Uruguay: Doing Business In

The Uruguayan system of law is based in positive law (which involves private law (civil and commercial law) public law, among others. Our Constitution in place, has a presidential system of government. Such government is divided into three independent Powers: Executive, Legislative and Judicial. We have the Supreme Administrative Court (“TCA”) which is not part of the Judicial Power but it is a Court established by our Constitution.

Despite there are many type of vehicles available to perform business, the most commonly used are Corporations, Simplified Stock Corporations and Limited Liability Companies.

Companies may also register as a branch of a foreign company. The branch is the same foreign legal entity that is registered to act in the country complying with the required formalities. The foreign company that wishes to register as branches, must designate a branch administrator and indicate the capital assigned.

Non-domestic entities may develop activities in Uruguay by establishing a Permanent Establishment or may set up operations in Uruguay by adopting the structure of a local entity or a branch of a foreign enterprise, if its purpose is to perform business in Uruguayan on a regular basis. However, if its purpose is not to perform business in Uruguayan on a regular basis, non-domestic entities are recognized by law and can perform isolated acts and appear before court without need to perform any administrative procedure.

Corporations (SA): There is no minimum capital required to establish a corporation. In this type of corporation capital is expressed in shares, generally bearer or nominative. At the time of incorporation of the corporation, 25% of the authorized capital must be paid in and the remaining 25% must be subscribed. The Law does not require the integration of all the capital.

Limited Liability Companies (SRL): There is no minimum capital required to establish an SRL and its paid in capital is represented by social quotas. At least 50% of the cash contribution or 100% of the in-kind contribution must be subscribed at the time of incorporation, with a two-year term to contribute the 100% of the capital.

Simplified Stock Corporations: There is no minimum capital required to establish a Simplified Stock Corporationsand its capital is represented by shares (nominative or registered shares -bearer shares are not allowed). Each shareholder must pay in 10% of its contribution in cash or 100% of the contribution in kind at the time of incorporation, with a term of 2 years to contribute the rest.

These are the different types of vehicles in order to establish in Uruguay and their main characteristics:

Corporations:

1. Shareholders: Minimum: 2 shareholders for its incorporation, Maximum: unlimited.
2. Capital: Expressed in shares, generally bearer or nominative. 25% of the authorized capital must be paid in and the remaining 25% must be subscribed. The Law does not require the integration of all the capital.
3. Purpose: The bylaws must establish the activities that the company may carry out.
4. Liabilities: The liability of the shareholders in an S.A. is limited, in principle, to the amount of their contributions.
5. Transfer of shares: Restrictions on the transfer of shares may be established in the bylaws, but in principle, they are freely transferable.
6. Administration: The administration will be in charge of a Board of Directors or Administrator, natural or juridical person, appointed in the bylaws or by the Shareholders’ Meeting.

Simplified Stock Corporations:

1. Shareholders: Minimum: 1 shareholder, maximum: unlimited.
2. Capital: The capital is expressed in shares (nominative or registered). Each shareholder must make 10% of its contribution in cash or 100% of the contribution in kind at the time of incorporation, with a term of 2 years to contribute the rest.
3. Purpose: It may state in its bylaws that its purpose is “Any lawful activity”.
4. Liabilities: The liability of the shareholders of a SAS is limited, in principle, to the amount of their contributions.
5. Transfer of shares: In principle, they are free to circulate freely, but restrictions may be established in the bylaws that imply the prohibition to dispose of the shares for a maximum term of 10 years.
6. Administration: SAS are not required to have an administrative body. It may be established in the bylaws, but in all cases it must be established that the company must have at least one legal representative.

Limited Liability Company:

1. Partners: Minimum: 2 partners, maximmum: 50 partners.
2. Capital: The capital is expressed in social quotas. At least 50% of the contribution in cash or 100% of the contribution in kind must be subscribed at the time of incorporation, with a term of two years to contribute 100% of the capital.
3. Purpose: The articles of association must establish the activities that the company may carry out.
4. Liabilities: The liability of the partners in an S.R.L. is limited, in principle, to the amount of their contributions, except that they are also liable for salary, tax and social security debts.
5. Transfer of social quotas: In principle, the social quotas are freely freely distributable, although the consent of 75% of the capital is required in SRLs with 5 or less partners and 100% in those companies with more than 5 partners.
6. Administration: In the case of an S.R.L. with 20 or less partners, the administration and representation of the company will correspond to one or more persons, partners or not, designated in the articles of incorporation or subsequently. In the case of an S.R.L. with more than 20 partners, its administration regime is the one applicable to S.A.’s.

Nowadays, the most common type of entities used in Uruguay are the Corporations and SAS.

Corporations: The administration of corporations shall be in charge of an administrator or a board of directors.

The articles of incorporation may delegate to the shareholders’ meeting (highest corporate authority) the determination of one or the other form of administration and the number of members of the board of directors.

In the case of open corporations, the administrative body shall necessarily be a board of directors.

Simplified Stock Corporations: The bylaws of the simplified stock corporation shall freely determine the organizational structure of the corporation and other rules governing its operation. In the absence of statutory stipulation, it shall be understood that all the functions provided for corporations shall be exercised by the shareholders’ meeting or by the sole shareholder, and that the functions of administration and representation of the corporation shall be performed by the legal representative.

During the time the corporation has only one shareholder, the latter may exercise the powers conferred by law to the various corporate bodies.

This corporations are not obliged to have a collective administrator, board of directors or administrative body.

Limited Liability Company: Teh bylaws of the SRL can establish the existence of an Administrator. In that scenario, the administrators partners are also liable for the payment of the company’s income tax on Economic Activities.

Please fin the answer in question 5.

Regarding the local residency or nationality there are no general restrictions.

Yes you can work with commercial agents or resellers. The main conditions of this kind of structures shall be agreed by the implicated parties and stipulated in an agreement.

However, please take into consideration that the existence of a dependent agent with power to conclude contracts on behalf od non resident company could be trigger the existence of an agency permanent establishment for Income tax on economic activities purposes.

No. However, companies in certain industries (financial industry, for example) or companies that are public companies (e.g. companies that publicly issue and trade its shares) must follow certain corporate governance standards.

Capital injection is available and admitted by law in order to provide the entity with capital.

Every capital injection shall be adopted by Extraordinary Shareholders Meeting without need of administrative approval (as long as the bylaws do not require another procedure).

Loans can also be agreed with third parties or even with shareholders (observing certain matters).

In the case of corporations, it is compulsory to distribute as dividend to the shareholders at least 20% (twenty percent) of the net proceeds of each fiscal year.

The obligation to pay dividends in accordance with the provisions of Law N° 16.060 shall not apply when so expressly resolved in a well-founded shareholders’ meeting, with the concurrence of shareholders representing at least 75% of the capital stock and the favorable opinion of the auditors, if any.

The provisions of this article shall not apply when the profits of the year are to be used to reintegrate the legal reserve or to cover losses of previous years.

In the case of merger, spin-off, transformation, extension or early dissolution of the corporation, transfer of the domicile to a foreign the corporate purpose and increase of the capital stock, or total or partial reintegration of the integrated capital, both on first and second call, the resolutions shall be adopted by the affirmative vote of the absolute majority of shares with voting rights, unless the articles of incorporation provide a greater majority.

No binding instructions are regulated. However, the shareholders meeting is the maximum authority, and has exclusive powers to resolve certain matters (e.g. the appointment or removal of administrators).

At the present time in Uruguay, there is no type of norms that can be described as “principal”. Without prejudice to the above, we should mention that for the last 10 years or so, there has been a trend in our country towards legal protection for victims of labour and sexual harassment. As well as the eradication of this scourge.

The aforementioned trend was reinforced in our country, with the ratification by Law No. 19.849 of the International Labour Convention No. 190 on Moral and Sexual Harassment

On the other hand, it is also noted that in our country there is a protective regulation against certain groups of employees such as: i– unionized employees (or union leaders);

ii– employees who have a certain disability (and have been declared as such by the respective bodies); iii– older employees; iiii– employees who are victims of domestic violence, among others

In Uruguay we have a free dismissal system.

This means that no prior notice is required and in principle and except for special statutes, no cause for dismissal is required.

The employer must pay the severance payment to the employee within 10 business days following the termination. Otherwise, the severance credit will generate a 10% penalty on the amount of the dismissal, an update of the amount of the payment by the consumer price index and will also generate an interest of 05.% per month.

In the cases where a reasonable cause is required to dismiss the employee, they concern the dismissal of union delegates, dismissal while the employee is certified due to common illness, or due to work accidents or professional illness, or dismissal of disabled personnel.

Regarding costs. In the event that the employer does not pay the employee the corresponding severance payment, the employee must file a lawsuit, which has no cost for him (except for the payment of the attorney’s fees).

On the other hand, we point out that at the moment there is no regulation on collective dismissals.

Unfair dismissal

There is no regulation at the moment.

The intervention of the union, in repressing a claim for reinstatement or reinstatement of the dismissed or discriminated dismissed. This is regulated in Law No 17,940. There are not entities which are exempt from the corresponding regulations.

Yes. In Uruguay, the definition of bribery is established in Article 159 of the criminal code, together with Law No. 17.060 and Decree 30/03, which establish norms referring to the misuse of public power (corruption).

These rules are applicable to public officials of all state agencies, state services or entities, as well as non-state public persons (legislative branch, executive branch, judicial branch, court of accounts, electoral court, etc.).

These rules do not have extraterritorial reach

The Integral Anti-Money Laundering Law, No. 19,574 is one of the most important laws in this regard, there is also Law No. 14,095 on Economic Crimes of the Central Bank of Uruguay.

Under certain circumstances, there may be an obligation to report this type of crime. In general terms, the obligation applies (depending on their particularities) to persons and organizations operating in certain regulated sectors, such as banks, lawyers, accountants, casinos and real estate agents. Likewise, Article 6 of Law 14.095 establishes the obligation of public officials to report the economic crimes provided therein.

Money laundering and terrorist financing are regulated by Laws 19.574 y 19.749. Broadly, the legislation: (i) requires obliged entities to undertake appropriate customer due diligence; (ii) requires obliged entities to establish an internal money laundering reporting function; (iii) criminalizes as money laundering the action that converts or transfers goods, products or instruments that come from the criminal activities established in article 34 of this law.

No

According to applicable law, the financial statements must be prepared and presented in accordance with appropriate accounting standards, which must be submitted for approval by the partners or shareholders within a period not exceeding one hundred and eighty days from the end of the fiscal year by means of an ordinary general meeting.

The companies, whatever their form, must file their financial statements with the state control body within the terms established by the regulations if its income at the close of the annual fiscal year, exceeds 26,300,000 Indexed Units (aprox.USD 4,965,075), or 4,000,000 Indexed Units (aprox. USD (475,000) if at least 90% of such income generates income that is not of Uruguayan source. Financial statements must also be filed before the Central Bank of Uruguay in case of some financial regulated entities or public companies (e.g. companies that publicly issue and trade its shares).

The company may not distribute profits resulting from the corporate management without having previously registered the financial statements corresponding to the last fiscal year closed.

The financial statements shall remain at the registering entity for a period of three years at the disposal of any interested party.

The legal annual compliance shall include the celebration of an Ordinary Shareholders Meeting and the approval of the balance sheet.

The Ordinary Shareholders Meeting shall celebrated annually and it has to consider and resolve the following matters:

1. Balance sheet (statement of assets and liabilities and statement of income), profit and loss (statement of net worth and statement of income), profit distribution project, report and fiscal committee and any other measure relating to the management of the company that it is responsible for resolving on in accordance with the law and the contract, or that are submitted to its decision by the administrator or the board of directors, and the fiscal commission or the trustee.
2. Appointment or removal of the administrator, the directors, the syndics or members of the of the fiscal commission and the fixing of their remuneration.
3. Responsibilities of the administrator or the directors, the trustee or the members of the fiscal commission.

The corporations with bearer or nominative shares shall communicate the Central Bank of Uruguay (“CBU”) their shareholders, any modification regarding the shareholders and their final beneficiaries.

Law N° 19.484 (applicable for nominative shares) and Law N° 18.930 (applicable for bearer shares) establish that the obliged entities must communicate any change that may occur in relation to the information registered, including the changes in the chain of titularity.

Moreover, the final beneficiaries of the companies shall also be communicated. According to our legislation, a beneficial owner is defined as an individual (physical person) who, directly or indirectly, holds at least 15% (fifteen percent) of the integrated capital or its equivalent, or of the voting rights, or who by other means exercises ultimate control over an entity, being considered a legal person, a trust, an investment fund or any other legal entity or structure, with or without legal personality.

Final control is understood as control exercised directly or indirectly through a chain of title or through any other means of control.

This communication shall be presented in a Form provided by the CBU and sign by the representatives of the company.

In the case of limited liability companies, they shall communicate their final beneficiaries as well to the CBU. However, they are not be obliged to file the communication as long as all of the social quotas belong to individuals, provided that they are their final beneficiaries.

Uruguay has adopted (with some exceptions) the source principle and therefore only imposed its taxes for assets located, activities performed, and rights economically used in the country, irrespective of the nationality, domicile or residence of the parties involved, and the location where the contracts are entered into. This means that those activities or assets performed/located outside Uruguayan territory may not be subject to taxes in Uruguay (although there are some exceptions).

Moreover, a key element in Uruguayan taxation is the concept of residence. Corporations may be subject to tax in Uruguay when they are duly incorporated in Uruguay in compliance with its legislation. Hence, corporations that are deemed residence in Uruguay may be subject to tax by the Corporate Income Tax on Economic Activities (“IRAE”), with a tax rate of 25%.

Those that are considered non-residents (both corporations and individuals) are subject to Non-resident Income Tax at a flat rate of 12 % only for the Uruguayan source profits.

However, if a non-resident configured a Permanent Establishment (“PE”), may be subject to tax with IRAE for their Uruguayan source income, at the same rate of 25%.

PE definition adopted in Uruguay has its origin in Article 5º of the OECD Model Tax Convention to avoid double taxation, with some changes that are the background of the UN Model Convention.

In this sense, the definition of PE includes the place where non-resident carries on all or part of its business through a fixed place of business in Uruguay (including, place of management, branches, offices, factories, workshops, and any other place of extraction of natural resources). Additionally, Uruguayan PE is also comprehensive of construction works/ installation projects that last more than three months and some hypothesis of rendering of services.

Capital gains and holding income of Uruguayan source are subject to IRAE at the 25% rate. Dividends and profits distributed by a local company are not subject to IRAE. Non-resident entities pay IRNR on this kind of income provided it is of Uruguayan source, the general rate is 12%, but entities located in a low or nil tax jurisdiction are subject to a 25% rate.

Also, from an indirect taxation perspective, Uruguay has VAT with a standard rate of 22% and a basic rate of 10%, and an Excise Tax (“IMESI”), with differential rates for a wide range of products such as cigarettes, alcohol, oil, cars, perfumes, etc.

Finally, legal entities may be subject to tax with a Net Worth Tax. This tax is imposed on residents and non-residents at the end of the fiscal year. The tax is levied on the assets held in Uruguay as at the fiscal year-end valued according to tax regulations (only specific liabilities are deductible in the calculation).

The general rate is 1,5%. In the case of financial entities, the rate is 2,8%. The rate applicable to entities located in BONT jurisdictions is 3%.

In the case of individuals, the rates are progressive and there is a non-taxable threshold.

Uruguay presents some strengths (democratic stability, source-principle income, proximity with Brazil and Argentina), that traditionally attracted foreign investors. In this sense, the main incentive regimes in Uruguay for legal entities are:

1. Investment Law N° 16.906.

General Regime.

There are automatic exemptions in the Net Wealth Tax, and in the Excise Tax (IMESI) for both IRAE and IMEBA (Tax on the Transfer of Agricultural Assets) taxpayers, for those movable assets directly associated within the productive cycle (i.e. industrial machines, industrial installments, agricultural machines, vehicles, etc).

Moreover, the Executive Branch may grant certain tax benefits for intangible assets such as: trademarks, patents, industrial models, privileges, copyrights, key values, trade names and concessions) granted for several process related with the exploitation natural resources.

Specific Regime.

Under the specific regime, any enterprise (national or foreign) of any sector may present an investment project to the Investment Commission (“COMAP”) to obtain certain tax benefits, prior approval of the Executive Branch.

In this sense, investments can obtain a wide range of benefits, from IRAE exemption for a percentage of the amount invested, exemption from Wealth Net Tax, exemption from taxes on the import of the investment and VAT refund related to civil works to be carried out in Uruguay.

To obtain these benefits, the entity shall submit an application for tax benefits and commit to one of the objectives set forth in the Investment Law (i.e. generating employment, increasing exports, investing in cleaner production goods, among others).

Industrial Parks

Under the frame of the Investment Law, was sanctioned Law N° 19.784 which promotes extra tax benefits for the promotion of Industrial Parks and Scientific-Technologic Parks.

In this sense, users of such parks may apply for an additional tax exemption of 15 % in IRAE. Also, the Law gives the Executive Brunch the faculty of grant a total exemption of IRAE, VAT credits, and custom taxes in fixed assets under certain requisites.

Trading regime.

The trading regime sets an alternative method to calculate the net taxable income for IRAE purposes on certain transactions:

• Intermediation of goods: buying and selling goods that do not have Uruguay as its origin or destination, nor do the goods pass-through national territory during the transaction.
• Intermediation in the provision of a service, where the service is provided and economically used abroad.

For this kind of intermediation, regulations establish that only 3% of the difference between the sale and purchase price of the goods is considered of Uruguayan source. The 25% rate is then applied to this tax base with no further deductions

2. Free Trade Zones (FTZs).

Free Trade Zones Law N° 15.921 declared of national interest the promotion and development of Free Zones in Uruguay, while establishing the guidelines for their exploitation under the protection of important tax benefits.

FTZs users are subject to subjective exemptions. According to these exemptions, they are exempted from all national taxes, created or to be created, even those whose legal exemption requires a specific authorization.

There are also objective benefits. In this sense, goods and raw materials introduced to the FTZs from foreign territory, are exempt of all customs import taxes and of all taxes that are generated in occasion of the introduction to the territory. On the other hand, goods leaving FTZs to other countries are not subject to any tax.

Likewise, the entry of goods and raw materials to FTZs from non-free zone Uruguayan territory is considered an export of goods for tax purposes. Hence, the contracting of services to be rendered necessarily and exclusively within the free zone territory is considered an export of services and are taxed with VAT at “0% rate”.

Additionally, dividends or profits, paid to individuals or legal entities domiciled abroad are exempt from withholding taxes. Moreover, if shareholders are local individuals or entities, dividends payments are also exempt from Income Tax of Individuals (IRPF) and IRAE.

3. Investment Promotion Treaties.

Nowadays, Uruguay has 32 Investment Treaties in force, celebrated with 34 countries.

There are no foreign exchange or capital controls in Uruguay. Also, there is no branch remittance tax.

Moreover, those individuals or legal entities that are considered non-residents and do not configured Permanent Establishment shall be taxed with IRNR at a flat rate of 12 %. This tax is generally collected by withholding through IRAE taxpayers as withholding agents (unless there is not a IRAE taxpayer appointed, in which case a representative of the IRNR taxpayer may be registered at the Tax Office).

Additionally, there is a 7% IRNR rate over dividends or earnings paid or credited by taxpayers of IRAE).

Dividends and profits connected to income non-taxed by the IRAE shall be exempted from the IRNR.

The abovementioned withholdings may vary if a Double Tax Treaty applies. Currently Uruguay has celebrated 38 Double Tax Treaties with 36 countries.

There are no stamp duties in Uruguay. However, transfer of real estate triggered a Transfer Tax, (“Impuesto a las Transmisiones Patrimoniales”) that is paid -for the relevant in this guide- with a rate of 2% for the seller and 2% for the buyer.

There are no public takeover rules in Uruguay, save por public corporations by shares (oferta pública de adquisición).

Pursuant Law N° 18.159 (“Competitition Law”) there are certain transactions that are under approval of the Competition Office (Comision de Promoción y Defensa de la Competencia).

Under this frame, if the participants of the transaction (individually considered) have a gross income of approximately USD 70 milllion or higher in any of the last three fiscal years, may be subject to the prior approval of the Competition Office.

This rule is relatively new and the consecuences of not obtaining this approval is not quiet clear yet, but its consecuenqes may be to consider the transaction as inexistence or void.

Yes, there are certain standards provided under Uruguayan Civil Code and general law principles that obliges parties to negotiate and act in good faith.

M&A transactions are not subject to specific rules regarding employement rights, rather than the ordinary employement legislation.

There is no restriction for foreign investment in Uruguay. However, there is some control under Competition Law.

In such frame, and in case the gross income requirements of the participants are met (see answer to question 30), such transaction may not be subject to approval by the Competition Office only, if it is a single foreign entity acquiring shares of a single Uruguayan entity, and if such foreign entity does not have assets or shares in Uruguay yet. Otherwise, that transaction it will be necessary to obtain a prior approval of the Competition Office.

There are not exchange control requirements.

The most common way for winding up a corporation is to liquidate and dissolve such legal entity. Although dissolution and liquidation are two separately legal acts, it is a common standard to celebrate them jointly with a General Extraordinary Meeting of Shareholders. The process could be broadly described as follows:

1. Celebration of a General Extraordinary Meeting to resolve the liquidation and dissolution of the legal entity.

For such General Extraordinary Meeting, the entity may draft a provisory balance sheet and a Project of Asset Distribution. Jointly with these documents, the entity shall designate a representative/liquidator, while also state that for the future, the company shall be referred with the phrase “en liquidación” (in liquidation).

Moreover, in the liquidation act, the General Extraordinary Meeting: (i) approves a definitive balance sheet and the Project of Asset Distribution, (ii) approve the Liquidator´s appointment, and (iii) cancel the shares of the company.

2. Filling to public authorities.

The entity may request to the Tax Authority (“DGI”), the Social Security Bank (“BPS”) and State Insurance Bank (“BSE”) some special certificate in order to – among other acts), request the issuance of special certificate for the closure of the legal entity.

3. Approval of the Internal Audit Office (“AIN”).

In the next 30 days of the celebration of the General Extraordinary Meeting, the legal entity shall communicate the liquidation process to AIN.

Once the special certificates issued by DGI, BPSE and BSE are obtained, AIN may approve the liquidation process.

4. Inscription in the National Registry of Commerce (RNC).

After the approval of AIN, the dissolution and liquidation shall be presented before the RNC for its approval.

5. Publications.

Lastly, and following the RNC registration, the legal entity shall make two publications, one in the Official Gazette and other in a private gazette of the city of the corporation.

The process has a duration of approximately of 2-3 years since the celebration of the meeting, mainly because of the delay in DGI issuing the relevant special certificate.