INCENTIVIZING INVESTMENT

With the acknowledgment that private investment is the best way to generate higher quality jobs, the state has formulated several tax benefits particularly for productive investments in the country.

IN ECUADOR'S CURRENT ECONOMY, dollarized as it is, it is essential to have constant private investment that allows to maintain our fostered model. For that, our government has adopted the development and attraction of new capital as public policy.

Currently, Ecuadorian legislators have contemplated a great number of tax benefits for national and foreign companies that decide to make new productive investments in Ecuador, principally focused in partial or total exemption of income tax. For some of these benefits, there are defined temporary windows, areas in which they could be applied.

To apply these tax benefits, our legislation has three legal instruments: The Organic Code of Production, Trade, and Investment (Production Code); the Productive Development Law (PDL); and the Solidarity Law for Earthquakes’ Damages (Solidarity Law). These three instruments will be analyzed further here.

PRODUCTION CODE

The Production Code was issued on December 29, 2010, and gathers the general guidelines applied by temporary law that we will get the chance to examine.

This law exempts income tax for companies based on criteria on the characteristics of the investment, the place in which it has been made, and the relation with the line of business and the productive sector in which business is made. Particularly, investments must be made by new enterprises, which means companies must not have existed prior to December 29, 2010. The sectors in question refer to agriculture, industry, tourism, biotechnology, and strategic substitution of imports, among others. These are described in more detail in Article 17 of the Regulation of Investments from the Production Code.

One important thing to keep in mind is that there is no deadline to invest for the Production Code. It could be equally applicable to investments made in 2020, in later fiscal years, or even investments made previous to the issuance of the PDL and the Solidarity Law if they comply with the conditions described above.

PRODUCTIVE DEVELOPMENT LAW

The PDL contemplates an exemption benefit on income tax for a greater period than the one specified in the Production Code: 12 years for the companies that make new investments outside of the urban jurisdictions of Guayaquil and Quito and eight years for investments made within the urban jurisdictions of Guayaquil and Quito.

Additionally, this law does not require the investments to be in new companies. This means companies created before the issuance of PDL and the Production Code can directly benefit from this.

For this exemption to take place, certain conditions must be fulfilled—the investment must start within the following 24 months counted from the issuance of the law. In other words, the period starts from August 21, 2018 to August 20, 2020. The investments also must be done in activities within the priority sectors described herein. Lastly, this investment must generate net employment.

According to the regulations of the PDL, large companies must increase their net employment by at least 3%, and this must be maintained throughout the period in which the company is applying for this benefit. To comply with the employment condition, large companies must progressively increase their net employment during the period in which the investment

is made and must reach at least an additional 3% to their existing percentage. Once the investment period is over, they must maintain the average number of workers of the last year of investment, during the validity of the benefit.

Nevertheless, a company can request an exemption of the job condition, only if it complies with aspects like the increase of production of more than 5%, environmental considerations, technology, and so on.

According to what has been previously discussed, the PDL does not require that the companies that make investments are new. For an existing company, the incomes and profits assigned to investments must be identified, which is why it is viable to manage the new investment as a project, applying cost accounting. The incomes generated by the project are exempted from taxes.

If the identification cannot be done, the company has the opportunity to benefit from the law in a proportional manner according to a formula detailed in this legal instrument. In the event in which it is applied, the exemption cannot be greater than 10 percentage points of the fee reduction.

SOLIDARITY LAW

This law presents three substantial differences with the PDL: the period during which investments can be made; the term of the exemption; and the absence of the obligation for investments to be made in prioritized sectors.

Its principal characteristic is that this benefit solely applies to investments done in the provinces of Manabi and Esmeraldas between May 20, 2016 and May 19, 2021. The PDL extended the term previously stated up to 2019, and that established that the exemption lasted for 15 years counted since the first year in which incomes that were attributable to the investments were made. For investments made before August 21, 2018, the term is 10 years.

Another requirement to apply this benefit was to hire personnel in the affected areas, in at least 75% of unskilled labor. Another interesting point is that the jobs generated as a result of the new productive investment must be maintained during the entire term of the application of this exemption. There is no obligation to generate net employment under the terms that do apply to the PDL.

INVESTMENT CONTRACT (IC)

Another interesting tool for the development of investments is this figure adopted by the Organic Code of Production, Trade, and Investment that grants tax stability for 15 years, which is renewable for one time only.

The principal requirement to declare an IC is a production investment of USD1 million with a disbursement of USD250,000 in the first year (the balance of the investment can be made in subsequent years). There should also be positive employment incidence, which is already a requirement for income tax exemption established in the PDL.

On the other side, the PDL establishes an additional benefit for the parties of an IC—the exemption of Currency Outflow Tax for the import of capital assets and raw materials needed for the project in which the investment has been done.

This benefit is automatic with the signing of the contract, and to qualify for it, the procedure established in the secondary regulations must be followed. It should be noted that the possibility of signing this contract and obtaining these benefits does not have a defined term, as it does in the case mentioned above for the exemption of income tax.

With the signing of the IC, it is assured that tax benefits are kept over time, granting other benefits like the protection of private property. In case something happens to it, the state guarantees its guardianship and the investment that has been made on the property, understanding that property is not only the place in which the project has been done. The signing of the IC is important because it is a guarantee and recognition by the state of the investment being made.

Ecuador considers various benefits that grant legal security for the investor in promoting entrepreneurship in Ecuador, promoting free enterprise and guaranteeing investments in order to protect food sovereignty, generation of social wealth, and foreign exchange. Ecuador has understood that private investment is the best way to raise the quality of life of Ecuadorians through the generation of decent jobs.