ECUADOR Law and Practice Contributed by: Roque Bernardo Bustamante and Claudia Bustamante, Flor Bustamante Pizarro & Hurtado
The benefit to the operating company is the total amount of sales minus amortisation of investments in accordance with applicable accounting rules, minus all operating costs (it is important to note that contributions to community development are not tax-deductible), minus all amounts paid in royalties between 3% and 8% on large-scale mining projects, minus 12% profit-sharing currently being paid to the central government and minus 25% of income tax. There is no different treatment for national or foreign investors. While a tax of 5% applies to all transfers of funds from Ecuador abroad, it is exempted for divi - dends. 4.2 Tax Incentives for Mining Investors and Projects There are no material incentives, since the rule that the government benefit be greater than the company benefit is a Constitutional concept that does not admit any exemptions. On large-scale mining projects, it is necessary to execute a contract before entering production. In that contract, stabilisation clauses may be possible, provided that the aforementioned benefit rule is main - tained. 4.3 Transfer Tax and Capital Gains on the Sale of Mining Projects The general tax regime provides for capital gains of up to 10% on the transfer of mining concessions’ rights or shares, except when the local project represents less than 20% of the value of the total transaction. 5. Mining Investment and Finance 5.1 Attracting Investment for Mining Ecuador had a boom in the attraction of mining invest - ment in 2016 and 2017. This was due to several fac - tors, including: • exploration potential; • that, at that time, it was possible to apply for new mining concessions directly from the government; and
• political and community opposition being manage - able. While the exploration potential remains, the other two factors are not so clear: it is uncertain when it will be possible to apply for new mining concessions and how judges and courts are going to rule on Constitu - tional actions aiming to block mining projects. 5.2 Foreign Investment Restrictions and Approvals in the Exploration and Mining Sectors There are no restrictions on foreign investments. For - eign and Ecuadorian capital and companies receive the same treatment. 5.3 International Treaties Related to Exploration and Mining Ecuador has resigned from most of the treaties it had signed for protection of investments from other coun - tries, known as bilateral investment treaties (BITs). The protection of investments can only be achieved through local judges and courts or, eventually, through clauses on the exploitation contract before the pro - duction period or a protection of investments agree - ment with the Ministry of Production aiming to achieve international arbitration for disputes between the par - ties. 5.4 Sources of Finance for Exploration, Development and Mining Exploration, development and mining have been financed from different sources in Ecuador, depending on the type of company behind the projects. Most of the junior, mid-sized companies seek capital in foreign stock exchanges and finance their activities with loans by finding a major as a partner. The few majors that have arrived have their own resources. 5.5 Role of Domestic and International Securities Markets in the Financing of Exploration, Development and Mining The domestic securities market has not been a play - er in the financing of exploration, development and mining in Ecuador. Most of its financing comes from abroad.
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