Ecuador. New Organic Law for Humanitarian Support

National Assembly of Ecuador passed the Ecuadorian law of humanitarian support (Ley Orgánica de Apoyo Humanitario) last 15^th May. This law is based on three main issues, which are

• Solidarity and welfare measures system
• Reforms to guarantee the employment situation
• A temporary system to prevent bankruptcy proceedings and encourage successful agreements between debtors and creditors

These are the main measures introduced.

Employment and Social Security

The Ecuadorian Institute of Social Security (IESS, by its acronym in Spanish) will extend the coverage of health benefits up to sixty (60) additional days besides the established ones. Such coverage will be provided due to the ceasing of contributions of those members who have become unemployed or in arrears due to loss of income after the declaration of the state of exception.

Individuals engaged in economic activities, micro and small companies, as well as the remaining businesses and cooperatives that remained closed during the state of exception that have not been able to pay their social security contributions during March, April, May and June 2020, will be able to do it with no interest, fines or surcharges. Also, there will be no employer’s liability.

As a measure to support the sustainability of employment, workers and employers may, by mutual agreement, modify the economic conditions of the employment relationship in order to maintain sources of employment. The agreements duly recorded must be reviewed and approved by the Ministry of Labour of Ecuador. The following are the basic requirements to validate the agreement:

• Employers must provide the employee a complete, truthful and integrated set of financial statements
• Employers may not distribute dividends for the years in which the agreements are in force, nor reduce the company’s capital during the time the agreements are in force
• If agreements are reached with most employees and the employer, these agreements will be required even for employees who have not signed them
• In cases where signing the agreement is essential for the subsistence of the company and no agreement is reached between employers and employees, the employer may start the liquidation process immediately
• During the duration of the agreement, the fraudulent use of the company’s resources for the benefit of its shareholders or administrators will be considered grounds for fraudulent bankruptcy

Special emerging employment contract. This is a fixed-term agreement signed for the sustainability of production and sources of income in emerging situations as well as for new investments or business areas, products or services, business growth or extensions, changes within operations, or an increase in the supply of goods and services. This agreement will be valid for a period of up to 2 years and can be renewed once for the same length of time. The working day of this contract will be either partial or complete, with a minimum of 20 hours and a maximum of 40 hours per week, divided into a maximum of 6 days per week without exceeding 8 hours per day.

Reduced working hours can happen due to force majeure or by chance. The employer has the right to shorten the working day by up to 50 %; the employee’s wage must not be less than 55 % of that set before the reduction. The social security contribution must be paid based on the shortened working day. Such a reduction shall be notified to the Ministry of Labour of Ecuador. Once the working day has been shortened and for as long as it lasts, companies that have implemented the shortened working day may not distribute dividends.

In addition, it is established:

• In the event of dismissal, the compensation and bonus due to eviction will be based on the last monthly wage received by the employee before the shortened working day
• The employers will have the power of notifying the worker individually regarding the schedule wherein his or her vacation will be used, within two years of the law’s release.
• Teleworking has been officially incorporated into the Employment Code of Ecuador. It has all the features related to the working day, the worker (mobile, part-time, temporary, self-employed), the place where the services are provided, etc.
• “Acute respiratory diseases caused by viruses” have been added to the Employment Code of Ecuador as an additional type of occupational disease
• An explanation of how labour agreements can be terminated by force majeure or by accident has been included. It says: “the impossibility of carrying out the work by force majeure or chance will be related to the total and definitive cessation of the employer’s economic activity, that is to say, there will be impossibility when the work cannot be carried out both by usual physical means and by alternative means, not even by telematic means”.

Tax Aspects

Any financial entity that provides loans to MSMEs of the ordinary commercial, productive or microcredit type exceeding US$25,000, for at least 48 months from April 2020 to 31^st December 2020, as well as loans granted to companies that are modified in the short term to structure them as long term (at least 2 years) will be able to deduct 50 % of the value of the interest received from the payment of these loans from income tax.

Taxable persons may make voluntary advance payments on their tax obligations to the Ecuadoran treasury. In such case, the corresponding interest shall be recognised in their favour, which shall be calculated from the date of payment until the date on which the tax obligation expires.

The contribution of one per thousand on the value of fixed assets that was paid annually by tourism service providers is abolished.

The opening of new businesses will be guaranteed from the first day without requirements. Therefore, the Ecuadorian internal revenue service (Servicio de Rentas Internas) and the local governments, as applicable, will issue provisional operating permissions valid for 180 days. In the meantime, the entrepreneur must regularize his activity in terms of tax, municipal issues and permits required of any nature.

For the purposes of tax returns for the years 2020 and 2021, expenses for domestic tourism will be considered as deductible personal expenses, in an amount equal to the categories already in force.

Contractual Aspects Between Debtors and Creditors

Companies, all types of assets, self-employed individuals, trusts, and natural persons, except for financial institutions, may benefit from the following procedures:

Debtors by mutual agreement may enter into exceptional precautionary agreements and debt management measures with their creditors. Conditions, deadlines and the reduction, capitalization or restructuring of outstanding obligations of any nature may thus be established. These agreements may be agreed upon through mediation.

The pre-bankruptcy agreement will at least include

• The clear and precise identification of the debtor and the creditors who sign it
• Clear and precise identification of other creditors
• The sworn statement detailing the obligations due
• The pre-bankruptcy agreement reached
• Means of verification that all creditors have been notified of the intention to enter into the agreement
• The supervisor who has been appointed by the parties

Another mechanism of agreement between debtors and creditors will be the so-called “Concurso preventivo” (preventive insolvency proceeding). For this purpose, the debtor must submit a sworn statement before a notary public, in order to establish that he will not be able to comply on a regular basis with his obligations, or when he foresees that he will not be able to comply on a regular and timely basis with his obligations.

Financial and Insurance

As long as the state of exception lasts, prepaid medical insurance companies and insurance companies who offer health care policies cannot terminate health insurance policies. They may not terminate prepaid medicine agreements, nor suspend coverage of these or health benefits, if the contracting parties of these insurances do not except for delays in payments of up to three consecutive months.

The entities of the national financial system will offer quick-disbursing credit lines that will include special conditions such as grace periods, long terms and preferential interest rates.

Financial institutions, especially public banks, will create specific credit lines to cover payroll and working capital payments, for amounts equivalent to 3 months of operation. The credit operations will give priority to the productive and educational sector.

The Ecuadorian monetary and financial policy and regulation board (Junta Política y Regulación Monetaria y Financiera) foresees an interest rate review process for all credit segments, especially the productive ones. Furthermore, until the state of emergency is in effect, and for 60 days thereafter, all financial sector entities must reschedule the collection of monthly quotas generated by any type of credit operation, without generating interest on arrears.

General and life insurance companies shall reschedule the collection of monthly insurance fees. This will be applied in favour of natural or legal persons that are prevented from carrying out their activities as a result of the state of exception. This will not involve loss or suspension of coverage and benefits in favour of the insured.

Other Aspects

Educational institutions may not suspend student attendance and assessments for justified delays in monthly payments for the duration of the exception. Private universities must increase the percentage of scholarships by 10 % to what is already established by law and they must approve higher education virtual study programs.

Temporary suspension of eviction in matters of tenancy No evictions may be carried out on tenants of real estate during the period of the state of exception and for 60 days thereafter.  In order to benefit from the temporary suspension, tenants must pay at least 20 % of the value of outstanding fees and, in the case of commercial premises, the tenant must prove that his income has been affected by at least 30 % compared to February 2020.

Between the time the state of exception comes into effect and one year later, any increase in values, rates or fees for basic services, including telecommunications and Internet services, are prohibited. Such service suppliers must guarantee the stability and quality of the service.

A 10 % drop in electricity consumption values for March, April, May and June 2020 is provided for electricity users in the first two income level quintiles.

Gustavo Verdezoto
Country Manager Ecuador

All information contained in this publication is up to date on 2020. This content has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this chart without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this content, and, to the extent permitted by law, AUXADI does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this chart or for any decision based on it.