Chapter 7. Investment Climate
Investment Climate
Openness to Foreign Investment
The Government of Uruguay recognizes that foreign investment plays an important role in the continuing development of the economy, and maintains a favorable investment policy through a number of incentives. It grants equal treatment to both national and foreign investors, and foreign investors do not receive any additional benefits. Aside from a few sectors in which foreign investment is not permitted, there is neither de jure nor de facto discrimination towards investment by source or origin.
In 1998, the Uruguayan Government approved an investment promotion and protection law (no.16906) that declares that the promotion and protection of national and foreign investment is in the nation’s interest. The main aspects of the law are that foreign and national investments are treated alike, that investments are allowed without prior authorization or registration, that the Government does not prevent the establishment of investments in the country, and that investors may freely transfer abroad their capital and profits from the investment. There are no restrictions on technology transfer. In June 2003, the government established a single-window mechanism to channel all investment requests. 100% foreign ownership is permitted, except where restricted for national security purposes.
The Uruguayan Government does not generally require that a firm have specific authorization to set up operations, import and export, effect deposits and banking transactions in any currency, or obtain credit. No screening mechanisms apply on foreign or national investments. No special government authorization is needed for access to capital markets or to foreign exchange.
Uruguay has a history of maintaining state monopolies in a number of areas in which direct foreign equity participation is prohibited by law. Privatization and association with private capital is widely opposed by the population and the opposition parties. Several state-owned entities, however, have contracted with foreign-owned companies to provide specific services for a given period of time under Build-Operate-Transfer (BOT) regimes. Although private power generation is now allowed, the state-owned power company, UTE, still holds a monopoly on wheeling rights. The state-owned oil company, ANCAP, remains the only importer and refiner of petroleum products. Despite commitments to the IMF, the Uruguayan Government has yet to demonopolize oil refining and telecommunications (basic telephony). Cellular service is provided by ANTEL (through its subsidiary ANCEL) and a private firm (BellSouth) regulated by ANTEL. Local wireless loop systems, the installation and maintenance of public telephones, data transmission, and some value-added services are open to the private sector. While many port services were privatized in 1992, all Uruguayan ports are operated and administered by the National Port Administration, ANP. A state enterprise, OSE, controls most water and sewage services except in some resort areas on the coast. 51% of the state-owned airline PLUNA was sold to the private sector in 1996. The GOU had planned to sell the rest in 2002. The insurance and mortgage sectors were demonopolized in 1996. However, workers’ compensation insurance remains a government monopoly. Foreign investors are treated as nationals in privatization and concession programs and are allowed to participate in any stage of the process.
A budget law approved on February 2001 created the legal basis for the establishment of regulatory offices for telecommunications (URSEC) and electricity (UREE), and levels the tax treatment of public and private firms.
Although U.S. firms have not encountered major obstacles in Uruguay’s investment climate, some have been frustrated by the length of time it takes to complete bureaucratic procedures and by the numerous changes in rules or new taxes since 2001.
Conversion and Transfer Policies
Uruguay has maintained a long-lasting tradition of imposing no restrictions on the purchase of foreign currency or the remittance of profits abroad. Foreign exchange can be freely obtained.
Expropriation and Compensation
In the event of expropriation, the Uruguayan constitution provides for the prompt payment of fair compensation. There have been no expropriation actions taken in the recent past.
There are no laws that force local ownership, except in the areas reserved for the State.
Dispute Settlement
The investor is given the option of choosing between arbitration and recourse to the courts for the settlement of disputes. Although Uruguay is not a member of the ICSID (International Center for the Settlement of Investment Disputes), the Uruguayan Government has requested that Parliament agree to membership. Uruguay's legal system is based on a civil law system derived from the Napoleonic code. There are effective means for enforcing property and contractual rights. There is no government interference in the court system. The Judiciary is independent, but sometimes slow.
There are both commercial and bankruptcy laws. In the case of bankruptcies, creditors with real guarantees collect first, followed by the firm's employees and the government. Local firms usually wait too long to implement bankruptcy proceedings. Consequently, only few firms that enter into bankruptcy manage to pay their debts, and the majority close after some years.
Performance Requirements/Incentives
There are no specific performance requirements on which foreign investment is conditioned. The current investment law treats local and foreign investors equally, and does not provide preferential tax deferrals, grants, or special access to credit to foreign investors. There are no discriminatory or excessively onerous visa, residence, or work permit requirements inhibiting foreign investors. There is no requirement that nationals own shares, that the share of foreign equity be reduced over time, or that technology be transferred on certain terms. There are no government-imposed conditions on permission to invest.
By law, the government has established certain asset, value-added, and internal tax benefits, as well as social security payments and tariff reductions to certain activities. In addition, it provides preferential treatment for capital good imports and tax deferrals for exports. No export or import quotas are applied. Investments in sectors such as forestry, hotels, and agro-industries receive additional specific incentives.
A government decree establishes that local products or services of equal quality that are no more than 10% more expensive than foreign goods or services be given preference in government tenders. U.S. and other foreign firms are able to participate in government-financed or subsidized research and development programs on a national treatment basis.
Right to Private Ownership and Establishment
There are no restrictions on private ownership, the establishment of a business or engaging in any form of remunerative activity, except in areas declared to be of national security interest, or those in which the government maintains a legal monopoly (see Openness to Foreign Investment.)
Protection of Property Rights
Secured interests in property, both movable and real, are recognized and enforced. Mortgages exist, and there is a recognized and reliable system of recording such security interests. Uruguay has a legal system that protects the acquisition and disposition of all property rights, including land, buildings, and mortgages. Execution of guarantees is, however, usually a slow process.
In mid-2003, several political factions attempted to pass a bill that would alleviate the payment burden of Uruguayan dollar debtors who had been adversely affected by the peso’s devaluation. The law would have forced banks to re-negotiate the terms of their loans. However, the GOU opposed the initiative and succeeded in getting the country’s political parties and banks to agree to an “administrative solution.” This allowed for extending loan maturities and allowing debtors to make smaller payments on a negotiated basis. The government also eliminated the value-added tax on interest.
Protection of Intellectual Property Rights: Uruguay is a member of the World Intellectual Property Organization (WIPO) and a party to the Bern and Universal Copyright Conventions. It is also a member of the Paris Convention for the Protection of Industrial Property. In 2002, coordinating closely with U.S. and international IPR organizations, Uruguay passed new TRIPS-compliant copyright legislation. Previously in 1998 and 1999, Uruguay had passed trademark and patent legislation.
-- Copyrights: The new copyright law represents a significant improvement over the 1937 law, leading USTR to upgrade Uruguay from “Priority Watch List” to the “Watch List” in 2003. However, USTR believes that the lack of effective enforcement against widespread piracy still represents an obstacle for copyright owners in Uruguay. In its 2003 report, USTR also urged the Uruguayan Government to improve border controls, especially given Uruguay's role in the transshipment of pirated and counterfeit goods from other countries in Latin America, especially Paraguay. In 2000, the local Phonogram Chamber, the Uruguayan Video Association, and the Motion Picture Association launched aggressive anti-piracy campaigns that resulted in the prosecution and imprisonment of several people. Uruguay adhered to the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) in 1997, and should complete the ratification process by the end of 2004.
-- Patents: Patents are protected by Law No. 17164, which was passed on September 2, 1999. Invention patents have a twenty-year term of protection from the date of filing. The patents for utility models and industrial designs have a ten-year term of protection from the date of filing and may be extended once for five more years. The law provides for a lax definition of compulsory licensing and a vague determination of the "adequate remuneration" to be paid to the patent holder. Some U.S. industry groups are unhappy with the law and believe that its compulsory licensing requirements are not TRIPs consistent.
-- Trademarks: The Uruguayan Government approved a trademark law on September 25, 1998 that upgrades trademark legislation to TRIPS standards. Under this law, the registration of a trademark lasts ten years and can be renewed as many times as desired. It also provides prison penalties of six months to three years to lawbreakers. It is no longer possible to register a foreign trademark without proof of a legal commercial connection with the trademark. Enforcement of trademark rights is adequate, and has improved during the current administration as a result of an intense anti-smuggling campaign.
Transparency of the Regulatory System
Laws and procedures regulating foreign investment are transparent and streamlined. However, from time to time, the government allows debtors (especially those in the agriculture and mortgage sectors) to refinance their debts on very favorable terms and conditions. These kinds of regulations are unfair to other debtors who pay on time, and are a disincentive for them to honor their debts. This practice also forces well-managed firms to compete with those that do not pay their debts and taxes in a timely manner.
Efficient Capital Markets and Portfolio Investment
Foreign investors have easy access to credit on market terms. Although the private sector has access to a variety of credit instruments, access to long-term credits in the local banking sector may be difficult. (Please see Chapter 8 for a detailed description of the banking sector.)
Uruguay's capital market is underdeveloped and concentrated on public paper. There is no effective regulatory system to encourage and facilitate portfolio investment. Although there are two stock exchanges, operations with stocks are practically non-existent (only 17 firms are registered at one of the exchanges.) In 1996 and 1997, there was a boom in the issuance of commercial paper, but the market soon stalled. In 2002, only six firms issued obligations, and transactions involving commercial paper accounted for only 2% of total transactions in the secondary market. The vast majority of agents operating with investment funds are national, and the funds are mostly invested in Uruguayan public paper. Risk rating firms first established a presence in Uruguay in 1998.
There are no "cross shareholding" or "stable shareholder" arrangements used by private firms to restrict foreign investment. There are also no practices by private firms to restrict foreign investment, participation, or control of domestic enterprises.
Political Violence
There have been no significant incidents involving politically motivated damage to property or installations. Uruguay is a stable democracy where respect for the rule of law is the norm and where most of the population is committed to non-violence.
Corruption
Uruguay has strong laws to prevent bribery and other corrupt practices. In 2002, Uruguay was ranked 32nd in Transparency International’s Corruption Perception Index (second best after Chile in Latin America). A new law against corruption in the public sector was approved in 1998. Acceptance of a bribe is a felony under Uruguay's penal code. Money laundering is penalized with sentences of up to ten years (this also applies to Uruguayans living abroad). U.S. firms have not identified corruption as an obstacle to foreign direct investment. Several former Uruguayan officials and one judge were prosecuted in 2002 and early 2003.
Bilateral Investment Agreements
Uruguay has signed bilateral investment treaties with China, Spain, France, Great Britain, Chile, Belgium, Luxembourg, Hungary, Italy, Mexico, Panama, The Netherlands, Poland, Rumania and Switzerland. Bilateral investment treaties with Israel, Malaysia, Portugal, the Czech Republic, Sweden, and Venezuela are pending parliamentary approval. In addition, Uruguay signed Double Taxation Agreements with Germany, Korea and Hungary.
Uruguay does not have a bilateral investment treaty with the United States. However, a working group on investment under the Joint Trade and Investment Council created in April 2002 is reviewing the possibility of negotiating an agreement.
OPIC and Other Investment Insurance Programs
The Uruguayan Government signed an investment insurance agreement with the Overseas Private Investment Corporation (OPIC) in December 1982. The agreement allows OPIC to insure U.S. investments against risks resulting from expropriation, inconvertibility, war or other conflicts affecting public order. OPIC programs are currently used in Uruguay.
On June 20, 2002 the Uruguayan Government eliminated its decade-long exchange rate regime policy and allowed the peso to float freely. (The previous regime consisted of a 12%-wide band in which the peso-dollar exchange rate floated and permitted a de-minimis annual depreciation of 33%.) The action was in response to recent economic problems. There is no black market for currency exchange. The U.S. Embassy uses the official rate when purchasing local currency.
Labor
The Uruguayan labor force of some 1.2 million is well educated and adept in the application of modern industrial techniques. The government has instituted technical training programs to help meet industry's skilled labor requirements. At 97%, Uruguay’s literacy rate is the highest in Latin America and on par with that of the United States.
Uruguay’s social security overhead is high and increases an employer’s basic wage costs by almost 50%. A law approved in May 1998 provides incentives for companies that hire young people, including a reduction of between 12-18% in employer social security and healthcare contributions. In May 2001, the Uruguayan Government passed a bill that permits further reductions in social security payments by employers in several sectors. The social security system currently allows for retirement at age 60 for both men and women. Workers who become disabled on the job receive a monthly payment from the government equal to 70% of their salaries plus free medicine and medical care. The value of local manufactured goods reflects a relatively high percentage of labor content. Legislated labor and social security benefits add significantly to a firm's cost structure.
According to official statistics, the latest unemployment rate (Feb-April 2003) was 18.9% (approximately 200,000 people). The employment rate for the same period was 47.2%, and the activity rate was 58.2%. GDP contraction and an investment slump have been the key factors behind the unemployment rate. The unemployment rate has also increased as a result of several firms terminating their operations or implementing technical reconversion programs that made them more capital-intensive. The government provides six months of unemployment benefits for workers who have been laid off, and is examining the possibility of spreading the same amount of benefits out over a period of nine months. Real salaries contracted 0.3 and 10.7% in 2001 and 2002, respectively.
Uruguay has ratified a large number of ILO conventions that protect worker rights, and generally adheres to their provisions. The Uruguayan constitution guarantees workers the right to organize and strike, and union leaders are protected by law against dismissal for union activities. Labor unions are independent of government and political party control. Sympathy strikes are legal. The level of unionization in the private sector has steadily decreased since the return of democracy in 1985 due to: 1) a loss of jobs in the industrial sector; 2) an increase in jobs in the informal sector and in smaller companies where it is more difficult to form unions; and 3) a lack of Ministry of Labor initiative in regulating labor negotiations. There is no collective bargaining activity, and there have been no major labor union achievements since 1985. Current labor concerns include those related to salaries, the reinstatement of collective bargaining mechanisms, housing, job creation, and opposition to the government's economic policies. A February 2003 public opinion poll indicated that 52% of the population distrusts the leaders of the labor umbrella movement (PIT/CNT).
Foreign Trade Zones (FTZ) / Free Ports
All types of commercial, industrial, and service activities can be performed within the free trade zones. Activities carried out in a free trade zone are considered as taking place outside of the national territory. When goods from a free trade zone are introduced into the rest of the country, they are treated as “imports.”
Law No. 15921 of December 17, 1987 regulates the operation of FTZs within the country. The law allows storage and warehousing, manufacturing, and financial and data processing, and related activities to take place within FTZs. Nine FTZs are located throughout the country (one public, one mixed ownership, and seven private.) As MERCOSUR regulations treat products manufactured in all member state FTZs as extra-territorial, products manufactured by Uruguayan or foreign firms in Uruguayan FTZs are not eligible for MERCOSUR certificates of origin. Products manufactured in FTZs do not benefit from any MERCOSUR customs union advantages and must pay the MERCOSUR common external tariff when entering any MERCOSUR member country.
Both local and foreign-owned industries operating in an FTZ enjoy several advantages. They are exempt from all domestic taxes in effect or which may be created. There are two groups of exemptions -- customs duties and tax exemptions. The first group is applicable to the entry and exit of goods, while the second group is exclusively granted to the entities which have become free trade zone tenants and whose contracts the General Trade Authority – Free Trade Zone Department has duly approved. The only tax not covered by these exemptions is the employer contribution to social security for Uruguayan employees. Uruguayans must comprise 75% of the labor force employed by a user of the zone. The employer is free from payment of social security taxes for non-Uruguayan employees if those employees waive coverage under the Uruguayan social security system.
Goods, services, products or raw materials of foreign and Uruguayan origin may be brought into the zones, held there, processed, and re-exported without payment of Uruguayan customs duties and import taxes (goods of Uruguayan origin re-entering into FTZs will be treated as Uruguayan exports for all tax and other legal purposes.) Goods that enter Uruguayan customs territory from FTZs are subject to customs duties and import taxes. Industrial or commercial government monopolies are not honored within FTZs.
Foreign Direct Investment Statistics
Foreign direct investment (FDI) in Uruguay has been low (even by Latin American standards) in part because of the country’s small market size, the lack of major privatizations, and the small number of firms that base their MERCOSUR-wide operations locally. At 1.1%, Uruguay's FDI/GDP ratio for the 1997-2001 period is well below the Latin American/Caribbean average and that of its Southern Cone neighbors (Latin America/Caribbean 3.8%, Chile 7.5%, Brazil 4.4%, Argentina 3.9%, Paraguay 2.1%. Source: World Bank Development Indicators)
Since investments need not be registered, official statistics are not very reliable. According to the Central Bank, the stock of FDI declined from $2.4 billion in December 2001 to $1.4 billion in December 2002, mostly as a result of the fall in the asset value of foreign-owned banks and firms following the sharp 2002 economic contraction and devaluation.
A 1999 study by the Uruguayan Government identified 756 foreign companies, including firms with foreign capital participation. FDI in the non-financial sector amounted to $2.4 billion in the 1995-1999 period. The overall stock of FDI added up to $5.6 billion as of 1999. The study has not been updated.
According to the study, the United States was the largest single investor in Uruguay (33% of overall FDI), followed by Argentina and Spain. North America, Europe and MERCOSUR each accounted for one-third of the FDI. Various US firms have ceased operating in Uruguay since the beginning of the economic crisis in 1999, and there have been few new U.S. entrants.
Although figures on investment by sector are unavailable, most foreign investment in recent years has gone into forestry-related activities, industry, construction (i.e. hotels, office buildings and infrastructure), and mining.
Host country contact information for investment-related inquiries
Mr. Victor Angendscheidt
Executive Director
Uruguay XXI
Direccion de Promocion de Exportaciones e Inversiones
Plaza Independencia 831, of. 611
Montevideo, Uruguay
Tel: (5982) 900-2912 / 900-0318; Fax: (5982) 900-8298
E-mail: uruxxi@adinet.com.uy; web page: http://www.uruguayxxi.gub.uy