March 14, 2022
Ecuadorian President proposes bill to attract new investments
If enacted, the bill would include rules for public-private association contracts. It also would include tax reform provisions for duty-free zones and special economic development zones. Additionally, the bill would require Ecuadorian companies listed on a local stock exchange to disclose their chain of ownership under certain circumstances.
Ecuador’s President proposed a bill on 22 February 2022, aimed at attracting new investments. The National Assembly will discuss the bill over the next 30 days. If approved, the bill will be sent to the President for his signature. The bill would be enacted once the final version is published in the Ecuadorian Official Gazette. While the National Assembly discusses the bill, it may be subject to changes.
Public-private associations and delegated management
Creation of organization to regulate public-private associations and delegated management contracts
The bill would create the Interinstitutional Committee for Public-Private Association and Delegated Management, which would consist of several public institutions that will oversee planning, establish regulations, provide authorizations for the execution of the public projects and promote private investment.
For public projects developed under a public-private association, the bill would allow private entities to finance all or part of the investment necessary for the execution of the project. The public-private association must comply with the level of service required by the project and/or the infrastructure needed.
The bill would require transfers of shares or securities that represent a change of control of the private manager entity to be reported to, and authorized by, a governmental delegating entity.
For public-private association contracts, the bill would require a commercial trust established by the private manager to manage all the income and expenses. Income from the project or the private manager would be considered to be for the public entity’s benefit.
The bill would require private managers to be authorized to collect tariffs.
Foreign state-owned companies with which Ecuador maintains diplomatic relations could submit, and participate in, public bids for delegated management and public-private association contracts.
The bill would allow legal stability to apply from the moment the contract is executed, meaning the rules in effect at the time the contract is entered into would apply until the end of the contract. To apply legal stability, it must be declared as an essential part of the investment contract.
Delegated management and public-private association contracts would have a term of up to 30 years and could be extended for up to an additional 10 years.
General tax reform
Income tax in duty-free zones and special economic zones (ZEDE)
If the bill is enacted, private investors may request authorization to operate in duty-free zones. If authorized, the investors must conduct productive processes and export goods in the duty-free zones. Productive processes in duty-free zones mainly consist of industrial activities (e.g., manufacturing), and providing services and logistics.
Special economic zones (hereinafter ZEDEs) cannot be combined with duty-free zones. The areas under this regime are “customs destinations” for new investments.
The bill would exempt administrators or operators of duty-free zones and ZEDEs from paying income tax for the first 10 years, beginning in the tax year following the year in which the area is designated as a duty-free zone or ZEDE.
At the end of the 10-year period, the duty-free zones or ZEDEs would be entitled to a 10-percentage point reduction in the corporate income tax rate in effect at the time their designation was granted. The reduced tax rate would apply until the authorization to operate as a duty-free zone or ZEDE expires.
Value-added tax in duty-free zones or ZEDEs
The bill would impose a 0% value-added tax rate on imports of goods and raw materials made by the administrators and operators of duty-free zones or ZEDEs.
Remittance outflow tax
The bill would exempt from the remittance outflow tax payments made to foreign investors for financial yields or capital gains on investments that are part of managed or collective investment funds in Ecuador.
Ecuadorian companies that are listed on local stock exchanges would have to disclose their chain of ownership all the way through the ultimate beneficial owner. The bill would only require shareholders that hold a stake of more than 10% of the capital of the company to disclose the chain of ownership.
This provision would only apply to corporations incorporated in Ecuador.
For additional information with respect to this Alert, please contact the following:
EY Addvalue Asesores Cia. Ltda., Quito
EY Addvalue Asesores Cia. Ltda., Guayaquil
Ernst & Young LLP (United States), Latin America Business Center, New York
Ernst & Young Abogados, Latin America Business Center, Madrid
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific