Subsidiaries in Ecuador

Ecuador is a preferable location to establish a business due to the lowest income tax regime in the region and cost-effective labor force. It is strategically located in the north of South America. It boasts a modern infrastructure, an excellent trading hub, a dynamic economy, and an easy company incorporation process. So, the country brings considerable foreign investment. Its GDP ranked 63rd globally and 129th in the 2020 Ease of Doing Business.

The establishment of a subsidiary in Ecuador aids companies in extending their business in the country and acquiring the best benefits of their growing economy. Besides, it is one of the cost-effective and easily accessible approaches to exploring the Ecuadorian market. It also requires comparatively less paperwork and compliance.

The following guide covers all the essential information before setting up a subsidiary in Ecuador. 

What are the Types of Subsidiaries in Ecuador?

The choice of the type of subsidiary depends on the company’s objectives, requirements, and activities. The following section discusses the various types of subsidiaries you must know before setting up a subsidiary system in Ecuador. 

Limited Liability Company (LLC)

• This form of subsidiary business in Ecuador involves 2-15 partners.
• It is created based on the unique or personal bond between the shareholders.
• The minimum required capital is USD 400. The partners can pay the 50% capital in installments within one year after 50% of the capital has been paid during the company’s registration.
• It is mandatory to have a President and a General Manager.
• A partner can only transfer shares to third parties or on the public stock market with the approval of all partners.

Corporation (SA)

• Also known as Anonymus Societies or Sociedades Anónimas in Spanish, this type of subsidiary business in Ecuador is wholly based in its capital.
• It depends on the contributions of the shareholders. Partners receive the shares per their contribution.
• It doesn’t depend on the relationship among the shareholders.
• A partner can transfer shares without any restriction. No need to take shareholders’ approval.
• The minimum required capital is USD 800.
• At least two shareholders are required to set up this type of subsidiary.
• Ecuadorian or foreign individuals or legal entities may own stock.
• There is no fixed percentage of Ecuadorian ownership required.

Simplified Joint Stock Company (SAS)

• The key benefit of opening this form of subsidiary business in Ecuador is it can flexibly adapt to the characteristics of each business.
• It boasts a flexible registration process.
• Its shareholders have the freedom to define the rules of its operation in the bylaws.
• It can’t issue public shares.
• One or more shareholders can register SAS. No restriction applies to nationality.
• Incorporating this subsidiary system in Ecuador doesn’t require minimum capital. 

Mixed economy Company (Compañía de economía mixta)

• This type of subsidiary company formation in Ecuador involves two shareholders, i.e., a Government share and a Private share.
• The capital is divided into shares if the Government shares exceed 50%.
• A Government director should be the shareholder’s council president.

Limited partnership company divided by shares.

• This type of subsidiary business in Ecuador involves two different holders, i.e., named partners (own the control) and investors participate (work as limited partners and don’t exercise control).
• Its company’s name should include one of several partners’ names.

Collective name company (Compañía de nombre colectivo)

• 50% of the shares are payable while establishing this subsidiary system in Ecuador.
• Only those with a personal legal form can establish this subsidiary type.

Simplified Shares Company (SAS)

• It can be registered with one or multiple shareholders.
• It is also known as ‘Sociedad por Acciones Simplificada’.
• It can be established either online or manually.
• Foreign or Ecuadorian individuals or legal entities may own stock (excluding the foreign corporations (“Sociedad Anónima”)).

How to Set Up Subsidiaries in Ecuador?

The steps below will guide you through establishing a subsidiary company in Ecuador:

Step 1: Select a company name

• Companies should finalize the company name before registering their subsidiary business in Ecuador.
• Prepare multiple names if the foremost proposed one is unavailable for registration.
• The company name should not match the registered ones in Registro Mercantil (Mercantile Registry Office).

Step 2: Prepare the necessary documents

• -To register a subsidiary business in Ecuador, the Foreign Company should issue Powers of Attorney (POA) to its local authorized agent.
• The corresponding party should sign the POA.
• Prepare articles of association and memorandum. The following details must exist in the articles of association.

1. 1. Company objectives
   2. Subsidiary’s name and address
   3. Name of the beneficiaries and shareholders
   4. Internal regulations
   5. Shareholders’ contribution to the capital
   6. Information regarding the shares and their rights

Step 3: Appoint directors and deposit capital

• Designate at least one shareholder and one director for your subsidiary. They can be individuals or companies.
• The number of shareholders depends on the subsidiary type. 

Step 4: Register for VAT

• Fill out the VAT registration form and attach copies of Business Registration documents.
• Note that VAT registration is optional if the foreign entity has no permanent establishment in Ecuador.

Step 5: Company registration

• Register with the Superintendence of Companies (SUPERCIA). It will assign a unique registration number.
• Also, it is necessary to do company registration at the Registro Mercantil (Mercantile Registry Office), which ensures the company’s legal registration.
• The required documents are the registered office address, legal representative name, and certified copy of the bylaws and articles of incorporation.

Step 6: Business bank account

• Open a bank account for the subsidiary in Ecuador.
• Deposit the minimum share capital in the bank account as per the type of your subsidiary.

Step 7: Register for TIN

• The tax identification number in Ecuador is called Taxpayer Unique Registry (RUC).
• Apply for a Tax Identification Number at the Servicio de Rentas Internas (SRI).

Step 8: Obtain the Tasa de Habilitación

• You must first pay for the Commercial Patent at the local Municipality to obtain the “Tasa de Habilitación” (document allowing a commercial space to operate if it fulfills all safety dispositions and local regulations).

Step 9: Register for social security

• Register the company with the Social Security Agency (IESS).

Step 10: Get a license and permits

• Obtain a license of economic activities (LUAE) and municipal patent

Step 11: Arrange general meetings

• Arrange general meetings of the shareholders or the supervisory board to set up a board of directors.

Benefits of Setting Up an Ecuador Subsidiary

Let’s review the benefits of a subsidiary company in Ecuador.

Dynamic economy:

As per the Economic Commission for Latin America and the Caribbean (“ECLAC”), the Ecuadorian economy boasts decent performance in Latin America.

Increased foreign investments:

One of the crucial benefits of setting up a subsidiary company in Ecuador is that Ecuadorian law significantly promotes private investment in the economy. It guarantees entrepreneurship freedom.

Favourable tax regime:

Another benefit of establishing a subsidiary business in Ecuador is that the country boasts a favorable tax regime. The incorporation subsidiary of a foreign company in Ecuador benefits from low tax rates, tax incentives for foreign investors, and exemptions for certain kinds of income.

Free trade zones:

Ecuador has seven free trade zones in Manta, Esmeraldas, Machala, Cuenca, Riobamba, Quito, and Guayas. Establishing a subsidiary business in Ecuador benefits from free trade zone regulations. They allow investors to import equipment and materials without paying taxes. The export of semi-finished or finished goods is duty-free.

Access to financing:

After setting up a subsidiary system in Ecuador, it can access local and international financing options. It is because Ecuador owns a developed financial sector.

Special Economic Development Zones (ZEDE):

Four Special Economic Development Zones (ZEDE) exist in Ecuador. Business owners who incorporate their companies in these zones gain the following benefits:

• An exemption from tariffs on imported goods in these zones
• An exemption from corporate taxes for the initial 20 years.
• Decent infrastructural facilities.

Benefits the parent company:

The incorporation of a foreign subsidiary in Ecuador allows the parent company to extend its reach and gain high profits. Also, it lets them explore more opportunities and different markets. 

Documents to Prepare When Opening a Subsidiary in Ecuador

Companies should prepare the following documents while applying for incorporation of subsidiary business in Ecuador:

• Memorandum and Articles of Association
• Articles of incorporation
• Certificate of Registration
• The company’s bylaws
• A certificate of the name of the company issued by the Superintendent of Companies
• Filled application form
• Certification of good standing
• Power of attorney (if applicable)
• Proof of enrollment in Social Security
• Proof of address
• Tax Identification Number (TIN)
• Documents identifying the shareholders, directors, legal representative, and company secretary
• Application letter from the investor that requests participation in bidding for a license
• Bank certificate for evidence of deposit of capital
• Details on the amount of capital
• Income statement and company balance sheet
• A statement stating that the partners are not prohibited by law or by opinion from establishing a company

Note: The Registrar can request more essential documents to set up your subsidiary business in Ecuador.

What Business Forms can Ecuador Subsidiaries Take?

Subsidiaries in Ecuador can adopt one of the following standard subsidiary forms:

• Limited Liability Company (LLC)
• Corporation (SA)

As per the requirements and the business plan, the company can select the most suitable subsidiary form for setting up a subsidiary in Ecuador.

Ecuador Subsidiary Laws

Companies aiming to incorporate a subsidiary business in Ecuador should consider the below laws:

• A subsidiary company cannot obtain ordinary shares provided by its parent company.
• Although subsidiary companies are considered independent legal persons, their parent companies may own secondary responsibility for the subsidiaries’ overdue obligations. The condition for this is if the liquidation of a subsidiary business in Ecuador occurs from a financial intervention of the parent company. Such provisions protect corporate creditors against the diplomatic behavior of corporate groups.
• Ecuadorian Company Law restricts rights attached to shares.
• A parent/main company is not liable for the liabilities of its subsidiaries unless it has explicitly acknowledged this responsibility.
• The profits of a foreign subsidiary business in Ecuador are not transferable to a parent company.

Post Incorporation Compliance

The below aspects are vital to consider under the compliance checklist for the incorporation of a foreign subsidiary in Ecuador:

• You should establish the Company’s registered office as soon as you complete the incorporation of a foreign subsidiary in Ecuador. The relevant office address allows all formal communication from various authorities.
• Get the unique company number.
• Get the incorporation certificate as issued by the Mercantile Registry Office.
• After incorporating your subsidiary business in Ecuador, you must handle payroll deductions, banking principles, local tax laws, and employment requirements.
• The board of directors (BOD) will designate the first auditor of the Company after completing the incorporation of a foreign subsidiary in Ecuador. The first auditor will supervise the office administration until the first AGM (Annual General Meeting) lasts.
• All private limited Companies should file their Annual Return after finishing a tax year. But, companies should submit the tax return within three months of the year closing.
• Companies must submit the tax return to Ecuador Internal Revenue Service.

Taxes on Subsidiaries in Ecuador

A subsidiary in Ecuador is subject to the following taxes:

Tax Incentives for Businesses Setting Up a Subsidiary in Ecuador

It is vital to consider tax incentives while you work on the incorporation of a foreign subsidiary in Ecuador. Notwithstanding the business sector, the following section discusses the benefits of incentives for the taxation of foreign subsidiaries in Ecuador:

• A general grant incentive applied to Ecuadorians and foreign individuals comprises legal and fiscal incentives for private investors. The National Assembly approves this grant.
• Incentives can be provided through investment contracts signed between the government and investors through the Production, Employment, and Production Coordinator Ministry.
• By 2022, the Ecuadorian tax law will offer three percentage points deductions in the income tax rate for new investments and corporations. The former will be applicable for up to 15 years. The amassed exemption may be, at most, the amount invested.
•  An amount corresponding to 150% of the compensation of disabled employees is an additional deduction for calculating income tax. The corresponding deduction will be considered in addition to the minimum number of disabled employees the employer has to hire.
• A remittance tax-funded on imports of goods and raw materials (mentioned in a list declared by the Tax Policy Board) and used in productive activities is a tax credit for CIT (corporate income tax) calculation.
• Companies licensed for incentives under the Industrial Development Law may be partially or wholly exempt from most stamp taxes. 

Other Important Considerations

In addition to the compliance checklist for incorporation of a foreign subsidiary in Ecuador, you must consider the following considerations.

• A subsidiary system in Ecuador cannot obtain ordinary shares issued by its parent company.
• The Ecuadorian Companies Act provides a modern regulation of corporate groups. The Act specifies that a corporate group relies on the subsidiary company’s subordination (as per contractual/proprietary/factual control employed by its parent company) and on the unity of purpose and direction.
• You must be familiar with your business undertakings and the goal of registering before initiating the process of subsidiary company formation in Ecuador.
• The process of incorporation of a subsidiary of a foreign subsidiary in Ecuador should be error-free and reliable. If not, the errors can impose fines, penalties, and a delayed setup process.
• You must consider residence permits, insurance, registration for required licenses, and registration with the federal tax administration to create a subsidiary system in Ecuador.
• You must consider expenditures and travel before incorporating a subsidiary system in Ecuador.
• As per the business sector, the Government may request additional investment to set up your subsidiary business in Ecuador.

How Multiplier’s Employer of Record Can Help You Hire & Expand in Ecuador

Expanding a business in a foreign nation demands considerable time and investment. You can make the most of the different services from a third-party company like Multiplier that supplies infrastructure to employ talent. Also, you must devote substantial time and effort to abide by a nation’s labor laws and industry standards, which Multiplier assists you in saving for an affordable cost.

Multiplier administers all the applicable regulations, from recruiting skilled employees to payroll processing, while expanding the business in a foreign country. Moreover, it dismisses the requirement to establish a subsidiary. Multiplier also helps you hire local and global talent while upkeeping compliance for a foreign subsidiary in Ecuador according to its labor laws and regulations.