries surveyed for Transparency International’s 2018 Corruption Perceptions Index and received a score of 34 out of 100. High-profile cases of alleged official corruption involving state-owned petroleum company PetroEcuador and Brazilian construction firm Odebrecht illustrate the significant challenges that confront Ecuador concerning corruption.
Illicit payments for official favors and theft of public funds reportedly have taken place frequently. Dispute settlement procedures are complicated by the lack of transparency and inefficiency in the judicial system. Offering or accepting a bribe is illegal and punishable by imprisonment for up to five years. The Controller General is responsible for the oversight of public funds and there are frequent investigations and occasional prosecutions for irregularities.
Ecuador ratified the UN Anticorruption Convention in September 2005. Ecuador is not a signatory to the OECD Convention on Combating Bribery. The 2008 Constitution created the Transparency and Social Control branch of government, tasked with preventing and combating corruption, among other things. In December 2008, President Correa issued a decree that created the National Secretariat for Transparency to investigate and denounce acts of corruption in the public sector. Both entities can conduct investigations into alleged acts of corruption. Responsibility for prosecution remains with the Office of the Prosecutor General.
Resources to Report Corruption
Through the Function of Transparency and Social Control, alleged acts of corruption can be reported by dialing 159 within Ecuador. The Council for Citizen Participation and Social Control also maintains a web portal for reporting alleged acts of corruption: .
10. Political and Security Environment
Ecuador does not have a tradition of frequent violence as a result of demonstrations or political instability, but security along the border with Colombia deteriorated significantly in late 2017 and early 2018. Drug trafficking groups attacked police and military units, and engaged in kidnappings, resulting in several deaths, a first for Ecuador. Student, labor union, and indigenous protests against government policies have been a regular feature of political life in Ecuador. While disruptive, especially to transportation, violence is usually limited and localized. Popular protests in 1997, 2000, and 2005 contributed to the removal of three elected presidents before the end of their terms. Large-scale but peaceful demonstrations against the Correa government occurred in June 2015. Some indigenous communities opposed to development have blocked access by petroleum and mining companies.
13. Foreign Direct Investment and Foreign Portfolio Investment Statistics
Table 2: Key Macroeconomic Data, U.S. FDI in Host Country/Economy
* Source for Host Country Data: Central Bank of Ecuador. The Central Bank publishes FDI calculated as net flows only. Outward Direct Investment statistics are not published by the Central Bank.
Table 3: Sources and Destination of FDI
|Direct Investment From/in Counterpart Economy Data|
|From Top Five Sources/To Top Five Destinations (US Dollars, Millions)|
|Inward Direct Investment||Outward Direct Investment|
|Total Inward||$1,401||100%||Total Outward||Amount||100%|
|“0” reflects amounts rounded to +/- USD 500,000.|
Source: Ecuador Central Bank, no Information available on the IMF’s CDIS website, and there no information available on Outward Direct Investment