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Protection of Foreign Investment under Ecuadorian Law

This May one year ago the Ecuadorian Government notified those countries with which it had executed Bilateral Investment Treaties (“BITs’”), with the formal denunciation. As a consequence, those new foreign investments that are executed in Ecuador will no longer be subject, nor will they enjoy, the protection that the BITs’ granted to the nationals of the countries with a BIT. Therefore, we consider this to be an appropriate time to analyze in general terms the protection regime for foreign investment under Ecuadorian legislation.

As a general principle the Constitution recognizes and protects private property, which includes the investment made by private parties. The Constitution makes no exception to such principle that signifies that all private investment is protected under its terms, no matter its categorization (local, foreign, etc.).

Similarly, the Investment, Commerce and Production Code (“COPCI”) is in force since December 2010. The COPCI contains a detailed classification of the investment, differencing between: (1) investments for production, (2) new investments, (3) foreign investment, and, (4) local investment. The legal effect of this classification is important only to define which tax incentives apply to new investment and to the investment for production.

Moreover, the COPCI develops the constitutional principle that protects private property by recognizing other principles that naturally derive from the first. Non-discrimination is the first principle that the COPCI recognizes. Under this principle, all investors have the right to enjoy equal conditions for the administration, operation, expansion and transfer of their investments; additionally, foreign investors have the right to enjoy the same rights as local investors. The second principle recognized by the COPCI is the prohibition of arbitrariness. This principle provides that the investment cannot be subject to any arbitrary actions. The third recognized principle is an express prohibition on any form of confiscation[1].

In relation to the protection of foreign investments, and as was mentioned in the introduction, in May 2017 Ecuador denounced all the BITs’ that were in force with third nations.  Most of the BITs’ contained provisions under which the protection granted was extended for an additional period of time[2] to those investments made until the effective termination date[3]. In that sense, foreign investments executed under the umbrella of a certain BIT and made before the BIT effective termination date, are protected and guaranteed by the terms of such treaty. On the other hand, new foreign investments to be made subsequently to the BIT’s effective termination date will no longer be protected by its terms.

As a consequence, the main instrument that a foreign investor currently has in order to protect its investment in Ecuador is an investment protection agreement with the Ecuadorian Government under the terms of the COPCI (an “Investment Protection Agreement”).

Under the COPCI and its regulations, any investor that (1) makes new investment[4], and (2) has a minimum disbursement of 250,000 USD during the first year, is eligible to request and sign an Investment Protection Agreement with the Government. The COPCI sets forth that under an Investment Protection Agreement the parties can establish: (a) the treatment that the Government shall grant to the investment, namely, the principles that shall govern and protect the investment and the rights granted to the investor; (b) stability over the tax benefits detailed in the COPCI; and, (c) national or international arbitration, provided that some conditions are met.

Since the entry into force of the COPCI, investors have used the Investment Protection Agreements mainly to obtain certain tax benefits and stability over their investments. They have developed a tax chapter in the agreement, leaving aside the investment protection chapter.

In this particular moment in which Ecuador has no longer valid BIT’s, and until the Ecuadorian Government signs the so called “Bilateral Investment Agreements” with third countries, the Investment Protection Agreements are the best instrument that a foreign investor has in order to agree to the principles that shall govern and protect the investment and the rights granted to the investor.

[1] There is one exception in the COPCI that allows for the confiscation of private property and relates to the expropriation of real state for the sole and only purpose of executing social development programs, sustainable projects for the environment and collective wellbeing. In the case of an expropriation for the detailed purposes, the Government must apply due process, prepare a valid assessment and pay the owner an adequate and fair compensation.

[2] Most TBIs’s provide for a protection period of 15 years counting from the effective termination date.

[3] The effective termination date for most of the TBI’s was 12 months from the date in which the Ecuadorian Government notified with the denunciation, which in most cases was done on May 16th, 2017.

[4] Under the COPCI new investment is defined as the flow of resources destined to increase the capital on the economy, through an effective investment in production assets that allow for (1) extend the future production capacity, (2) generate a larger level of production of goods or services, and (3) generate new employments.