Top 10 Challenges of Doing Business in Ecuador
Article

Top 10 Challenges of Doing Business in Ecuador

12 July 2018

The economy of Ecuador is the eighth largest in Latin America, with plenty of business potential, but despite the opportunities, it remains a complex country in which to do business.

Following a long history of political instability in Ecuador, the current government has been in power for 11 years, focusing on pro-poor policies and large-scale public investment, particularly on education, health, and major infrastructure projects.

Since reaching a record 7.9% in 2011, the relatively stable political environment has helped to stimulate economic growth, but this has slowed in recent years - 5.6 % in 2012; 4.9 % 2013; 4.0 % 2014; 0.2 % 2015; and -1.5 in 2016. However, economic recovery began last year thanks to an upturn in oil production, which sought to benefit from higher oil prices. With a 3% growth in 2017, the momentum continues during 2018, though a planned government austerity programme is likely to have an impact.

After three years of negotiations, the Protocol to include Ecuador into the EU–Andean Trade Agreement (with Peru and Colombia) came into force in January 2017. The reduction in tariffs has boosted trade significantly since then, with UK exports to Ecuador, for example, up by over 70% on 2016. Imports to Ecuador rose from a 24% downturn in 2016 to a 22% growth last year.

But despite the business opportunities in Ecuador, the business environment remains challenging. The World Bank’s 2017 Doing Business report ranked Ecuador 114th out of 190 countries.

Starting a business

Foreign investors starting a business in Ecuador usually establish local corporations, or local branches of offshore entities. Alternatives include limited liability companies (SRL – Sociedad de responsabilidad limitada - in Spanish), partnerships, and mixed economy companies (when including government participation). All entities are registered with and controlled by the Superintendent of Companies and governed by the Companies Law. Starting a business in Ecuador includes two no-cost steps with the Municipal Authority. The first is to apply for a patent, an online process which takes up to 24 hours. The second is to obtain the licence for functionality, which involves a firefighters’ inspection that is usually made within 15 days following application. With approval, the ‘tasa de habilitacion’ is granted and the commercial patent cost is paid, calculated according to the assets of the company.

Protection of a trade name is contingent on registration with the Ecuadorian Intellectual Property Institute (IEPI), and the Superintendent of Companies usually does not allow new companies to use names similar to those of existing companies. Ecuador has taken steps to make starting a business easier, by introducing an online registration system for social security.

Dealing with Construction Permits

Ecuador is ranked 105 out of 190 economies by the World Bank Group for ease of dealing with construction permits, with 17 procedures taking a total of 132 days to complete and incurring significant costs. There are also several different official departments to be consulted during the procedure, such as the Association of Architects of Ecuador (Colegio de Arquitectos del Ecuador –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 -EMAAP)

Getting Electricity

There are four procedures to obtaining electricity: application, date for documents, inspections, and installation. The service is provided by the Empresa Eléctrica Quito S.A. (EEQ), whose professional electrical engineers will ultimately carry out and sign off the power connection.

Registering Property

It is mandatory to hire a lawyer to register a property in Ecuador, with fees normally calculated based on the market price of the property. It can be a lengthy procedure, involving several different contracts and taxes to be paid, again based on the market value of the property. Ecuador has made registering property more burdensome by requiring a valuation certificate to register a property transfer. This procedure has become more time-consuming than expected, due to implementation problems in transferring authority over property records to the municipality of Quito.

Getting Credit and Protecting Investors

Ecuador’s credit bureau has started to distribute historical data, improving access to credit information. This is a significant improvement on previous years, when there was no public registry in the country. But the legal rights index is still underdeveloped, and obtaining credit can be tricky because of high interest rates relating to the US Dollar. Investor protection is also ripe for improvement, but Ecuador has strengthened minority investor protections by introducing greater requirements for disclosure of related-party transactions, as well as a requirement that a potential acquirer make a tender offer to all shareholders upon acquiring voting shares.

Paying Taxes

There are ten tax payments required each year in Ecuador but according to the World Bank’s ‘Doing Business in Ecuador’ report 2018, processing them can take 666 hours per year. The regional average is 28 tax payments, but they only take half the time required in Ecuador.

Trading Across Borders

Ecuador has reduced the time for exporting and importing through improvements in port infrastructure and the banking sector and by abolishing some documentation requirements. But exporting and importing goods can still be time-consuming, with border compliance on exports higher than the regional average, at 96 hours compared with 62.5. Border compliance on imports fares better, at 24 hours compared with the regional average 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 $149.9. Cost to import is $250 compared with an OECD average of $111.6.

Enforcing Contracts

There are over 30 procedures to navigate when enforcing contracts, which takes an average of 523 days to complete, well under the regional average of 767.1. The cost of a claim is 27.2% of claim value, 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 judicial processes, compared with a norm of 2.9 years in Latin America and 1.7 across the OECD. The recovery rate of 17.4% is almost half the norm of 30.8% in Latin America and well below OECD levels of 71.2%.

Bribery and Corruption

Progress in combatting endemic corruption has been made in Latin America in recent years, with the investigations of several high-profile cases. But Ecuador remains pretty static in the annual Transparency International Corruption Perception Index, moving from 120th out of 176 countries rated in 2014 to 117th out of 180 in 2017. Care and due diligence must be taken seriously when doing business in Ecuador, as the regulatory spotlight is growing, under international pressure for compliance.

TMF Group

TMF Group in Ecuador was established in 2006 and is a leading provider of accounting, tax compliance, human resources, payroll, and the management of legal entities, servicing both local and global customers.  An active member of the American Chamber of Commerce, TMF Group is well-positioned to help you navigate the complexities of setting up a business in Ecuador or streamlining your operations. A team of experienced professionals has local knowledge with global reach, part of a worldwide operation of business support services in 83 countries. Talk to us.

Written by

Diego Mantilla

Director Client Services

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