In this chapter

• General framework
• Environmental and community relations
• Taxes

General framework

Major features

In 2018, Ecuador formulated a Prosperity Plan to address , the problems of economic imbalance
This Prosperity Plan, has five axes: productive development; attraction of foreign investment and employment generation; optimization of the State; fiscal sustainability and transparency and social protection.

The responsible use of natural resources is an essential part of the Prosperity Plan due to its positive impact on the productive investments, generation of employment and increasing the level of exports. In this sense, Mining is becoming one of Ecuador´s major economic activities and a major foreign exchange earner for the country. Sector investments are estimated to reach approximately US$3,8 billion by 2021 and as such mining would increase its contribution to the Gross Domestic Product, from 1.6 percent in 2017, to 4 percent in 2021. In addition, the Ecuadorian State could receive more than US$800 million in taxes from mining projects in 2021 alone, resources that will serve to further strengthen social investment.

For these reasons, the National Government promotes responsible mining, considering environmental, economic, and social aspects.

Under these criteria, not only large mining projects but also second generation, small and artisanal strategic projects, are being developed.

Ecuador has excellent mineral resources, most notably gold, silver, and copper. There are also, strategic projects, such as Fruta del Norte, which has a planned investment between 2021 and 2024 of US$ 113.90 million.

Legal system and sources of law

The Ecuadorian mining regime is based on the civil legal system and regulated by the following laws:

1. The Constitution of Ecuador
2. The Ecuadorian Civil Code.
3. The National Mining Law No. 45, published on January 29^th, 2009.
4. The general regulations applying to the mining activities.

Ownership of mineral resources

Non-renewable natural resources and, in general, subsoil products, mineral deposits and hydrocarbons are inalienable property and are administered by the State.

The State executes its mining activities through the National Mining Company and may constitute mixed economy companies.

The State will exceptionally grant mining concessions through an administrative act issued by the Regulation Agency and Miner Control in favor of the interested party.

The mining title gives its holder the exclusive right to prospect, explore, exploit, benefit, melt, refine, commercialize and dispose of all mineral substances that may exist and be obtained in the concessioned area, becoming a beneficiary of the economic revenues obtained from those processes, within the limits established by the Ecuadorian law.

Role of the state

In Ecuador the role played by the State in the mining sector consists in the awarding of the mining properties and the regulation of the exploration and exploitation activities.

The State as the absolute, exclusive and permanent owner of all mines, grants individuals or entities the authorization to acquire, explore and exploit mineral deposits, through a mining concession.

The Ministry of Energy and Non-Renewable Natural Resources has the power to generate, promote, communicate and evaluate policies and standards to optimize the country’s sustainable mining development, maximize its contribution to social economic development and consolidate its international leadership through the responsible and sovereign use of mineral resources.

Nature of mineral rights

Non-renewable natural resources and, in general, subsoil products, minerals and substances whose nature is different from that of the soil, even those found in the areas covered by soil, are inalienable, imprescriptible and unattachable properties of the State. The dominion of the State over the subsoil is exercised independently from the property right pertaining to the superficial lands, covering the mines and deposits.

Mining rights are recognized in mining concessions, exploitation contracts, licenses, and permits, and authorizations to install smelting, benefit and refining plants.

As mentioned before, the mining concession is an administrative act that grants a mining title, over which the holder has a personal right, which is transferable after the mandatory suitability qualification of the assignee of the mining rights by the sectorial minister, and on it, one may establish pledges, assignments in guarantee and other guarantees established in the Ecuadorian laws. The registration of the mining title transfer must be authorized by the Regulatory Agency and Mining Control, once the communication from the concessionaire informing the transfer of the mining rights is received.

Granting of mineral rights

As previously stated, the State, represented through the Ministry of Energy and Non-Renewable Natural Resources, is the authority entitled to grant mining rights.

The following individuals or corporations are eligible to hold mining rights: (i) natural persons or (ii) legal entities, national and/or foreign; public, mixed or private; community and self-managed, whose corporate purpose and operation comply with the applicable regulations.

It is prohibited to grant mining rights to individuals or corporations who have conflicts of interest or can use privileged information. In addition, mining rights cannot be granted to natural or legal persons related to the entities in charge of granting the concessions, either through their direct participation in such entity or through the participation of the shareholders or relatives up to the fourth degree of consanguinity and/or second degree of affinity. Moreover, mining rights cannot be granted to former officials of the Ministry of Natural Resources, the Ministry of Energy and Mines and the Ministry of Mines and Oil or their immediate relatives up to the fourth degree of consanguinity and second degree of affinity.

Security of tenure

The mining concessions and its permits will expire upon expiration of the term granted or its extension.

The expiration of mining rights affects those substantive rights acquired by the holder through the concession and deprive the concession holder of its exercise.

The mining concession is valid for a twenty-five year period that may be renewed for equal periods, as long as a written request is submitted from the concessionaire to the Sectorial Ministry, before its expiration date and a favorable report from the Regulatory Agency has been previously obtained Mining Control and the Minister of the Environment.

According to the law there are several causes of expiration that could affect the mining rights, which are mainly the following:

1. Expiration due to non-payment. Concessions expire when their holders don´ts paying the patents, royalties and other rights or taxes established in the law.
2. Expiration due to the lack of submission of the exploration reports or the evidence regarding the performance of mining activities and minimum investments.
3. Expiration due to unauthorized exploitation and/or submission of false information. The mining concession expires if the holder performs exploitation work, directly or indirectly, prior to the signing of the relevant exploitation contract. Likewise, the mining concession expires if the reports submitted by the concessionaire contain false information or data that maliciously alters the technical and economic conclusions.
4. Expiration due to malicious alteration of the milestones. Malicious alteration of the demarcation milestones, duly verified, are ground for expiration of the mining concession.
5. Expiration due to Declaration of Environmental Damage. The Sectorial Ministry must declare the expiration of mining concessions when environmental damage occurs, regardless of the concessionaire's obligation to take remedial actions.
6. Expiration due to damage to the Cultural Heritage of the State. The sectorial ministry, based on a technical report from the National Institute of Cultural Heritage, can declare the expiration of a mining concession if the performed activities cause serious, permanent or irreparable damage to the cultural heritage of the State, in accordance with the provisions established in the Ecuadorian Constitution and the Law of Cultural Heritage No.1, published on December 30, 2016.
7. Expiration due to Human Rights Violations. The Sectorial Ministry must declare the expiration of a mining concession if a violation of human rights is committed, either by the concessionaire, its representatives, or contractors. Companies who act on behalf of the concessionaire can also be held accountable for violations of human rights, determined by a court.

Foreign investment

Foreign natural or legal persons, to be holders of Mining rights, must have legal domicile in the national territory and will receive the same treatment than that granted to any other natural or national legal person.

Environmental protection and community relations

Environmental framework

The Constitution of Ecuador recognizes the right of all citizens to a healthy environment. It also determines the obligation of the Ecuadorian State to guarantee a sustainable development of the country that must be environmentally balanced and respectful of cultural diversity, to ensure the needs of current and future generations.

The main norms of environmental regulation in Ecuador are the following:

• The Organic Code of the Environment, published in the Official Gazette Supplement 983 of April 12, 2017
• Regulation to the Organic Code of the Environment, issued by Executive Decree No. 752, published in the Official Gazette Supplement 507 of June 12, 2019
• The Unified Text of the Secondary Legislation of the Ministry of the Environment, Executive Decree No. 3516, published in the Official Gazette Special Edition 2 of March 31, 2003
• The Environmental Regulation of Mining Activities, Ministerial Agreement No. 37, published in the Official Gazette Supplement 213 of March 27, 2014
• Municipalities and Province Governments (Gobiernos Autónomos Descentralizados or GADs) may also incorporate their own environmental standards, which will be applied within their territory of competence.

Ecuador is the first country in the world to recognize Nature as a being who coexists with us as a subject with rights.

Environmental protection and licensing

In Ecuador, the entity in charge of environmental control and licensing is the Ministry of the Environment, Water and Ecological Transition (Ministerio de Ambiente Agua y Transición Ecológica or MAATE), GADs can be responsible for environmental control and licensing as well, if they perform a qualification and accreditation process before the MAATE.

Every activity that may cause an ecological impact must obtain an operating permit based on the possible risk for the environment. The MAATE is responsible for defining the level of risk of each activity and what kind of permit the operation will have to obtain.

As per the Environmental Regulation of Mining Activities, the permits for mining activities are categorized as follows:

• Environmental registry: for artisanal mining, initial exploration in medium and large mining, exploration with boreholes in small mining.
• Environmental license applies to simultaneous exploration and exploitation of small mining, free use of construction materials for public entities, advanced exploration in medium and large mining, exploitation in medium and large mining, tailings construction and benefit plants.

Before carrying out any mining activity, the concessionaires must obtain the applicable environmental permit and a certification that their activities will not affect the surface and/or underground water from the MAATE.

Water use and efficiency

If the project requires the use of groundwater for the development of the mining activity, the concessionaire must request a water use permit to the MAATE. The details of the documents and the content of the petition can be found in the Organic Law of Water Resources¹ and its Regulation².

Granting of environmental permits

The environmental permits are issued by the MAATE. Authorized GADS can grant permits only for aggregate and stone mining in their jurisdictions.

Compliance with environmental regulations

Mining holders who obtained the permits must submit several environmental monitoring and compliance reports, in accordance with Ecuadorian legislation and the obligations contained in the environmental license.

For the exploration phase in small and artisanal mining projects, the reports must be submitted annually. In cases of simultaneous activities, such as exploration, exploitation, and benefit, smelting and refining in small mining and advanced exploration of medium and large mining, the reports must be submitted every two years.

For the medium and large mining, benefit, smelting and refining phases of exploitation, the report must be submitted quarterly.

The control offices are the MAATE and the GADs, within the scope of their competence.

Environmentally protected area

Protected areas

One of Ecuador's priorities is the conservation of nature and its natural heritage. For this purpose, our country has a vast system of protected areas.

The Organic Code of the Environment determines five types of protected areas, which are all part of the National System of Protected Areas (SNAP).In addition to these, the MAATE, the GADs and private owners can declare special areas for the conservation of biodiversity.

Another protected area recognized by our law is called Protective Forests and Vegetation. These forests are protected because of their importance in the conservation of the National Forest Heritage.

Our Constitution recognizes the territories of indigenous peoples in voluntary isolation as intangible, which means that no activity or presence of other groups is permitted. These areas are restricted for these indigenous groups only, consequently, all types of extractive activity are prohibited.³.

Prohibition of mining activities in areas that have a special environmental protection

The Constitution, in its article 407, prohibits any extractive activity of non-renewable natural resources within the areas of the SNAP an intangible area. An extractive activity can be exceptionally permitted if the president requests a declaration of national interest to the National Assembly, which can call for a referendum to rule on the matter.

In Protective Forests and Vegetation areas, non-renewable natural resources extraction activities can be carried out, as long as such activity does not affect the Forest characteristics and does not change the land use⁴. The area in which these activities are carried out must be listed as a “zona de otros usos” in the Land Use and Management Plan.

In the special conservation areas, the extractive activities that can be carried out depending on the zoning established for each category and in regards of the buffer zones, the authorized activities must be foreseen in the relevant management plan of the adjacent protected area.

Communities

The communes, communities, indigenous people and individuals that live in a protected area have the right to use the natural resources in a sustainable way according to their traditional uses, ancestral artisan activities and for survival purposes, without requiring any environmental permit.

Consultation and indigenous rights

Article 398 of the Constitution establishes that any state decision that may affect the environment must be previously consulted with the potentially affected community. In addition to this, other provisions must be taken in consideration, such as the Indigenous and Tribal Peoples Convention of 1989 (“ILO Convention 169”), and article 57.7 of the Constitution, related to “Free Prior and Informed Consultation of communes, communities, indigenous peoples and indigenous nationalities”⁵.

The “Free Prior and Informed Consultation” is a concept developed by the Regulation of the Organic Code of the Environment. This norm determines which projects require a prior consultation. It also establishes the participation methods that must be observed and indicates which population must be consulted⁶. 

The consultation must be carried out prior to the granting of the environmental permit.

Mining activity generates a medium or high impact to the environment; therefore, it always requires a process of prior consultation of the population.

Taxes

Duties, royalties and taxes

Concerning income tax, the mining industry is subject to the general tax system.

In Ecuador, companies must pay the following taxes:

Corporate Income Tax (CIT): at the rate of 25 percent and 22 percent in the case of being classified as regular exporters (when they make more than six annual exports, and the exports represent more than 25 percent of their sales).

In addition, the mining industry must pay a rate of between three percent and eight percent on the sales generated from royalties for mining exploitation. In the event that the activity corresponds only to the commercialization of the mineral, the concessionaire will have to pay a royalty of two percent on each transaction.

Value Added Tax: The transfer of minerals made by holders of mining concessions, or natural or legal persons have a zero percent rate when they have a marketing license granted by the sector ministry.

Withholding in the commercialization of minerals and other exploitation assets: the commercialization of mineral substances that require marketing licenses is subject to withholding at the source of income tax to a maximum of 10 percent of the gross amount of each transaction.

Incentives

There are no incentives of Income Tax or Tax on Funds sent abroad for the mining sector. In the case of VAT, the mining exports applies the reimbursement of VAT paid by the exports sending since January 1, 2018, onwards.

Transfer tax and capital gains

The transfer of property of a mining project is subject to the general tax regime. Therefore, the seller must pay taxes over the profit obtained. Any capital gain from US$20,000 onwards is subject to a progressive tax rate that ranges from zero percent to 10 percent, when the transaction is not made through the stock exchange in Ecuador.

For 2021, the profit from the direct or indirect sale of shares will be taxed from the base of US$42,424. If the transaction is carried out in the Ecuadorian stock exchanges, this base is updated annually.

Losses due to direct or indirect disposal of fixed or current assets, shares, participations, rights representing capital or other rights that allow the exploration, exploitation or concession are not deductible regarding companies domiciled or permanent established in Ecuador, when the transaction takes place between related parties.

^[1] Law 0, published in the Official Gazette Supplement 305 of August 6, 2014

^[2] Executive Decree No. 650, published in the Official Gazette Supplement 483 of April 20, 2015

^[3] Article 57 of the Constitution of the Republic of Ecuador.

^[4] Use of land: a regulation that lists the allowed activities in certain areas.

^[5] According to the glossary of the Ecuadorian Ministry of Finance, “Indigenous Nationalities” is a term used to refer to human collectives that have their own forms of social organization and that share economical, historical, political and cultural bonds. Retrieved from: https://www.finanzas.gob.ec/wp-content/uploads/downloads/2013/07/INT_GLOSARIO_COMPLETO.pdf

^[6] The population that must be consulted is the is the one living in the area considered as territory of communities of indigenous peoples and indigenous nationalities, where the project may be implemented.