2004. Uruguay XXI Yaguaron 1407 Of. 1103, Montevideo, Uruguay, Phonel.: (5982) / Fax: (5982)

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1 Uruguay is located in South America between Argentina and Brazil and has a land area of 68,000 square miles (176,000 km 2 ). There are no notable topographic extremes and the climate is pleasant throughout the year. Population totals 3.3 million, with a large percentage of European descents. Spanish is the official language. The country is a democratic republic with a presidential system. Bills are passed by Parliament and signed into law by the President of the Republic. Judges handle civil, commercial, labor, criminal and family cases. Decisions by judges serve as a guide for other trials. They do not have binding precedence (stare decisis effect). In Uruguay, one may live a safe, peaceful, healthy and pleasurable life. The country offers one of the highest levels of safety in Latin America and The Caribbean. A variety of consumer goods from all over the world are available in the Uruguayan market, all at international prices. Businesspeople visiting the country only need a current passport to enter, except for some specific cases. MERCOSUR citizens need only their national identification card. The Uruguayan peso is the local currency and the $ sign is the official currency symbol.

2 Over the last two decades, Uruguay has applied major transformative policies to promote the opening and liberalization of the economy. Policy has been geared towards creating stability through the balancing of governmental budgets. Results of public budget control are seen in the resulting low inflation rates. Services have grown significantly and currently make up the largest percentage of GDP. Investment promotion has focused on facilitating access to capital goods and supplies at international prices. An open financial system, free convertibility and remittance of funds, bank secrecy and an overall international financial atmosphere have made Uruguay the region's major financial center. Uruguay offers complete freedom for capital movements and transfers.

3 In 1991, the Southern Common Market (MERCOSUR) was created by Argentina, Brazil, Paraguay and Uruguay. Under MERCOSUR, the Uruguayan economy commenced to open at an accelerated pace through a progressive regional integration process, starting with the current Customs Union and aiming at the final objective of a Common Market. MERCOSUR offers existing and new companies in Uruguay access to a 207 million consumer market with GDP totaling USD 1 trillion, representing 75% of South America's GDP. Over the last decade, the Uruguayan economy has shown positive performance in spite of unpredictable and volatile economic and financial regional shocks, seen especially in Among exports, traditional products such as textiles, beef, leather, rice, dairy and other agriculture products make up the greatest volume. Over the past few years, other exports have developed, including automobiles, auto parts, fishing, wood, paper, plastics and software. A notable export is tourism, which totals 3% of GDP.

4 Uruguay has been working towards economic deregulation and elimination or privatization of stateowned companies. Notable aspects: Using private concessions for public works projects. Eliminating monopolies in certain activity sectors, such as insurance, and power generation. Social security system reform. Channeling financial resources through Investments Promotion Law, and Securities Law, supported by the recently passed law on Trusts. Regarding investment promotion, Law 16,906 guarantees: Equal treatment of domestic and foreign investments. Fair treatment. Freedom to transfer capital and profits abroad, in freely convertible currencies. Certain tax exonerations.

5 The government encourages investments, and no discrimination is made between domestic and foreign investments. A favorable attitude is given towards foreign investors. Major Foreign Direct Investment (FDI) initiatives include: Information and communication technologies: Government has given special emphasis to this sector with the objective of making the country the largest technology pole in the region. Significant tourism industry development. Logistics and distribution: Two competitive advantages are the Free Port and Free Zone systems, rounding up the strategic location of the country within MERCOSUR. The country is known for economic, political and social stability, giving the Uruguayan financial system solid international recognition. Infrastructure development with public works concessions. Agribusiness: Natural resource availability with advantageous conditions. Manufacturing: A traditional FDI receiver, this industry represents a significant percentage of total FDI and jobs. Mining: existence of gold and mineral exploitation.

6 General Transportation System: Well developed existing network plus infrastructure undergoing major developments in a strategic zone of MERCOSUR. Highway Transportation: The main highway network, paved and tailored to the current plan, is the most dense in Latin America and The Caribbean. Certain infrastructure projects are underway, to improve regional connections. Railway Transportation: Uruguay's railway network consists of three trunk lines that converge at the Central Station and Port of Montevideo. Connections are available with Argentine and Brazilian networks. River and Maritime Transportation: The Port of Montevideo, the main domestic port, receives ships from all over the world and concentrates on export, import and in transit commerce. Air Transportation: Main airport facilities are located in zones of high population density and tourism infrastructure (Montevideo and Punta del Este)

7 Telecommunications: The telephone network has digital transmission and switches. The law establishes that international call centers, services, distance learning and electronic digital signature services can be offered in the Free Zones. In early 2001, an independent regulatory agency was created (URSEC) and the telecommunications market continued to open (except for land line telephone services, which are offered by ANTEL, the state-owned company). Competition is open to mobile telephony, wireless communication (data transmission), ISPs, teleports and international long distance. Energy: Basic sources of power in Uruguay are hydroelectricity and petroleum. Natural Gas Transportation and Distribution: Two construction projects for transport of natural gas were completed: Cruz del Sur Pipeline and the Litoral Pipeline. Water: Each Uruguayan has 5.4 times more fresh water available than the world s average.

8 There are 35 privately held banking institutions including: 17 banks, 6 financial services companies, 5 financial intermediation cooperatives, 7 external financial intermediaries, and consortium administrators that are not financed by public deposits. The State, in addition to controlling the Central Bank (the state monetary authority), controls the Banco de la República Oriental del Uruguay (BROU, a stateowned commercial bank), the Banco Hipotecario (a state-owned bank specializing in mortgages) and is the only shareholder of the Nuevo Banco Comercial (a commercial bank subject to private law) The Central Bank of Uruguay oversees the financial system. The securities market is more active for the following reasons: Creation of pension funds administrators(afap), as a result of the reform of the social security system. Insurance market opening to other providers. Investment fund regulation. Long term corporate debt instruments, encouraged through the granting of tax advantages. The insurance market was opened in At that time, several foreign insurance companies commenced operations. Freedom of remittance of funds in and out of Uruguay, free convertibility of currencies, and current tax advantages make out of Uruguay an attractive international financial center.

9 Incentives authorized by the Investments Promotion Law: This law grants wide-ranging investment stimulus (principally tax breaks) that are automatically applied to Corporate Income Tax (IRIC) taxpayers, as well as to Agriculture Income Tax (IRA) and Sale of Agricultural Goods Tax (IMEBA) taxpayers. Environmental Protection Law: This law modifies the investment law in accordance with assets directly used for the elimination or mitigation of negative environmental impacts arising during the production or cleanup of affected environmental conditions. Fixed improvements related to treatment of environmental effects of manufacturing or agricultural activities are included. Personnel Training Incentives: Expenditures incurred for the training of personnel in priority areas can be deducted for income tax purposes, between 1.5 and 2 times of the amount invested.

10 Science and Technology Research and Development Incentives: Expenditures directly made by a company or financial support given to public or private scientific or technological research institutions and their development projects, particularly biotechnology, may deduct for income tax purposes, up to 1.5 times of the invested amount. Exoneration on Profit Reinvestment: Net profits, after deducting all other special tax breaks, may be exonerated from income tax up to 50%. To that effect, profits must be allocated towards a reserve fund account, which only purpose may be capital investment. Exoneration on Plant and Manufacturing Equipment: Manufacturing equipment directly involved in production may receive a 50% deduction of fiscal value for net worth tax purposes. Additionally, equipment is considered exempt asset for this tax, starting from the date of purchase to 5 years out. Real estate used for agriculture, excluding improvements, are also exempt from this tax.

11 Investments Promotion Law: Through promotional declaration by the Executive Branch, Law 16,906 offers a stimulus package for particular investment projects or specific sector activities. These wideranging tax exonerations include: Income tax: For amount of investment made with own funds. Net Worth tax: For equipment for investment projects. Capital transfer tax: For real estate acquired forinvestment projects. Import tax: All taxes on importing capital assets for the project, as long as they do not compete with domestic assets. Manufacturing Promotion Law: The entire manufacturing sector is promoted with tax exonerations. The Manufacturing Promotion Law includes the same benefits as the Investments Promotion Law. Tourism Industry Promotion: With this law, the Executive Branch declared investments in Tourist Facilities of national interest, authorizing additional tax benefits to those granted under the Manufacturing Promotion Law. Forestry and Citrus Fruit Law: Forests planted in previously defined priority zones as well as lands used for forestry are protected by wide-ranging tax national and departmental breaks. Protective or timber artificial forests are included under this law as well as natural protective forests that meet the requirements established by the Forestry Law. Citrus fruit areas enjoy the same exonerations, except for income tax. To receive these benefits, the project must be approved by the Forestry Division of the Ministry of Livestock, Agriculture and Fishery.

12 External Financial Intermediaries: Companies which exclusive object is to offer financial intermediary services to nonresidents are exonerated from all taxes, except for social security contributions. Holding Companies: Holding companies are a corporations which main object is to invest abroad in securities and real estate or to carry out business activities abroad, in their own name, in the name of a third party, or for a third party. These companies, whose only assets in the country are stocks of other like companies, or bank accounts with balances below 10% of total assets, or publicly held stock, are only subject to a 0.3% tax on its net worth plus the amount of liabilities exceeding the double of the net worth, and social security contributions. Free Zones: Free Zone promotion and development aims at stimulating investment, exports, employment and international economic integration and has been declared of national interest by law. Companies operating as Free Zone users enjoy the following benefits: Total tax exoneration, including income tax (withholding tax applies to remittance of dividends or profits to persons domiciled abroad, if said payments are taxed abroad, and tax credit is available for tax withheld in Uruguay) Entrance and exit of goods are exempt from all taxes. Exemption does not cover social security contributions, except for foreign personnel that choose not to contribute to the Uruguayan system. 75% of personnel must be Uruguayan citizens.

13 3.2.1 Regional Agreements. MERCOSUR: The MERCOSUR treaty signed by Argentina, Brazil, Paraguay and Uruguay in 1991 was created for the purpose of creating a common market. To achieve this, a customs union was implemented as a first step, offering the free circulation of merchandise, services and capital goods through the progressive reduction and elimination of tariff and non-tariff barriers. Tariffs applicable to trade between member countries were eliminated on 1 January 1995, save for some goods which were temporarily excluded. In addition, member countries signed agreements with Bolivia, Chile and Peru to integrate them into MERCOSUR as associate countries (not full-fledged members), to further free trade. Furthermore, MERCOSUR signed the Interregional Framework Cooperation Agreement with the European Union on December 1995, with the objective of defining cooperation in trade, economics and integration.

14 Import Freedom: All goods are free to be imported in to the country. Certain products are subject to security, health and other controls that do not differ from those originated in the country of origin. Tariffs: Uruguay has made considerable efforts to reduce tariff levels, which resulted in the creation of MERCOSUR. General Policy: Uruguay promotes exports through diverse methods, all of which satisfactorily meet with the WTO Subsidy Code. The basic principle is freedom to export without taxes or prohibitions. Return of Taxes: Exports are exempted from VAT payments, and exporters are allowed to recover the tax incorporated in purchases. Likewise, a system to return indirect taxes exists. Tax Benefits: Uruguay promotes the export of manufactured products through special fiscal incentives for the manufacturing sector. Temporary Admission: Manufacturing supply imports for exportable goods are subject to a tax system that allows these items to be imported without tariffs. Draw Back: For certain products, this system allows the return of tariffs paid during import when re-exported (whether re-exported after value-added procedures or re-exported in the same condition.) Financing: An export financing system exists that allows exporters to obtain loans in dollars from privately held banks at preferential rates, depositing 30% of funds in the Central Bank.

15 ! Copyright: In Uruguay, copyright laws protect literary, scientific and artistic works and all other intellectual production for 50 years.. The country has ratified the Berne Convention for the Protection of Literary and Artistic Works. Furthermore, Uruguay has ratified the Rome Convention of 1961, the Geneva Convention of 1971 and the TRIPS (Trade Related Aspects of Intellectual Property Rights) agreements. This legal framework also applies to software and creative work in electronics and computers. Trademarks: Trademarks have a 10-year effective period and are renewable for equal periods indefinitely. The exclusive property of a trademark is acquired for products or services for which they have been solicited. Trademarks may be transferred inter vivos or at death. With the National Administration of Industrial Property (DNPI) title, the owner may bring forth trademark actions in civil or criminal courts to protect rights from any trademark rights violation or infringement. Patents: Patents are used to protect industrial property rights of owners of an invention or novel design. Patents give owners the exclusive use of these technical solutions and creations. The patent procedure is carried out by the National Administration of Industrial Property. The patent owner may bring forth civil and criminal actions to impede other parties from selling or commercializing products that have patent protected technologies without the owner's consent. The patent owner may give up his patent, or license it to third parties.

16 " # $ % & ' The most common types of new legal entities include: Corporations (Sociedad Anónima): Capital can be reflected in bearer or registered shares. Limited Liability Partnerships (Sociedad de Responsabilidad Limitada) Less common types of companies include: General Partnerships (Sociedades Colectivas) Limited Partnerships (Sociedades en Comandita) Capital and Industry Partnerships (Sociedades de Capital e Industria) De Facto Partnerships (Sociedades de Hecho) Consortiums and Interest Groups can also be formed. In the case of individual undertakings, Sole Enterprises may be establishedings, Sole Proprietorships may be established.

17 Main characteristics: Activity: No operating restrictions; may carry out any type of activity. Liability: Investors limited liability. Shareholder liability is limited to the amount of contributed capital. Capital: USD 24,000 minimum. Personal Commitment: Capital based structures are disassociated from individuals. Anonymity: Shares can be bearer or registered. For financial entities, shares must be issued in registered form. Profits: Distributed proportionately to contributed capital. Transfer: Bearer shares are transferred upon delivery. Registered shares must be endorsed and delivered, and their transfer must be communicated to the corporation. Other: After the corporation is formed, one shareholder may hold all shares. The investor may finance the corporation through loans in conditions similar to those of a third independent party. There are two types of corporations, closely held and public; public corporations are those which use savings from the public in general, or are listed in the Securities Exchange.

18 OPERATION: Corporations are managed by a Board of Directors, as designated by the shareholder meeting. Directors can be legal entities, national or foreign, or individuals, resident or non residents. SHAREHOLDER MEETING: The Shareholder Meeting is the governing body of the corporation. An annual Ordinary Meeting must be held to consider the state of business, the performance of the Board of Directors, designation of members thereof and of members of the Trustee Board, and approval of the annual financial statements. When considering other matters, a special Shareholder Meeting should be convened. CONTROLS: Except for Free Zone corporations, all other corporations are subject to controls by the National Internal Audit Office (AIN).

19 This legal structure is most frequently used by small and medium sized business entities. Main characteristics: Activity: Only operating restriction is they cannot carry out financial activities. Liability: The liability of the partners is limited to the amount of capital contributed, save for employment and social security obligations. Capital: Minimum and maximum capital. The maximum capital is USD 24,000, the same amount as the minimum for corporations. Personal Commitment: In case of death or incapacity of one of the partners, dissolution may be avoided.. Anonymity: Capital quotas are in registered form. Profit: Profits are distributed according to contribution, or established by the contract (distribution may be different from contributed capital). Transfer: No limitations among partners. Third party transfer is subject to approval by 75% of partners (when partners are 5 or more). Other: Partnership may have from 2 to 50 partners, who may be individuals or legal entities, without nationality or incorporation limitations. They may temporarily operate with one partner.

20 These may be individually established without having to start a corporation or a partnership. Main characteristics: Activity: Only operating restriction is they cannot carry out financial activities. Liability: The owner of the sole entrepreneur is personally liable for all obligations. Capital: No minimum or maximum. Personal Commitment, Anonymity, Profits: The person and the business form one same identity. The person is owner of the business and its profits. Transfer: Ownership of the company is nontransferable. The business s assets and liabilities may be transferred.

21 Companies established abroad can carry out isolated business operations in Uruguay and appear in court, without need of incorporation; to perform the activities established in the purpose of the bylaws, however, a branch must be established in Uruguay. Main characteristics: Activity: No operational limitations, but business purpose is limited to the parent company s. Liability: Limited to parent company s liability, ; the branch and parent company form one and same identical legal entity, and creditors may claim from both. Capital: The same as a corporation, with a USD 24,000 minimum and no maximum. Personal Commitment, Anonymity, Profits: As a branch of a foreign company, these aspects depend on the conditions of parent company. Transfer: Capital is not represented.

22 These are closely held corporations that carry out offshore investments and operations, while enjoying a special, advantageous tax scheme. The object of these corporations is mainly to carry out activity of portfolio corporations, consisting of a diversified holdings of securities and real estate. They are subject to a 0.3% annual tax on net worth and the liabilities and funds administered for third parties which exceed twice the sum of the abovementioned net worth at the end of the fiscal year. They are especially suited for performing international financial operations for companies of the same economic group, and operating as a financial holding.

23 ( Free Zone companies are a special type of closely held corporation whose object is exclusively to engage in manufacturing, commercial or service activities within Free Zones, while enjoying ample tax exemptions, including income tax. Companies may operate as direct or indirect users of Free Zones. They are exempt from all taxes, except for social security contributions. Foreign personnel who waive social security in Uruguay may also be exempted from social security contributions in Uruguay. Entrance of goods and services in to Free Zones are exempted from all taxes. Goods coming in from non-free zone territories are considered exports from those territories. Likewise, goods exiting Free Zones are exempt from all taxes. If they are introduced into non-free zone national territory, they are considered imports and thus subject to applicable taxes. At least 75% of personnel must be Uruguayan. This percentage may be reduced upon authorization from the Executive Branch. Free Zones are especially suited for carrying out international trade operations, without necessarily having to physically move goods from or in to the Free Zones. They are also suited for rendering services to other countries or to Free Zone users, and for providing technical or professional assistance. They are generally used as warehouses and distribution centers. Manufacturing plants must be located within their physical limits to capitalize these advantages.

24 ! The Legislative Branch has the power to approve national tax laws, which are later regulated by the Executive Branch. The fiscal administration does not have the power to modify tax legislation. The country is divided into 19 departments which can establish, control and collect through their local governments only specific departmental taxes. The most significant are Real Estate Tax, Vehicle Tax and Bromatology Tax. However, their incidence on companies is not significant. The Uruguayan tax system is based on indirect taxes. Value Added Tax (IVA) generates over 50% of revenue, while Excise Tax (IMESI) makes up 20%. Income Tax (Impuesto a la Renta, IRIC) and Net Worth Tax (IP) generate a small portion of overall tax revenues. Value Added Tax levies the internal circulation of goods, services, as well as imports. The basic rate is 23%, but there is a minimum 14% tax applied to basic needs and medicines. Certain goods and services are exempted from this tax. Social Security Financing Contribution Tax (COFIS) is applied to the import and sale of manufactured goods. It applies to transactions between state agencies, private companies and any other entity subject to VAT or Excise Tax.

25 Uruguay does not have a Personal Income Tax. Income Tax (IRIC) is levied at a rate of 35% percent on net profits of Uruguayan source obtained by business entities. Income derived from farming activities is subject to Agricultural Income Tax (IRA). Current legislation establishes that these rates will decrease to 30% in January Net Worth Tax taxes assets located in the country, after deducting certain debts. At the end of the fiscal year, a 1.5% tax is levied on industrial, commercial and farming businesses; 2.8% is applied to banks and financial institutions, and a 2% rate is applied to all other legal entities (foreign entities not incorporated in Uruguay). Individuals pay Net Worthat progressive rates varying from 0.7% to 3.0%, applied to amounts over a non-taxable minimum of approximately USD 80,000 for sole persons and over the double of said amount for families. Excise Tax is applied to the first sale made by producers or importers of various products in the local market. Exports are not subject to this tax. Rates vary per item and are generally set by the Government within the limits established by the law.

26 Foreign Operations. Income Tax (IRIC) only taxes Uruguayan income, defined as income deriving from activities performed, goods located or rights exercised within Uruguayan territory. Offshore Financial Operations. External Financial Intermediaries exclusively engaging in offshore operations are exempt from Income and Net Worth Taxes. Holding Companies (SAFIs) are exempt from Income Tax and pay a 0.3% tax on net worth plus the amount of liabilities exceeding twice the net worth. Corporations (SA) that carry out international merchandise trading activities enjoy a preferential tax system and pay Income Tax (IRIC) at a rate of 35% on 3% of their profit margins. Free Trade Zones. Activities carried out within the Free Trade Zones enjoy ample tax exemptions, since they are not taxed by domestic or foreign trade taxes.

27 Individual labor relations are governed by detailed legislation. Collective relations, on the other hand, have ample liberties, and the Government only intervenes in a secondary and indirect manner. The labor force in Uruguay is amongst the best trained and highest qualified in Latin America. The availability of well-qualified labor is an asset for new investment projects. The role of the Government is only to establish the national minimum monthly compensation, minimum earnings for rural and domestic workers and government wages. The national minimum compensation is set by the Executive Branch and is only a parameter used for social security benefits. The minimum monthly compensation currently totals approximately USD 50. The workday is generally limited to 8 hours. A 44- hour work week is customary in commercial activities, while a 48-hour work week is normal in manufacturing and service activities. Termination occurs when the employer unilaterally ends the working relationship with the employee. No formalities are required for this situation, only a simple communication to the employee. The law establishes that when a contract with a permanent employee is terminated, the employer must pay a monetary compensation (IPD) based on the length of service and the last pay, as base for its calculation.

28 Social Security covers disability, sickness, elderly retirement, labor accidents, unemployment and death. Affiliation is mandatory except for foreigners rendering services in the Free Zones. Foreigners working for companies abroad that are transferred to a Uruguayan branch can choose, during a two-year period, to be under their original country s social security system, as permitted according with international treaties signed by Uruguay. The Social Security Office (BPS) is the government body responsible for the social security system. It is in charge of collecting all payments made by companies and employees, and of maintaining the work history of each employee. Unemployment: An unemployment insurance system gives the unemployed worker, whether permanent or temporarily unemployed, a subsidy of 50% of the monthly average of wages received in the past six months (or 70% for a worker responsible for a family.) There is a cap of eight minimum monthly compensation (currently USD 400). Labor Accidents: The worker is protected against occupational hazards and on the job accidents, under mandatory public coverage system, which is administered by BPS.

29 CONTRIBUTIONS Workers, if completely dependent on one company, including paid corporate directors and auditors, partners of personal partnerships, as well as owners of sole proprietorships are subject to Special Social Security Contributions (CESS) and special Tax on Personal Compensation (IRP). Employers must make monthly contributions, and withhold and pay any contributions corresponding to their employees. These payments are applied to all compensation paid to the worker. Work permits are issued without major restrictions. To obtain a permit, the following items are required: Proof of good conduct in the previous country of residence. Certificate of good health. Certificate of means of support. Restrictions: The only restrictions on foreign personnel are: Fishing: Captain and at least 50% of crew must be Uruguayan citizens. Uruguayan airlines: Crew must be Uruguayan and at least 75% of employees must be Uruguayan citizens. Free Zones: 75% of employees must be Uruguayan citizens to obtain exemptions.