Investment Framework

by Perez, Bustamante y Perez

Foreign investment in Ecuador can adopt several forms: direct foreign investment, sub-regional investment, neutral capital, and investment by foreigners who are residents in Ecuador.

"Direct foreign investments" are investments made from abroad by foreign investors in freely convertible currencies or in physical assets intended for the capital stock of an enterprise. A direct foreign investment, as a general rule, is either permitted, restricted or prohibited, depending on the sector where the investment is to be made.

In Ecuador, a direct foreign investment may be made in domestic companies (companies organized in Ecuador) or by the establishment or registration of branches (foreign companies domiciled or authorized to customarily carry out their operations in Ecuador).

A foreign investment may be made through (1) incorporation of new Ecuadorian companies; (2) a capital increase in existing Ecuadorian companies, in several forms; (3) purchase of shares from foreign, sub-regional and local investors; (4) establishment or registration of branches of foreign companies; and (5) an increase of capital allocated to branches of existing foreign companies.

For investment purposes only, companies are classified as follows:

• National Enterprises - companies incorporated in Ecuador, more than 80% of whose capital belongs to Ecuadorian investors.
• Mixed Enterprises - companies incorporated in Ecuador, 51% to 80% of whose capital belongs to Ecuadorian investors.
• Foreign Enterprises - companies incorporated or established in Ecuador and whose capital belonging to Ecuadorian investors is less than 51%.

As a general rule, only direct foreign investment is regulated. Investments in other companies, made by enterprises incorporated or established in Ecuador, are not recognized as such. In certain cases, however, investments from such enterprises are regulated in accordance with the type of economic activity that the company receiving the investment is going to conduct (second generation investments).

It should be noted that the current regime (see box page 877), like the previous one, always makes reference to enterprises and not to companies. Under this concept, foreign investments in one-person enterprises are authorized.

Foreign currency exchange in Ecuador is not regulated by the law. At present, foreign investments are made in the free market at the free market rate. Subsequently, the investment has to be registered with the Central Bank of Ecuador.

Repatriation of Capital and Remittance of Profits Abroad

As a general rule, there is no time limitation in Ecuador for repatriation of capital abroad. Remittances of profits abroad are subject to the following rules.

• A general limit of 30% net annually (after income tax withholding), calculated on the investment registered in a foreign currency.
• A limit of 40% net annually, if the enterprise exports 40% or more of its annual production.
• A limit of 40% net annually, in the case of enterprises engaged in low-income housing construction.
• Unlimited, if the enterprise exports 80% or more of its production to third country markets (outside of the Andean area).
• Unlimited, for enterprises involved in the tourist sector.

Reinvestments

Reinvestments are accepted in Ecuador and do not require any authorization except a formal communication to the authorities providing notice of such reinvestments for statistical purposes only and subsequent registration of such reinvestment at the Central Bank of Ecuador.

Remittances of profits abroad are subject to 36% income tax, while reinvestments of such profits are subject to 25% income tax.

Foreign Investment Restrictions

As previously mentioned, foreign investment is either permitted, restricted or prohibited in Ecuador. It is prohibited in the following sectors: commercial radio stations; commercial TV stations; publication of newspapers and magazines and other mass media; public utilities such as potable water, sewage, electric power, telephone, mail, and telecommunications; domestic transportation; and publicity and advertisement.

Foreign investment is restricted up to 49% in the following sectors: fisheries, banking, financing companies, and insurance and reinsurance companies. In the construction sector, foreign investment is restricted up to 19%.

In the remaining sectors of the economy, including agriculture, agrobusiness, manufacturing, tourism, and mining and oil, foreign investment is permitted up to 100%. Ecuadorean Treatment of Foreign Capital and Intellectual Property

The current regime for the treatment of foreign capital and trademarks, patents, licenses, and royalties stems from Decision 220 of the Cartagena Agreement Committee. Ecuador enforced this regime through Executive Decree No. 3049, promulgated in Official Gazette No. 723 of July 7, 1987. This code on foreign investment contains rules which are more favorable to foreign investment in the sub-region, grants greater freedom to the governments of member countries to regulate such provisions through domestic laws, and replaces the old regime that had been established by Decision 24 and its amendments.

By Presidential Decree No. 3095, promulgated in Official Gazette No. 738 of July 29, 1987, the federal government issued regulations for application of Decision 220 of the Cartagena Agreement Commission.

The law firm of Perez, Bustamante y Perez is located in Quito, Ecuador. Its practice areas include corporate, commercial, banks, mines and oil.