Doing business in Ecuador - PKF International business in ecuador.pdf · are 17 small airports located in different cities of the country. There are approximately 6,000 km. of roads,

Doing business in Ecuador

important disclaimer

No person should act or rely upon any matter on information contained in or implied in this publication without first obtaining advice from a qualified adviser that relates specifically to their particular circumstances. This publication should not be regarded as offering a complete explanation of the taxation matters referred to. The publishers and the authors are not responsible for the results either of any actions taken on the basis of information in this publication, nor for any error in or omission from this publication. The publishers and the authors expressly disclaim all and any liability and responsibility to any person, who acts or fails to act as a consequence of reliance upon the whole or any part of the contents of this publication.

preface

The PKF Ecuador Member Firm is also legally independent member of PKF International Limited, the network now comprises over 230 member firms in 120 countries and 400 locations. The thousands of clients of the Ecuadorian firm rangefrom multi-national conglomerates to business start-ups and private individuals. We allcommit to provide our clients with a consistent quality of service, which means that no matter how small your business or individual needs might be, your affairs are personally overseen by a partner. In practice, this means that your partner will ensurethat you are provided with the right skills to help you operate more profitably and taxeffectively. You will be given a commitment to provide you with timely, expert advice. As a result of understanding your needs, your partner will be able to take the initiativeand offer pro-active advice. PKF International Limited is member of the Forum of Firms.

PKF & Co. Cia. Ltda. is a member firm of the PKF International Limited network of legallyindependent firms and does not accept any responsibility or liability for the actions or inactions onthe part of any other individual member firm or firms.

Contents

PKF - Doing business in Ecuador – Contents i

• Basic Indicators 1• Geography 1• Weather 1• Advantages of Investment in Ecuador 2• Population 3• Constitution 3• Economics 4• Communications 4• Political and Administrative Division 5• Legal System 5• Major Exports and Imports 5• Religion and Education 5• Government Policy on Foreign Investment 6• Import Controls 6• Source of Finance 7

Chapter 1 – Introduction

Chapter 2 – Business Structures

• Companies 8• Stock Company 8• Partnerships (Limited Liability Company) 9• Mixed Economy Company 9• Unipersonal Companies 10• Joint Ventures 10• Regulatory Matters 11• Branch or Agency 11• Directors 12• Audit requirements and practices 13

ii PKF - Doing business in Ecuador – Contents

Chapter 3 – Taxation of Business Operations

Chapter 4 – Treaties and Tax Chart

Chapter 5 – Individuals / Natural Persons

• Taxation of Profits 14• Lodgement of returns 15• Residence and source 16• Fiscal year 16• Percentages established by Ecuadorian Law 17• Value Added Tax (IVA) 18• Payroll Taxes 19• Controlled Foreign Companies Legislation 19• Repatriation of Profits and Transfer Pricing 21• Taxation of Capital Gains 21• Customs Duty 22

• Treaties 23• Tax Charts 23

• Tax Payment 26• Annual Taxable Income Table 26 • Social Security 24 • Inheritance and Donation Taxes 24

Chapter 7 – Protection of Intellectual and Industrial Property

• Work and Residence Permits 32• Who is Eligible 33 • Employee’s Rights and Obligations 34

Contacts 36

Chapter 6 – Incentives 29

31

Chapter 8 – Immigration

Introduction

Basic Indicators

Area: 256,730 km²Population: 14’233.123 Language: Spanish is the official language. English is widely spoken in business sectors.Capital: QuitoLargest City: GuayaquilCurrency: US. DollarInflation rate: 6.52%

Geography

Ecuador has an area of 256,730 km². The territory of Ecuador has four regions: the Coast, which borders on the Pacific Ocean; the Highlands, made up by the Andean Mountain Chains, the Amazon, covering approximately 50% of the territory, crossed by multiple rivers and covered by tropical timberland, and the Galapagos Islands with 14 larger islands and 20 small islands.

Weather

The weather on the Coast, the Amazonic Region and the Galapagos Islands are mainly sunny and bright, warm and humid. Cooler weather prevails in the Highlands.

The Coast produces all kinds of tropical fruits and vegetables that are mainly destined for export. Fishing is also recognized around the world especially due to the export of shrimp and tuna.

1 PKF - Doing business in Ecuador - Introduction

Highland production is destined mainly for internal consumption, which is composed of cereal, meat, fruit and vegetables. Flowers exports are important from this region. The Amazonic Region holds substantial oil and mineral reserves and the Galapagos Islands are worldwide recognized for their islands diversity of “fauna and flora”, unique in the world.

Advantages of Investment in Ecuador

Ecuador presents an attractive alternative for Foreign Investment in sectors that count with possibilities in technological applications, generating value added and important resources as: bio-technology, based in the bio-diversity emphasized that has our country.

Ecuador is one of the few countries on the planet named as “Megadiverse”, with 18,250 species of plants, 706 species of fresh water fishes, 1,559 species of birds, 374 species reptiles and 402 of amphibious.

Bio-commerce and the bio-business are the important subjects in the National Strategy of Bio-diversity, an instrument that has Ecuador to take economic advantage of their bio-diversity, generating wealth without destructing the natural base.

A rich variety of microclimates, four natural regions, permanent solar luminosity and the impressive fertility of our land; are some of the factors that make our country a suitable place to develop any type of productive and commercial activities.

PKF - Doing business in Ecuador - Introduction 2

Population

Ecuador’s population is composed of diverse ethnic groups: Indigenous, Spanish, European and African descendants. Spanish is the official language spoken through out the country, although Quechua is the language spoken by most of Indians living in the Highlands.

Constitution

Ecuador was a Spanish Colony and became independent on August 10, 1809. The capital is Quito. It is divided into 24 provinces, each made up of cantons and parishes for administrative and politicalpurposes.

According to the Constitution of 2008 the President and Vice-president are elected for a four year term with an option for re-election.

The Government is organized in three administrative areas: Executive, headed by the President and Vice-President and a Cabinet that consists of 28 Ministries appointed by the President. The Legislative Assembly; and the Judicial which is presided by the Supreme Court of Justice.

Every city has a mayor, elected every four years by direct vote.


Economics

Since January 2000, the US DOLLAR is the official local currency in Ecuador.

The Government’s task is controlling inflation by slightly reducing public sector employment. For this purpose the Government has created the CONAM (National Council of Modernization). This institution is in charge of selling off several state-owned companies to decentralize, privatize and modernize the basic services such as: water, electricity, telecommunications, social security, etc.

This is part of the Government’s policy to attract foreign investment to the country.

Communications

There are two international airports in Ecuador, one in Guayaquil (JoséJoaquín de Olmedo) and other in Quito (Mariscal Sucre). Also, there are 17 small airports located in different cities of the country.

There are approximately 6,000 km. of roads, most of them paved and in good condition. There is widespread direct international phone service available as well as fax, cable, mobile and e-mail wireless communication and internet facilities.

There is also a frequent air, major ports (Guayaquil, Manta, Puerto Bolivar and Esmeraldas) and freight transportation available from Ecuador to any place in the world.


Legal System

The legal system is based on Civil Law, based on the Napoleonic Code which is also the rule in Latin America. Lawsuits must be presented in provincial court. The judge hears and decides the cases.

Sentences may be appealed. Cases go first through the ProvincialCourt, then to the Superior Court. In some cases the Supreme Court will also be involved.

Major Exports and Imports

Major exports commodities of the country are petroleum, bananas,shrimp, coffee, cocoa, cut flowers and fish.

The export partners of the country are the United States, Colombia, Italy, Peru and Chile.

The main country imports are machinery and equipment, fuels; rawmaterials and consumer goods. Import partners of the country are the United States, Colombia, Japan, Mexico and Venezuela.

Religion and Education

The main religion is Catholicism. Although there are congregations and groups that represent other religions beliefs.

There is an adequate number of private and public schools (sponsored by the Government). Universities are supported by theState, most of them are private.

The most important universities are located in Guayaquil and Quito, theses are: University of the State, Catholic University, Military Academies and Polytechnics.


Government Policy on Foreign Investment in Ecuador

Ecuadorian legislation offers broad facilities for foreign investment in a wide range of activities. The type of business entities used in Ecuador are corporations and branches of foreign companies offering special systems for investment in certain areas, Ecuador offers flexible, clear, stable norms that ensure a very attractive climate of economic freedom.

Investors can establish joint ventures or holding companies in order to link their interests with companies that are already established and successful. They can also undertake new activities, taking advantage, for instance, of the privileged treatment granted in the Free Zone system, which exempts them from payment of the value added tax (VAT), tax on profits, customs duty, special consumption tax (ICE), municipal taxes and export fees.

Another interesting alternative is in the “Maquila Law”, which allows export from Ecuador of goods with final added value incorporated in this country. This attractive mode of production is also exempt form the VAT and export fees, with the understanding that production is exclusively for export. Special system guarantees the conditions for these activities in the long term and, of course, free repatriation of profits, as with all foreign investment.

Import Controls

The Government levies customs duties on most merchandise entering Ecuador. Customs clearance must be obtained to import. There are important quarantine controls on certain goods, including certain drugs, animals, plants, food, firearms and vehicles.


Source of Finance

Modern financial and banking systems began in 1928 with the establishment of the Central Bank. The Monetary System Law defined the functions of the Central Bank, which included issuing and stabilizing the national currency, providing credit to the private sector, managing foreign-exchange reserves, controlling import-export permits, carrying out the Monetary Board's policies, supervisingprivate banks, and regulating international financial transactions. The bank also maintained a check clearinghouse, rediscounted and made advances to commercial banks, and published economic data.


Basic BusinessStructures

Companies

There are different kinds of business forms: stock company, limited liability company, general partnership, limited partnership, partnership limited by shares, mixed economy company, joint venture and unipersonal companies. Although the most popular forms are: the corporation, limited liability company and mixed economy company.

Every company must be registered in the Mercantile Register and will be subordinated to the Superintendence of Companies and in the case of financial institutions, to the Superintendence of Banks and Insurance. These institutions control and supervise business operations according to the Ecuadorian Law.

Stock Company

It is divided in negotiable shares and is formed by the contributions of its shareholders, who are responsible only for the amount of their contribution. Its minimum capital is US$800.00 and should be specified by the Superintendence of Companies. The company must be constituted by public deed, with prior authorization of the Superintendence of Companies, and registered in the Mercantile Register. The corporation must have at least two shareholders at all times.

According to Company Law, it should be held at least one shareholders meeting per year at its domicile. Unless specified differently, 50% of the capital representation constitutes a quorum. For capital-related decisions, a majority of two thirds is required, while ordinary matters a simple majority is enough.

PKF - Doing business in Ecuador - Business Structures 8

Corporations must pay 10% of their annual net income to a reserve fund until it reaches the 50% of the paid-in capital and must distribute at least 50% of their net income. If the shares have been sold in public offering, they must distribute at least 30% of net profits.

Partnerships (Limited liability company)

Made up of partners, with limited liabilities or participation according to the percentage of their capital contributions. Its capital is not constituted by freely negotiable shares. If a partner wishes to sell his shares, the remaining partners receive the rights to first-refusal.

A limited liability company can not participate in activities such as banking, finance, insurance and savings operations. According toCompany Law, it must have a minimum capital of $400 to be legally constituted and must hold a shareholders meeting at least once a year.

This type of company must distribute at least 50% of their net income and allocate 5% of their annual profits to a reserve fund until it reaches 25% of the paid-in-capital.

Mixed Economy Company

In this kind of company the State or any public entity participates with private investors in the capital and administration. This company must have a minimum capital amount of $800.

9 PKF - Doing business in Ecuador - Business Structures

Unipersonal Companies

Unipersonal companies are formed by one partner and their only shareholder’s responsibility is limited to the capital provided for the company’s formation. An active partner is the owner manager.

The capital allocated cannot be less than to 10 basic salaries. (US$2,180.00). The (Empresa Unipersonal de ResponsabilidadLimitada), EURL will be formed through a public registry and will require a Civil Judge’s approval and inscription in the Mercantile Registry.

Management and control of the Company is the responsibility of the owner.

Companies must allocate 10% of their annual pre-tax profits to a reserve fund until the fund reaches 50% of the assigned capital. This fund must be invested and preserved in amounts of high liquidity and cannot be removed.

Joint Ventures

The joint venture defines each participant’s proportionate share in venture assets, liabilities and results. There are no special regulations governing the establishment of joint ventures.

Regulatory Matters

At the end of each accounting period (On December 31), companiesmust remit to the Superintendence of Companies or to the Superintendence of Banks and Insurance, the following information:

• Balance sheets, profit and loss statements, cash flow.• Annual Report by the General Manager to the Board of Directors.


• Independent auditor’s report and statutory report.• List containing names, nationality and ID number or passport of the legal and administrative representatives.

• Forms, duly filled out in the Superintendence of Companies.• The company’s public deeds, duly approved by the Superintendence of Companies, must be published in a local newspaper.

Companies have two years to completely pay in the subscribed shares.

Mixed economy and Stock Companies must publish their balance sheets in a local newspaper, as established by the Superintendence of Companies.

If the total amount of fixed assets of any company or branch exceeds $1,000,000 for Stock Companies or Limited Liability Company and $100,000 for Mixed Economy Companies, they must hire independentauditors to issue an Independent Auditors Report on examination of yearly financial statements.

Branch or Agency

To establish a branch or agency of any company in Ecuador it is necessary to:

• Submit the head office´s articles of incorporation and decision to establish a branch, to the Superintendence of Companies or Banks.

• Appoint an agent or manager who must act as legal representative of the branch.


• Obtain an authorization from the Superintendence of Companies orBanking and of the Ministry of Industries and Commerce, when necessary.

• A branch requires a minimum capital of $2,000 to operate.

• Must obtain a certificate from the Mercantile Register.

• Publish in a local newspaper its certificates and permits to operate the new branch or agency.

When the branch or agency is going to offer public services or to perform activities related to the exploitation of natural resources, or when the establishment of a branch is required by law, the minimum capital referred to above may be different.

Directors

The principal controlling body of a company is the Shareholders Meeting, which elects the Board of Directors.

Company directors have a statutory obligation to ensure that theannual financial report gives a true and fair view of the financial position and performance of the company, and whether the companywill be able to pay its debts as and when they become due and payable.

The directors have an obligation to ensure that the financial report has been prepared in accordance with the accounting standards (During January 2010, Ecuador has to adopt the International Financial Reporting Standards, IFRS).


Audit requirements and practices

All companies that have assets major than US$1,000,000 must appoint auditors to annually report on their financial statements ended at December 31. (See Regulatory Matters)


Taxation of BusinessOperations

The Ministry of Economic and Finance through the Internal Revenue Service is responsible for managing the national tax system.

There are different kinds of taxes that must be paid by individuals or corporations. These are: Corporate Income Tax, Vehicle tax, Withholding on income tax, Value Added Tax, and Special Consumption tax.

Other institutions are also in charge of managing some taxes, such as: Tax of 1,5 x 1000 over total assets, Taxes on property, patents and taxes that are managed by the municipalities. Tax of 1 x 1000 over total of assets, contributions to the Superintendence of Companies, Tax of 2 x 1000 over paid-in capital and contributions to the University Hospital and Tax over the Working Capital of the Charity Board.

Taxation of Profits

Companies incorporated under Ecuadorian Law are considered resident companies and are eligible to pay corporate income tax. The base to determine the income tax is made up of total profits less related returns, discounts, production or operating costs and other expenses.

Profits derived from:

• Any income earned by Ecuadorian or foreigners derived from any legal profession or economic activity.

• Transfers of movable properties.

PKF - Doing business in Ecuador - Taxation 14

All these incomes are considered in calculating the taxable base. Net profits less expenses, bad debts (except obligations contracted between partners, spouse, relatives and between related companies), and transfer of property constitute the taxable base for companies.

The following expenses should be deducted from income: depreciation, bad debts, commissions, entertainment, general expenses, insurance premiums, interest, investment, start-up, expenses, publicity, rent, repairs and maintenance, research and development, royalties, taxes, salaries, social security and welfare, losses resulting by natural disasters or criminal offences not covered by insurance, exchange losses for transactions registered in the Central Bank or free market.

Lodgement of returns

Taxpayers (as previously defined), trusts and partnerships are required to lodge returns annually.

• Patents, Royalties, trademarks, industrial models and commercialnames.

• Income from lotteries, raffles, gambling, etc.

• Income received from public entities.

• Inheritances, bequests and gifts located in Ecuador.

15 PKF - Doing business in Ecuador - Taxation

Residence and source

Residents are subject to tax on all income, irrespective of its source (eg. on worldwide income).

• Residence of Individuals

A taxpayer’s residency status is determined according to his Income Tax Return.

• Residence of Companies

A company is resident in Ecuador if it is incorporated in Ecuador.

Ecuadorian incorporated subsidiaries of foreign companies are residents of Ecuador for taxation purposes.

Fiscal Year

Between January 1 to December 31 of each year.


Percentages established by Ecuadorian Law to calculate annual depreciation of fixed assets

Real Estate 5%

Installations 10%

Machinery, Equipment and Furniture 10%

Vehicles and Transportation Equipment 20%

Computers 33%

Non-resident corporations are those established under the laws of their head office abroad. Withholding tax of non-resident individuals or companies is 25%. (Except for those companies constituted in countries with which Ecuador has tax treaties)

The following incomes of non-resident individuals and companies are exempt from withholding tax:

Payment for imports, payment under international treaties and payment made to producers or distributors of cinema or television films.

90% of the payment made by news agencies the value of charters for international carriers.


Value Added Tax (IVA)

Value Added Tax is levied at 12% and applied to certain transfers of goods and services.

Transfers of goods include: movable property, fixed assets, merchandise destined for business or personal use.

Services include the following activities or enterprises: laundry, telecommunications (except radio or television), leasing, printing, services rendered in restaurants, bars, discotheques, hotels, casinos, billiards, etc; insurance, photographic industry, security services, computing systems, gymnasiums, etc.

The following transferences and products are subject to 0% valueadded tax:

• Donations to the public sector or non-profit institutions.• Transfer of shares.• Sale of companies or businesses.• Produce from agriculture, livestock, fishing, forestry, or hunting activities.• Medicine and drugs for human use.• Basic consumption products like: meat, milk, bread, cereals, salt, sugar, medicines, etc.• Books, magazines, newspapers, etc.• Merchandise imported by public entities, diplomatic sector, religious institutions and passengers entering Ecuador (up to the amount specified by the Customs Law).• Any other goods or raw material specified in international agreements or special regulations presently in force.

Individuals, Corporations and Public entities must pay the value added tax. There is tax credit available for some taxpayers, which must keep accounting records and be legally registered; also for the export of goods and services.



Value Added Tax must be reported monthly. Taxpayer’s establishments, whose returns or payments have not been made formore than three months, will be closed down until they cancel the total amount owed.

Payroll Taxes

Every employer must deduct from the employee’s monthly salary 9.35% correspondent to the contributions that have to be made to IESS (Ecuadorian Institute of Social Security).

Additionally, employers must remit 12.15% of the total amount payroll, which includes 0.5% industrial training (SECAP) and 0.5% for education (IECE).

Controlled Foreign Companies Legislation

Foreign investment in an Ecuadorian Company does not require anykind of authorization. But foreign companies willing to establish an independent company or business must follow several rules according to the law.

There is no limitation on the amount of foreign investment in Ecuador. Companies that want to start any kind of legal activity in Ecuador must present an application to the Superintendence of Companies in order to obtain an authorization to operate in Ecuador.

The foreign company must submit a copy of the relevant public deed, proof of sale of the foreign exchange, import permit or proof of shares transfer.


• It must appoint a legal representative who should be a resident in Ecuador and be authorized to sign and contract in the name of the company.

• Every four months the company must submit to the Superintendenceof Companies: balance sheet, profit and loss statement, list of representatives and an other information required by the Superintendence.

• Foreign companies must have a fixed place of establishment in order to conduct operations, manage or administer a business destined to offer services or to conduct activities such as:

a. Carry out economic activities, such as:

Hiring persons in order to carry out permanent economic activities on behalf of the company.Selling merchandise in Ecuador.Paying for permits, services or related expenses connected with any

economic activity.

b. Acting as consultant in technical or financial projects.

c. Rendering services to entertainers or to national/international travel agencies.

d. Establishing any kind of industrial plant.

e. Extracting natural resources.

f. Operating through a branch established in Ecuador.

g. Appointing a representative with authority to contract on behalf of the company.

Repatriation of Profits and Transfer Pricing

In addition to paying interest, the payment of management fees, service fees and royalties are methods of repatriating profits to non-resident associates, controllers and owners of Ecuadorian entities.

Transfer Pricing: According to Article 1 of Resolution No. DGER2008-NAC-0464, published in Official Gazette NO. 324 of April 25, 2008, taxpayers of income tax that have transactions with foreign related parties, within the same fiscal period for an accumulated amountexceeding three million dollars of the United States of America (USD 3,000,000.00), shall submit to the Internal Revenue Service the Annex of Transfer Pricing. In addition, those taxpayers that have transactions with foreign related parties, within the same fiscal period of an accumulated amount exceeding five million dollars from the United States of America (USD 5,000,000.00), shall submit in addition to the Annex of Transfer Pricing, the Transfer Pricing Integral Report.

Tax authorities request taxpayers to submit this information in accordance to the Law.

Taxation of Capital Gains

Ecuador also taxes gains realized on the disposal of capital assets other than depreciable assets or assets acquired for resale (such as trading stock and short term investment held by share traders), which are NOT subject to income tax, ordinarily.



Customs Duty

Customs duty is imposed on various goods imported into Ecuador including textiles, clothing, footwear and motor vehicles with the duty generally expressed as a percentage of the free on board (FOB) value of the goods. Many goods are exempt from duty, and concessions may also be available where the import of goods does not have anadverse effect on the market for locally produced goods.

Treaties and TaxCharts

23 PKF - Doing business in Ecuador – Treaties and Tax Charts

Ecuador is member of the Latin American Integration Association as well as the Andean Group, with the purpose of promoting foreign investment and international relations with other countries.

Ecuador has signed cooperation taxation treaties with: Colombia, Peru, Venezuela, Chile, Bolivia, Brazil, France, Germany, Italy, Mexico, Romania, Spain, Canada, Sweden, Switzerland and Argentina.

• 0.15% of net assetsNet worth tax

• 1% on the valueForeign money transfer

• 5-years carry-forward, but deduction in a year is limited to 25% of profits

Annual loss

• CreditableForeign income tax

• Ecuadorian companies and resident Ecuadorians are taxed on worldwide income

Territorial scope

• 25% creditable against liability of non-resident (If earnings are capitalized, the rate is 15%)

Corporate income tax(CIT)

RESIDENT ENTERPRISES

TAX CHART

PKF - Doing business in Ecuador - Treaties and Tax Charts 24

• Up to 35% taxInheritance/gift tax

• From 0,025% to 0,3% for rural property and 0,025% to 0,5% for urban property; surtaxes and surcharges apply

Real estate tax

• NoneNet wealth tax

• Progressive from 5% to 35%Individual income tax(ITT)

RESIDENT INDIVIDUALS

• NITRoyalties

• NIT generally, 8% for securities Interest

• Exempt if paid out of profits already taxed; otherwise 25% final withholding tax

Dividends

• 25% irrespective of distributionBranch profits

• No special taxationExcess profits

• 25%Ordinary rate (NIT)

NON-RESIDENTS

25 PKF - Doing business in Ecuador – Treaties and Tax Charts

• No transfer taxShare/bond transfers

• 4% to 8% real estate, ships and airplanes

Transfer tax (alcabala)

• Different ratesExcise taxes

• 12% single rateValue added tax

TRANSACTION TAXES

Individuals / NaturalPersons

PKF - Doing business in Ecuador - Individual 26

Foreigners are considered Ecuadorian residents when they have resided in Ecuador for more than six months within the same year.

Tax Payment

Dividends, goods or services derived from labor, investment, capital and inheritances are subject to income taxes.

Diplomats, agents, official representatives, consuls and ambassadors are exempt from paying income tax. The following income is exempt: Government pensions and retirement, security funds, benefits received from the Armed Forces, handicapped persons’ income and the participations of workers in the companies’ profits.

The following chart applies to the calculation of individuals income tax:

Annual Taxable Income Tax Chart for year 2009

25%6.447,0065.480,0049.110,00

30%10.540,0087.300,0065.480,00

12%39016.370,0013.640,00

35%17.086,00Over87.300,00

20%3.173,0049.110,0032.740,00

15%71832.740,0016.370,00

10%11713.640,0010.910,00

5%010.910,008.570,00

0%-8.570,00-

Marginal rate on the excess

Tax due on lower limit

Over taxableincome

Taxableincome

27 PKF - Doing business in Ecuador - Individual

Companies and individuals who have paid contracted services, labor of any type or in general, as a source of other taxable income for individuals, must withhold income tax according to the followingservices:

1%Interest and commissions in respect of financialoperations between institutions of the financial system; payments for freight and passenger transport; payments related to electrical power; immovableproperty building activities; Payments related topurchase of tangible movable property (except fuels); payments to Ecuadorian insurance companies andbranches of foreign companies (1% on 10% of thepremium invoiced); payments to Ecuadorian leasing companies and payments for media services made tomarketing companies.

2%Labor services performed for individuals; payments by credit card companies to their merchants; interest andsimilar payments

25%Payments to non-resident foreign individuals for subject-to-tax services occasionally performed in Ecuador and other payments other than dividends or profit distributions.

2%Any other payments.

8%Fees, commissions and other payments toprofessionals or other persons that are present in Ecuador for more than 6 months for services that are predominantly intellectual or for sport or artisticservices; royalties paid to resident individuals orEcuadorian branches of non-residents; payments forletting of immovable property.

PKF - Doing business in Ecuador - Individual 28

Inheritance and Donation Taxes

All inheritances and donations from Ecuador sources are subject to taxation, both of residents and non-residents.

Social Security

Every employee must be covered by the Ecuadorian Institute of Social Security. Employers must deduct 9.35% of the employee’s net income in order to remit it to the IESS and the employers must contribute 12.15% of each employee’s annual salary.

Self-employed individuals, who optionally choose to be covered by this system, have to contribute 15.5% of half of their preceding year’s gross earnings.

The Ecuadorian Institute of Social Security offers the followingservices:

• Retirement funds

• Health care

• Maternity

• Worker’s illness compensation

• Death benefits for dependents

Incentives

• Profits derived from the exploitation of forest land are exempt from income tax, land covered by forest or used for forestation purposes is exempt from property tax and import taxes in any kind of equipment or material destined for forestry activities.

• Enterprises or companies eligible to perform assembly operations in Ecuador may import duty free, raw and packing material, equipment and accessories, machinery, etc.

• Companies which are related to the automotive activity must obtain a certificate renewable every two years to enjoy full exemption from any duty generated from import procedures (stamp tax, registration tax, customs duties, conversion of certificates or shares).

• Companies dedicated to the construction business must apply to the JNV (Junta Nacional de la Vivienda) in order to obtain a classification that could be A or B. These companies enjoy the following benefits: exemption from 80% (A) or 60% (B) of fiscal, municipal and othertaxes (except income tax) caused during the transfer of land destined for low cost housing.

• In order to increase exports, this activity is exempt from taxes.

• Fishery enjoys full exemption from taxes on operations carried on with credit instruments, companies registration fees, conversion of certificates or shares, import of raw materials, exemption (for 5 years) from federal and municipal taxes, customs duties on imports of any kind and on transfers of property or ships.

29 PKF - Doing business in Ecuador - Incentives

• There is a system of free zones to promote employment and foreign investment and transfer of technology in undeveloped areas. Any enterprise wishing to establish on a free zone must submit an application to the CONAZOFRA. Free zones are exempt of any kind of taxes (business license fees, production taxes, income taxes,import, duties, etc).

• Industrial companies are established to produce articles that presently are not produced in Ecuador, or articles that are going to be exported have special benefit such as: constitution taxes exemptions, shares transferences, tax over importing machinery not available in Ecuador and exemption (during 5 years) of municipality and provincial taxes.

• Eligible enterprises engaged in petroleum, electricity, port andtourism activities, enjoy the following benefits for 10 years from the beginning of their operations according to the law: full exemption from income taxes, registration, incorporation, increase of capital, certificates exchange or conversion, transfer of property destined to the tourism industry taxes, etc.

• The people dedicated to produce handmade goods, services or any kind of artistic expression as well as individuals or enterprises willing to establish small industries receive the following benefits: exemption of custom duties on import of equipment and other materials, export taxes, business licenses and transfer of property for workshops or artisan centers.

PKF - Doing business in Ecuador – Incentives 30

Protection ofIntellectualand Industrial Property

31 PKF - Doing business in Ecuador – Intellectual and Industrial Property

Law No. 83, Official Gazette No. 320 on May 19, 1998: the State recognizes, regulates and guarantees intellectual property acquired under this Law, the Decisions of the Andean Community Commissionand the existing international agreements in Ecuador.Intellectual property includes:

1. Copyright and related rights.

2. Intellectual property, which includes the following:

• Inventions;

• Industrial designs;

• Layout designs (topographies) of integrated circuits;

• Undisclosed information and commercial and industrial secrets;

• Trademarks, trade, services and commercial slogans;

• The distinctive appearance of business and commercial establishments;

• Trade names;

• Geographical indications; and,

• Any other intellectual creation that is destined for an agricultural, industrial or commercial use.

Immigration

The Constitution prohibits discrimination on the basis of sex, race, nationality or religions beliefs. In general, the Ecuadorian Constitution and The Labor Code strive to protect the workers rights.

Several major changes to the Labor Code are being discussed by the authorities in order to attract greater foreign investment and to liberalize the rather inflexible labor legislation.

These changes will help to increase the workers efficiency through training programs, standardize equal pay for equal work and encourage employees to raise their level of work to increase quality.

WORK AND RESIDENCE PERMITS

a) Work Permits

According to law, every foreigner willing to work in Ecuador must obtain an authorization from the National Director of Employmentand Human Resources.

Immigrant Visas are granted to: retired people who receive pensions from their native countries, real estate investors who bring capital to Ecuador, investors who wish to export agricultural products, livestock or mineral resources, companies with local agents who possess power of attorney to represent the company in Ecuador, contracted technicians, professionals with university degrees recognized by a national university and spouses and children of Ecuadorian citizens.

PKF - Doing business in Ecuador – Immigration 32

WORK AND RESIDENCE PERMITS

a) Work Permits

Most countries’ visitors do not require tourist visas.

Non-immigrant and Tourist Visas are granted to temporary foreign technicians, participants in intercultural exchanges, tourist and businessmen. Except for the Diplomats’ and political exiles Visas, all other Visas are granted by the consul and must be renewed every year.

Specific legislation also exists which governs the treatment of foreign employees working in Ecuador.

b) Residence Permits

Any person willing to live in Ecuador for an undetermined periodof time must obtain an authorization from the National Government. This authorization must be renewed annually after

paying the respective duties.

Who is Eligible

Ecuador wants to attract people whose business, entrepreneurial, trade or professional skills will contribute to its economic growth.

33 PKF - Doing business in Ecuador – Immigration

Employee’s Rights and Obligations

• Working and terms of conditions are generally specified in individual or collective contracts.

• The national minimum wage established by the government is US$218 per month. Salaries which exceed the minimum wage are negotiated between the employer and employee.

• At the end of each fiscal year, companies must distribute 15% oftheir profits among all the company employees.

• Employers must contribute 9.35% of their employees’ monthly salary to the Ecuadorian Institute of Social Security to be eligible to receive its benefits and assistance.

• Besides salary, employers must pay the following supplements:

In April in the Coast and in September in the Highlands (annually)

$218.00 Fourteenth(décimo cuarto)

In December (annually) in Coast and Highlands

One month’s wageThirteenth(décimo tercero)

To be paidDescriptionName

PKF - Doing business in Ecuador – Immigration 34

• Pregnant women must be given a leave of absence two weeks before and ten weeks after delivery. They are also entitled to leave the workplace two hours earlier during a nine month period following the birth.

• Every employee who has worked for at least one year at the same place of business has the right to fifteen uninterrupted calendar days of paid vacation. After years of working in the same place,the employee has the right to one more day of vacation of every additional year worked.

• Workers may choose to organize themselves in unions, either as an independent entity among their co-workers or as member of a collective that represents the industry.

• Employees right to strike is guaranteed by the Labor Code.

• Employers must contribute the equivalent of one month’s salary to the IESS for every employee who was worked for more than one year in the same place of business and one month’s salary for every year thereafter.

• Employers, who knowingly dismiss a pregnant woman, for no other reason than that she is pregnant, must pay several penalties.

• If an employer wishes to fire an employee, he must pay him an indemnity according to Labor Code.

• In cases when the employer has just cause for dismissal he must request a Labor Inspection and the employee is placed on leave for 30 days while a labor investigator evaluates the employer’s claims.

35 PKF - Doing business in Ecuador – Immigration

Contacts

• Walter OrellanaAudit Partner

• Trevor HardingMarketing Director

• Cristina NaranjoAdministration Partner

• Xavier RocaConsulting Partner

• Yesenia TumbacoAudit Partner

• Edgar NaranjoManaging Partner

• Av. República del El Salvador #836 y Portugal, piso 4 EdificioPrisma Norte

• Telefax: (593) 2 - 2263960 • Quito – Ecuador

Quito Office

• 9 de Octubre 1911 y Los Ríos, Edificio Finansur, Piso 12, Of. 2

• P.O. Box 09-06-2045 • PBX: (593) 4 - 2453883• Fax: (593) 4 - 2450886• www.pkfecuador.com• E-mail: [email protected]• Guayaquil – Ecuador

Main Address

• RUC: 0990593280001

• PKF & Co. Cía. Ltda. Main Office

PKF - Doing business in Ecuador – Contact 36

Documents

Doing business in Ecuador - PKF International business in ecuador.pdf · are 17 small airports located in different cities of the country. There are approximately 6,000 km. of roads,