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
Ecuador conducted a trade policy review with the World Trade Organization in March 2019; information can be found at https://www.wto.org/english/tratop_e/tpr_e/tp483_e.htm
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 (https://www.proecuador.gob.ec/ ), 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.