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Diplomacy in Action

2011 Investment Climate Statement - Uruguay


2011 Investment Climate Statement
Bureau of Economic, Energy and Business Affairs
March 2011
Report
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Openness to Foreign Investment

The Government of Uruguay recognizes the important role foreign investment plays in economic development and works to maintain a favorable investment climate. Aside from a few sectors in which foreign investment is not permitted, there is neither de jure nor de facto discrimination toward investment by source or origin, and national and foreign investors are treated equally.

The Uruguayan Government's (GOU)’s Law 16906, adopted in 1998, declares promotion and protection of investments made by national and foreign investors to be in the nation’s interest. The law states that: (1) foreign and national investments are treated alike, (2) investments are allowed without prior authorization or registration, (3) the government will not prevent the establishment of investment in the country, and (4) investors may freely transfer abroad their capital and profits from the investment. Decree 455/007 adopted in November 2007 regulates Law 16906 and provides significant incentives to investors which, together with strong growth, have led to a significant increase in foreign and local investment.

The left-of-center Frente Amplio administration that governed from March 2005 through March 2010 stressed the importance of local and foreign investment for social and economic development. The GOU’s macroeconomic policies have reduced Uruguay’s vulnerability to external shocks and allowed the economy to keep growing even through the 2008-2009 global financial crisis. Jose Mujica, the Frente Amplio candidate, was elected in late 2009 and took office in March 2010, with the same focus on fostering investment.

The 2005-2010 Frente Amplio administration passed labor legislation strengthening labor rights, some of which was adamantly opposed by business chambers. In the second half of 2010 there was a surge in labor conflicts, sometimes resulting in the occupation of workplaces, prompted by empowered unions and a combination of three factors: multi-sector negotiations in salary councils; initial steps towards reform of the State; and the parliamentary debate over the GOU’s five-year budget.

There have been reports of potential foreign investors placing planned investments on hold due to Law 18.092 (passed in 2007), which required corporations that purchase land to use registered shares held by individuals, instead of bearer shares. The GOU later exempted some large foreign firms from this requirement.

In general, the GOU does not require specific authorization for firms to set up operations, import and export, make deposits and banking transactions in any particular currency, or obtain credit. Screening mechanisms do not apply to foreign or national investments, and special government authorization is not needed for access to capital markets or to foreign exchange. In tenders for private participation in state-owned sectors, foreign investors are treated as nationals and allowed to participate in any stage of the process. Bidders on tenders should be prepared for a lengthy adjudication process.

The World Bank's 2011 "Doing Business" Index, which ranks 183 countries according to the ease of doing business, placed Uruguay 124th globally and 24th within the Latin American and the Caribbean region (32 countries). Uruguay gets high marks in the categories "obtaining credit" and "closing a business," but lags in "paying taxes", "registering property," and "dealing with construction permits."

In May 2010 the GOU launched a new program through which entrepreneurs will be able to register and open a firm in 24 hours. The new program cuts the number of public offices involved in the creation of a firm (from six to just one), as well as the number of steps (from 20 to 5) and the number of days (from 65). The new procedure also slashes the cost of creating an enterprise. This business-friendly move is part of a larger GOU program funded by UNDP to consolidate six major registries of enterprises, which are currently not interconnected, into a single one. The program will also focus on expediting the winding down of corporations beginning in 2011.

Uruguay is ranked as a “moderately free economy” by the Heritage Foundation’s Index of Economic Freedom.

Table 1

  Index Ranking Year

– T.I. Corruption Perception Index
(10 is lack of perceived corruption)

6.9

24 in 178

2010

 

 

 

– Heritage Economic Freedom
(100 is entirely free)

69.8

33 in 179

2010

 

 

 

– World Bank’s Doing Business
(1 is easiest for doing business)

 

124 in 183

2011

 

 

 

MCC indicators are Not Applicable

 

 

 

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 tenders.

Uruguay and the United States signed a Bilateral Investment Treaty (BIT) in November 2005, which entered into force on November 1, 2006 (available at www.ustr.gov/Trade_Agreements/BIT/Section_Index.html and http://uruguay.usembassy.gov). Uruguay and the United States also signed an Open Skies Agreement in late 2004 (ratified in May 2006), a Trade and Investment Framework Agreement (TIFA) in January 2007, and a Science and Technology Cooperation Agreement in April 2008. Under the TIFA, in 2008, both countries signed two additional protocols on business facilitation and on the environment.

Conversion and Transfer Policies

Uruguay maintains a long tradition of not restricting the purchase of foreign currency or the remittance of profits abroad, even during the 2002 banking and financial crisis. Foreign exchange can be freely obtained at market rates.

Article 7 of the U.S.-Uruguay BIT provides that both countries "shall permit all transfers relating to investments to be made freely and without delay into and out of its territory." The agreement also establishes that both countries will permit transfers "to be made in a freely usable currency at the market rate of exchange prevailing at the time of the transfer."

There are no restrictions on technology transfer.

Expropriation and Compensation

In the event of expropriation, the Uruguayan Constitution provides for the prompt payment of "fair" compensation.

Article 6 of the U.S.-Uruguay BIT rules out direct and indirect expropriation or nationalization, except under certain very specific circumstances. The article also contains detailed provisions on how to compensate investors, should expropriation take place.

Following a constitutional amendment to implement state control of water services, the GOU took over the operations of URAGUA, a Spanish water company that had operated locally from 2000 through 2005. The GOU and URAGUA subsequently reached a negotiated settlement.

Dispute Settlement

The investor may choose between arbitration and the judicial system to settle disputes. Uruguay became a member of the International Center for the Settlement of Investment Disputes in September 2000. Uruguay's legal system is based on a civil law system derived from the Napoleonic Code, and the government does not interfere in the court system. The Judiciary is independent, albeit sometimes slow.

The U.S.-Uruguay BIT devotes over ten pages to establish detailed and expedited dispute settlement procedures.

Performance Requirements and Incentives

Article 8 of the U.S.-Uruguay Bilateral Investment Treaty bans countries from imposing seven forms of performance requirements to new investments, or tying the granting of existing or new advantages to performance requirements.

Local and foreign investors are treated equally. There are no preferential tax deferrals, grants, or special access to credit for foreign investors. Foreign investors are not required to meet any specific performance requirements. Moreover, foreign investors are not inhibited by discriminatory or excessively onerous visa, residence, or work permit requirements. The government does not require that nationals own shares or that the share of foreign equity be reduced over time, and does not impose conditions on investment permits.

The investment promotion regime is regulated by Law 16906 and Decree 455/007 passed in November 2007. Law 16906 grants automatic tax incentives to several activities including personnel training; research, scientific and technological development; reinvestment of profits; and investments in industrial machinery and equipment. Other benefits provided exclusively to industrial and agricultural firms by Law 16906 (such as tax exemptions on imports of fixed assets and reimbursement of VAT on local purchases of goods and services for construction) have in practice been superseded by Decree 455/007, which has a wider scope.

Decree 455/007 grants significant tax incentives to investors in a wide array of sectors and activities. Certain activities –such as the purchasing of land, real estate or private vehicles– are not eligible for the benefits. The size of the benefit to be granted is determined according to the size of the investment and a pre-defined list of criteria. Investment projects are classified as small (defined in indexed units and equivalent to USD 0.37 million as of December 2010), medium (up to USD 7.5 million), large (up to USD 750 million) and of great economic significance (over USD 750 million). A matrix based on pre-defined criteria list includes the project’s: (1) generation of jobs; (2) contribution to R&D and innovation; (3) impact on GDP, exports, and local value added; (4) contribution to geographic decentralization; and (5) use of clean technologies.

The principal incentive consists of the deduction from income tax of a share of total investment. Investors are allowed to cut their corporate income tax payments between 51 percent and 100 percent of their investment (for up to a 25-year term), according to their matrix’s score. Other incentives include: i) the exoneration of tariffs and taxes on imports of capital goods that do not compete against local industry, ii) the exoneration of the patrimony tax on personal property and civil works, iii) refunding VAT paid on purchases of materials and services for civil works, and iv) special tax treatment to fees and salaries paid for research and development. Decree 455/007 also streamlined procedures for firms requesting tax exemptions and established a “single-window” process to channel investment requests and guide investors. In face of the strong growth in investment in 2010 there was a debate over the possible curtailing of the referred incentives. For further information please refer to http://www.uruguayxxi.gub.uy.

Local and foreign investors reacted positively to Decree 455/007. The number of investment proposals that were eligible for tax exemptions doubled in 2008 to 310, valued at over $1 billion, well above the 58 proposals submitted annually in 2002-2007. The dollar value of proposals rose 22 percent in 2009 despite the global crisis but fell slightly in 2010. It is unclear how many of these proposals have materialized.

There are also special regimes to promote the tourism industry, plantations of forestry and citrus, exploitation of hydrocarbons, production of biofuels, development and exports of software, production of vehicles or auto parts, and shipbuilding. Additional special regimes also apply to the development of the printing industry (printing and sale of books, magazines, and educational material), communications (newspapers, broadcasting, television, theater and film exhibit and distribution), production of electronics and electronic equipment (e.g. computers, telecommunication equipments, measurement tools, medical equipment and electrical appliances), and call centers. Investors can combine benefits, applying for certain tax benefits under Decree 455/007 and for other benefits under the sectoral special regimes. These regimes do not differentiate between foreign and national investors.

A government decree establishes that government tenders will favor local products or services, provided they are of equal quality and not more than 10 percent more expensive than foreign goods or services. 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

Private ownership does not restrict a firm or business from engaging in any form of remunerative activity, except in two areas -- national security interest, and legal government monopolies (see Competition from State Owned Enterprises). One hundred percent foreign ownership is permitted, except where restricted for national security purposes.

Protection of Property Rights

In 2005, the GOU rescinded a 1966 decree that enabled employers to request police action to evict occupying workers. Occupations surged in 2005 and 2006 (from an annual rate of 15-20 per year prior to 2005 to 36 in 2006) and declined in 2007 to 30. In 2008, 150 plants were occupied for one day during a conflict in the metal industry, and seven plants were occupied in a conflict in the plastic industry in 2009.

In 2006 the GOU passed Decree 156/06 to restrain excesses and provide for obligatory negotiations between employer and employees prior to employees resorting to occupying the workplace. In practice, however, occupations have been early measures in several labor conflicts. Furthermore, under certain circumstances the decree considers occupations as a licit extension of workers’ right to strike, a point of view generally opposed by entrepreneurs. Courts have ruled to evict occupying workers in several instances. In November 2008, the International Labor Organization released a report suggesting that Uruguay revise its legislation on this issue.

Secured interests in property and contracts are recognized and enforced. Mortgages exist, and there is a recognized and reliable system of recording such securities. Uruguay's legal system protects the acquisition and disposition of all property, including land, buildings, and mortgages. Execution of guarantees has traditionally been a slow process. A new Bankruptcy Act (Law 18387 passed in October 2008) seeks to expedite such executions, encourages arrangements with creditors before a firm goes definitively bankrupt, and provides the possibility of selling the firm as a single productive unit.

Uruguay is a member of the World Intellectual Property Organization (WIPO), and a party to the Bern and Universal Copyright Conventions, as well as the Paris Convention for the Protection of Industrial Property. In 1998 and 1999, Uruguay passed trademark and patent legislation. In 2003, coordinating closely with U.S. and international IPR organizations, Uruguay passed new TRIPS-compliant copyright legislation. The 2003 copyright law represented a significant improvement over the 1937 law and led USTR to upgrade Uruguay from the "Priority Watch List" to the "Watch List." Uruguay signed the WIPO Copyright Treaty (WCT) and the WIPO Performances and Phonograms Treaty (WPPT) in 1997. Parliament ratified the WCT in October 2006 (Law 18036) and the WPPT on February 20, 2008 (Law 18253). The United States Trade Representative (USTR) removed Uruguay from the Special 301 Watch List in 2006 due to progress in IPR, especially with respect to copyright enforcement. The USTR statement commended the “positive progress” and was “encouraged that Uruguay has set a positive example by its efforts to combat piracy and counterfeiting.”

Patents are protected by Law 17164 of September 2, 1999. Invention patents have a twenty-year term of protection from the date of filing. Patents for utility models and industrial designs have a ten-year term of protection from the filing date and may be extended for an additional five. The law defines compensation as "adequate remuneration" to be paid to the patent-holder. Some industry groups believe that the law's compulsory licensing requirements are not TRIPS consistent and criticize the slowness of the patent-granting process.

The GOU approved a trademark law on September 25, 1998, upgrading trademark legislation to TRIPS standards. Under this law, a registered trademark lasts ten years and can be renewed as many times as desired. It provides prison penalties of six months to three years for violators, and requires proof of a legal commercial connection to register a foreign trademark. Enforcement of trademark rights has improved in recent years.

Transparency of Regulatory System

Transparent and streamlined procedures regulate foreign investment. However, long delays and repeated appeals can significantly delay the process to award international and public tenders.

Article 10 of the Uruguay-U.S. BIT mandates both countries to promptly publish or make public any law, regulation, procedure or adjudicatory decision related to investments. Article 11 sets transparency procedures that govern the accord.

Efficient Capital Markets and Portfolio Investment

Foreign investors can access credit on the same market terms as nationals. As long-term banking credit has traditionally been more difficult to obtain, firms tend to roll over short-term loans.

The banking system is generally sound and has good capital, solvency and liquidity ratios. Profitability, in a context of low international interest rates and low demand for credit, is a problem. The largest bank is the government-owned Banco de la Republica, which as of November 2010 accounted for 40 percent of total credits and deposits.

Uruguay's capital market is underdeveloped and concentrated in sovereign debt. While Uruguay is receiving “active” investments oriented to establishing new firms or gaining control over existent ones, it lacks major “passive” investments from investment funds that are an essential source of start-up capital and liquidity for new ventures and companies wishing to expand operations.

There is no effective regulatory system to encourage and facilitate portfolio investment.

There are two stock exchanges. An electronic exchange, which encompasses over 90% of transactions, concentrates on the money market and public securities. The traditional exchange focuses on sovereign bonds.

Only 12 firms are registered in the traditional stock exchange. Trading in shares and commercial paper is virtually nil, severely limiting market liquidity. There are few investment funds in operation, mostly serving domestic clients to invest their funds in Uruguayan sovereign debt. Risk rating firms first came to Uruguay in 1998.

In recent years there has been a good deal of discussion, encouraged and facilitated by the Embassy, among the relevant Uruguayan actors about how to reinvigorate Uruguay's capital markets.

A new capital markets law (No. 18.627) was passed in December 2009 to try to jumpstart the local capital market. The 138-article law is a substantial revision of the 1996 law, which was only 53 articles long.

The 2009 law sought to pass “basic regulatory principles aimed at increasing market transparency, competitiveness and efficiency, as well as protecting investors’ interests” and “comply with IOSCO guidelines and the results of the last IMF Report on the Observance of Standards and Codes (ROSC) on corporate governance.” To this extent it: i) established a Commission to promote the development of the capital market; ii) provided for tax incentives to help develop the capital market, iii) gave more regulatory powers to the Central Bank, iv) included new regulations and new supervisory procedures on stock exchanges and brokers and v) provided for new corporate governance regulations on debt issuers, stricter internal controls, stronger information disclosure requirements and increased protection of minority shareholders. The law also required some issuers to hire risk rating agencies and external audits and provided extensive regulations on the compensation, clearing and custody of electronic securities (Uruguay still uses physical bonds).

Private firms do not use "cross shareholding" or "stable shareholder" arrangements to restrict foreign investment. Nor do they restrict participation in or control of domestic enterprises.

Competition from State Owned Enterprises

Uruguay has a history of maintaining state monopolies in a number of areas where direct foreign equity participation is prohibited by law. While privatization is generally opposed by the population, some government-run monopolies have been dismantled over the past few decades, and private sector participation in the economy has increased significantly. Several state-owned entities have contracted with foreign-owned companies to provide specific services for a given period of time under Build-Operate-Transfer (BOT) regimes. While basic telephone services remain a monopoly, government-owned ANCEL, Spain’s Telefonica, and Mexico’s America Movil provide cellular services. International long distance calling, data transmission, and value-added services are also open to the private sector. The Telecommunication and Postal Services regulatory agency (URSEC) aims to preserve a level playing field for private and public firms, but sometimes lacks the strength to enforce regulations on government-owned ANTEL.

Other sectors have varying levels of private sector participation. Although private power generation is allowed, the state-owned power company, UTE, holds a monopoly on wheeling rights. The state-owned oil company, ANCAP, remains the only importer and refiner of petroleum products. ANCAP has established associations with foreign partners, especially in the area of off-shore exploration. In the ports, private companies provide most services. The national airline PLUNA is 75% owned by a consortium of investors (including U.S. capital). The insurance and mortgage sectors are de-monopolized, but workers compensation insurance remains a government monopoly. An October 2004 constitutional amendment, approved by 64% of voters, declared water a national resource to be controlled exclusively by the State.

As of early 2011, Congress is working on a Public-Private Partnership (PPP) law. While this sort of association already exists in Uruguay, the new legislation would formalize the procedures, responsibilities, and obligations of the State and private investors. The GOU believes that such a law would further attract foreign investment, mainly in infrastructure and energy projects.

Most State-owned firms are defined as autonomous but in practice coordinate certain issues, mainly tariffs, with their respective ministries and the Executive Branch. State-owned firms are required by law to publish an annual report and their balances are audited by independent firms.

Corporate Social Responsibility

The concept of Corporate Social Responsibility (CSR) is relatively new in Uruguay, but many companies do abide by the principles of CSR as a matter of course. Many multinational companies find it advantageous to stake out a CSR strategy and have made significant contributions in promoting safety awareness, better regulation, a positive work environment and sustainable environmental practices. Consumers do pay attention to the CSR image of companies, especially as it relates to a firm’s work with local charity or community causes. U.S. companies have proven to be leaders in promoting a greater awareness of and appreciate for CSR in Uruguay.

Political Violence

Uruguay is a stable democracy. Respect for the rule of law is the norm and the vast majority of the population is committed to non- violence.

The Economist's 2010 Democracy Index ranked Uruguay as the most democratic country in Latin America and the Caribbean (LAC), and one of only two “full democracies” in the region.

Corruption

Overall, U.S. firms have not identified corruption as an obstacle to investment.

Uruguay has strong laws to prevent bribery and other corrupt practices. A law against corruption in the public sector was approved in 1998, and acceptance of a bribe is a felony under Uruguay's penal code. Money laundering is penalized with sentences of up to ten years (which also apply to Uruguayans living abroad). Laws 17835 and 18494 (passed in 2004 and 2009) establish a good framework against money laundering and terrorism finance. Enforcement is improving at a good pace. Several Uruguayan officials and one judge were prosecuted for corruption in recent years.

Scoring 6.9 points in the 2010 edition of the Transparency International's Corruption Perception Index, Uruguay ranked second in the Latin America and the Caribbean region and 24th globally (among 178 countries). The United States ranked 22nd with a score of 7.1 and Chile 21st with 7.9. Uruguay has gradually improved in the Corruption Perception Index over time, from 35th place in 2001 to 24th place in 2010.

Despite Uruguay's favorable rating and effective legislation, other surveys indicate a perception of public sector corruption. Almost three out of four top tier executives polled by KPMG in 2007/2008 opined that there is fraud in the public sector –especially in the awarding of public contracts– and one in three stated their firm had been affected by corruption. A 2009 nation-wide poll by the Political Sciences Institute of the Universidad de la Republica showed that almost 80 percent of the population thinks that corruption is a “very serious” or a “serious” problem, especially in the public sector.

Bilateral Investment Agreements

In November 2005, Uruguay and the United States signed a Bilateral Investment Treaty (BIT) to promote and protect reciprocal investments, which was subsequently ratified by both legislatures and entered into force on November 1, 2006. The full text of the agreement is available at www.ustr.gov/Trade_Agreements/BIT/Section_Index.html and http://uruguay.usembassy.gov.

The 62-page agreement has 37 articles and 3 annexes, and was the first “latest generation” BIT signed by USTR. Among other benefits, the BIT grants national and most-favored-nation treatments to investments and investors sourced in each country.

The agreement also includes detailed provisions on compensation for expropriation, and a precise procedure for settling bilateral disputes (over ten-pages long). The annexes include sector-specific measures that are not covered by the agreement and specific sectors or activities which governments may restrict further.

Uruguay also has BITs with Argentina, Brazil and Paraguay (its Mercosur partners, signed in 1994), Armenia, Australia, Belgium, Canada, Chile, China, Czech Republic, El Salvador, Finland, France, Germany, Great Britain, Hungary, Israel, Italy, Luxembourg, Malaysia, Mexico, Portugal, The Netherlands, Panama, Poland, Romania, Spain, Sweden, Switzerland, and Venezuela. BITs with India and Vietnam, signed in 2008 and 2009 respectively, await Parliamentary approval.

Uruguay has Double Taxation Agreements with Argentina, Chile, Germany, Hungary, Israel, Norway, Panama, Paraguay, Poland and Switzerland.

In 2009, the GOU reacted to its inclusion by the OECD in a grey list of jurisdictions that “have not committed to implement the internationally agreed tax standard” and swiftly endorsed OECD standards on transparency and exchange of information. In order to be removed from the list Uruguay must sign twelve information exchange agreements with OECD members. According to private sector sources, as of June 2010, it had signed agreements with Mexico (ratified by Parliament), Spain and Portugal (pending ratification, before Parliament), and France and Germany (not submitted to Parliament). It had also reached preliminary agreements with Belgium, Lichtenstein, Malta, South Korea, Switzerland and Finland.

OPIC and Other Investment Insurance Programs

The GOU 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.

Currency Exchange

In 2002, after three years of recession and in the face of devaluations in neighboring economies, Uruguay eliminated its decade-long exchange rate band. Since then, the peso has floated freely, albeit with intervention from the Central Bank aimed at reducing the volatility of the price of the dollar. There is no black market for currency exchange. After falling 19 percent in 2009, the dollar appreciated 1.4 percent to 19.98 pesos in December 2010 Analysts expect the dollar to appreciate slightly to 20.4 pesos by December 2011. The U.S. Embassy uses the official rate when purchasing local currency.

Labor

At 97 percent, Uruguay's literacy rate is the highest in Latin America and on par with that of the United States. However, Uruguay endures longstanding problems in its educational system including a high dropout rate in high-school and a poor performance in OECD’s Program for International Student Assessment (PISA).

From a global perspective, respondents to the 2010-2011 edition of the WEF’s Global Competitiveness Report identified “restrictive labor regulations” as the “most problematic issue for doing business in Uruguay”. Some foreign investors have also reported concerns about the productivity level of Uruguay’s workforce.

Social security payments are high and increase employers' basic wage costs by about 30 percent. In addition to the worker’s salary, employers must pay: (a) 7.5 percent of the wage to social security, (b) 5 percent to health insurance, (c) 0.125 percent to a labor restructuring fund, (d) a supplementary annual bonus equivalent to 1/12 of the annual pay (basically a 13th month’s wages), and (e) a vacation pay equivalent to about 80 percent of the net wage received by the employee times 20 (days of leave) divided by 30 (days a month). An employer can dismiss workers as long as the firing is not deemed discriminatory and the employer pays the worker one month for each year of work, with a cap of six months.

Uruguay has ratified numerous International Labor Organization (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 members are protected by law against dismissal for union activities. Labor unions are nominally independent from the government. Sympathy strikes are legal. In labor trials, the Judiciary tends to rule in favor of the worker, as he/she is considered to be the weaker party.

The level of unionization has increased steadily since the governing Frente Amplio coalition took office on March 1, 2005. The umbrella labor organization PIT/CNT claims to have over 320,000 active members, or 28 percent of the workforce. Unionization is particularly high in the public sector.

On December 2, 2010 the GOU passed a decree providing expedited procedures for evicting occupants of public-sector workplaces. The PIT-CNT initially assessed the measure as unconstitutional. In turn, the business community thought the decree was as a positive step forward, but criticized that the GOU for using a different standard to deal with workers´ occupations in the private and public sectors.

In 2005, the GOU reinstated salary councils, a three party board consisting of representatives from unions, employers, and the government. The councils are responsible for setting the wage increases for individual sectors; if the unions and employers fail to reach an agreement to determine the wage increase to be applied for sectors, then the government makes the final decision. The councils were first instituted in 1943 and dissolved on several occasions, the last time in 1992.

In 2006, the administration passed a law on the “Promotion and Protection of Labor Unions” that renders any discriminatory action affecting the employment of unionized workers illegal. Among other measures, the law provides for the immediate reinstatement of the employee if any infringement of the law is proven. Business chambers strongly opposed the bill, arguing that it slanted labor relations heavily in favor of unions.

In January 2007 Parliament passed Law 18099 on outsourcing, which was adamantly opposed by the business community, as it made employers responsible for possible labor infringements on employees by third-party firms that were contracted by the employers. In November 2007, the GOU submitted another bill clarifying some of the private sector’s concerns, which was passed in January 2008 as Law 18251. Parliament passed a law in December 2008 providing between 6 and 12 days of mandatory leave for students to prepare for exams. Some businesspeople thought the law could negatively affect labor-intensive sectors that hire students, such as call centers.

Law 18395, passed in 2008, reduced retirement to age 60 for both men and women who have worked for at least 30 years, modified the system for advanced age retirement and provided more beneficial terms to mothers with children. Law 18399, also from 2008, modified the unemployment insurance regime, gradually reducing unemployment benefits during the six month eligibility period, and extending coverage for employees over 50 years old to one year. Workers who become disabled on the job receive a monthly payment from the government equal to 70 percent of their salaries plus free medicine and medical care.

A law on Collective Bargaining (No. 18,566) was passed in September 2009, which among other things establishes a bargaining system structured at three levels: national scope; branch of activity or productive chain; and bipartite collective bargaining at the company level. The first level is governed by the Higher Tripartite Council, a governing body composed of nine reps from the government and six from the business chambers and unions respectively. At the second level, bargaining is structured by branch of activity and the bargaining takes place in wage councils. For the third level, classic collective bargaining takes place on a bipartite level.

The Collective Bargaining law was adamantly opposed by the two most representative local business chambers and the International Organization of Employers, which filed a case against the government before the International Labor Organization’s Freedom of Association Committee in February 2009. In their arguments the business chambers stated that “the Uruguayan Government, which took office on 1 March 2005, embarked on a fundamental reform of labor law in total disregard for the business sector, total lack of consideration for the contributions of the sector, a total lack of recognition of employers’ rights in a context where social dialogue and effective tripartite consultation was totally absent.” The complainant organizations also alleged that the government had passed a series of labor laws (including some of those mentioned above) without taking account of the contributions from the employers’ side, and challenged the Collective Bargaining Law for violating ILO’s Conventions No. 98 and No. 154.

On the other hand, the government stated that: “(1) when the administration took office (in 2005), the labor relations scene was dismal, minimum wages were appalling, collective bargaining hardly existed and freedom of association was suppressed; (2) the legislation contained flagrant contraventions of international Conventions… (3) the wage councils were not convened after 1990, and there were less than 100 company-only collective agreements which covered less than 10 percent of the total workforce” … and (4) in three bargaining rounds (that took place in 2005-2009), over 80 percent of all collective agreements were reached unanimously, and there was a significant rise in real wages.”

Based on the parties’ arguments and the foregoing comments the ILO made the following recommendations to the government:

a) “With regard to Decree No. 145 of 2005, which revoked two decrees, one of which had been in force for over 40 years, which allowed the Ministry of the Interior to clear company premises which had been occupied by the workers, the Committee is of the view that the exercise of the right to strike and the occupation of the premises should respect the right to work of non-strikers, and the right of the management to enter its premises. In these circumstances, the Committee requests the Government to ensure respect for these principles in regulatory legislation and practice.”

(b) “The Committee requests the Government, in consultation with the most representative workers’ and employers’ organizations, to take measures to amend Law No. 18566, in order to give effect to the conclusions formulated in the foregoing paragraphs and to ensure full conformity with the principles of collective bargaining and the Conventions ratified by Uruguay on the subject. The Committee requests to be kept informed in this regard.”

In some of the comments that served as basis for its recommendations, the ILO also requested the government to:

– ensure that all the parties involved in the negotiation are liable for any breaches of the right to secrecy of the information which they receive during the collective bargaining

– hold discussions with the social partners to modify the composition of the Higher Tripartite Council and include an equal number of members from each of three sectors plus an independent chairperson.

– take the necessary measures, including the amendment of existing legislation, to ensure that the bargaining level is established by the parties and is not subject to voting in a tripartite body.

–discuss with the social partners amendments to the legislation in order to find a solution regarding the duration of collective agreements and, in particular, the maintenance in force of all the clauses of the agreement which has expired until a new agreement replaces it.

Labor conflicts increased gradually after President Mujica took office on March 1, 2010 reaching a crescendo in November and early December 2010. The disputes were prompted by empowered unions and a combination of three factors that rarely coincide: multi-sector negotiations in salary councils; minor steps towards a State reform; and the parliamentary discussion over the GOU’s five-year budget. The tally of general labor conflicts in October 2010 was three times higher than during the previous budget discussion in October 2005. President Mujica has already endured five general strikes organized by the umbrella labor organization PIT-CNT, two of which were for 24 hours each. U.S.-owned Coca Cola and Weyerhaeuser have been affected by labor conflicts, with Coca-Cola’s plant becoming the target of a day-long occupation in November 2010.

Although investment is rising, there is an ongoing discussion about the impact of the labor situation on productivity and whether labor conflicts scare foreign investors. Labor conflicts are expected to slow down in 2011 after the passage of the GOU’s five-year budget plan.

Foreign-Trade Zones/Free Ports

Law 15921 of December 17, 1987, regulates the operation of free trade zones (FTZs) within the country. Twelve free trade zones are located throughout Uruguay. While most are dedicated almost exclusively to warehousing, three host a wide variety of tenants performing various services (e.g., financial, software and call centers). One in particular (Zonamerica) was developed as a technology park to provide services and infrastructure for competitive development of companies with international reach. Two FTZs were created exclusively for the development of the paper and pulp industry.

These activities are considered to take place outside Uruguayan territory. When goods from an FTZ are introduced into Uruguay’s customs territory, they are treated as "imports" and thus subject to customs duties and import taxes. Goods of Uruguayan origin entering into FTZs are treated as Uruguayan exports for tax and other legal purposes.

Decree 344/010 passed in November 2010 introduced some changes in the free zone regime in order to discourage the establishment of shell or “paper” companies in free zones for tax evasion purposes. The Decree requires companies to submit a business plan and limits the term of the authorization to ten years, which is renewable upon GOU review.

Goods, services, products, and raw materials of foreign and Uruguayan origin may be brought into the FTZs, held, processed, and re-exported without payment of Uruguayan customs duties or import taxes. Current government monopolies are not honored within FTZs. Local and foreign-owned industries alike enjoy several advantages in an FTZ, including the exemption from all domestic taxes. Customs duty exemptions are applicable to the entry and exit of goods. Additionally, the employer does not pay social security taxes for non-Uruguayan employees who have waived coverage under the Uruguayan social security system. However, Uruguayans must comprise 75 percent of a company's labor force to qualify for FTZ tenancy.

Uruguay is a founding member of MERCOSUR, the Southern Cone Common Market composed of Argentina, Brazil, Paraguay and Uruguay (as of December 2010 Venezuela's membership was pending due to opposition in the Paraguayan Parliament). Since MERCOSUR regulations treat products manufactured in all member state FTZs as extra-territorial and hence charge them its common external tariff, with few exceptions, little manufacturing is done in local FTZs. Furthermore, products manufactured by Uruguayan or foreign firms in Uruguayan FTZs are not eligible for MERCOSUR certificates of origin and must pay the bloc’s common external tariff upon entering other member countries.

Uruguay has other special import regimes in place, including industrial zones, private customs deposits, free ports and temporary admission. The free port and private customs deposits exempt goods that are kept within the premises from all import-related duties and tariffs. While in the premises, merchandise may be labeled, fractioned, re-packaged, or have any other process done to it as long as it does not modify the nature of good. There are no limits for the length of stay of merchandise in the port, nor for the volume of stored goods.

Under the temporary admission regime, manufacturers can import duty-free raw materials, supplies, parts and intermediate products used to manufacture products that are later exported. Products that are consumed during the production process without being incorporated in the finished exported product, containers and packing material are also covered. The system requires government authorization and that final products be exported within a period of 18 months.

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Uruguay has been traditionally low (under 3 percent of GDP), even by Latin American and regional standards, because of the country's small market, the lack of major privatization initiatives, and the small number of firms that base their MERCOSUR-wide operations locally. However, FDI rose significantly in recent years – to 6 percent of GDP in 2008. The global financial crisis put a brake on growth, mainly through lower foreign trade and investment and cut FDI to 3.6% of GDP in 2009.

Annual inflows of FDI rose gradually from $397 million in 2004 (2.4 percent of GDP) to $1.8 billion in 2008 (6.9 percent of GDP). While the economy continued growing in 2009, the global financial crisis slashed FDI by 30 percent to $1.3 billion. Notwithstanding FDI resumed its growth trend in 2010 and rose to $1.6 billion (on an annualized basis as of the third quarter of 2010). Surging inflows of FDI have led the stock of FDI to record levels ($9.0 billion in 2009).

The sectors that received the greatest amount of FDI in 2003-2008 (latest figure available) were agriculture (forestry, ranching, farming, and slaughterhouses), construction (real estate in Punta del Este, hotels, and office buildings) and industry (chemicals and food and beverages).

Finnish Botnia’s construction of a $1.2 billion pulp mill in 2005-2007 was Uruguay’s largest-ever foreign investment. Another cellulose producer, Spain’s Ence, planned to build a pulp mill worth $1.0 billion. In mid 2009 Ence sold the project to a Finnish-Swedish-Chilean firm, Stora Enso-Arauco, which still intends to develop the plant. A dispute between Argentina and Uruguay over these pulp mills investments led to strained relations between the two countries, although President Mujica has proactively sought to heal the relationship through high profile meetings with his Argentine counterpart.

Argentina, Spain, Brazil and the United Kingdom were the biggest investors in 2003-2008, with 18 percent ($1.4 million), 11 percent ($700 million), 5 percent ($356 million) and 4 percent ($261 million) respectively.

About one-hundred American firms operate in Uruguay and, according to the U.S. Department of Commerce, the stock of U.S. direct investment amounted to $2.9 billion in 2009. Major U.S. investments include Weyerhaueser (forestry), Conrad Hotels (tourism and gambling), Sabre (call center), McDonald’s (restaurants) and Pepsi (beverages).

Host country contact information for investment-related inquiries:

Uruguay XXI – Investment and Export Promotion Directorate
Mr. Roberto Villamil
Executive Director
Address: Rincón 518 suite 528
Montevideo, Uruguay
Tel: (5982) 915 3838 - Fax: (5982) 916 3059
Web page: http://www.uruguayxxi.gub.uy



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