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Ecuador unilaterally adopted safeguard measures on goods imported from Colombia and Peru, due to their currency devaluation against the dollar. Even though, the General Secretariat of the Andean Community (“SGCA“) rejected the corrective measures, ordered their termination and the refund of the values paid for such concept, the Ecuadorian Customs Administration (“SENAE“) has rejected the reimbursement claims filed by the affected importers.

On December 24, 2014, Ecuador requested the SGCA to authorize the application of emergency measures on imports of goods originated in Colombia and Peru to restore normal competitive conditions altered by the recent currency devaluation in those countries. The request was registered on January 6, 2015, by the SGCA.

The SGCA has one month from receipt of the request to issue a ruling. If the SGCA does not do so, the member country that requested the measures may adopt them and, subsequently, the SGCA must decide on their maintenance, modification, or suspension.

Not having passed the term mentioned above, Ecuador, through Resolution 050-2014 issued on December 29, 2014, by the Committee on Foreign Trade (“COMEX“) decided to apply a safeguard equal to 7% of the ad valorem tariff for products originated in Peru and 21% for products originated in Colombia.

On February 6, 2015, through Resolution 1762, the SGCA: i) rejected the application of safeguards for imports from Colombia and Peru; ii) ordered their immediate removal; and iii) recommended Ecuador to establish mechanisms to reimburse the companies affected by the application of such measures. Ecuador revoked the corrective measures on March 6, 2015, through Resolution 010-2015 issued by COMEX.

Although the measures were revoked, Ecuador should have refunded the amount paid by importers during the period the measures were applied. It is important to bear in mind that, by virtue of the supremacy principle, the Andean Community regulations prevails over domestic law; therefore, the CAN member countries are obliged to accept the Andean Community regulations, create mechanisms for their application and enforcement, and not obstruct them.

The purpose of this article is to identify the best alternative to obtain the refund of the amount paid for these safeguards and thus comply with the order of the SGCA.

SENAE’s position has been to reject the claims submitted to obtain the refund of the safeguard, arguing that: i) the safeguard was in accordance with the Cartagena Agreement; ii) the amounts paid for the safeguard were in compliance with the applicable regulations; and iii) Resolution 1762 only recommended the refund.

SENAE´s interpretation is incorrect. Resolution 1762 obliges to refund the affected importers and recommended the establishment of adequate mechanisms to exercise this right. Therefore, it is not a recommendation. What was ordered by the SGCA is to reimburse the affected companies the amounts paid since January 5, 2015, after verifying that none of the conditions alleged by Ecuador to authorize the corrective measure were fulfilled.

In response to the refusal at the administrative proceeding, the importers filed lawsuits against the resolutions of the SENAE that rejected the administrative claims. However, the Tax Court (“TDCT“) and the Administrative Court (“TDCA“) have had contradictory opinions regarding the competent authority to review the case.  Even when the National Court of Justice (“CNJ“) has already stated that the competent court is the TDCT.

The CNJ has established that, although safeguards are not taxes, judgments have recognized that the safeguard is an economic measure adopted by the State that causes an increase in taxes on international trade; therefore, it has been recognized as a taxation matter.

This delay, both in the administrative and judicial process, has caused evident damages to importers who have not yet received a refund of the amount paid.

The remedies and actions provided by Ecuadorian law are not adequate mechanisms to guarantee the proper recognition of the importer’s right to a refund of what has been unduly paid. 

Faced with this situation, the Andean Community regulations allows the affected party to initiate a legal action for non-compliance against the member country, before the SGCA and the Court of Justice of the Andean Community (“TJCA“), a measure that excludes the possibility of simultaneously appealing to the national courts.

To file the action, the conduct that causes the non-compliance with the Andean community regulations and the violation of the individual’s rights must be demonstrated. The SGCA issues a non-binding opinion about the existence of the damage. However, if the non-compliance persists, the person affected may appeal to the TJCA, which through a judgment will determine the responsibility of the member country and the obligation to adopt the necessary measures for its compliance. The judgment constitutes a legal instrument to claim the member country the execution of the judgment and compensation for damages.

María José Flores
Associate at CorralRosales
mflores@corralrosales.com

Green hydrogen is emerging as a major alternative when it comes to taking on climate change.  Forbes has called it the “energy of the future,”[1] and Goldman Sachs estimates that by 2050, the green hydrogen market will exceed US$11 trillion. [2]

In Latin America, Chile is one of the countries that is at the forefront. In 2020, the nation launched its “National Green Hydrogen Strategy,”[3] and just two years later, several projects were announced, including: HyEx, which will produce green hydrogen for mining; Highly Innovative Fuels (HIF), to generate fuels based on green hydrogen[4]; and Antofagasta Renewable Energy and Mining (AMER), which will include the construction and operation of an electrolyser capable of producing around 30 tons of green hydrogen per day.[5] 

In Ecuador, green hydrogen is already considered a fundamental element for the decarbonized energy transition,[6] and the country will begin working[7] on a roadmap[8] for its implementation.

This article elaborates on what green hydrogen is, delving into its concept and challenges, and providing several conclusions.

I. Green Hydrogen

Hydrogen is “…the lightest chemical element that exists, its atom is made up of one proton and one electron and is stable in the form of a diatomic molecule (H2).” [9] It is not isolated in nature, but rather coexists with other elements such as oxygen (H₂O) or carbon (forming organic compounds).[10] This means that hydrogen cannot be obtained directly and needs to be produced.[11] 

According to the International Renewable Energy Agency[12] (hereinafter, “IRENA”), hydrogen can be produced using multiple processes. A color-based nomenclature system has been assigned to differentiate the various production processes;

1. Gray hydrogen is produced with fossil fuels (e.g.  from methane by steam reforming or coal gasification) and its use generates significant CO₂ emissions. About 95% of the total world hydrogen production is grey.
   
2. Blue hydrogen is gray hydrogen with an added capture and storage of CO₂ emissions. However, studies show that this capture and storage has an efficiency of between 85% and 95%, in the best of scenarios, meaning that it emits between 5% and 15% of CO₂. This means that it reduces emissions, but does not eliminate them.
   
3. Green hydrogen is produced through processes that use only renewable energy and do not generate CO₂ emissions, which makes a significant contribution to tackling climate change. Electrolysis is the most mature and consolidated process on the market. This consists[13] of breaking down water molecules (H₂O) into oxygen and hydrogen[14] through an electrolyser[15] that is powered by electrical energy from renewable sources (e.g., wind, solar, etc.). There are other processes (including biomass gasification, pyrolysis, thermochemical division of water, photocatalysis, combined dark fermentation), but they have not yet reached a commercial scale, so they have not been considered in this article.

As shown here, the difference is not in the hydrogen itself, but rather the method for producing it. 

The Race to Zero[16] campaign under the United Nations Framework Convention on Climate Change[17] establishes a goal by 2050 of reducing “… greenhouse gas emissions to as close to zero emissions as possible…”[18] Achieving this will require substituting fossil fuels with renewable energies to cover global energy demand.[19] Such alternatives include green hydrogen.[20] By 2050, this industry could “…reduce 6 billion tons of greenhouse gases…”[21]

Because of the environmental benefits surrounding green hydrogen, its uses have expanded to sectors where more value can be generated. Initially,[22] green hydrogen use was limited to light-duty fuel cell vehicles (or FCEVs). Today it is used widely and large amounts of green hydrogen have been planned for industries that generate major amounts of CO₂ emissions that are difficult to mitigate, which include: the steel industry, oil refining, maritime and air transportation.[23][24][25]

Sweden’s SSAB [26] uses green hydrogen instead of coal to produce “green steel,” and maintains that it would reduce up to 10% of its annual emissions of CO₂.[27] Shell will invest in the construction of a project in Rotterdam to produce around 60 tons of green hydrogen per day and allocate it to oil refining.[28]

Additionally, green hydrogen can be stored for long periods and later used to generate electrical energy.[29] Aces Delta, a joint venture between Mitsubishi Power Americas and Magnum Development LLC, has set out to build “…the largest green hydrogen production and storage facility in the world” ^[30] in Delta, Utah.

II. Challenges

The biggest challenge facing green hydrogen revolves around reducing its high cost of production, which depends mainly on the capital costs of electrolysis and the price of electrical energy used for said production. In 2019, green hydrogen was two to three times more expensive to produce than gray hydrogen.[31] 

However, trends have pointed to a reduction in the prices of electricity produced by renewable sources and the capital costs of electrolysis, which means that the production costs of green hydrogen are expected to decrease. In this regard, Wood Mackenzie published a report suggesting that costs will be reduced by up to 64% by 2030.[32]

Another challenge is the lack of infrastructure for the transportation and storage of green hydrogen. In 2020, worldwide, there were only 5,000 kilometers of transmission pipelines for green hydrogen and more than 3 million kilometers for natural gas. This means that either new infrastructure needs to be created or adaptations need to be made to existing infrastructure insomuch as possible.[33]

It will also be necessary for humanity to recognize the value of green hydrogen in the fight against climate change in order to generate enough demand to justify the industry’s development. 

To face these challenges and promote the generation and consumption of green hydrogen, one key development will be an adequate legal framework.

In Ecuador, as provided in articles 261.7 and 261.11 of the Constitution, the State has exclusive jurisdiction over natural and energy resources. Additionally, under article 313, it is the State’s responsibility to administer, regulate, control, and manage strategic sectors, which include all forms of energy.

The Organic Law of the Public Service of Electric Power and its Regulations govern the development, financing, operation, and commercialization of electric power in Ecuador, including the promotion and execution of energy projects based on renewable energy sources, which would be the basis for the production of green hydrogen by electrolysis.

However, the Ecuadorian legal system contains no specific regulation on green hydrogen. This makes it important to structure an effective legal regime that fully addresses the entire value chain and promotes its production (through electrolysis or other processes), distribution, and use. Said regime must include short- and long-term commitments that provide security and encourage the private sector to assume the risk of investing in this new industry, as well as the fiscal and financial incentives or associated benefits to attract said investment. 

Within this legal framework, a recommendation is made, among other things, to include guidelines fit to the reality of each country:

1. Identify priorities. If a country has enough renewable energy sources, it will be able to focus its activity on generating green hydrogen at a competitive cost. In other cases, importation will be a better option.
2. Identify applications or uses that generate greater value. It makes no sense to use green hydrogen in sectors where efficient and cheaper alternatives exist. Hence, its use is focused on hard to abate sectors such as steel, maritime, and air transport.
3. Facilitate and promote the flow of capital for the creation, expansion, or reuse of infrastructure for green hydrogen, as well as the manufacture or import and installation of the technologies that allow its production (e.g. electrolyzers, which are the devices that make it possible to carry out electrolysis processes in a controlled manner).
4. Establish tax rebates to offset competition from those jurisdictions where gray hydrogen production remains attractive.
5. Promote the switch to green hydrogen through loans or funds dedicated to that industry; special prices or rates for green hydrogen; promote the market for “green” products.

III. Summary

Green hydrogen could help in the fight against climate change. In addition, if the industry develops as expected, social and economic benefits could be obtained, since it would promote the growth of skills and human capital, as well as productive diversification, job creation, and investment.

The success of green hydrogen may vary depending on the reality and objectives of each country. Interest in green hydrogen may be higher or lower than expected and, therefore, the projections may be more or less optimistic.

In any case, the fight against climate change, reduction of the capital costs of electrolysis, and the price of electrical energy from renewable sources have generated a favorable scenario for the development of green hydrogen around the world, which can be promoted through an effective legal framework.

In Ecuador, a legal regime needs to be structured that, coupled with the nation’s reality and objectives, addresses the entire value chain of green hydrogen in a way that provides legal certainty and clear incentives or benefits to private investment.

[1] BBC, Green Hydrogen: Green hydrogen: 6 countries that lead the production of one of the “energies of the future” (and which is the only one in Latin America), March 31, 2021, https://www.bbc.com/world/news-56531777

[2] BBC, Renewable energies: what are green, blue and black hydrogens (and why billions are invested in two of them), August 26, 2020, https://www.bbc.com/world/news-53925884

[3] Chilean Ministry of Energy, National Green Hydrogen Strategy, November 2020, https://fch.cl/wp-content/uploads/2021/07/estrategia_nacional_de_hidrogeno_verde_-_chile.pdf

[4] BBC, Green Hydrogen: Green hydrogen: 6 countries that lead the production of one of the “energies of the future” (and which is the only one in Latin America), March 31, 2021, https://www.bbc.com/world/news-56531777

[5] H2 Business News, Air Liquide will develop a large renewable hydrogen electrolyser for Chile, August 15, 2022, https://h2businessnews.com/air-liquide-develop-a-great-renewable-hydrogen-electrolyzer-for-chile/

[6] CELEC EP, Ecuador offers investment opportunities around green hydrogen through the generation of renewable energies May 26, 2022, June 8, 2022,https://www.celec.gob.ec/electroguayas/index.php/sala-de-prensa-2/noticias/773-ecuador-ofrece-oportunidades-de-inversion-en-torno-al-hidrogeno-verde-a-traves-de-la-generacion-de-energias-renovables-26-mayo-2022

[7] Vistazo, Green hydrogen, a promising solution for decarbonization, September 2, 2022, https://www.vistazo.com/enfoque/hidrogeno-verde-prometedora-solucion-para-la-descarbonizacion-FK2927667

[8] H2LAC, Ecuador will have its own roadmap and national strategy for green hydrogen, April 27, 2022,https://h2lac.org/noticias/ecuador-tendra-su-propia-hoja-de-ruta-y-estrategia-nacional-para-el-hidrogeno-verde/

[9] National Hydrogen Center, Hydrogen, retrieved on September 26, 2022,  https://www.cnh2.es/el-hidrogeno/,

[10] National Hydrogen Center, Hydrogen, retrieved on September 26, 2022,  https://www.cnh2.es/el-hidrogeno/,

[11] Ibid.

[12] IRENA, Hydrogen: A renewable energy perspective, September 2019, https://www.irena.org/publications/2019/Sep/Hydrogen-A-renewable-energy-perspective 

[13] BBC, Renewable energies: what are green, blue and black hydrogens (and why billions are invested in two of them), August 26, 2020, https://www.bbc.com/world/news-53925884

[14] Chile Foundation, A strategic opportunity for Chile: green hydrogen, retrieved on September 29, 2022, https://fch.cl/iniciativa/hidrogeno-verde/

[15] BBC, Green Hydrogen: Green hydrogen: 6 countries that lead the production of one of the “energies of the future” (and which is the only one in Latin America), March 31, 2021, https://www.bbc.com/world/news-56531777

[16] This campaign represents 1,049 cities, 67 regions, 5,235 companies, 441 of the largest investors and 1,039 higher education institutions, from a total of 120 countries. For more information, see: https://unfccc.int/climate-action/race-to-zero-campaign

[17] United Nations, Race To Zero Campaign, visited on September 29, 2022, https://unfccc.int/en/node/227769

[18] United Nations, Getting to Net Zero Emissions:

the world pledges to take action, visited on September 29, 2022, https://www.un.org/es/climatechange/net-zero-coalition

[19] La República, A country with a future in green hydrogen, August 31, 2022, https://www.larepublica.co/especiales/camino-a-la-sostenibilidad/un-pais-con-futuro-en-el-hidrogeno-verde-3436269

[20] Ibidem.

[21] CELEC EP, Ecuador offers investment opportunities around green hydrogen through the generation of renewable energies May 26, 2022, June 8, 2022,https://www.celec.gob.ec/electroguayas/index.php/sala-de-prensa-2/noticias/773-ecuador-ofrece-oportunidades-de-inversion-en-torno-al-hidrogeno-verde-a-traves-de-la-generacion-de-energias-renovables-26-mayo-2022

[22] IRENA, Green hydrogen: A guide to policy making, November 2020.https://www.irena.org/publications/2020/Nov/Green-hydrogen

[23] EKOS, Green Hydrogen: What is it and why do they call it the energy of the future? June 1, 2022, https://www.ekosnegocios.com/articulo/hidrogeno-verde-que-es-y-por-que-lo-llaman-la-energia-del-futuro

[24] BBC, Renewable energies: what are green, blue and black hydrogens (and why billions are invested in two of them), August 26, 2020, https://www.bbc.com/world/news-53925884

[25] Chile Foundation, A strategic opportunity for Chile: green hydrogen, retrieved on September 29, 2022, https://fch.cl/iniciativa/hidrogeno-verde/

[26] SSAB, About SSAB, visited on September 29, 2022, https://www.ssab.com/en/company/about-ssab

[27] EKOS, Green Hydrogen: What is it and why do they call it the energy of the future? June 1, 2022, https://www.ekosnegocios.com/articulo/hidrogeno-verde-que-es-y-por-que-lo-llaman-la-energia-del-futuro

[28] H2Businessnews, Shell: “Green hydrogen will cost less than blue fossil fuel,” August 10, 2022, https://h2businessnews.com/shell-el-hidrogeno-verde-costara-menos-que-el-azul-de-origen-fosil/

[29] IRENA, Green hydrogen: A guide to policy making, November 2020.https://www.irena.org/publications/2020/Nov/Green-hydrogen

[30] H2Businessnews, Construction of the largest underground hydrogen storage project in the world, August 8, 2022, https://h2businessnews.com/construyen-el-mayor-proyecto-de-almacenamiento-subterraneo-de-hidrogeno-del-mundo/

[31] IRENA, Hydrogen: A renewable energy perspective, September 2019, https://www.irena.org/publications/2019/Sep/Hydrogen-A-renewable-energy-perspective

[32] BBC, Green Hydrogen: Green hydrogen: 6 countries that lead the production of one of the “energies of the future” (and which is the only one in Latin America), March 31, 2021, https://www.bbc.com/world/news-56531777

[33] In this regard, IRENA notes the following: “One option would be repurposing pipelines currently dedicated to fossil gas for the transportation of green hydrogen. Repurposing pipelines may involve the replacement of valves, regulators, compressors, and metering devices, but, in some cases, depending on the pipeline material, it could also require replacing the actual pipelines.” IRENA, Green Hydrogen Supply: A guide to policy making, May 2021, p. 15,  https://irena.org/-/media/Files/IRENA/Agency/Publication/2021/May/IRENA_Green_Hydrogen_Supply_2021.pdf

Mario Fernández
Associates at CorralRosales
mfernandez@corralrosales.com

Rafael Serrano
Associates at CorralRosales
rserrano@corralrosales.com

Notorious marks are those well-known in the specific sector of the public for which said products, services, or activities are intended, and are used to identify and protect such brands. Renowned brands are widely known by the general public.

Both notorious marks and renowned brands must maintain high commercial traffic to obtain the fame and prestige that characterize them, and this requires a large investment of time, resources, and publicity by their owners.

The concept of a renowned brand is not regulated in Decision 486 of the Andean Community; in a preliminary interpretation, its Court of Justice recognized renowned brands to be those that are known by the general public, outside of merely the relevant sector. As a result, such brands completely break with the principles of registration, territoriality, and specialty, protecting them over all products or services, as opposed to a notorious mark.

The Andean Community Court of Justice has referred to the concept of a renowned brand for several years; and in Preliminary Interpretation 01-IP-87, it analyzed renowned brands, indicating the parameters of its knowledge: “[…] the above-mentioned renowned brand must be known by different groups of consumers in different markets, and not only within a particular group, as is the case with notorious marks. Therefore, it can be deduced that every renowned brand is notorious, but not every notorious mark is a renowned brand, as the classification of the latter is more demanding”[1]

In Interpretation 41-IP-98, the Court recognizes renowned brands, connecting it to fame, prestige, and goodwill, clearly differentiating it from a notorious mark: “Similarly, “through means of the regulations in question, they have been granted characteristics foreign to their nature and typical of renowned or very well-known brands, by extending their protection to all classes, including to denote different products or services.”[2]

In its recent case law, the Court exemplifies trademarks that, due to their positioning and global notoriety, are recognized as renowned brands, as follows: “Renowned brands (for example: Coca Cola, Toyota, Facebook, Google, etc.) are known by practically almost the entire general public, by different types of consumer segments and suppliers, including those who do not consume, manufacture, or market the product or service identified with the renowned brand.”[3]

Likewise, it emphasizes that, given its nature, a renowned brand does not need to be proven: “Notoriety must be proven by the party alleging it, in accordance with Article 228 of Decision 486. Meanwhile, renowned brands do not need to be proven, since under the general theory of process, this is called a “notorious fact.” Here, “notorious facts” are known ex officio and do not require evidentiary activity (notoria non egent probatione), so do not require evidence”[4]

Over the last thirty years, in its preliminary interpretations, the Court has differentiated renowned brands from notorious marks, thus establishing the foundations for a possible regulation of this type of brand within the Andean Community. “Renowned brands, meanwhile, are not regulated by Decision 486, but rather, due to their nature, receive special protection in the four member countries.”[5]

Under this line of case law, in recent resolutions, the Collegiate Body of Intellectual Rights has ratified the character of renowned or very well-known brands that, due to their prestige and global knowledge, deserve the special protection that case law and doctrine grant them to protect their value from attempted misuse by third parties in a clear unfair use of said character. This also helps to protect the rights of consumers.

In procedures in which third parties tried to make use of the very well-known UBER and MAC brands, the Ecuadorian office confirmed their wide recognition by the general public, as well as the reinforced protection that must be given to them, establishing: “the UBER brand is one recognized among the population, not only by the relevant sector of consumers (users of the digital application). By accession, this type of brand is protected not only from the risk of confusion and association, but also from the risk of dilution and unfair use of its prestige”[6]

Similarly, given the misappropriation of the trade name MAC ACCES BY MOBILE STORE MAS LOGOTIPO, it determined the risk of confusion, association, dilution, and unfair use that this registration would imply due to the very well-known nature and recognition of the MAC brand worldwide: “this type of brand is protected not only from the risk of confusion and association, but also from the risk of dilution and unfair use of its prestige”[7]

In conclusion, the resolutions of the Andean Court of Justice have paved the way for the competent offices of the member countries of the Andean Community to establish clear rules for the recognition and protection of renowned brands.

[1] Prejudicial Interpretation 01-IP-87

[2] Prejudicial Interpretation 41-IP-98. Process 219099, marks SUPERMAN v. SUPERMANI. Consulting country Colombia.

[3] Preliminary Interpretation 196-IP-2020. Case 7467-2017-0-1801-JR-CA-26, trademarks TFQ LA TABERNA DE FRANCO Q vs SANTIAGO QUEIROLO S.A.C. Consulting country Peru

[4] Preliminary Interpretation 23-IP-2021. Process 570061-2014/DSD, marks ZAPATA PERU AGROINDUSTRIAS ZAPATA S.A.C. v. CATENA ZAPATA Consulting country Peru

[5] Prejudicial Interpretation 123-IP-2021. Process SD2016/0059251, marks ZOO v. BIO ZOO. Consulting country Colombia.

[6] Resolution No. OCDI-2022-159. Collegiate Body of Intellectual Rights. SENADI-2018-65615 process, marks UBER v. UBER FRUITS.

[7] Resolution No. OCDI-2022-272. Collegiate Body of Intellectual Rights. OCDI-2021-191-AN process, marks MAC v. MAC ACCES BY MOBILE STORE MAS LOGOTIPO.

Andrea Miño
Associate at CorralRosales
andrea@corralrosales.com

It may seem strange for a company to be its own shareholder, i.e., to hold a certain number of shares issued by the company itself, commonly known as treasury shares or treasury stock. However, there are several reasons why a company might be interested in acquiring its own shares, and their regulation becomes necessary, since it entails equity and corporate risks. This matter would merit a more in-depth analysis, but this article aims to describe in broad outline the main purposes of treasury stock, the risks it presents, current regulation and possible reforms.

1. Main purposes of treasury stock and its risks

From an equity perspective, the acquisition of treasury stock essentially produces the same effects as a distribution of dividends, especially considering that the Law on Companies determines that, in order to acquire treasury stock, it is necessary to use funds taken from net profits which may be disposed of by the general shareholders’ meeting. The company uses the net profits, which are part of the shareholders’ equity, to pay the selling shareholder the value of the acquired shares. The renowned Spanish lawyer Jesús Alfaro states that: “when a company acquires its own shares, in fact, what it does is to distribute part of its equity to the shareholders or members whose shares or units it acquires.”[1]

In addition, if the treasury stock is resold at a higher value than that at which it was acquired, the shareholders will benefit, since this transaction will generate a profit for the company, which will ultimately be consolidated in the total profit belonging to all shareholders.  

From a tax perspective, it is more convenient for the shareholders to receive income from the sale of shares than from dividends, since the income in the first case is taxed by the Single Income Tax (Impuesto a la Renta Único) over the profit on the sale of shares, while the income from dividends becomes part of the global income subject to Income Tax. In short, the shareholder will have the option to choose between keeping its participation in the company or obtaining a tax benefit on the value received, which could be in the shareholder’s interest in case it considers that its investment has yielded the expected results. It will also be very important to consider whether by selling part of his shares to the issuing company itself, the capital percentage held by shareholder decreases – diluted – or not.

From a different standpoint, holding treasury stock allows certain financial transactions, such as the issuance of convertible bonds. Thus, when the bonds are converted into shares, it is not necessary to carry out a capital increase, but it can be done with shares held in treasury.

The problem is that these types of transactions affect the equity of the company, since the capital stock ceases to be a guarantee against creditors, since, in accounting terms, the capital stock does not have a cash counterpart, but the counterpart is the company’s own shares. This means that the capital stock is not invested in actual assets. For these reasons, as will be discussed below, the legislator is becoming increasingly wary of these transactions. 

2. Current regulation

Pursuant to the Law on Companies, corporations may acquire their own shares in order to: (i) resell them; or (ii) redeem them, provided that the requirements contained in article 192, transcribed below, are met: 

“The general shareholders’ meeting may decide that the corporation acquires the shares issued by it, provided that the following requirements are met:

1. That a majority of the shareholders attending the corresponding meeting resolve the acquisition of the shares;
2. That only funds taken from net profits are used for such transaction;
3. That the capital corresponding to the acquired shares is fully paid-in; and,
4. That in no case shall the acquisition result in a decrease in the subscribed capital.

As long as the shares are held by the company, the rights inherent to them will be suspended.

A resolution by the general shareholders’ meeting will also be required for these shares to be put back into circulation.”

Article 196 of the Law on Companies refers to the redemption of shares and establishes that:

“The redemption of the shares will be done against the capital stock, for which its reduction shall be previously resolved, in the form established by this Law or the bylaws. The redemption of shares may not exceed fifty percent of the capital stock”

It derives from the foregoing that corporations, once they acquire their own shares with net profits, may either reintroduce them into the legal market or redeem them by means of a capital reduction.

Prior to the entry into force of the Law for the Modernization of the Law on Companies – in December 2020 – the redemption of shares against distributable profits and not necessarily against the stock capital was allowed, in which case, there was no capital reduction. This possibility was eliminated, which evidences a certain reaction from the lawmakers with respect to the acquisition of treasury stock, which, with this possibility, could be kept in the company without the need to reduce capital or reintroduce them into circulation.

With respect to limited liability companies (compañías de responsabilidad limitada), Article 112 provides as follows:

“The redemption of the corporate units will be done against the capital stock, for which its reduction shall be previously resolved, in the form established by this Law or the bylaws. The redemption of the units may not exceed fifty percent of the capital stock.”

Based on the above and derived from the very nature of limited liability companies, they can only acquire their own shares in order to redeem them. 

At this point, the reader may be asking themselves, in what time does the company have to resell or redeem the shares, in the case of a corporation, or redeem the units, in the case of a limited liability company? Well, this very important point is not currently regulated by the Law on Companies. Therefore, although the possibility of redeeming shares against distributable profits has been eliminated, companies do not have a time limit in which they must either redeem them or resell them.

In other legislations, such as Spain, the regulation of the acquisition of treasury stock is much stricter since it is expressly prohibited[2]. In the event of contravention of this prohibition, a limit of one year is established for the resale or redemption of the shares or units, and a fine of up to the nominal value of the shares or units is imposed.  

Moreover, our legislation does not provide for express regulation on this matter for companies listed on the stock exchange, where these transactions would be particularly dangerous.

Possible reforms

As we have anticipated, the Ecuadorian lawmaker is becoming more and more reluctant to this type of transactions, and although it is not expected to reach a rigidity similar to the Spanish legislation, the draft Law Reforming the Law on Companies for the Promotion of Corporate Governance, currently in process in the National Assembly, foresees the inclusion of the following paragraph in article 192 in fine of the Law on Companies:

“The shares must be transferred within a maximum period of one year from their acquisition. Once this period has elapsed without the transfer having taken place, the administration shall immediately proceed to call a general shareholders’ meeting to resolve to redeem the repurchased shares, with the consequent reduction of the capital stock.”

This constitutes a significant change compared to current legislation, since companies will not be able to hold treasury stock indefinitely, which would consequently discourage this type of operation. This change could also be seen as protection for minority shareholders and third-party creditors.  

It will be very important to regulate these types of transactions in companies listed on the stock exchange in order to preserve their transparency.

[1] Alfaro, J. (2020) Los negocios de una sociedad sobre sus propias acciones o participaciones. Almacén de Derecho. https://almacendederecho.org/los-negocios-de-una-sociedad-sobre-sus-propias-acciones-o-participaciones

[2] Artículo 134 de la Ley de Sociedades de Capital de España: “En ningún caso las sociedades de capital podrán asumir o suscribir sus propias participaciones o acciones(…)”

Sofía Rosales
Associate at CorralRosales
srosales@corralrosales.com

The Irish Data Protection Commission (DPC) has fined Meta-owned social media platform Instagram €405 million for breaches of the European Union’s (EU) General Data Protection Regulation (GDPR).[1]

The sanction was imposed following a two-year investigation by the DPC, which found that Instagram had allowed users between the ages of 13 and 17 to operate business accounts on the platform that displayed users’ phone numbers and email addresses. This led the authority to conclude that Meta had been processing the personal data of children and adolescents illegally without a legal basis under the GDPR.

The DPC also found that the platform had operated a user registration system whereby the accounts of users aged 13 to 17 were set to “public” by default, thereby also making their social network content public.  The fine, which is the second highest under the GDPR, following only a €746 million sanction against Amazon, is the third imposed by the Irish authority on a Meta-owned company.[2] In addition to the fine, the DPC decided to admonish Meta and require it to adopt a series of specific corrective measures to comply with the proper data processing.

In December 2021, the DPC presented a draft decision to all EU counterpart regulators, also known as Competent Supervisory Authorities, as provided under Article 60 of the GDPR. Six of these national regulators raised objections to the DPC’s draft decision. The DPC was unable to reach a consensus with the regulators on the issue of objections and therefore referred the case to the European Data Protection Committee (EDPC), pursuant to article 65 of the GDPR.

On July 28, 2022, the EDPC issued its binding decision,[3] under which it required the DPC to modify its draft decision to the effect that it included having found an infraction of article 6(1) of the GDPR and to reassess the proposed administrative fines arising from said additional infraction.[4] After including these considerations in the text, the DPC rendered its final decision on September 2, 2022,[5] and on September 15, 2022, confirmed the conclusions from the investigation into Instagram and the fine of 405 million euros.[6] The DPC has at least six other ongoing investigations involving companies owned by Meta.[7]

Irish state-owned station RTE quoted a Meta spokesman as saying that they will appeal the fine, because this investigation was based on old configurations that they apparently updated over a year ago. Since then, they have implemented a number of new features to help keep teens safe and their information private. Such updates include a setting in which accounts belonging to users under 18 years of age are automatically configured as “private” when they register on Instagram.[8]

This is a major sanction, since it is the first fine imposed in relation to the personal data of children and adolescents, and a sign that financial sanctions for non-compliance with the GDPR are being imposed with ever-increasing values. This could be a sneak preview of the investigations and fines that the future Personal Data Protection Authority of Ecuador could well initiate and impose when the sanctioning regime set out in the Organic Law on Personal Data Protection (LOPDP) goes into force on May 26, 2023.

Personal data is any information that allows a person to be identified and requires special care when it comes to children’s personal data in a digital environment like social networks. The LOPDP will have a greater impact on individuals and legal entitiesthat process the personal data of children and adolescents, since their data is categorized in said regulations as special data, which implies additional obligations for the person in charge and the person responsible for processing such data. Such additional responsibilities include impact assessments and granting additional rights to data owners.[9] In this sense, the personal data of children and adolescents will receive reinforced and specific protection, especial when such data is used  for marketing, profiling, and the collection of these through services offered directly to minors, as happens on social media.

Since 20202, Ecuador has had a public policy aimed at guaranteeing internet safety for children and adolescents,[10] focused on protecting the dignity and physical, psychological, emotional, and sexual integrity of children and adolescents and enhancing the opportunities and skills offered by digital technologies in their lives and comprehensive development. Now, under the LOPDP, companies must be vigilant to ensure they comply with this rule, otherwise they will be penalized with the respective sanctions.

Although the DPC sanction applies in the EU, Meta will need to rectify this problem and adopt the corrective measures not only in that jurisdiction, but also change the default configuration of the commercial accounts of children and adolescents in Latin America, since currently, Instagram business accounts are set to “public” by default. Otherwise, the Latin American data protection authorities will have some work to do.

[1] BBC. (September 5, 2022). Instagram fined €405m over children’s data privacy. https://www.bbc.com/news/technology-62800884

[2] The penalty is currently the highest for a Meta-owned company, coming on the heels of a 225 million euro fine against WhatsApp and one for 17 million euros against Facebook.

[3] The EDPC published its decision on September 15, 2022.

[4] EDPC. (September 15, 2022). Binding Decision 2/2022. https://edpb.europa.eu/system/files/2022-09/edpb_bindingdecision_20222_ie_sa_instagramchildusers_en.pdf

CPD: (September 2, 2022). Decision of the Data Protection Commission made pursuant to Section 111 of the Data Protection Act, 2018 and Article 60 of the General Data Protection Regulation, DPC Inquiry IN-20-7-4. https://edpb.europa.eu/system/files/2022-09/in-20-7-4_final_decision_-_redacted.pdf

[6] Irish Data Protection Commission. (September 15, 2022). Data Protection Commission announces decision in Instagram Inquiry. https://dataprotection.ie/en/news-media/press-releases/data-protection-commission-announces-decision-instagram-inquiry

[7] Independent. (September 5, 2022). Instagram fined €405m by Irish regulator for breaching children’s privacy rights. https://www.independent.ie/business/technology/instagram-fined-405m-by-irish-regulator-for-breaching-childrens-privacy-rights-41962706.html

[8] Le Monde. (September 5, 2022). Irish data watchdog fines Instagram €405 million over children’s privacy. https://www.lemonde.fr/en/pixels/article/2022/09/05/irish-data-watchdog-fines-instagram-405-million-euros-over-children-s-privacy_5995936_13.html

[9] Under article 21 of the LOPDP, in addition to the right of children and adolescents not to be the subject of a decision based solely or partially on automated assessments, sensitive data or data of children and adolescents cannot be processed except with the express authorization of the data owner or their legal guardian.

[10] National Council for Intergenerational Equality. (2020). Public policy for a safe internet for children and adolescents. https://www.igualdad.gob.ec/wp-content/uploads/downloads/2020/09/política_publica_internet_segura.pdf

Rafael Serrano and Christian Razza
Associates at CorralRosales
rserrano@corralrosales.com

The process for settling differences provided for in the Internal Tax Regime Law is a fast-track tax assessment that should only be activated when the conditions established in the law are met and, if activated, the principles that regulate administrative procedures and the taxpayer’s rights should be respected.

Article 68 of the Tax Code defines the assessment capability of the Tax Authority as the act or set of regulated acts carried out to establish the existence of the taxable event, the taxpayer, the taxable base, and the amount of the tax.

Articles 107-A and following of the Internal Tax Regime Law establish that the Internal Revenue Service (IRS) has the power to notify the taxpayer of any differences detected in its tax returns and which generate amounts payable to the Treasury. If the taxpayer does not make the payment or justify the differences within 20 days, the IRS issues a Payment Settlement for Differences in the Tax Return, which implies a collection order for the exercise of the coercive action. 

The acts of notification and subsequent settlement of differences contemplated in the aforementioned articles are tax assessment acts, since the Tax Authority determines the existence of the taxable event, the taxable base and the amount of the tax. The process for settling differences is a fast-track assessment process; therefore, it is only applicable when the Tax Administration finds differences in the taxpayer’s returns.

According to the dictionary of the Royal Academy of the Spanish Language, difference is: “that quality or accident by which something is distinguished from something else”. Therefore, the Tax Authority can only apply the fast-track assessment process when it reaches the conclusion that there is a difference when comparing the data provided by the taxpayer in its tax returns or those declared by third parties in relation to the same taxpayer.

For example, the Tax Authority could identify a difference if the taxpayer has not applied a deductibility limit established by law in its income tax return; or, if the value declared and paid for withholding tax does not coincide with the values provided by third parties. And only if the evidence filed by the taxpayer is not sufficient to disprove such difference, the corresponding settlement may be issued.

However, there are cases in which the Tax Authority has exceeded its faculties. For example, when issuing settlements of differences based on presumptions, i.e., the Internal Revenue Service has presumed the existence of differences in the Value Added Tax rate applied to certain services, based on the activities registered by the taxpayer in the Single Taxpayer Registry.

The Internal Tax Regime Law does not allow the Tax Authority to establish differences by presumption and could not do so since it would be contrary to the nature of a direct and abbreviated assessment procedure. Therefore, the question arises, a settlement of differences issued based on presumptions made by the Tax Authority is valid? Does the Tax Authority have the power to issue a settlement of differences when the difference is presumed?  The answer is no.

The initiation of a fast-track assessment procedure without having complied with the conditions set forth in the law, breaches the principle of prohibition of arbitrariness provided in the Administrative Code and violates the taxpayer’s rights to due process and defense, recognized in the Constitution and in the Tax Code.

Faced with this circumstance, the taxpayer may exercise its right to appeal the assessment procedure – the liquidation of differences – through an administrative claim or a judicial challenge. However, within these processes the taxpayer will be obliged to rebut the presumption of legitimacy applicable to the administrative tax acts.

In conclusion, although the legislator has provided that the Tax Authority may initiate fast-track assessment procedures against taxpayers, these procedures of liquidation of differences may only be initiated when the Authority effectively determines the existence of differences, otherwise the Authority would be acting arbitrarily and, consequently, violating the taxpayer’s rights, especially his right to defense.

Andrea Moya
Partner at CorralRosales
amoya@corralrosales.com