In our latest Q&A, Biz Latin Hub’s Juan Francisco Román Mendoza, country manager in Ecuador, discusses corporate law and what to expect when doing business in Ecuador.
Juan Francisco has a master’s degree in International Law from the Universitat de Barcelona, Spain, and a master’s in Corporate Law. His expertise is in international corporate mergers, and acquisitions compliance policies in Ecuador.
Juan Francisco has more than 10 years of experience in corporate law, starting his career in the law firm Estudio Jurídico Prado. He is a manager and partner at multiple law firms.
Table of Contents
What are the main drivers in the Ecuadorian economy? And what are the biggest opportunities when doing business in Ecuador?
Juan Francisco Román: The Ecuadorian economy is still largely driven by raw materials and not manufactured products. Therefore, the country stands out for the raw materials it sells in international markets. The demands for oil, bananas, flowers, and fine aroma cocoa should give businesspeople an idea of where there is room to grow in Ecuador.
Depending on the line of business, Ecuadorian legislation confines some sectors with stringent rules and regulations, prioritizing their sale to the public sector. For example, the dialysis component market is obligated to provide dialysis filters nationwide because the state guarantees universal healthcare for serious diseases. Therefore, we can find international brands of these products in the Ecuadorian market.
Foreign investors should consider the quality of the raw materials, and be mindful of legal regulations before doing business in Ecuador. It may be very lucrative or maybe not, that’s why businesspeople need to analyze the pros and cons before entering the country.
What advice would you give to entrepreneurs who want to mitigate the risks of entering the Ecuadorian market?
JFR: From our experience, entrepreneurs should focus on the risks of doing business in Ecuador, and how it might affect their financial plans, before entering the country. An assessment of financial due diligence, legal, tax, corporate compliance and labor costs can yield useful information to understand how to operate in Ecuador – and also to know when they will see a return on investment.
Latin American regulation is bureaucratic, and Ecuador is no exception. Without local expertise, it can cause significant damage to the business you want to carry out in the country. But this evil is mitigated almost entirely when a detailed study of the conditions to be faced is carried out. In this sense, a financial projection that visualizes the execution of the business with projected outcomes will give the entrepreneur a clearer picture and help them make the right decisions on how to approach business in the country.
How do post-pandemic conditions affect a potential market entry?
JFR: As in all markets worldwide, the post-pandemic effects created a readjustment in the markets and rearranged regulations to cope with it. In this sense, we could highlight regulatory changes to Ecuador’s corporate, public registry and labor sectors.
In the corporate sector, Ecuador took a massive step in the digital transformation of companies by introducing the Simplified Joint Stock Company. This company is formed digitally and can have a single shareholder and a single legal representative. It does not require face-to-face procedures such as notaries or a commercial registry. The processing time associated with company formation has been reduced from months to weeks or even days (depending on the legal advisor), and so have the costs. Status reports can be managed through public digital platforms that give detailed information in real-time.
One of the biggest headaches for the entrepreneur is compliance reporting corporate information, for example, property registration, intellectual property registration, commercial records, among others. Ecuador has implemented a digital system for almost all registration and reporting requirements, speeding up corporate compliance and reducing costs.
Regarding labor, the country has adapted to a global reality already knocking on the doors of labor relations: teleworking, or work from home. Ecuadorian labor legislation was updated in recent years regulating digital labor relations through telework, so employers can choose to maintain contractual relationships with its workers in three ways:
- 100 percent digital
- Hybrid work-from-home and face-to-face work
- 100 percent face-to-face work
This should be looked at from a purely economic context, as operating costs can now be lower since we can have businesses without physical offices, and instead have workers operating in a virtual office space. If we mix these benefits with a back-office service for business operations, doing business in Ecuador is highly desirable.
How does the country’s dollarized economy affect foreign companies doing business in Ecuador?
JFR: I believe dollarization benefits foreign investors since a dollarized economy has predictability in the financial costs of fixed transactions, and stability with regard to inflation. Moreover, foreign investors and businesspeople can better gauge the performance of an investment when it’s measured in US dollars.
The war in Ukraine, on the other hand, has made the dollar more expensive, which is not necessarily beneficial, depending on where the entrepreneur is located. Still, it is helpful for everyone when it comes to financial projections.
The costs associated with a local currency and its exchange to dollars, euros or yen have variations that usually requires a monthly forecast and financial adjustment. The advantage of doing business in Ecuador is that, given its dollarization, businesspeople can have more liquidity available in cash, and don’t have to worry about fluctuations in a local currency. This makes Ecuador attractive for the distribution of dividends when they occur.
Ecuador has Special Economic Development Zones (ZEDEs) and the Attraction of Foreign Investment Law. How have these been beneficial to business?
JFR: Ecuador has a law officially called the Organic Law for Productive Promotion, Investment Attraction, Job Generation, and Fiscal Stability and Equilibrium, that dates to 2018, and its tax benefits has already expired. There is ongoing debate in Ecuador’s National Assembly about possibly renewing of parts of this law.
The ZEDEs benefit entrepreneurs interested in agriculture or cross-border trade, as these zones focus on these environments providing the entrepreneur with exceptional, temporary measures to become competitive. But there are stringent regulations regarding ZEDEs, and it requires that the state will benefit from the business. When it comes to operating in a ZEDE, the entrepreneur should seek corporate and legal compliance advice, and understand what’s needed to qualify to operate in these zones.
What should investors/businesspeople know about Ecuadorean culture when it comes to time management, English proficiency, and attitudes towards payment?
JFR: Ecuador’s culture colors the way business is done in the country. General work culture, working hours and meeting are done a little differently in Ecuador. To the uninitiated, this can lead to frustration and misunderstandings, so it’s advisable that businesspeople consult a local expert, so they better understand the work environment.
English proficiency is not widespread in Ecuador. It’s important to find local talent that is proficient in English so that business operations won’t be hindered by a language barrier, and so everyone can understand communiqués from head office or international stakeholders. Looking for lawyers, accountants, and financial advisors with excellent English ability is a necessity.
On payment attitudes, we believe that contracts can solve and clarify the behavior of the portfolio of clients that the entrepreneur aims to have. For this, it requires a deep knowledge of how certain clients have acted in the past in terms of timely accounts receivable. Hiring the right corporate lawyer, or team of lawyers, with sufficient experience in portfolio litigation may be the solution to these issues. It can help businesspeople take on clients they know they can trust to make timely payments, and perhaps reject doing business with clients who have a history of not paying for the goods and/or services they receive.
Why should businesspeople and investors choose Ecuador over other Latin American jurisdictions, such as countries with higher levels of social and political stability?
JFR: Ecuador is going through a moment of political transformation as it gradually moves away from a state-centric vision to a more business-friendly vision that caters to the private sector. This has been reflected in the recent regulatory changes that have positively affected the corporate sector.
Outbursts of heated social and political strife affect the business risk levels, but this is something that’s seen across the length and breadth of Latin America. This can negatively affect business continuity, as governments can change laws and regulations in response to widespread protests and other forms of discontent.
As we have said, Ecuador has the dollar as its local currency. The regulatory changes have kept the game’s general rules intact as they relate to labor, civil, contractual and tax matters. This may be the most attractive business advantage that Ecuador has over other jurisdictions.
Of course, the markets businesspeople and investors want to enter must be analyzed by local experts, so they have all the information they need to make the right decisions for their businesses.
Biz Latin Hub can help you with doing business in Ecuador
At Biz Latin Hub, we provide integrated market entry and back-office services throughout Latin America and the Caribbean, with offices in Quito, as well as over a dozen other major cities in the region. We also have trusted partners in many other markets.
Our unrivaled reach means we are ideally placed to support multi-jurisdiction market entries and cross border operations.
As well as knowledge about doing business in Ecuador, our portfolio of services includes hiring & PEO, accounting & taxation, company formation, bank account opening, and corporate legal services.
Contact us today to find out more about how we can assist you in finding top talent, or otherwise do business in Latin America and the Caribbean.