Frequently Asked Questions
REPORT ECUADORIAN TAX REGIME
This report covers the general tax regime applicable to all companies or branches of foreign companies established in Ecuador.
ACCOUNT AND TAXES
Branch operations in Ecuador are generally subject to the same legal regulations and obligations as any other Ecuadorian company. For legal purposes, the holder of the parent company’s power of attorney generally manages the branch of a foreign corporation.
Ecuadorian branches of non-resident companies must keep accounts separate from those of their main offices, as in the eyes of the law they are seen as separate entities.
1.1. Accounting Period
The tax accounting period for a company may not be longer than 12 months, normally following the calendar year, beginning on January 1, and ending on December 31.
INCOME TAX RATE FOR COMPANIES
Companies incorporated in Ecuador, as well as the branches of foreign companies domiciled in the country and the permanent establishments of foreign not domiciled companies, who obtain taxable income, will be subject to the tax rate of twenty-two percent (22%) on their tax base.
Tax on Foreign Exchange Outflow (ISD) in Imports. – In the case of imports, it would correspond to the importer to pay the tax on foreign exchange outflow, which rate as we have indicated is 5%. In the event that the import payment is made through transfers or currency shipments, banks will charge the tax at the time of the transfer or shipment. Financial entities constitute withholding agents for transfers made by their customers´ disposal. Also, in the case of sending a check via Courier, the active laws establish the obligation to declare and pay the respective tax.
It is important to take into account that the ISD will be paid even if the payments are made by an Ecuadorian company or a branch domiciled in Ecuador, from the outside, under a registered account locally in the company’s accounts.
Despite recent the economic crisis and downturns in several important countries in the region, Latin America still remains a crucial trading and investment area for multinationals. For after over a decade of full-blown globalization efforts by the government and international investors, Ecuador has opened to foreign investment. Within this framework the country has welcomed dozens of international franchises including McDonald’s, Burger King, KFC, Baskin & Robbins, Pizza Hut, Domino’s Pizza, Taco Bell, Dunkin Donuts, TGI Fridays, Tony Roma’s, Hugo Boss, Blockbuster, Tower Records, and ACE Hardware, Hamburguesas El Corral, Subway, The Growth Coach, Re/Max, among others.
Registration of Franchise Agreements
Although not mandated by Ecuadorian law, experience has shown that both foreign and local investors in franchises benefit from the registration of their franchise agreements with the mercantile registry of the city or province where the franchise is to be set up. Registration and notarization of these contracts elevates these documents to the level of public instruments which in turn provides additional evidentiary protections to the parties in the event of a future contractual dispute. With registration (provided that individual clauses do not conflict with the country’s civil or commercial code) the parties’ can be confident that their franchise agreement will control the parties’ obligations and duties.
Registration of Trademarks and Ecuador’s Intellectual Property Law
On more than one occasion perspective franchisers have found that local pirates had already illicitly appropriated their trademark or product. In light of these practices, franchisers are advised to register their trademarks with Ecuador’s Intellectual Property Institute. In light of the fact that trademarks are considered property rights in Ecuador, the franchiser should also register their marks in the Mercantile Registry of the city, town, or province where the franchise is to be initiated.
CODE FOR PRODUCTION, COMMERCE AND INVESTMENTS:
Via Official Register Supplement No. 351 dated December 29th, 2010, the Organic Code for Production, Commerce and Investments was published in which 10 laws are repealed, 7 are reformed, and which contains 9 general dispositions and 19 transitory dispositions.
The Regulations to the Organic Code for Production must be issued within 90 days after publication of the Code.
Scope of the Code:
The Code is fundamentally divided into 4 areas:
- Development, promotion and regulation of investments
• Development of MSMC companies and handcrafters
• Foreign commerce and instruments of commercial policy
• Ease of foreign commerce and customs control
The objectives of this Code are: an increase in business productivity, incentives for investments and productive competitiveness, in spite of the fact that there a number of conditions for incentives.
The Code puts emphasis on the absence of discriminative deals between private investors and foreigners and that the incentives shall not apply to foreign individuals or legal entities domiciled in tax havens.
Below we will expand on several issues of importance:
1.-INCENTIVES: Throughout the Code, reference is made to several incentives: fiscal, tax, labor, customs, SZED, MSMC, foreign commerce and ecosystem policies.
1.1.- Fiscal Incentives: include three (3) types: General, Sectional and for Depressed Areas – with a lower grade of industrialization.
1.2.- TAXES (TAX INCENTIVES): These have been incorporated as reforms to the Internal Tax Regime Law and the Reform for Tax Equity in Ecuador:
1.2.1.- Income Tax Exemptions:
- This includes that earnings obtained from mercantile trusts and earnings obtained from investment funds and complementary funds are exempt from income tax, provided that at the time that benefits are distributed, the fund administrator or trust company has withheld the income tax at source from the beneficiary.
- Other items are established that may be exonerated from income tax such as: yields for deposits, obtained by investments in titles in fixed income or by mercantile trusts, investment funds, provided that these are issued within the term of a year more; interest paid to workers for loans and economic compensation for a fair salary.
Five years without income tax:
- The exoneration of income tax is established for the development of new companies and not for new investments from companies already set up. This benefit runs from the first year that the new company generates taxable income, thereby guaranteeing exoneration for five years. In the case of this incentive, the new company must operate outside of Quito and Guayaquil.
- Recently formed companies, new investments, individuals and undivided successions obliged to record accounts, which initiate activities, are subject to the payment of this item after the fifth year of effective operation.
DISTRIBUTOR OR DEALERS AGREEMENTS IN ECUADOR
- Protection Law for Foreign Representatives.
In 1976 Supreme Decree No. 1038-A was issued through which the Law for the Protection of Representatives, Agents and Distributors from Foreign Companies was passed, establishing a series of rules which protected concessionaries in the case of the termination of a commercial relationship.
These rules stated that in spite of the contract establishing clauses for which parties reserve the right to freely terminate the commercial relationship, neither party could terminate the contract without proving before a judge the existence of a “just cause” which would permit the aforementioned termination, also defining which causes are understood as just for such a purpose. If the just cause was not mediated, the conceding party had to pay the concessionary for damages and losses for which Decree 1038-A established some factors for calculating the payout amount. These factors included: the cost invested by the conceding party, the cost of goods acquired which could not be commercialized, the capital gain of the business, and the number of years the agent has been with them, etc.
Through Law No. 125 of Supreme Decree No. 1038-A, Decree No. 1038-A was reformed and interpreted in 1996 and a maximum limit for indemnities was established to be paid in accordance with Decree No. 1038-A, which could not exceed the result reached upon applying one of the two formulas established in Law No. 125.
Decree 1038 –A, (published on the Official Registry number 245, dated December 31, 1976) established the rules for executing agreements among Foreign and Ecuadorian companies. The aforementioned law also includes a section regarding the agreement’s termination and its corresponding indemnification; it only provided the unilateral termination of the “DA” if there was a fair cause duly proved before the corresponding judge; such causes should be originated by the concedent or grantor and are the following:
- The serious breach of contract performed by the concessionaire on regards to the obligations established in the Agreement or in the Law.
- Any action or omission performed by the concessionaire that might seriously affect the company’s interests (Motransa).
- The bankrupt or insolvency of the concessionaire.
- The liquidation or ending of the activities.
On September 19, 1997, Decree 1038–A was revoked, leaving the contracting parties free to establish the contractual conditions, as established in article three.
“Art. 3.- The private contractual relations between nationals and foreigners, shall be subject to the principle of autonomy of contractual will and freedom. Consequently, without prejudice of the dispositions set forth in the applicable Civil and Mercantile Legislation, it corresponds only to the contracting parties to anticipate the contractual conditions and the causes for termination of contracts, as well as the compensations, if applicable.”
The Civil Code on its article 8, number 18 establishes that for every contract executed it is understood the incorporation of the laws in force at the moment of its execution. Therefore, if the “DA” was executed while Decree 1038–A was in force, the other party could claim indemnification and compensations according to that law.
This repeal did not, however, void the rights and obligations established in the contracts, nor alter the judicial situation originating under the protection of said laws. In accordance with the stipulation in Article Three of the abovementioned Law, “private contractual relationships between national and foreign entities will be subject to the principles of autonomous will and contractual freedom.
Consequently, without detriment to applicable stipulations in the Civil Code, and Commercial Legislation, this corresponds only to the parties to a contract guided by the contract’s conditions and the reasons for the contract’s termination, as well as the severance agreement that would take place.
Our legislation states that all contracts incorporate “the laws in force at the time of signing”.
In Ecuador since October 2011 the Ecuadorian Congress issued a new Antitrust Law and the respective Regulations to the Law since April 2012.
Article 11 of the Law Prohibit Agreements and Practices between two or more economics operators related to the any commercial relationship which object or effect could to the possibility to limit the competence and that Article has more than 21 numerals that determinate when the conduct will prohibit.
Numeral 17 determinate that is prohibit between the parties in a commercial relation to establish the fix price to sell the products without a justification.
Numeral 19, determinate that establishing distributions agreements with exclusivity, clauses of non-competition or similar that will not have any justification will constitute agreements and practices against the law or prohibits.
We are pleased to inform you that Romero Arteta Ponce / RAP has been shortlisted as follows en Chambers & Partners:
“Ecuador Law Firm of the Year-/2015”
The Law Firm has several pro-bono projects. One of our to 2015 project was with THOMSON REUTERS FOUNDATION. “Ambitious legal projects have the potential to facilitate the evolution of an entire sector. The Innovation Award showcases projects that feature not only a new and exciting idea or enterprise, but a legal team that used creativity in addressing the issues faced”. Romero Arteta Ponce Asociados, among other latin american law firms won the Innivation Award 2015. The video of the winning team and project is (available here)
The Firm participated as contributor for the independent publication ‘Americas Diversity and Discrimination Traffic Lights 2015’ and ‘Americas Termination Traffic Lights 2015’ ( Mayer Brown). The publication could be found here: https://www.mayerbrown.com/Americas-Diversity-and-Discrimination-Traffic-Lights/