Uruguay

Openness to Foreign Investment

national and foreign investors are treated equally.

Economic officials of the incoming leftist Encuentro
Progresista-Frente Amplio administration, which will take
office on March 1, 2005, have stressed the importance of
local and foreign investment for social and economic
development. The orthodox incoming economic team has set
an ambitious goal of doubling Uruguay's investment/GDP
ratio over a five-year term by attracting direct foreign
investment, developing the local capital market, and
conscientiously implementing existing legislation. So
far, the incoming administration has resisted pressures
from unions and lobbyists and sent positive signals to
investors.

In 1998, the Uruguayan Government (GOU) approved a law
(no.16906) that declares that promotion and protection of
national and foreign investment is 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 does not prevent the establishment of
investments in the country, and (4) investors may freely
transfer abroad their capital and profits from the
investment. There are no restrictions on technology
transfer. The new administration plans to expand the use
of a single-window mechanism, instated in mid-2003, to
channel all investment requests. One hundred percent
foreign ownership is permitted, except where restricted
for national security purposes.

In general, the GOU does not require that firms receive
specific authorization to set up operations, import and
export, effect deposits and banking transactions in any
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 privatization
and concession programs, foreign investors are treated as
nationals and are allowed to participate in any stage of
the process.

Uruguay has a history of maintaining state monopolies in a
number of areas in which direct foreign equity
participation is prohibited by law. While privatization
is widely opposed by the population, some progress has
been achieved dismantling government-run monopolies and
increasing private sector participation in the economy.

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, cellular
services are provided by government-owned ANCEL, Spanish
Telefonica, and Mexican America Movil. Local wireless
loop systems, the installation and maintenance of public
telephones, data transmission, and some value-added
services are also open to the private sector. Although
the Telecommunication and Postal Services regulatory
agency, URSEC, aims to preserve a level playing field for
private and public firms, it sometimes lacks the strength
to enforce regulations on government-owned ANTEL.

Other sectors demonstrate varying levels of privatization.
For instance, although private power generation is now
allowed, the state-owned power company, UTE, still holds a
monopoly on wheeling rights. Also, despite various
commitments to the IMF, the state-owned oil company,
ANCAP, remains the only importer and refiner of petroleum
products. In a December 2003 referendum, over 62% of
voters repealed a law to allow ANCAP to associate with
foreign partners and demonopolize refined oil imports.
Ports are widely privatized, with private companies
providing most services since 1992. Fifty-one percent of
the state-owned airline PLUNA was sold to the private
sector in 1996, and the GOU plans to sell the rest. The
insurance and mortgage sectors were demonopolized in 1996,
but workers compensation insurance remains a government
monopoly. While there was some private sector provision
of water and sewage services in resort areas, an October
2004 constitutional amendment, approved by 64% of voters,
declared water a national resource to be controlled
exclusively by the State.

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, and by numerous changes in tax
codes and regulations since 2001.

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.

Expropriation and Compensation

In the event of expropriation, the Uruguayan Constitution
provides for the prompt payment of fair compensation.
While there have not been any expropriations in the recent
past, the constitutional amendment on water services could
lead to expropriation of private firms in that sector.

There are no laws that require local ownership, except in
specific areas reserved for the State.

Dispute Settlement

The investor may choose between arbitration and the
judicial system to settle disputes. Uruguay is a member
of the International Center for the Settlement of
Investment Disputes since 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. Corruption is not a major problem and
the Judiciary is independent, albeit sometimes slow.

Bankruptcy

In the case of bankruptcies, creditors with preferred
shares collect first, followed by the firm's employees and
the government. Since local firms usually wait too long
to initiate bankruptcy proceedings, few firms that enter
into bankruptcy manage to pay their debts, with the
majority closing after some years.

Performance Requirements/Incentives

Current investment law treats local and foreign investors
equally and does not provide preferential tax deferrals,
grants, or special access to credit for foreign investors.
Consequently, foreign investors are not required to meet
any specific performance requirements. Furthermore,
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. Moreover, technology can be freely
transferred and the government does not impose conditions
on invest permits.

For some activities, the government has established asset,
value-added and internal tax benefits, as well as social
security payment and tariff reductions. In addition, it
provides preferential treatment for capital good imports
and tax deferrals for exports. Quotas are not applied to
exports or imports. Investments in sectors such as
forestry, hotels, and agro-industries receive additional
incentives. The incoming administration may tie
incentives more closely to job creation, technology
transfer, and decentralization.

A government decree establishes that government tenders
will favor local products or services, provided they are
of equal quality and not more than 10% 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 Openness to Foreign
Investment).

Protection of Property Rights

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. Nevertheless, execution of guarantees is
usually a slow process.

In mid-2003, several political factions attempted to pass
a bill that would have alleviated the payment burden of
Uruguayan dollar debtors 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 negotiating an
"administrative solution" with all parties. This extended
loan maturities and allowed some debtors, especially in
the agricultural and mortgage sectors, to make smaller
payments on a negotiated basis. The government pledged to
favor credible debtors over those who have been delinquent
for a long time. The incoming administration will likely
continue this policy. The law also eliminated the value-
added tax on mortgage 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, and the Paris Convention for the Protection
of Industrial Property. In 2003, coordinating closely
with U.S. and international IPR organizations, Uruguay
passed new TRIPS-compliant copyright legislation. In 1998
and 1999, Uruguay also passed trademark and patent
legislation.

-- Copyrights: The 2003 copyright law represented a
significant improvement over the 1937 law and led the
United States Trade Representative (USTR) to upgrade
Uruguay from the "Priority Watch List" to the "Watch
List." However, IPR enforcement remains ineffective and
the GOU fails to provide adequate TRIPS consistent
protection for confidential test data. Uruguay signed the
WIPO Copyright Treaty (WCT) and the WIPO Performances and
Phonograms Treaty (WPPT) in 1997 but, as of January 2005,
has not ratified them. In its 2003 and 2004 reports, USTR
urged the GOU to improve border controls, ratify the WIPO
Internet treaties and address deficiencies in enforcement
against piracy and counterfeiting. Various IPR chambers,
which founded an umbrella organization in 2004, have
implemented aggressive anti-piracy campaigns, resulting in
several successful prosecutions.

-- Patents: Patents are protected by Law No.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
and additional five. The law provides a lax definition of
compulsory licensing and vaguely defines compensation as
"adequate remuneration" to be paid to the patent-holder.
Some U.S. industry groups believe that the law's
compulsory licensing requirements are not TRIPS
consistent.

-- Trademarks: 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 is adequate and has
improved in recent years as a result of an intense anti-
smuggling campaign.

Transparency of the 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.

Efficient Capital Markets and Portfolio Investment

Foreign investors enjoy easy access to credit on market
terms. Although the private sector can access a variety
of credit instruments, access to long-term credit in the
local banking sector became difficult after the 2002
financial crisis. (Please see Chapter 8 for a detailed
description of the banking sector.)

Uruguay's capital market is underdeveloped and
concentrated in public paper. There is no effective
regulatory system to encourage and facilitate portfolio
investment. Although there are two stock exchanges,
trading is very limited (only 17 firms are registered at
one of the exchanges). Despite an increase in commercial
paper in 1996 and 1997, the market soon stalled.
Currently only a few firms issue obligations, and
commercial paper transactions are minimal. There are only
two investment funds that mostly service domestic clients
and invest their funds in Uruguayan public paper. Risk
rating firms first came to Uruguay in 1998.

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.

Political Violence

There have not been any significant incidents involving
politically motivated damage to property or installations.
Uruguay is a stable democracy in which respect for the
rule of law is the norm and most of the population is
committed to non-violence.

Corruption

Uruguay has strong laws to prevent bribery and other
corrupt practices. In 2004, Uruguay ranked 28th in
Transparency International's Corruption Perception Index,
second only to Chile in Latin America. 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). Despite Uruguay's favorable rating and effective
legislation, public surveys indicate a widespread
perception of public sector corruption. Several former
Uruguayan officials and one judge were prosecuted in
recent years. Overall, U.S. firms have not identified
corruption as an obstacle to investment.

Bilateral Investment Agreements

In late 2004, Uruguay and the United States signed a
Bilateral Investment Treaty (BIT) and an Open Skies
Agreement which are pending ratification as of January
2005. The incoming Minister of Economy publicly announced
his intention to seek rapid ratification of the BIT.

Uruguay also has BITs with Australia, Belgium, Canada,
Chile, China, Czech Republic, Finland, France, Germany,
Great Britain, Hungary, Israel, Italy, Luxembourg,
Malaysia, Mexico, The Netherlands, Panama, Poland,
Romania, Spain, Switzerland, and Venezuela. BITs with
Armenia, Portugal and Sweden are pending ratification. In
addition, Uruguay signed Double Taxation Agreements with
Germany, Korea and Hungary.

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.

In 2002, after four years of recession and in the face of
devaluations in neighboring economies, Uruguay eliminated
its decade-long exchange rate bands and allowed the peso
to float freely. There is no black market for currency
exchange and 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.

Social security payments are high and increase employers'
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 GOU passed a bill permitting 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 labor market improved in 2004 with the average
unemployment rate dropping from 17.1% in 2003 to 13.4%,
and real average wages starting to stabilize. Activity
and employment rates were 58% and 51%, respectively, in
November 2004, with approximately 165,000 people
unemployed. The government provides six months of
unemployment benefits and is evaluating whether to extend
the term to nine months.

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 members are
protected by law against dismissal for union activities.
Labor unions are independent from 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 few 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 organization, PIT/CNT.

Unions are optimistic about relations with the new
administration, and received a promise from the designated
Industry Minister, a centrist businessman, and the
designated Labor Minister to convoke salary councils.
However, wage increases seem unlikely given other public
spending commitments. Union leaders stated they do not
expect immediate changes.

Free Trade Zones (FTZ) / Free Ports

Free trade zones permit all types of commercial,
industrial, and service activities. These activities are
considered to take 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). 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.
Furthermore, these products do not benefit from MERCOSUR
customs union advantages and must pay the MERCOSUR common
external tariff when entering member countries.

Goods, services, products and raw materials of foreign and
Uruguayan origin may be brought into the zones, held,
processed, and re-exported without payment of Uruguayan
customs duties or import taxes. Goods of Uruguayan origin
entering into FTZs are treated as Uruguayan exports for
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.

Local and foreign-owned industries alike enjoy several
advantages in an FTZ. They are exempt from all domestic
taxes, with exemptions granted exclusively to free trade
zone tenants with approved contracts from the General
Trade Authority. Customs duty exemptions are applicable

to the entry and exit of goods. The only additional cost
to employers is the contribution to social security for
Uruguayan employees. The employer does not pay social
security taxes for non-Uruguayan employees if those
employees waive coverage under the Uruguayan social
security system. However, Uruguayans must comprise 75% of
a company's labor force to qualify for FTZ tenancy.

Foreign Direct Investment Statistics

Foreign Direct Investment (FDI) in Uruguay has been low
because of the country's small market, the lack of major
privatizations, and the small number of firms that base
their MERCOSUR-wide operations locally. Uruguay's FDI/GDP
ratio of 1% is well below the Latin American/Caribbean
average of about 3%, and that of its Southern Cone
neighbors Argentina and Brazil, with 2.6%, and Chile with
5.6%.

According to Uruguay's Central Bank, FDI stock declined
from $2.4 billion in 2001 to $1.4 billion in 2002, mostly
due to decreased asset values following the sharp 2002
economic contraction and devaluation. Economic recovery
led the stock of FDI to increase to $1.8 billion in 2003,
and major investments in 2004 should contribute to further
increases.

A 1999 study by the GOU (which has not been updated)
concluded that the United States was the largest single
investor in Uruguay (33% of overall FDI), followed by
Argentina and Spain. According to the U.S. Department of
Commerce, the 2003 stock of U.S. direct investment in
Uruguay amounted to $600 million.

Although figures on investment by sector are unavailable,
most foreign investment in recent years has gone into
forestry-related activities, service industries,
construction (i.e. hotels, office buildings and
infrastructure), and mining.