About Uruguay

1.1. Economic Stability

Uruguay is a country with macro-economic stability that is currently undergoing an economic expansion process that will take the GIP to a new record in 2010, with a growth rate of 7.9% in the third quarter. This represents an accumulated growth of around 4% as compared to the year 2009, and a significant increase of activities in all productive sectors.

1.2. Economic Policy and Free Convertibility
For several decades Uruguay has been applying policies observant of liberalization and openness processes, along with a strict compliance with international obligations. There is full freedom for entry and exit from the country of capitals, as well as currencies and gold, combined with free convertibility of currency with no limitations for the purchase or sale of foreign currencies.

1.3. State Reform
The newly started process for a State reform and deregulation of the economy has brought along the opening of private competition and/or participation in activities that had been so far exclusive of the public sector. Special mention must be made of concessions granted for public works projects, the de-monopolization of insurance and cellular telephony services and the production of electrical power. Other outstanding aspects are: structural changes to the social security system, the Mutual Funds Law to promote the channeling of financial resources, and other legislation like the Securities Market Law and the Trust Funds Law.

There is also a tax reform process under way, whose may features are: the system’s simplification, rationalization and generalization, the stimulation of employment and productive investments, reduced taxes and social security contributions for companies, and the promotion of a more fair and efficient system..

2.1 “Sociedad Anónima” (Corporation)

In order to develop their activities in Uruguay, companies have the possibility of adopting several legal organizations. The most common option is a corporation structure, while limited liability companies are more frequently used for lesser-scale enterprises.

2.2 “Sociedad Anónima de Inversión” (Investment Corporation)

Corporations of this type are constituted pursuant to Law Nr. 16,060, with the main purpose of making investments in other companies, both within the country and abroad (as opposed to SAFIs, the traditional Uruguayan off-shore companies).
Investment corporations are governed by the same rules as regular corporations (Law on Business Partnerships Nr. 16,060), except that the former are not subject to the limitation relative to investments in other companies (as set forth in Article 47 of Law Nr. 16,060 pursuant to which corporations are not allowed investments in the stock of other corporations in amounts exceeding the net worth of the investing company).

2.3. “Sociedad Anónima Usuaria de Zona Franca” (Corporation User of Free Trade Zone)

These corporations, meant for the sole purpose of developing activities in their capacity as users of free trade zones, are subject to incorporation procedures that are much simpler than those applicable to regular corporations. They are also allowed extensive tax benefits, and their shareholders may be both natural or legal persons, either national or foreign.

2.4. “Sociedad Anónima Financiera de Inversión” – SAFI (Financial Investment Corporation – Offshore)

As of the enforcement of Law Nr. 18,083 (1 July 2007) the incorporation of new SAFIs was banned. In addition, as of 1 Janu

2.5. “Sucursal de Persona Jurídica Extranjera” (Branch of Foreign Legal Entity)
Companies duly incorporated abroad are acknowledged by force of law in Uruguay. Such corporations are governed – in what concerns their duration, capacity, functioning and dissolution – by the legislation applicable in the place of their incorporation.
Foreign legal entities intending to carry out on-going business in Uruguay which include the fields of activity set forth in the business purposes of the head office must register their articles of incorporation at the National Registry of Commerce, along with a resolution by the competent body of the head office as to the approval of the branch being established in Uruguay.

2.6. “Sociedad de Responsabilidad Limitada” (Limited Liability Partnership)
In addition to having features specific of personal companies, these partnerships share with corporations the limitation of the liability of partners in relation to the capital they have each subscribed, with the exception of labor debts, for which all partners are unlimitedly liable.

Following is an overview of the Uruguayan tax system and the main taxes applicable in the country.

3.1. Territoriality or Source Principle
In defining its competence for the application of taxes, Uruguay resorts to the Source Principle and thus takes on entitlement for taxes applied to activities, income or assets derived from sources located within the country’s boundaries, regardless of the citizenship, domicile or residence of those on whom the taxes are applied and independently from the place where transactions are carried out. This principle applies to all taxes, except for a few cases expressly established in writing in relation to the Income Tax applicable to Non-residents (IRNR) and to more recent cases of Personal Income Tax (IRPF).
By virtue thereof, activities carried out, assets located, or income derived from productive factors outside the Uruguayan territory are not subject to taxes in Uruguay.

3.2. Taxes applicable to Corporations
3.2.1. Corporate Income Tax (“Impuesto a las Rentas de las Actividades Económicas” – IRAE)
The IRAE is a yearly 25% tax, applicable to: i) corporate and assimilated income from Uruguayan sources obtained by companies (entities in general) regardless of the economic factors used in producing such income. That is: the IRAE tax applies to pure capital income as well as to income from working activities or income derived from a combination of both.

3.2.1.1. Intermediation Activities from Uruguay (Trading)
For cases of: a) purchase and sale of goods located abroad whose origin or destination points are not within the national territory, and b) intermediation activities in the provision of services, to the extent that such services are economically provided and used outside the national territory, the net income from Uruguayan sources is equal to 3% of the difference between the purchase and resale prices of the referred goods or services.

3.2.1.2. International Income
Net income from Uruguayan sources corresponding to certain activities carried out partially within the country is fixed by way of percentages going from 10% to 30%.

3.2.1.3. Transfer Prices
The Tax Reform Law regulates transfer prices based on guidelines set forth by the Model of Agreement for Avoiding Duplicate Taxes (“Convenio para Evitar la Doble Imposición” – CDI) defined by the OECD (Organization for Economic Cooperation and Development).
Transfer prices apply to:
i) Transactions between related parties.
ii) Transactions between an entity subject to the IRAE tax and non-residents with domicile, incorporated or located in countries with low or inexistent taxes, or benefitting from a special regime implying low or inexistent taxes.
iii) Transactions with entities operating at port facilities benefitting from a regime implying low or inexistent taxes.

3.2.2. Net Worth Tax for Legal Entities (IP)
The IP is a yearly 1.5% tax applicable to assets and entitlements of industrial and commercial companies, as well as to agricultural and livestock exploitation establishments economically located, placed or used in the country, minus the liabilities determined by law, at the closing of the fiscal year. Assets and entitlements economically located, placed or used outside the country’s territory are not subject to this tax.

3.2.3. Corporations Control Tax (ICOSA)
Uruguayan corporations are subject to this fixed tax that applies in the event of: i) the incorporation of the company, at a rate of 1.5%, and ii) the closing of every fiscal year, at a rate of 0.75%. The amount of this tax is approximately US$ 940 for case (i), and US$ 500 for case (ii).

3.3. Taxes applicable to Resident Natural Persons
3.3.1. Personal Income Tax (IRPF)
The IRPF tax presents a dual system, not global, with two categories. The first (Category I) includes capital income and the second (Category II) income from work, obtained by resident natural persons and originated in Uruguayan sources. Category I is subject to a proportional rate tax and Category II to rates calculated on the basis of progressive scales.
As of 1 January 2011, the IRPF will apply to capital gains abroad received by Uruguayan residents. This recent legal change, an exception to the territoriality principle, does not affect capital gains abroad received by non-residents.

3.3.2. Net Worth Tax for Natural Persons (IP)
This is a yearly tax applicable to assets and rights economically located, place or used within the country of natural persons, family groups and undivided estates as of 31 December each year, to the extent that such taxable estate exceeds the minimum not subject to taxes.
Spouses living together who decide to jointly file declarations on this tax as family group will be jointly and severally liable for payment thereof. In each case, each spouse shall declare his/her own assets and half of his/her jointly owned assets.

3.4. Taxes applicable to Non-residents
3.4.1 Income Tax applicable to Non-residents
This tax, introduced by the Tax Reform Law, applies to income from Uruguayan sources of any kind, whether originating in: a) entrepreneurial and assimilated activities; b) profits obtained from working activities; c) capital gains, or in e) net worth increases obtained by non-resident natural persons or other entities, not acting by means of permanent establishments in Uruguay.
There is, however, an exception to the territorial source principle in the Income tax applicable to Non-residents, for income “obtained in exchange for services provided from abroad to payers of the IRAE tax” are considered as originating in Uruguayan sources (to the extent that they relate to obtaining profits subject to this tax). Pursuant to the solution of regulatory standards, the non-observance of the source principle is limited to services provided outside employment relationships.

3.4.2. Profits obtained from working activities
Profits obtained from working activities are those originating in personal services provided, either pursuant to an employment relationship or not, (as referred to the solution of the IRPF tax). The proportion of the rate applicable is 12%.

3.4.3. Dividends
The applicable law indicates that dividends paid to foreign locations, to the extent that they correspond to income subject to the IRAE tax, are subject to the IRNR tax, at a rate of 7%, with the local company being responsible for withholding such tax.

3.4.4. Interest
A) Loans granted by natural persons or legal entities abroad: payments made by way of interest on loans granted by natural persons or legal entities abroad are subject to a tax rate of 12%, except for a few cases where exemptions are provided for.
B) Deposits: interest on deposits for the payment of capital loans made on Uruguayan territory, and/or derived from securities of non-residents who are not permanently settled in the country, is subject to this tax.
The proportional rates applicable depending on the purpose and term of the deposit range are: 3%, 5% and 12%.

3.4.5. Royalties and Copyright
Payments originating in royalties and/or copyrights made to non-residents are subject to the IRNR tax at a rate of 12%. No exemptions or any other mechanisms oriented at avoiding duplicate international taxation are planned for these cases.

3.4.6. Profits from Real Estate Property
By virtue of the territoriality principle applied, profits derived from real estate located upon Uruguayan territory and/or from rights constituted or assigned in regards to such property are to be considered as originating in Uruguayan sources. The proportional rate applicable is 12%.

3.4.7. Net Worth Increases
The proportional rate applicable to increases in net worth is 12%. There are specific situations considered as exceptions and exemptions have also been provided for.

3.5. Value Added Tax (IVA)
Value Added Tax (IVA) applies to: i) the internal circulation of goods, ii) the provision of services for good and valuable consideration carried out on Uruguayan territory, iii) goods introduced into the country, and iv) value added to the construction of real estate property.
The element subject to tax is the consideration in exchange for the delivery of goods and/or the provision of services. For imports, the proportional rate of the tax applies to the customs value plus the corresponding duties, and is to be paid upon the dispatch of the goods.
The basic rate of the tax is 22%, with the possibility for the Executive Power of government to gradually reduce such rate down to 20%.

The minimum rate is 10%, applicable to foods and medicine products, services provided in relation to tourism packages and accommodation services.

3.6. Other Taxes
3.6.1. Specific Internal Tax
This tax applies to the first disposal, upon any title, made in the domestic market by manufacturers or importers of certain goods such as: beverages, motor vehicles, fuels, lubricants, tobacco, cigarettes and cigars. The tax is also applicable to the possible use, by the manufacturers or importers, of the taxable goods.

3.6.2. Sales Tax on Agriculture and Livestock Goods (“Impuesto a la Enajenación de Bienes Agropecuarios” – IMEBA)
This tax applies to the first disposal, upon any title, of certain agriculture and livestock goods, by producers in favor of entities subject to the IRAE tax. Applicable rates go from 0.9% to 2.5%, depending on the goods disposed of.

3.6.3. Tax on Real Estate Transactions
This tax applies to real estate disposed of and to other real estate entitlements conferred. Both parties to the transaction are subject to a 2% tax rate. In the case of direct heirs or legatees of the originator, the applicable tax rate is 3%.

3.6.4. Income Tax applicable to Insurance Companies
This tax applies to the gross income of public or private entities acting as insurance companies. The minimum rates of this tax vary depending on the risks covered by the insurance (from 0.5% for life insurance, to 15% for fire).

3.7. Special Social Security Contributions
A general rate of 7.5% applies to the pension plan contributions made by employers to the Social Security Bank of Uruguay (“Banco de Previsión Social” – BPS).

3.8. Tax Treaties for avoiding duplicate international taxations
Uruguay has subscribed treaties for avoiding duplicate international taxations with Germany and Hungary, where the general guidelines applicable are those established in the Model of Agreement for Avoiding Duplicate Taxes (“Convenio para Evitar la Doble Imposición” – CDI) defined by the OECD (Organization for Economic Cooperation and Development).
Recently, Uruguay has also subscribed treaties for avoiding duplicate taxation or for data exchange (none of which are in force yet), with: Mexico (subscribed and ratified by the Uruguayan Parliament); Spain; Portugal; France (TIAE); Germany (re-negotiation of the treaty currently in force); Belgium; Liechtenstein; Malta; South Korea; Switzerland and Finland.

4.1. Treatment for Foreign Investors
The government applies a policy for the promotion of investments in general, and particularly in favor of foreign investments, liable of the same incentives as local investments.
The only exception is that of companies operating radio and television stations, which must be owned by Uruguayan citizens.
Foreign investments are not subject to authorizations or approvals, and, in what regards tax treatment, there are no differences between the tax regime for foreign investments and taxes applicable to local investors.

4.2. Tax Incentives
4.2.1. Exemptions on Investments
There are exemptions on the IRAE tax, to a maximum of forty percent (40%) for profits applied, during the fiscal year, to the acquisition of certain goods, by payers of the IRAE and IMEBA taxes who carry out industrial, extractive or agricultural and livestock activities.
Exemption of the referred tax also applies, up to a maximum of 20%, to profits applied – during the fiscal year – to:
– The construction and renovation of hotels, motels and roadside bars/hotels;
– The construction of buildings, or renovations thereof, meant for industrial, agricultural or livestock activities.
4.2.2. Benefit for Channeled Savings
This benefit consists of the deduction, for calculation of the IRAE tax, of the amount of documented contributions made, towards registered stock shares, by natural persons or legal entities included in a project or activity declared of national interest.

4.3. Regime applicable to Investments
This regime, as regulated by Law Nr. 16,906, includes the declaration of national interest relative to the promotion and protection of national and foreign investments in the territory. This regime confers the following benefits:
4.3.1. Automatic Tax Benefits
Applicable, in general, to all entities subject to the IRAE and IMEBA taxes who carry out industrial, agricultural, and livestock activities, as well as other specific services.
4.3.2. Tax Benefits for “Promoted” Companies or Activities
These benefits may be granted to companies that carry out activities in both the industrial and agriculture and livestock areas, as well as the trade and services fields, while, as opposed to the above-described cases, these do not have any limitations in regards to the goods that may be subject to the benefits.
4.3.3. State Guarantee
The State lawfully warrants to investors, including its own liability for damages, the exemptions, benefits and entitlements conferred by the Investors’ Law, for the terms established in each case.

4.4. Sectors of Activity with Special Incentives
The main sectors to be mentioned are:
– Tourism Industry
– Forestry and Citrus Growing Industry
– Exploitation of hydrocarbons
– Printing and Graphic Industry
– Naval Industry
– Free Trade Zones system

5.1. Legal Minimum Wage

The legal minimum wage is determined by the Executive Power of government. The current value is approximately US$ 240 per month. For specific business sectors, salaries are defined as a result of collective bargaining sessions that include the participation of the Executive Power of government in the Salary Councils scheme.

5.2. Working Hours

Daily working hours are limited to a maximum of eight, and a total of 44 hours of work per week in business activities and 48 hours for industrial activities. These limitations do not apply to higher-ranking personnel.

5.3. Overtime

The hours worked that exceed the legal or conventional limit for the working day must be paid at a twice the value of the regular wage on regular working days, and at 250% of the regular wage on holidays.

5.4. Social Benefits

5.4.1. Vacation Pay
For each full year worked, workers are entitled to twenty working days off by way of yearly vacation. As of the fifth year on the payroll, an additional vacation day is granted for every four full years of work.

5.4.2. Vacation Allowance
In addition to their vacation pay, workers are also entitled to a vacation allowance intended for a better enjoyment of the yearly vacation, amounting to 100% of the net sum received as vacation pay.

5.4.3. Supplementary Yearly Salary
This benefit called “aguinaldo” is calculated as one twelfth of the aggregated salaries received in the year prior to the payment date. It is usually paid in two installments (June and December).

5.4.4. Severance Pay
When the employment relationship is terminated by the employer without a reasonable cause, the worker is entitled to receiving a sum, by way of compensation, equivalent to one monthly salary for every full or fractional year of service, up to a maximum of six monthly salaries.

Workers who are paid on a daily basis are entitled to compensation after completing one hundred working days. Their compensation consists of the pay of two working days for every twenty five full days worked, up to a maximum of one hundred and fifty daily salaries.

This amount is subject to an increase for the case of workers sent to unemployment while on sick leave or recovering from an accident at work, as well as in the cases of pregnant female workers, bank employees, traveling salespeople, and dismissals based on union activities of the worker, among others.

When an employee is dismissed due to his/her notorious intentional misconduct at work, then there is no entitlement to receiving any severance pay.

6. SOCIAL SECURITY SYSTEM

The Uruguayan social security systems covers cases of old age, retirement, disability, illness, industrial accidents, maternity leaves, unemployment and death.

Registration in the system is mandatory for all workers, except for foreign employees carrying out their activities in free trade zones, in which case they may choose to be excluded from the system. Foreign workers subject to applicable international treaties subscribed by Uruguay may also be excluded from this obligation.

6.1. Special Social Security Contributions

Companies must make monthly payments of their share of mandatory contributions, in addition to deducting and rendering the contributions corresponding to employees, applicable to salaries actually paid to them.

For trading, industrial and services companies (except banks and financial entities) contributions are subject to the following rates:

Contributions Employee Employer
Pension Plan Contribution 15% 7.5%
Health Insurance 3% 5%

For agricultural and livestock exploitation establishment there is a fictitious taxable base that is calculated upon the number of hectares of the property and its potential productivity.

6.2. Labor Re-conversion Fund

The following contributions for the Labor Re-conversion Fund are also mandatory:
Employee: 0.125%
Employer: 0.125%

The Uruguayan social security systems covers cases of old age, retirement, disability, illness, industrial accidents, maternity leaves, unemployment and death.
Registration in the system is mandatory for all workers, except for foreign employees carrying out their activities in free trade zones, in which case they may choose to be excluded from the system. Foreign workers subject to applicable international treaties subscribed by Uruguay may also be excluded from this obligation.

6.1. Special Social Security Contributions
Companies must make monthly payments of their share of mandatory contributions, in addition to deducting and rendering the contributions corresponding to employees, applicable to salaries actually paid to them.
For trading, industrial and services companies (except banks and financial entities) contributions are subject to the following rates:
Contributions Employee Employer
Pension Plan Contribution 15% 7.5%
Health Insurance 3% 5%
For agricultural and livestock exploitation establishment there is a fictitious taxable base that is calculated upon the number of hectares of the property and its potential productivity.

6.2. Labor Re-conversion Fund
The following contributions for the Labor Re-conversion Fund are also mandatory:
Employee: 0.125%
Employer: 0.125%

Foreigners carrying out income-earning activities in Uruguay must obtain the corresponding documents for temporary (for periods of up to two years) or permanent residence.

The requirements for these permits are a clear criminal record from the previous place of residence, proof of means of support, and a health certificate.

Mercosur

The Southern Common Market (MERCOSUR), established in 1991, is formed by Argentina, Brazil, Paraguay, Uruguay, and Venezuela, with Bolivia and Chile as associated members of the bloc.

Mercosur’s main objective has been and continues to be the integration of the five member states, through the free circulation of goods, services, and production factors in a market of over 180 million people, the establishment of a common external tariff, the adoption of a common trade policy, the coordination of macroeconomic and sector policies, and the harmonization of legislation in relevant areas.

Attracting investment is also one of Mercosur’s leading objectives. In a highly competitive global scenario, in which countries strive to offer incentives to investors, forming a customs union provides a very favorable framework for the attraction of capitals. Even with all the difficulties arising from today’s challenging international economic context and the issues resulting from the restructuring of domestic economies, Mercosur has been one of the world’s leading recipients of direct foreign investments.