Ten considerations when setting up shop in Ecuador Ten considerations when setting up shop in Ecuador

Ten considerations when setting up shop in Ecuador
12 Sep 2018

After a long history of political instability in Ecuador, the current government has now been in power for 11 years, focusing on policies to support low-income groups and large public investments, particularly in education, health, and major infrastructure projects.

The relatively stable political environment has helped to stimulate economic growth but, since hitting a peak of 7.9% in 2011, this has slowed over recent years. Following negative 1.6% growth in 2016, the country started an economic recovery last year thanks to an increase in oil production in order to try and benefit from higher oil prices. After experiencing a growth rate of 3% in 2017, the momentum is continuing to build during 2018, although a planned government austerity programme is likely to have an impact.

Following three years of negotiations, the Protocol of Accession, which included Ecuador in the European Union–Andean Trade Agreement with Peru and Colombia, came into force in January 2017. The subsequent reduction in tariffs has boosted trade significantly, with UK exports to the country up by more than 70% on 2016, for example. Imports to Ecuador rose to 22% last year, following a drop of 24% in 2016.

But despite the opportunities on offer in Latin America’s eighth largest economy, the business environment remains challenging. In fact the World Bank’s 2017 Ease of Doing Business report ranked the country 114th out of a total of 190 countries in terms of complexity.

Starting a business

Foreign investors starting a business in Ecuador usually set up local corporations or local branches of offshore entities. Alternatives also include creating limited liability companies (Sociedad de responsabilidad limitada or SRL), partnerships or mixed economy companies, which require government participation. All entities must be registered with, and are controlled by, the Superintendent of Companies and are governed under the Companies Law.

Starting a business consists of a free-of-charge, two-step process involving the local Municipal Authority. The first step is to apply for a patent, an online process that takes up to 24 hours.

The second is to obtain an operations licence, which involves an inspection being made by the fire brigade that usually takes place within 15 days of making your application. If approved, a ‘tasa de habilitacion’ is granted. A commercial patent, the cost of which is calculated based on the company’s assets, must then be obtained.

In order to protect your trade name, it is necessary to register it with the Ecuadorian Intellectual Property Institute (IEPI), but bear in mind that the Superintendent of Companies does not usually allow new companies to use names that are similar to those of existing organisations.

Some steps have been taken recently to make it easier to start a business though such as the introduction of an online registration system for social security purposes.

Dealing with construction permits

The World Bank ranks Ecuador 105th out of 190 economies in terms of ease of obtaining a construction permit. On average, obtaining one takes about 132 days, involves 17 procedures and incurs significant costs.

Several different official departments need to be consulted during the procedure, including the Association of Architects of Ecuador (Colegio de Arquitectos del Ecuador or CAE), the Association of Civil Engineers of Pichincha (Colegio de Ingenieros Civiles de Pichincha), the Property Registry (Registro de la Propiedad) and the Water and Sewage Authority (Empresa Metropolitana de Alcantarillado y Agua Potable or EMAAP).

Having electricity connected

It is necessary to undertake four procedures in order to obtain electricity: make your application; date your documents; undergo inspections and go through the installation process. The utilities provider is Empresa Eléctrica Quito SA (EEQ), whose professional electrical engineers carry out and sign off the activities involved in connecting you up.

Registering property

It is mandatory to hire a lawyer in order to register a property in Ecuador, and fees are normally calculated based on the property’s market price. It can be a lengthy procedure, involving several different contracts and taxes that must be paid, again based on the property’s market value.

But registering property has become even more burdensome recently as it is now necessary to use a valuation certificate to register a property transfer. This procedure is more time-consuming than expected due to implementation problems in transferring authority over property records to the municipality of Quito, which is the capital.

Obtaining credit and protecting investors

Ecuador’s credit bureau now enables access to historical data, a move that has improved access to credit information. The situation is a significant improvement on past years when the country had no public registry at all.

But the legal rights index is still underdeveloped and obtaining credit can be tricky due to high interest rates relating to the US dollar, which is the country’s official currency.

Investor protection is also ripe for improvement, but Ecuador has strengthened minority investor protection lately by making more requirements when disclosing related-party transactions. Potential acquirers must now also make a tender offer to all shareholders when purchasing voting shares.

Paying taxes

Employers must make 10 tax payments per year, but according to the World Bank’s ‘Doing Business in Ecuador’ 2018 report, processing them can take up to 666 hours. Although the regional average is 28 tax payments, they only take half the time to process when compared with Ecuador.

Trading across borders

Ecuador has reduced the time it takes to export and import goods by improving its port infrastructure, enhancing its banking sector and abolishing some documentation requirements. But the process can still be time-consuming, with border compliance activities relating to exports taking longer at 96 hours than the regional average of 62.5. Border compliance activities for imports is somewhat quicker at 24 hours compared with the regional norm of 64.4.

The cost of trading across borders, according to the World Bank 2018 report, works out at around US$560 per sample shipment, which is substantially more than the OECD average of US$149.9. The cost of importing is also around $250 compared with an OECD average of US$111.6.

Enforcing contracts

There are more than 30 procedures to navigate when enforcing contracts, which take an average of 523 days to complete, well below the regional average of 767.1. The cost of a claim is 27.2% of the claim’s value, which is lower than the Latin American average of 31.4% but higher than the OECD norm of 21.5%.

Resolving insolvency

Insolvency cases take an average of 5.3 years to move through the judicial process compared with a norm of 2.9 years in Latin America and 1.7 years across the OECD. The usual recovery rate of 17.4% is almost half the average of 30.8% across the rest of Latin America and well below OECD levels of 71.2%.

Bribery and corruption

Latin America has made progress in combatting endemic corruption over recent years as a result of investigations into several high-profile cases. But Ecuador remains pretty static in the annual Transparency International Corruption Perception Index, moving from 120th out of 176 countries in 2014 to 117th out of 180 in 2017. Care and due diligence must be taken seriously when doing business here as the regulatory spotlight is shining increasingly brightly due to international pressure.

Diego Mantilla

Diego Mantilla is director of client services at TMF Ecuador. Diego joined the organisation in 2013 and has more than 20 years’ experience of managing financial and accounting issues in companies such as Ernst & Young, Repsol YPF Ecuador, Techint International and Michelin of Ecuador S.A. He is a commercial engineer in finance, an authorised public accountant from the Pontifical Catholic University of Ecuador and holds an MBA from the University of Cádiz.

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After a long history of political instability in Ecuador, the current government has now been in power for 11 years, focusing on policies to support low-income groups and large public investments, particularly in education, health, and major infrastructure projects.

The relatively stable political environment has helped to stimulate economic growth but, since hitting a peak of 7.9% in 2011, this has slowed over recent years. Following negative 1.6% growth in 2016, the country started an economic recovery last year thanks to an increase in oil production in order to try and benefit from higher oil prices. After experiencing a growth rate of 3% in 2017, the momentum is continuing to build during 2018, although a planned government austerity programme is likely to have an impact.

Following three years of negotiations, the Protocol of Accession, which included Ecuador in the European Union–Andean Trade Agreement with Peru and Colombia, came into force in January 2017. The subsequent reduction in tariffs has boosted trade significantly, with UK exports to the country up by more than 70% on 2016, for example. Imports to Ecuador rose to 22% last year, following a drop of 24% in 2016.

But despite the opportunities on offer in Latin America’s eighth largest economy, the business environment remains challenging. In fact the World Bank’s 2017 Ease of Doing Business report ranked the country 114th out of a total of 190 countries in terms of complexity.

Starting a business

Foreign investors starting a business in Ecuador usually set up local corporations or local branches of offshore entities. Alternatives also include creating limited liability companies (Sociedad de responsabilidad limitada or SRL), partnerships or mixed economy companies, which require government participation. All entities must be registered with, and are controlled by, the Superintendent of Companies and are governed under the Companies Law.

Starting a business consists of a free-of-charge, two-step process involving the local Municipal Authority. The first step is to apply for a patent, an online process that takes up to 24 hours.

The second is to obtain an operations licence, which involves an inspection being made by the fire brigade that usually takes place within 15 days of making your application. If approved, a ‘tasa de habilitacion’ is granted. A commercial patent, the cost of which is calculated based on the company’s assets, must then be obtained.

In order to protect your trade name, it is necessary to register it with the Ecuadorian Intellectual Property Institute (IEPI), but bear in mind that the Superintendent of Companies does not usually allow new companies to use names that are similar to those of existing organisations.

Some steps have been taken recently to make it easier to start a business though such as the introduction of an online registration system for social security purposes.

Dealing with construction permits

The World Bank ranks Ecuador 105th out of 190 economies in terms of ease of obtaining a construction permit. On average, obtaining one takes about 132 days, involves 17 procedures and incurs significant costs.

Several different official departments need to be consulted during the procedure, including the Association of Architects of Ecuador (Colegio de Arquitectos del Ecuador or CAE), the Association of Civil Engineers of Pichincha (Colegio de Ingenieros Civiles de Pichincha), the Property Registry (Registro de la Propiedad) and the Water and Sewage Authority (Empresa Metropolitana de Alcantarillado y Agua Potable or EMAAP).

Having electricity connected

It is necessary to undertake four procedures in order to obtain electricity: make your application; date your documents; undergo inspections and go through the installation process. The utilities provider is Empresa Eléctrica Quito SA (EEQ), whose professional electrical engineers carry out and sign off the activities involved in connecting you up.

Registering property

It is mandatory to hire a lawyer in order to register a property in Ecuador, and fees are normally calculated based on the property’s market price. It can be a lengthy procedure, involving several different contracts and taxes that must be paid, again based on the property’s market value.

But registering property has become even more burdensome recently as it is now necessary to use a valuation certificate to register a property transfer. This procedure is more time-consuming than expected due to implementation problems in transferring authority over property records to the municipality of Quito, which is the capital.

Obtaining credit and protecting investors

Ecuador’s credit bureau now enables access to historical data, a move that has improved access to credit information. The situation is a significant improvement on past years when the country had no public registry at all.

But the legal rights index is still underdeveloped and obtaining credit can be tricky due to high interest rates relating to the US dollar, which is the country’s official currency.

Investor protection is also ripe for improvement, but Ecuador has strengthened minority investor protection lately by making more requirements when disclosing related-party transactions. Potential acquirers must now also make a tender offer to all shareholders when purchasing voting shares.

Paying taxes

Employers must make 10 tax payments per year, but according to the World Bank’s ‘Doing Business in Ecuador’ 2018 report, processing them can take up to 666 hours. Although the regional average is 28 tax payments, they only take half the time to process when compared with Ecuador.

Trading across borders

Ecuador has reduced the time it takes to export and import goods by improving its port infrastructure, enhancing its banking sector and abolishing some documentation requirements. But the process can still be time-consuming, with border compliance activities relating to exports taking longer at 96 hours than the regional average of 62.5. Border compliance activities for imports is somewhat quicker at 24 hours compared with the regional norm of 64.4.

The cost of trading across borders, according to the World Bank 2018 report, works out at around US$560 per sample shipment, which is substantially more than the OECD average of US$149.9. The cost of importing is also around $250 compared with an OECD average of US$111.6.

Enforcing contracts

There are more than 30 procedures to navigate when enforcing contracts, which take an average of 523 days to complete, well below the regional average of 767.1. The cost of a claim is 27.2% of the claim’s value, which is lower than the Latin American average of 31.4% but higher than the OECD norm of 21.5%.

Resolving insolvency

Insolvency cases take an average of 5.3 years to move through the judicial process compared with a norm of 2.9 years in Latin America and 1.7 years across the OECD. The usual recovery rate of 17.4% is almost half the average of 30.8% across the rest of Latin America and well below OECD levels of 71.2%.

Bribery and corruption

Latin America has made progress in combatting endemic corruption over recent years as a result of investigations into several high-profile cases. But Ecuador remains pretty static in the annual Transparency International Corruption Perception Index, moving from 120th out of 176 countries in 2014 to 117th out of 180 in 2017. Care and due diligence must be taken seriously when doing business here as the regulatory spotlight is shining increasingly brightly due to international pressure.

Diego Mantilla

Diego Mantilla is director of client services at TMF Ecuador. Diego joined the organisation in 2013 and has more than 20 years’ experience of managing financial and accounting issues in companies such as Ernst & Young, Repsol YPF Ecuador, Techint International and Michelin of Ecuador S.A. He is a commercial engineer in finance, an authorised public accountant from the Pontifical Catholic University of Ecuador and holds an MBA from the University of Cádiz.

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Minding your manners in Latin America

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