PRACTICAL GUIDE TO URUGUAY’S

FREE TRADE ZONE SYSTEM

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This document has been prepared by Ferrere Abogados to present an overview of the most relevant aspects of Uruguayan Free Trade Zone legislation which is frequently of most interest to foreign investors. It does not pretend to analyze in detail any of the laws, decrees or regulations referenced and it does not constitute on its own sufficient basis for making decisions without previously consulting with an attorney. Ferrere assumes no liability for the decisions adopted without prior, direct or specific consultation with our attorneys.

Ferrere (Montevideo)Av. Dr. Luis A. de Herrera 1248World Trade Center, Torre BMontevideo | UruguayPhone: (598 2) 623 0000Fax: (598 2) 628 2100Email: ferrere@ferrere.com

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Introduction.......................................................................3

1.Executive summary...........................................................4

2.Activities that can be undertaken in Aguada Park.................5

3.Tax advantages.................................................................7

4.Other benefits..................................................................8

5.Steps to start operating...................................................9

6.Legal security.................................................................11

7.Government sight...........................................................12

Regulatory references........................................................13

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INTRODUCTION

Uruguayan free trade zones are areas located within national territory that are not part of Uruguay’s customs territory and which provide broad tax exemptions.

The free trade zone legal regimen is set forth in Law No. 15,921 –passed on December 17, 1987 – and related amendments, decrees and resolutions.

We have created this practical guide to facilitate understanding of the system and to aid companies in analyzing it. It seeks to respond to the chief concerns that generally arise upon assessing the possibility of setting up business in a free trade zone.

The seven chapters of this guide cover the following aspects:

// What activities can be engaged in at Aguada Park? //

// What are the tax benefits and the system for social security contributions? //

// Are there other tax incentives? //

// What steps must be taken to start operating and what types of corporate organizations

can be adopted by users? //

// Is it a stable and secure regimen for investors? //

// Are companies overseen by government agencies? //

The first chapter summarizes the main aspects of the system in five points.

As explained in this guide, the Uruguayan system provides for almost absolute tax exemption, which goes far beyond the tariff benefits that other free trade zones in the region tend to provide.

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1. EXECUTIVE SUMMARY

// Aguada Park is a free trade zone exclusively for services.1 The companies setting up in Aguada Park may engage in all types of services provided they are rendered abroad, to other companies established in Aguada Park,2 or to companies established in other Uruguayan free trade zones.3

// To operate in Aguada Park it is necessary to become a free trade zone “user”.4 Users may adopt a variety of corporate forms (for example: corporation, branch, limited liability company), but in all cases the company’s purpose must be limited to providing services within the free trade zone and/or abroad. Additionally, to obtain “user” status it is necessary to sign a user agreement and submit a Business Plan. All of this must be approved by the government agency regulating and overseeing Free Trade Zones in Uruguay.5 Government agency approval takes approximately two months.

// Regardless of the type of company, users are exempt from all national taxes (Economic Activity Income Tax, Nonresident Income Tax, Net Worth Tax, Value-Added Tax),6 with the exception of social security contributions7 and taxes on income of the user’s employees.

// Activities in Aguada Park have three limitations: (i) companies can only perform services;8

(ii) save specifically established exceptions,9 companies cannot provide services or perform any activity whatsoever within Uruguayan non-free territory;10 and iii) at least 75% of the company’s employees in Aguada Park must be Uruguayan.11 Noncompliance with any of these requirements gives rise to sanctions that can imply forfeiture of all tax benefits.12

// The State has declared promotion and development of free trade zones in Uruguay to be in the national interest.13 It likewise assures users of Uruguay’s different free trade zones the tax exemptions and benefits for the full term of their user agreements, under liability for damages.14

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2. ACTIVITIES THAT CAN BE UNDERTAKEN IN AGUADA PARK

All types of service activities may be undertaken in Aguada Park, provided they are rendered from the free trade zone to other companies within Aguada Park, to companies established in other Uruguayan free trade zones, and/or abroad.

For example, without limitation, following are some examples of activities that can be performed:

// International outsourcing// Shared services centers// Call centers // Financial services// Professional services// IT services// Distance training

As exceptions, Uruguayan rules allow the following services to be provided to Uruguayan non-free territory:

// International call centers, except those whose sole or main target is non-free national territory15

// Electronic mailboxes // Distance training// Issuance of electronic signature certificates16

// Services for production of logical supports, IT advice and IT training17 // Management, administration, accounting and similar services provided to related entities devoted to provisioning and port logistics services, provided they do not exceed 20% of total income for the year18

Beyond these cases, the Executive Branch may authorize other activities that are beneficial to the national economy or for economic and social integration of States.19

The tax exemption of the Free trade zone does not apply to the aforesaid services provided to non-free territory.

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For the first four services mentioned (international call centers, electronic mailboxes, distance training, issuance of electronic signature certificates), the tax treatment will be the same as if the services where rendered from abroad.

Moreover, if the free trade zone user renders any other service listed above (services for production of logical supports, IT advice and IT training, management, administration, accounting and similar services provided to related entities devoted to provisioning and port logistics services, provided they do not exceed 20% of total income for the year) free trade zone tax exceptions will not apply to those specific services and the tax user must pay taxes under the general tax system in relation to those services.20

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3. TAX ADVANTAGES

The Free Trade Zone Law (No. 15,921) establishes that free trade zone users are exempt from all current and future national taxes.21

This exemption includes, among others, Income Tax on earnings obtained by users, Net Worth Tax on the assets and credits held by users, and Value-Added Tax. It also covers distributions of dividends by users to their local or foreign, individual or legal entity shareholders.

The circulation of goods and services within the free trade zone is also covered by the Value-Added Tax exemption.22 If services are provided within the free trade zone by a non-user, they will be exempt from VAT only if because of their nature they cannot be provided from outside the free trade zone.23

The broad exemption mentioned in the first paragraph does not cover taxes on the income of employees working for free trade zone users or special social security contributions.24

For Uruguayan employees remuneration is subject to payment of Individual Income Tax (IRPF) at progressive rates of from 0 to 25%. For social security contributions the same regimen applicable in the rest of national territory applies to free trade zones. In the case of Uruguayan employees the company must withhold approximately from 19.625% to 21.125% of their nominal remuneration as employee contribution, save exceptional situations where the percentage is less. In turn, the company must pay approximately 12.625% of the employees’ nominal remuneration as employer contribution.

Foreign employees, instead, may opt out of the Uruguayan social security system.25 If they take this option, neither the company nor the foreign employee have to make the aforesaid contributions. Additionally, the decision to opt out of the Uruguayan social security system allows the foreign employee to choose between paying the Personal Income Tax (IRPF) or the Nonresident Income Tax (IRNR) at a fixed rate of 12% on nominal remuneration.26 The tax must be paid in by the company, which must withhold the tax amount upon paying remuneration to its employees.

It is important to note that users cannot have over 25% foreign personnel. Except upon authorization by the Ministry of Economy and Finance, 75% of personnel working at the company must be Uruguayan, otherwise the company may forfeit its tax benefits.27

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4. OTHER BENEFITS

In addition to tax benefits, other benefits are available to users:

// Government monopolies on utility services are not applicable in free trade zones.28

Consequently, for example, a company established in a free trade zone would be authorized to hire telephone service from a company other than the State-owned telecom.

// Foreign exchange, securities and precious metals may enter and leave free trade zones freely and circulate freely within them.29

// Goods and raw materials introduced from non-free territory to the free trade zone are considered exports. Similarly, provision of services to the free trade zone is governed by the rules on exports of services.30 Industrial services provided on goods sent from the free trade zone to non-free national territory under temporary admission are considered exports of services and hence are not subject to VAT.31

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5. STEPS TO START OPERATING

To be entitled to the tax benefits mentioned in the foregoing chapter the company must obtain User status. In the case of a legal entity, the first step for obtaining User status is to choose the corporate vehicle that is going to be used.

a. Organization of a company

The investor can choose the corporate vehicle most in line with its needs (corporation, branch, limited liability company, or others).

Company shareholders may be local or foreign individuals or legal entities, and shares may be registered or bearer.

The sole restriction is that the purpose of the company or branch must be strictly limited to the provision of services within the free trade zone and/or abroad.

If the investor decides to organize a company, it may opt between a tailor-made or an off-the-shelf company. Organization of a tailor-made company takes approximately four months as of signature of the organization papers. The timeframe for organizing an off-the-shelf company is approximately 72 hours as of remittance of the pertinent documentation to the organizer.

If the decision involves organizing a branch of a foreign parent it is not necessary to amend the parent’s bylaws, provided the bylaws allow it to act outside the country of its incorporation.

To accredit the above it will be necessary to produce the following documentation:

// Notarized copy of parent company’s bylaws and any amendments.

// Certificate of existence and representation of parent.

// Minutes of meeting of parent’s shareholders or board of directors (as applicable) resolving to set up a branch in Uruguay, allocating capital and appointing representative/s of the branch. We note that while there are no residence or nationality requirements for the branch’s legal representative, as of the tax reform that took effect on July 1, 2007, the branch must have a tax representative residing in Uruguay.

// Granting of powers of attorney to represent the company and perform procedures for registration.

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Once such documentation has been legalized, the process under Uruguayan law for recognition of the parent takes from 30 to 45 days. The process involves:

// Filing with the National Registry of Commerce of the incorporation papers, the company resolution to establish a branch in Uruguay, appointment of the person/s who shall administer or represent same, and indication of the capital allocated.

// Making the publications required by law for companies organized in Uruguay, according to type.

// Registering the branch with Uruguayan tax and social security authorities.

We note that the accounting books of such companies must necessarily be filed with authorities in Uruguayan pesos.

b. Execution of a (direct or indirect) user agreement

Once the company is established, the user must sign an agreement with the free trade zone operator. This would be the case of a direct user.

The other possibility is to become an indirect user, by executing an agreement with a direct user to sublease use of its facilities.

c. Business Plan preparation

Together with the direct or indirect user agreement, the company must file a detailed description of the activities to be performed, a business plan and the investment to be made for the first three years, and indication of the number of persons to be employed.

Similarly, if the company has registered shares it must file a list of its shareholders and their domiciles. If the company has bearer shares it must report the names and domiciles of its directors.32 If the company is the affiliate of a foreign company without establishing a branch, it should indicate the parent company abroad and where it is located.

d. Authorization of Free Trade Zone Area

Once the documentation has been prepared, it is to be filed with the Free Trade Zones Area for consideration. Normally that authority takes two months to analyze the documents and to grant the applicant User status. Upon approval, the company may begin operating and enjoying all the benefits mentioned in chapter three.

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6. LEGAL SECURITY

The Free Trade Zones Law (No. 15,921) declares the promotion and development of free trade zones to be in the national interest.33

In the same Law the Uruguayan Government guarantees free trade zone users the tax exemptions and benefits for the full term of their user agreements, under liability for damages. The same commitment was included in the decree authorizing creation of Aguada Park.34

By virtue of the above, any change detracting from the user’s situation during the term of the agreement must be indemnified by the Uruguayan Government.

The rules also establish that if the Executive Branch were to revoke the free trade zone operator’s authorization, the Executive must adopt the measures necessary to maintain infrastructure and other essential services for the free trade zone to continue operating normally.35

From a political standpoint, we note that the free trade zone system has been in place for over 30 years in Uruguay and over that time the different administrations have tended to step up the system. Evidence of this is that there are currently 12 free trade zones that were authorized under administrations headed up by different political parties.

Additional proof of the political commitment assumed by the Uruguayan Government in connection with free trade zones is the fact that the tax advantages afforded to free trade zone users have remained unaffected despite the changes introduced in the tax reform law implemented in 2007.

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7. GOVERNMENT OVERSIGHT

Free trade zones are subject to oversight by the Free Trade Zones Area (an agency of the Ministry of Economy and Finance) which –among other powers- has the authority to approve user establishment.36

Additionally, given that free trade zones are part of Uruguayan territory, companies established there are subject to control by the different government authorities on all companies within national territory. For example, free trade zone users must file their financial statements with the General Revenue Service per applicable requirements. Similarly, they must comply with all labor and social security rules applicable in Uruguay and may be inspected by the respective authorities.

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Regulatory References 1. Resolution 486/007, art. 1: “ITSEN S.A is hereby authorized to operate a private free trade zones for services under the regimen of Law 15,921 of December 17, 1987, its Regulatory Decree No. 454/988 of July 8, 1988, and other applicable rules (…).”

2. Law 15,921, art. 2 (as drafted in art. 65 of Law 17,292): “Free trade zones are publicly or privately owned areas of national territory, fenced in and efficiently isolated, as determined by the Executive Branch upon the advice of the Honorary Free Trade Zones Advisory Commission, for development therein, with the tax exemptions and other benefits set forth in this law, of all types of industrial, commercial or service activities, including (…) C) Provision of all types of services not restricted under national law, both within the free trade zone and from same to third countries (…).”

3. Law 18,083, art. 102: “The companies indicated in article 17 of Law No. 15,921 of Dec-ember 17, 1987 may engage in all types of activities outside national territory or within a free trade zone to the benefit of direct or indirect users of any free trade zone.”

4. Law 15,921, art. 14: “Free trade zone users are all individuals or legal entities who acquire the right to engage therein in any of the activities referred to in article 2 (...).” In turn, art. 15 establishes that: “Direct users are those who acquire the right to operate in a free trade zone via an agreement with the free trade zone operator, be it the Government or a duly authorized private party. In all circumstances, for these purposes, the Government may contract directly through the Free Trade Zones Office and the user is to provide a guarantee. Direct users are those who acquire the right to operate in a free trade zone by means of an agreement executed with a direct user to use or enjoy its facilities.”

5. Law 15,921, art. 16: “Agreements executed by free trade zone operators with direct users, or executed by direct users with indirect user, and which regulate rights of free trade zone use shall be deemed nonexistent if they have not first been approved by the Free Trade Zones Office.”

6. Law 15,921, art. 19: “Free trade zone users are exempt from all existing or future national taxes, including those which by law require specific exemption, with respect to the activities they perform therein.”

7. Law 15,921, art. 20: “The aforesaid tax exemptions do not include special social security contributions and the legal benefits of a pecuniary nature established for nongovernmental social security persons under public law. When the foreign personnel working in a free trade

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zone opts out (in writing) of the Uruguayan social security system there shall be no obligation to make the pertinent contributions.”

8. Resolution 486/007, art. 1: “ITSEN S.A. is hereby authorized to operate a private free trade zone for services (…).”

9. An example of such exceptions is set forth in the Decree of March 20, 2006, which esta-blishes that free trade zone users may engage in services of software production, IT advice, and IT training, from a free trade zone to non-free territory, which until then was not permitted for them. The decree indicates that when this is the case, companies must pay taxes per the general tax regimen, i.e., they are not entitled to the tax benefits available to free trade zone users.

10. Law 15,921, art. 14: “(...) Companies established in free trade zones cannot engage in industrial, commercial and service activities outside of same.”

11. Law 15,921, art. 18: “Free trade zone users must employ in the activities they perform therein at least 75% (seventy-five percent) of natural or legal Uruguayan citizens, in order to maintain their status as users and the tax exonerations, exemptions, benefits and rights affor-ded them by this law. In exceptional cases this percentage may be reduced upon authorization by the Executive Branch, in the light of special features of the activity to be performed and reasons of general interest.”

12. Law 15,921, art. 42: “Violations and infractions of this Law, its regulations and contract stipulations shall be penalized by the Executive Branch: a) with a fine of up to N$ 50,000,000 (fifty million new pesos) to be adjusted per the Consumer Price Index established by the General Office of Statistics and Census; (b) with a prohibition from (…) performing any operation as user for a specific period; and (c) with forfeiture of the exemptions and other benefits afforded by this law.”

13. Law 15,921, art. 1: “The promotion and development of free trade zones, for the purpose of promoting investment, expanding exports, increasing use of national labor, and fostering international economic integration, are declared to be in the national interest.”

14. Law 15,921, art. 25: “The Government, under liability for damages, guarantees the user during effectiveness of its agreement the tax exemptions, benefits and rights that this law affords the user.”

15. Decree 71/001, art. 3: ”The number of incoming and outgoing calls, of telephone services provided by international call centers to national territory must be less than 50% of the total calls of the telephone services provided by such international call centers.”

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16. Law 15,921, art. 2 (as drafted in art. 65 of Law 17,292): “(...) Free trade zone users may also provide the following telephone or IT services from free trade zones to non-free na-tional territory, respecting government exclusivities, monopolies and/or public concessions: 1) international call centers, excluding those solely or primarily for national territory; 2) electronic mailboxes; 3) distance training; 4) issuance of electronic signature certificates.

The above services shall receive the same tax treatment as services provided from abroad as regards the provider, as well as regards the deductibility thereof by the receiver.” 17. Decree 496/007. art.1: “Free trade zone users may engage in the following services from free trade zones to non-free national territory: a) logical support production services, IT advice, and IT training.”

18. Decree 496/007, art. 1: “ (…) b) management, administration, accounting and similar services provided to related entities devoted to provisioning and port logistics services, provi-ded rendering of such services does not exceed 20% (twenty percent) of total income for the year.”

19. Law 15,921, art. 2: “Free trade zones are publicly or privately owned areas of national territory, fenced in and efficiently isolated, as determined by the Executive Branch upon the advice of the Honorary Free Trade Zones Advisory Commission, for development therein, with the tax exemptions and other benefits set forth in this law, of all types of industrial, commercial or service activities, including (…) D) others that, at the discretion of the Executive Branch, are beneficial for the national economy or for the economic and social integration of States.”

20. Law 15,921, art. 2: “(…) In the event that by regulation the provision of additional servi-ces from the free trade zone to non-free territory is authorized, such services shall be covered by the tax regimen in effect at the time of the authorization, which may be established based on permanent tax withholding regimens, as established by the Executive Branch. ”

21. Law 15,921, art. 19: “Free trade zone users are exempt from all existing or future national taxes, including those which by law require specific exemption, with respect to the activities they perform therein.”

22. Decree 454/988, art. 43: “Exemption from Value-Added Tax shall apply to: a) the circu-lation of goods and the provision of services in free trade zones, (b) the introduction of goods from abroad to free trade zones.”

23. Decree 220/998, art. 1: “The operations included in the concept of exports of services are: (…) 7) Services rendered exclusively in (…) free trade zones defined per Article 1 of Law No, 15,921 of December 17, 1987. For such services to be considered exports they must

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necessarily be provided in the said areas (…).” This criterion was confirmed by the General Revenue Service in various revenue rulings (for example: Rulings Nos. 4734, 4865 and 4935). 24. Law 15,921, art. 20: “The aforesaid tax exemptions do not include special social security contributions and the legal benefits of a pecuniary nature established for nongovernmental social security persons under public law. When the foreign personnel working in a free trade zone opts out (in writing) of the Uruguayan social security system there shall be no obligation to make the pertinent contributions.” 25. Law 15,921, art. 20: “(...)When the foreign personnel working in a free trade zone opts out (in writing) of the Uruguayan social security system there shall be no obligation to make the pertinent contributions.”

26. Law 18,083, Title 7, art. 7: ” (...) Non-Uruguayan nationals rendering personal services in free trade zones and excluded from the general Social Security Administration contribution re-gimen, pursuant to article 20 of Law No. 15,921 of December 17, 1987, may opt to pay taxes on their employment income via the Nonresident Income Tax. The aforesaid option may only be exercised with respect to those services rendered exclusively in the free trade zone, and such services may not directly or indirectly form part of other services provisions to residents in non-free national territory.”

27. Decree 454/988, art. 33: “In cases where a user wishes to employ more than twenty-five percent foreign personnel it must file such a request in writing with the Free Trade Zones Office, indicating the grounds for same. The said Office shall submit a report to the Ministry of Economy and Finance for its decision.”

28. Law 15,921, art. 24: “Government agencies that supply inputs or services to free trade zone users may establish special promotional rates for same. Government industrial and com-mercial services monopolies shall not apply in free trade zones.”

29. Law 15,921, art 38: “Securities, foreign and national currency, and precious metals may enter and leave free trade zones freely and be held, circulated or transferred freely therein.

30. Law 15,921, art. 21: “(…) Goods, services, merchandise and raw materials coming from non-free national territory and brought into free trade zones shall be governed by the same rules in effect for exports at that time.”

31. Decree 220/998, art. 34: “Operations included in the concept of services exports are: (…) 4) industrial services rendered in national customs territory, provided they comply with the following conditions: a) that such services are performed on goods consigned from outside national customs territory, under a temporary admission regimen, without exchange operations and with the consignor maintaining ownership thereof during their stay in national customs

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territory; and (b) that the said goods are brought in under the framework of the said regimen directly by the manufacturer providing toll manufacturing services, who must reexport same outside national customs territory and shall be the only one recognized as exporter of services. Reexported merchandise may in no case be brought into national customs territory in the same state, or transformed, or as part of other goods. The General Revenue Service and the National Customs Service shall establish the pertinent controls to ensure compliance with the conditions set forth in this section.”

32. Resolution by Ministry of Economy and Finance, General Office of Trade, Free Trade Zones Office (May 9, 2006), art. 1: “As of June 1, 2006, the following documentation is to be filed together with direct and indirect user agreements submitted for approval of the Free Trade Zones Office of the General Office of Trade: (a) if the user is a registered share corporation, it must include a list of shareholders, including domiciles of same at the date of filing of the agre-ement; if it is a bearer share corporation, it must include the name and domicile in Uruguay of the members of the Board of Directors in office at that date. Notwithstanding compliance with the above, when the user is the affiliate of a foreign company without establishing a branch or permanent representation, the foreign parent and the location of its offices must be identified; (b) brief presentation of the business plan to be implemented over the first three years; (c) detailed indication of number of persons to be employed.”.

33. Law 15,921, art. 1: “The promotion and development of free trade zones, for the purpose of promoting investment, expanding exports, increasing use of national labor, and fostering international economic integration, are declared to be in the national interest.”

34. Resolution 486/007, art. 3: ”The Government, under liability for damages, assures the free trade zone users that it authorizes, during the effectiveness of their respective agreements, the tax exemptions, benefits and rights afforded by Law No. 15,921 of December 17, 1987.”

35. Decree 454/988, art. 22: “In the event that authorization to operate is revoked, the Executive may order adoption through the Free Trade Zones Office of the necessary transitory measures for maintenance of the infrastructure and supply of essential services for proper and normal functioning of the free trade zone (…). The measures ordered as indicated above shall not imply substitution or assignment to the Free Trade Zones Office of the agreements executed between the users and the operator.”

36. Law 15,921, art. 5: “Administration, supervision and control of free trade zones shall rest with the Ministry of Economy and Finance through the Free Trade Zones Office, which may be granted appropriate authority for proper fulfillment of its functions.”

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