Why Uruguay Is a Favorite with Both Investors and Those Seeking a New Residency
With its breath-taking scenery, European influence, and excellent beaches, it’s not hard to see that Uruguay has much to offer. But the beauty of this country runs much deeper than what meets the eye. With steady economic growth even as the rest of the world struggles, Uruguay is as attractive economically as it is physically, making it an ideal place for both investors and those seeking a new place of residency. Let’s cut right to the chase: Uruguay has Latin America’s highest income per capita. It is the continent’s leading receptor of foreign direct investment (FDI) per capita (with 1.8 B dollars received in 2010). In 2010, the Uruguayan economy grew at a pace of 8.5%, in the seventh consecutive year of sustained growth, and after weathering the 2008 global crisis notably well (unlike most countries, it’s gross domestic product maintained positive growth that year). Let’s explore the reasons for this performance:
Keys to the Uruguayan economy
Uruguay is a favorite with investors for many reasons. Among them:
- A solid and predictable legal system.
- Political and economic stability.
- Social stability, thanks to the existence of a middle class, relatively low levels of poverty and the lowest ratio of income disparity in Latin America.
- Low rates of corruption.
- An open economy, with free flow of capital (inward and outward) and free convertibility of currency.
- Equal treatment (guaranteed by law) to local and foreign investors.
- A solid banking system with banking privacy laws.
- Generous tax incentives to investment projects, large and small.
- A dozen free trade zones, from which hundreds of global companies operate with offshore customers and clients tax free.
The next chapters offer a brief overview of the two main tax incentive options that Uruguay offers, as well as an analysis of the economy’s main industries.
Tax incentives granted to investors
Uruguay has an investment promotion law that grants investors significant tax breaks on labor-creating enterprises. This “Investment Act” (# 16,909), passed in 1998 and improved in 2007, grants exemptions in Income Tax (up to 100% of the invested amount), Value Added Tax on purchases (local or imported) and in Capital Tax.
Applying for these tax breaks is not complex: the request is made to a specialized unit within the Ministry of Finance, “COMAP”, who studies projects in and analyzes factors such as jobs creation, exports, incorporation of technology and the use of renewable energy. The higher the impact of these factors, the larger the tax breaks.
The system is not restricted to large industrial projects; the range of businesses that obtain these tax breaks includes agricultural companies, call centers, professional services firms, construction companies, logistics businesses, and even movie-theater complexes.
Over the past three years, tax breaks have been granted to projects totaling over USD 1 B each year, with 2010 seeing a record 800 projects totaling USD 1.2 B in invested capital.
Free Trade Zones
Uruguay has a dozen free trade zones (FTZ), in different parts of the country. Some FTZs are simply warehouses, others have office parks, and some offer a mix of both. Hundreds of global and regional companies are established in Uruguay´s FTZs (including the likes of Merrill Lynch, Royal Bank of Scotland, Tata, RCI, Sabre and Epson).
Companies established in a FTZ may engage in logistics and warehousing, provide services to clients worldwide (including financial and insurance services), operate in the handling, classification and selection of merchandise, and even manufacturing.
The main advantage that FTZs offer is total tax exemption of Uruguayan taxes (current or future ones). The only tax that must be paid is social security tax on local labor. Thus, a user of a FTZ will neither face import taxes or duties (since a FTZ is considered non-Uruguayan territory from a customs-duty perspective), Income Tax, Capital Tax, or VAT. The law guarantees the FTZ user that all tax breaks, as well as any other rights and benefits shall remain unchanged during the term of the user agreement.
The only requirement that companies operating in FTZs is that 75% of their payroll must be Uruguayan nationals.
Uruguay’s Main Industries
Agriculture, livestock and forestry
Historically, Uruguay has had a strong livestock industry, which played a significant role in its economy for over a century. More recently, the use of Uruguay’s ubiquitous farmland has been increasingly devoted to two other higher-yielding industries as well: twenty years ago, forestry and since 2002, an enormous agricultural expansion.
Forestry was pushed by a 1987 law which gave tax breaks to the industry, attracting companies such as Weyerhaeuser, Ence and RMK among others, who plant eucalyptus and pine. In 2007, Finnish company Botnia installed the most modern and largest pulp processing plant in Uruguay (a USD 1.B investment) and since 2010, Montes del Plata (co-owned by Sweden’s Stora-Enso) is building a second USD 2 B plant.
With the increase of commodity prices in 2002, and the arrival of Argentine grain farmers in 2003, the agricultural sector initiated an expansion that has consolidated agriculture as a key sector of Uruguay’s economy, with 1.2 million hectares planted in 2010. Companies from Argentina, Brazil, New Zealand, the United States, and Europe all have a foothold in Uruguay’s expanding agricultural industry.
Construction and real estate
The construction industry has grown significantly since 2003, both in residential and commercial real estate.
Montevideo has seen strong growth in coastal areas, particularly in residential condominiums. And in the capital’s old city, or “Ciudad Vieja”, a dynamic recycling process has taken off, mostly for office space, and driven mainly by foreign investors.
In the seaside regions, Punta del Este is witnessing a record number of construction permits, from condominiums to subdivisions of land into estates for high end European, Brazilian, Argentine and U.S. buyers. Rocha, the province that still offers untouched beachfront land, has seen unprecedented development in seaside towns such as Punta del Diablo and La Pedrera, and half a dozen subdivision projects are under way along the coast.
To the west, Colonia has not escaped this growth, with the modernization of its port terminal, the opening of new hotels and a sustained real estate development in its promenade. Even in the small town of Carmelo, to the west of Colonia, and across Buenos Aires, investment has increased significantly, with new high end developments aimed at polo and golf players.
Much of this growth in real estate is driven by Argentinean, Brazilian, U.S. and European investors seeking safe assets, in a stable market, and with attractive yields.
Tourism is an important part of Uruguay’s economy. Hotel investments have continued at a strong pace, including 6 star luxury hotels in the area of Punta del Este and new offerings in places like Rocha.
2010 saw a record number of tourists (2.4 million visitors) and USD 1.5 B in tourism revenue. 2011 is ste to cross the USD 2 B mark.
Uruguay is, for the first time, set to diversify into large-scale mining as a new industry. The discovery of large reserves of iron-ore in central Uruguay have led Indian investor group Zamin Ferrous to initiate the installation of an iron-ore extraction plant and a deepwater port; a USD 3 B investment, which marks Uruguay’s largest project in history.
Uruguay as a destination for those seeking relocation
In addition to the advantages and safety that Uruguay offers to investors, the country is also one of the most attractive options for European and North American citizens seeking to establish a new residency.
The low or null taxation on foreign income, safety, quality of life and the different options that Uruguay offers (city, coast or countryside) have motivated the tripling of residency applications in the last four years.
The process to obtain residency in Uruguay is simple, and does not require investing in the country. Basically, one must simply be able to prove a source of steady income and bear a clean police record.
In sum, these are some of the main reasons why Uruguay is favorite with both foreign investors, and citizens of third countries seeking a new place to live.