WORLD TRADE  
ORGANIZATION   
G/SCM/Q2/ECU/4 
29 September 2011  
 
(11-4725) 
Committee on Subsidies and 
Countervailing Measures Original:   Spanish 
 
 
 
SUBSIDIES 
 
Replies to Questions from the UNITED STATES Regarding the1 
New and Full Notification of ECUADOR2 
   The following communication, dated 28 September 2011, is being circulated at the request of 
the delegation of Ecuador.  
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Question 
 Free Zone Regime 
 
 Page 58, Paragraph 142 of the Secretariat' s Report for Ecuador's 2005 Trade Policy 
Review, WT/TPR/S/148 (11 May 2005), states that, the President has the authority to "grant a 
concession for the operation and administration of a free zone on the basis of a decision by CONAZOFRA."  The report then goes on to expl ain that CONAZOFRA takes various criteria 
into account when making such a decision, incl uding the company's legal and financial capacity 
as well as estimates of national value added and employment.  It appears that the decision on 
whether to grant a company free zone status ca n be made on a discretionary basis and that 
there are no specific conditions that would automa tically qualify a company for free zone status.  
In addition to the questions above, please answer the following questions. 
 
 Please explain whether CONAZOFRA tak es any other factors into account 
when granting companies free zone status. 
 Please explain what is meant by "estimates of national value added". 
 What type of support is provided under this programme? 
Reply 
 
 The legislation in place at the time of the Secretariat's Report for the Triennial Trade Policy Review of Ecuador, cited in document G/SCM/Q2/E CU/3 (Law on Free Zones and its Implementing 
Regulations), was revoked at the end of 2010.  The Production Code, which entered into force on 
29 December 2010, repeals the aforementioned le gislation in paragraph n of the Derogations. 
 
                                                      
1 G/SCM/Q2/ECU/3. 
2 G/SCM/N/220/ECU. G/SCM/Q2/ECU/4 
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   Nevertheless, and to reply to the questi ons posed by the United States in document 
G/SCM/Q2/ECU/3 of 25 August 2011, we note the following:   The introductory part states that "[i]t appear s that the decision on whether to grant a company 
free zone status can be made on a discretionary basis and that there are no specific conditions that 
would automatically qualify a company for free zone st atus".  This sentence follows the statement that 
"… the President has the authority to 'grant a concession for the operation and administration of a 
free zone on the basis of a decision by CONAZOFRA '.  The report then goes on to explain that 
CONAZOFRA takes various criteria into account when making such a decision, including the 
company's legal and financial capacity as well as est imates of national value added and employment". 
 
 In this introductory part, two notions are clea rly being confused, that of 'administration' and 
'users';  both play a fundamental role in a free zone  but with differing characteristics, functions and 
responsibilities, from both a legal and a strictly  operational perspectiv e.  Paragraph 142 of 
document WT/TPR/S/148/Rev.1 referred to in th e questions posed by the United States makes 
exclusive reference to the act of granting a concess ion to operate a free zone;  in this context the 
Spanish version, unlike the English version, expressly mentions the "management company" 
(empresa administradora ), which thus avoids confus ion and misinterpretations. 
  Despite the above clarification, which in f act answers the initial question and therefore the 
ensuing questions, we believe it to be useful firs t of all to expand on the process and criteria for 
granting a concession to operate a free zone under the legislation in force at the time of the 
Secretariat's Report for the Triennial Trade Policy Review of Ecua dor cited in document 
G/SCM/Q2/ECU/3:  
(i) "Management companies" are "… lega l persons, be they public, private or 
semi-public, which obtain by executive order a concession to operate Free Zones …" 
(Article 6 of the Law on Free Zones); 
(ii) the President has the authority to gran t by executive order a concession to operate a 
free zone to a "management company" (Article 10 of the Law on Free Zones), on the advice of CONAZOFRA (Article 8(c) of the Law on Free Zones); 
(iii) before issuing a decision on an applic ation for a concession to operate a free zone, 
CONAZOFRA must consider "… the social  and economic benefits arising from the 
establishment of the free zone, as well as the legal and financial capacity of the management company or the public body which in accordance with the provisions of the law or executive orders has the authorit y to operate as such.  The decision shall 
also contain the following:  (a) certification confirming that all requirements have 
been met;  (b) the location of and exact boundaries and area covered by the free zone;  
(c) the amount of the planned investment a nd the timetable of works;  (d) estimated 
national value added;  (e) estimated numbe r of jobs created;  (f) a report on the 
environmental impact;  and (g) the deadline for implementing the project" (Article 15 
of the Regulations implementing the Law on Free Zones); 
(iv) the application for a concession to operate a free zone must "… be accompanied by 
certified copies of the company's articles of incorporation and the title deeds or 
documents guaranteeing the use and enjoymen t of the land, general plans of the area 
destined for that purpose and building plans.  As well as general information in the 
feasibility study, the application shall contain the following:  (a) the taxpayer 
identification number (RUC) and the company identification number of the applicant;  
(b) legal accreditation of the company's legal representative;  (c) specifications of the 
surface area to be used and its location;   (d) information about the buildings and  G/SCM/Q2/ECU/4 
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  facilities to be constructed or adapted;  (e ) the number and kind of potential users;  
(f) the services needed to facilitate intern ational trade;  (g) information on the 
potential for generating direct employment;  (h) the general socio-economic impact 
on the region where the free zone is to be situated;  (i) the company's paid up equity 
capital;  and, (j) an environmental impact study" (Article 14 of the Regulations 
implementing the Law on Free Zones). 
Secondly, we also believe it useful to provide  details on the actual operation of a free zone 
under the legislation in effect at the time of th e Secretariat's Report for the Triennial Trade Policy 
Review of Ecuador, cited in document G/SCM/Q2/ECU/3:  
(i) The operation and control of each free z one is the responsibility of the respective 
"management company" (Article 13 of the Law on Free Zones); 
(ii) natural or legal persons that wish to set up business in a free zone, that is, that wish to 
be "users" of the free zone, must apply to the relevant "management company", 
which is responsible for approving or rej ecting the application (Article 16 of the 
Law on Free Zones); 
(iii) the application to obtain the status of user must contain the following information:  
(a) the business activities to be carried out in  the free zone;  (b) the products to be 
manufactured and marketed or the services to be supplied;  (c) the raw materials, containers and packaging to be used;  (d) the machinery, equipment, and other inputs to be imported and their origins;  (e ) the estimated number and technical or 
professional skills of foreign and domestic workers;  (f) the duration of the business 
activities;  (g) an environmental impact st udy and mitigating measures;  and (h) other 
information in accordance with the mana gement company's internal rules of 
procedure.  The application must also be accompanied by a certified copy of the company's articles of incorporation or a consular certificate establishing its legal 
status if it is a foreign company, a corresponding document providing proof of legal 
representation and documentation establishing that the company has the financial and 
operational capacity to meet its objec tives (Article 21 of the Regulations 
implementing the Law on Free Zones); 
(iv) the "management company" must within a specified period of time approve or reject 
the application in a decision, of whic h the applicant and CONAZOFRA must be 
notified (Article 24 of the Regulations  implementing the Law on Free Zones). 
 Thirdly, with regard to "special regimes", we consider it useful to add the following details in 
respect of the legislation in force at the time of the Secretariat's Report for the Triennial Trade Policy 
Review of Ecuador cited in document G/SCM/Q2/ECU/3:  
(i) The free zone is an "… area of national territory … subject to the special regimes 
created under this Law with regard to  foreign trade, customs, taxation, 
foreign exchange, financial matters, treatmen t of capital and labour …" (Article 3 of 
the Law on Free Zones); 
(ii) chapters XI to XVI inclusive of the Law on Free Zones specify the scope of these 
special regimes; 
(iii) with regard to taxation in particul ar, before 2007 income earned by "management 
companies" and "users" of free zones from all their activities and contracts carried out in the free zones, without distinction, was totally exempt from income tax.  G/SCM/Q2/ECU/4 
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  Since 2007, the tax authorities have establishe d that "…income earned by free-zone 
users and management companies from activities carried out in the free zones are subject to income tax", also without dis tinction, as the current Law on the Internal 
Tax Regime does not expressly provide for exemptions in this respect. 
 To summarize, under the legislation in force at the time: 
 
 FIRST:  The President had the authority to approve applications for concessions to operate 
free zones, on the advice of CONAZOFRA; 
  SECOND:  free zones were administered by  their respective "man agement companies"; 
 
 THIRD:  the "management companies" were  responsible for approving or rejecting 
applications to set up business in the free zones; 
  FOURTH:  the special tax regime applied in  the free zones in favour of the management 
companies and users of the zones did not, either prior to 2007 or subsequently, make its 
benefits subject to the origin of the management  companies or the users,  to the incorporation 
of specific inputs, to the carrying out of certain processes or to export performance.  
Furthermore, the tax rules have applied equa lly to income earned from export transactions 
and from transactions with Ecuadorian territory; 
 
 FIFTH:  on account of the distinct and par ticular characteristics of free zones, it was 
necessary to establish ad hoc processes and requirements as well as special institutional 
frameworks;  the act of granting concessions  could not, therefore, become a routine 
procedure, to be considered and settled auto matically using rigid standardized criteria, 
especially as they were basically conceived as t ools in support of preferential development of 
"depressed areas" of the country (Article 65 of  the Law on Free Zones).  However, it should 
be made clear that although the granting of  a concession was discretional that did not mean 
that it was arbitrary.  It was the result of a pr ocess of evaluation, on a case-by-case basis, as to 
whether specific requirements laid  down by law had been met. 
 
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