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The new free zone regime in Ecuador

by | Jun 15, 2024

Free zones are geographical areas within a country operating under a special tax regime. They have been established to seek and encourage foreign direct investment, promote international trade, and stimulate economic development. The free zone regime in Ecuador can contribute to national economic growth and reduce economic disparities between regions.

In Ecuador, an attempt had already been made to reintroduce the free zone regime, without success, by a bill sent to the National Assembly, which ended up rejecting it, and by Decree-Law, declared unconstitutional by the Constitutional Court because it was not considered of an economic nature. (Roa Chejín, 2023).

A free zone regime in Ecuador had been in place since 1991

There had already been a Free Zone regime in Ecuador since 1991, approved by the National Congress, which was established to promote trade and stimulate foreign investment, considering the country’s sociopolitical characteristics and geographical location. One of the objectives of the Law was the development of economically depressed areas. The free zones had to be delimited by an Executive Decree. By this, a concession was granted to an administrative company to operate under the free zone regime in Ecuador.

One of the particularities of the Free Zone Law in Ecuador was the exception regarding the stability of labor contracts. The nature of the contracts in free zones was temporary. On the other hand, workers’ salaries had to be 10% higher than the minimum wage. These salaries must be paid in American dollars (remember that the Law predates 2000).

Another exception to the  Free Zone Law was the exchange regime since users of the free zone regime in Ecuador enjoyed exchange freedom and were not subject to the laws, regulations, and regulations of the Central Bank of Ecuador.

ZEDES replaced the free zone regime in Ecuador in 2010

The COPCI (Organic Code of Production, Trade, and Investment) abolished the free zone regime in 2010 and replaced it with the special development zones or ZEDES, whose vision was different. The ZEDES were customs destinations that operated in delimited areas of the national territory and whose types varied in terms of their purposes:

  1. To carry out technology and innovation transfer and disaggregation activities.
  2. To execute industrial diversification operations
  3. To develop logistics services.
  4. To engage in tourist services

The recently approved “Organic Law of Economic Efficiency and Employment Generation” reforms the COPCI and reintroduces the free zones in Ecuador, defining them as delimited geographical areas within the national territory subject to special regimes in various areas, such as foreign trade, customs, taxation, finance, agribusiness, technology, and capital treatment; where industrial, commercial and service activities are carried out (34 COPCI).

Job creation is the goal

The purpose of free zones in Ecuador is the generation of employment, the attraction of national and foreign investments, the promotion of development poles to improve competitiveness at the national level, the facilitation of foreign trade, the promotion of global value chains, technology transfer, and innovation, the internationalization of goods and services, the promotion of development in economically depressed areas, the facilitation of the association of recognized communities, the attraction of essential infrastructure, the promotion of business internationalization strategies, the taking advantage of opportunities such as nearshoring, the leveling of international competitiveness, the attraction of projects for the internationalization of Ecuador, and the creation of beneficial infrastructure for users of free zones in Ecuador and their respective regions (art. 35 COPCI).

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The activities to which free zones can be dedicated are, first of all, the “Industrial goods” encompass areas devoted to the processing, transformation, assembly, repair, and conditioning of goods, including manufacturing, agriculture, agroindustry, processing of fishery products, aquaculture, and forestry, as well as other activities designated by the Strategic Committee for the Promotion and Attraction of Investments (CEPAI). Secondly, the “Service Industries” include areas for tourism, repair, cleaning, quality testing, auditing, consulting, professional services, telecommunications, information technology, health, scientific and technological research, and technical support, among others. These activities are also subject to CEPAI designation. Finally, the “Commercial and Logistics” category includes trade activities of goods for import, export, or re-export and logistics services such as transportation, storage, collection, packaging, distribution, recycling, exhibition, and other related functions, as established and defined by CEPAI.

The free zone system in Ecuador has three main actors: users, operators, users, and support services.

  • Operator users are those legal entities, under private or public Law, with a mixed economy, national or foreign, designated by ministerial agreement whose main activity is the acquisition, leasing of land, development of its infrastructure, sale or rental of physical facilities, services promotion, direction and administration of the free zone.
  • The users are the legal entities of private, public, national, or foreign mixed economy qualified by the user operator to carry out specific activities, according to what is described in the previous paragraph.
  • Support services are those natural or legal persons under private Law established within the Free Zone that provide services to users and user operators.

Free zone operators must abide by Ecuador’s labor code

The Law for the free zone regime in Ecuador does not provide for a special labor regime since user operators, users, and support service companies must apply the provisions of the Labor Code. The regulations issued must uphold the provisions of said Code (art. 50.9 COPCI), which differs from the previous free zone regime.

The Law provides certain fiscal exonerations and exemptions concerning free zones, mainly:

  • 0% Income Tax rate for operators and users for the first five years of declaring a free zone from the first year concerning acts and contracts carried out in the free zone, and a fixed rate of 15% thereafter.
  • Operators and users are exempted from VAT, ISD, and foreign trade taxes.
  • VAT exemption is for purchases of raw materials, supplies, goods, and construction materials from operators located in the national territory.
  • Exemption from income tax on income or dividends generated by the shares or participations of operators or users.

One of the concerns of opponents of the free zone regime in Ecuador is its environmental impact. In this sense, the art. According to the Ministry of the Environment guidelines, 50 COPCI prohibits activities that cause environmental deterioration, such as mining, hydrocarbon extraction, etc. Likewise, those responsible for violations due to environmental damage must carry out the remediation process following the Environmental Code. In addition, ecological damage or non-compliance with the Environmental Management Plan constitutes a serious penalty (50.25.f COPCI).

This reintroduction of the free zone regime in Ecuador can be very positive in terms of international trade, job creation, and attraction of investments. This is contrasted with the income that the state does not receive by the exemptions and exonerations described above. It remains to be seen if the free zone regime in Ecuador will meet such purposes and if the government can promote free zones to contribute significantly to the country’s economic development, especially in certain areas and regions that need to catch up to the rest of the country.

In conclusion, the reintroduction of the free zone regime in Ecuador represents a significant strategic move aimed at boosting international trade, generating employment, and attracting national and foreign investments. By offering fiscal incentives and a specialized regulatory environment, the free zones are designed to stimulate economic development, particularly in regions that have historically lagged behind the rest of the country. However, the effectiveness of this regime will ultimately depend on its implementation and the government’s ability to balance the potential economic benefits with environmental protection and the equitable distribution of resources. The success of the free zone regime in Ecuador will be measured by its ability to enhance the country’s competitiveness on the global stage, foster innovation, and create sustainable economic growth across diverse sectors.

Original Spanish Language Source Article

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