ECUADOR: An Introduction to Corporate/Commercial

A Country and a Culture on the Rise 

Currently, in Ecuador, political instability has led to the early termination of President Lasso’s four-year term, which was supposed to end in May 2025. President Lasso dissolved the National Assembly and called for new elections, with potential presidential run-off in November 2023. The economy is also expected to be potentially affected by El Niño, which is said to have arrived in Ecuador in June 2023, and whose extreme weather conditions have caused significant damages to Ecuador's infrastructure and businesses in the past.

Nevertheless, despite Ecuador's political instability this year, Ecuador still enjoys relative economic growth compared to others in the region (third in the region in 2023, after Venezuela (5%) and Paraguay (4.5%)), respectively. Ecuador also enjoys low inflation rates (expected 3.5% in 2023 according to the United Nations, second lowest in the region, after Bolivia (3.4%)), and has a dollarised economy, which eliminates foreign exchange risks. Ecuador has also implemented several reforms to is legal regime in recent years to attract investments and update its legal framework to international standards, particularly in the resolution of international investment disputes and corporate law, as explained below.

In the area of investment, Ecuadorian laws allow local and foreign investors to execute investment contracts with the Ecuadorian State under certain circumstances. These contracts include the possibility to reduce the income tax rate in five percentual points, the exemption of custom taxes and outflow currency tax in the importation of capital goods and raw materials, and in certain cases even the possibility to enjoy tax stability during the term of the investment.

Also, Ecuador is party to several International Trade Agreements with other countries, including recent agreements with China and Costa Rica, which were concluded at the end of 2022. Currently, Ecuador has reassumed negotiations with the United States; its agreement with Mexico reached a dead end, when certain products of special interest for Ecuador were excluded by Mexico during negotiations.

Regarding agriculture and aquaculture, which are Ecuador's traditional export areas, the country experienced significant growth particularly in shrimp exports (expected to exceed USD8,000 million in 2023), fisheries (tuna) and cacao. Recently, low shrimp prices have affected the sector, but still it has remained one of the most active in the last few years, with significant foreign investment and M&A activity. Banana production and export continues to provide a steady source of foreign export income and remains a solid performer.

The natural resources area has also seen increased activities, with mineral mining materials (gold, copper) production and export growing at a fast pace.

In the area of real estate, Ecuador has experienced significant growth in the past few years too, attracting significant new investment since the pandemic, both from local and foreign investors.

In relation to technology, the pandemic became a major factor that contributed to its growth. Thus, Ecuador has experienced the surfacing of new technology and fintech companies. This new Fintech Law amended the Organic Monetary and Financial Code, the Organic Law of Entrepreneurship and Innovation, the General Insurance and the Securities Market Laws to provide for a legal and regulatory framework for technology and fintech companies to properly operate in the country.

In the labour area, Ecuador does not impose restrictions on employee’s nationalities. Thus, a company incorporated under Ecuador laws may freely engage foreign employees, subject to the same legal provisions as local employees.

Regarding taxes, Ecuadorian corporate tax regime is 25%, which can be reduced, as indicated above, in five percentual points if an investor executes an investment agreement with the State.

On the corporate front, Ecuador has no restriction with respect to foreign individuals owning shares of a local company, and the process to set up a corporate vehicle in Ecuador is relatively straightforward and simple, usually taking only a few days to complete. There are different types of corporate vehicles in Ecuador. The most used are:

•“Compañía de Responsabilidad Limitada”, which is a limited liability partnership;

•“Sociedad Anónima”, which is a corporation; and

•“Sociedad por Acciones Simplificada”, which is a limited liability company that was recently introduced into the Ecuadorian legal system (since year 2020) and has quickly become by far the most common corporate vehicle used by new investors and entrepreneurs.

Foreign investors, as partners or shareholders of a local legal entity, have certain specific obligations, which include:

• having an Ecuadorian resident agent to receive notifications regarding obligations contracted locally and lawsuits initiated against the foreign investor in Ecuador;

• providing a list of their direct and indirect shareholders up to the final foreign individual beneficial owners; and

• certifying, each year, the legal existence abroad of the foreign legal entities that are partners or shareholders of the local legal entity.

Between years 2020 and 2023, Ecuador's Corporate Law underwent significant reforms to the Corporate Law that had a positive impact on the country's business and commercial sector. These changes include, among others, the inclusion of the “Sociedad por Acciones Simplificada”, additional protection for minority rights, the introduction of the business judgment rule to protect management decisions and greater possibilities for shareholders to control management excesses through derivative actions.

Also, these reforms included the incorporation of a "Sociedad Anónima" or "Compañía de Responsabilidad Limitada" with a single shareholder or partner, respectively. Moreover, as a result of these changes, specific regulations of share premiums in capital increase processes were included, in order to avoid dilution of existing shareholders. Another relevant change worth mentioning is the fact that now companies may have an indefinite term of duration and the possibility of re-domiciliation of foreign companies.

Additionally, to promote the inclusion of women and to reach equality of rights for women, the Violet Economy Law was enacted in January 2023. The Violet Economy Law establishes that new hiring of women enables companies or individuals to pay less Income Tax, and provides that the creation of a new job position will be deductible up to 140% additional to what already corresponded for salaries and the contribution to the Ecuadorian Institute of Social Security. This law also requires companies to appoint at least one woman for every three men within the Board of Directors of the company.

Most recent corporate changes enacted on 15 March 2023 particularly relate to mergers, transformations, and spin-offs. These changes aim to simplify the processes of transformation, merger, and spin-off of companies, eliminating certain formalities, among other changes. In addition, the reforms address a variety of special processes, such as abbreviated merger, reverse merger, total spin-off, partial spin-off and segregation.

Another significant change enacted on 15 March 2023 is the ability to incorporate and to amend corporate documents (Changes in Bylaws, Capital Increases, Name Changes, etc) of any type of company through private documents (as opposed to through Public Deed).

The 2023 reform incorporates a new process where dissident shareholders may voluntarily separate from a “Sociedad por Acciones Simplificada” or a "Sociedad Anónima". Additionally, the 2023 reform incorporates a new process to challenge decisions or resolutions issued in General Shareholders' Meetings.

Also, there have been changes regarding the negotiation of participation interests in partnerships in a Compañía de Responsabilidad Limitada, which is a type of company that historically has been identified as the structure chosen by partners that prioritise the personal relation between such partners and the status quo of their relation over capital, due to its nature. Until the 2023 reforms of the Companies Act, any transfer of participation interests required unanimous consent from all the partners of the company. 2023 reforms include the ability of partners to transfer their participation interests freely to another current partner without the consent of the other partners. Nevertheless, third-party transfers still require unanimous consent from all partners of the company.

In data protection area, Ecuador enacted its first Data Protection Law in May 2021. Even though the Law was enacted in 2021, sanctions and penalties for non-compliance of the Law are applicable only since 26 May 2023. The Data Privacy Law provides for a higher degree of protection on certain categories of personal data, such as sensitive data, data of children and adolescents, health data and data of people with disabilities; and provides for special treatment of these categories of data.

In general, corporate and commercial sectors in Ecuador, just as in every other country, depend on the macro-economic environment and are greatly affected by it; however, improvements in the legislation, including the creation of tax incentives and subscription of international trade agreements, generally have positive impacts on both local and foreign investments. The fact that Ecuador has implemented investment tools such as investment contracts, has a “dollarised” economy which eliminates foreign exchange risks, has rejoined the ICSID, is actively pursuing new international trade agreements with its main trade partners, has a tax regime consistent with other countries in the region, and is constantly updating its corporate and commercial regime, creates a convenient framework and environment for domestic and foreign investment in the country.