- 1.What are the most common types of private equity transactions in your jurisdiction?
Most private equity (PE) transactions taking place in Uruguay qualify as what in the US would define as mid-market. This has a significant impact on the complexity and type of leverage that can normally be put together in the context of acquisitions and exits.
Transactions usually involve acquisitions where the purchaser acquires 100 per cent of the target’s stock. In some high-profile deals private equity funds acquire control, but not 100 per cent of the capital. In most of these cases, the PE funds have a call option, maturing within a certain period (eventually also with a seller option).
Bringing in new management remains the rule, because of the nature of the transactions that are being closed, even with MBIs in certain lower-market transactions. However, the so-called BIMBO transactions, in which the existing management team is complemented by outside managers, is also a strategy commonly pursued.
Although PE fund managers have a preference for originated deals in which a reasonable exclusivity is agreed early in the process, some of the largest transactions have been managed as auctions, especially when the target is particularly hot or the seller is particularly sophisticated. Despite the above, some PE funds exited original auction transactions quite successfully and reaching competitive multiples. While Uruguay remains a sellers’ market, originated deals will exist, but auctions will be part of the menu, especially in the case of the hottest targets.
SPVs are used in many transactions. So far, convertible debt or hybrid instruments remain unusual. The market may be ripe for more sophisticated structures during 2011 as the pipeline of deals is growing rapidly and new PE funds are stepping in.
As to early stage financing, the market showed signs of development with the entrance of angel investors and VCs a few years ago, but the process lost steam in more recent years, in contrast with the rapid heating of the PE market. Today, VC transactions are marginal and, although probably not less frequent than a few years ago in absolute terms, they have definitely lost their visibility when compared with late stage financing transactions whose growth is snowballing.
- 2.What types of investors are most active in the private equity market of your jurisdiction?
Most PE investors are international PE funds, a majority of which already have some level of activity in the region. Regional PE funds are also active. Most private equity funds in closed transactions have been American, European or Latin American, but there have also been isolated transactions and interest from other origins. Sovereign wealth funds have announced interest in quite ambitious projects but, so far, have not been able to close on them, and in isolated cases even generated reactions because of cultural misunderstandings or strategic mistakes.
Leading PE funds have sometimes brought on board so called ‘captive’ PE funds linked to financial institutions or development agencies. Thus far, these funds have always participated only in the largest transactions and in a complementary rather than a leading role.
Business angels have been active in smaller PE type transactions, and this trend may speed up because of the cycle of reinvestment of the proceeds obtained by those on the exiting side of major M&A transactions.
Strategic acquisitions, some of them providing an exit from original PE transactions, have increased steadily. Very relevant for the market, the source of these strategic acquisitions has diversified significantly as compared to the situation only 10 years ago.
- 3.What historically have been the main target industries and what trends were noticeable throughout 2010? What trends do you expect to see in the next 18 months?
There have been transactions in a wide and increasingly diverse array of industry sectors that includes banking, microfinance, retail, airline, manufacturing, agribusiness and natural resources.
The most evident trend has been the rapid acceleration in the transaction pipeline, especially during recent months. Another trend is towards more leveraged and sophisticated transactions, involving more complex structures, more diversified investor types, and the use of both banking and securities’ financing.
- 4.Please describe the main features, size and activity levels of local private equity funds. Are there any regulatory or market restrictions or incentives to the development of such funds? Have any begun to participate significantly in transactions out of their local jurisdiction?
Private equity funds are not locally listed and have no special legal structures.
While regional funds are smaller and focus on investments of medium size, international funds, such as Advent, JHPartners and others, have been focusing on the larger deals.
Regulations do not prevent or discourage the creation of local PE funds, but the scale of the market does not provide incentives for their creation. Local funds are therefore scarce and focused on venture capital-type smaller transactions.
Pension funds could play a more relevant role in this market but their investments are still heavily regulated and restricted. Up to now pension funds have not been active as equity investors. Their role as a source of long-term financing for some of these transactions, however, is very likely to pick up in the near future. One significant obstacle is that, unless the whole market moves in the same direction, pension fund regulation does not promote, but rather penalises, pension fund managers that develop creative structures or make ambitious bets, even if rational from an economic point of view and in the best interest of the funds they manage.
- 5.Are there any private equity funds listed in your jurisdiction? Are there any special regulations or requirements applicable to the listing and public offering of securities by such funds or any reform initiatives that are under discussion?
There are no PE funds listed in Uruguay. PE funds are not currently subject to specific regulation. Securities regulation would apply if funds were to be listed.
- 6.What are the main issues in connection with the liability of fund managers?
As almost all PE funds active in Uruguay are foreign and have foreign investors, the most critical issues of fund manager liability related to fund raising, deal sourcing, evaluation, acquisition, financing, executive recruitment, portfolio management and exit execution are not likely to be heard before Uruguayan courts. Absent claims of fraud, directorial liability is the only major aspect of legal contingency subject to Uruguayan law.
However, as structures and transactions become more complex, more room may arise for litigation, not just with investors, but with management, partners, liquidators and regulators. Exit-related disputes may also become a risk area looking forward, although that has not been the case thus far.
- 7.What are the main remuneration schemes for fund managers and have there been any recent shifts observable in the market? Are there any limitations or reforms under discussion regarding the same?
Most funds operating in Uruguay follow international standards as to remuneration schemes.
Fund managers are normally remunerated by a fixed fee (typically in the neighbourhood of 2 per cent of investments measured as total company valuation per year) and a carried interest in case of successful exits. More sophisticated transactions with a higher component of leverage continue to allow fund managers to optimise returns on their efforts.
Expenses related to acquisition as well as exit are paid by the fund, while regular day-to-day costs are expected to be borne as part of the services remunerated by the fixed fee. The reluctance of PE managers to participate in auction processes is in part because of the material risk that expenses (that can be significant) may need to be covered by the fund manager if the transaction does not close.
- 8.Please describe any legal considerations of particular importance in your jurisdiction in connection with executing leveraged buyouts and similar strategies.
From a legal framework point of view Uruguay is a fairly safe and predictable jurisdiction in terms of legal aspects affecting LBOs. Uruguayan law does not restrict the use of company assets to finance an LBO-type transaction, provided shareholders expressly approve it, and the respective formalities are properly met. Leveraged transactions are, in fact, frequent.
Extension of bankruptcy is not as relevant an issue as in other Latin American jurisdictions. Shareholders are not, as a rule, liable for insolvency of corporations’ absent intentional wrongdoing.
Directors’ liability has been treated in line with international standards although a number of pending high-profile cases will be essential for determining the path for future jurisprudence. Duty of care and business judgment rule standards are not well defined, as is the case in most civil law jurisdictions, particularly when compared with more developed common law systems. In this context, despite general statutory principles, courts have a significant level of discretion to the detriment of legal certainty. Although the Uruguayan court system is honest and transparent, the lack of well-defined legal standards because of the statutory nature of fiduciary duties provides less certainty, and makes it advisable to pay more attention than normally paid to the fulfilment of all formalities and keeping a paper trail on the proper discharge of such duties.
- 9.What are the main organisational forms used in your jurisdiction to channel private equity investments? Has there been any change over time in the types of organisational forms used? What are the main formation requirements?
Vehicles are usually incorporated and only on rare occasions is some form of LLC used. When an entity’s main purpose is to own stock in other companies, local corporate law requires that an investment corporation be used as vehicle. In these cases, the main, but not indispensably exclusive, purpose shall be investing in other entities’ stock.
Incorporation procedures take three to four months, and in order to avoid delays many investors resort to off-the-shelf corporations with broadly defined corporate purposes. By-laws and capital structure are normally subsequently amended to tailor them to the transaction’s requirements.
LLCs cannot be acquired ‘off-the-shelf’, but red tape associated with their creation takes significantly less time than for corporate vehicles. LLCs cannot be used when the structure requires issuance of negotiable instruments, and are not suitable - for regulatory reasons - for all types of transactions.
LLCs afford tax benefits in their home countries to investors from certain jurisdictions, depending on the characteristics of the transaction, especially when the LLC qualifies as a pass-through vehicle. From the local tax perspective, corporations and LLCs have converged in recent years to very similar tax regimes. Differences still exist (such as a corporate control tax and a different treatment of withholdings when dividends are distributed by certain LLCs) but they are not relevant or material in most actual PE transactions.
- 10.What are the most important legal issues arising in the operation and governance of local companies in your jurisdiction?
Uruguayan law poses no restrictions as to nationality or residence of directors, and in fact even legal entities may be nominated.
The ultimate governance authority rests with the board of directors, which grants general or limited powers of attorney for officers to act on behalf of the company. The board retains ultimate liability, within the limits of its duties as defined by corporate law.
Uruguayan law does not pose restrictions on the origin or nationality of the shareholders of local corporations either, except for very limited areas or industries such as broadcasting, certain utilities, and the like. Shareholders meetings must be held in Uruguay, but proxy representation does not involve significant formalities and is widely used.
Formalities as to how to hold shareholders meetings depend on whether the company has registered or bearer shares (which are common in Uruguay), but in neither case create significant hurdles. When companies issue debentures or go public, the regulation adds extra layers of formal controls.
Companies may (or depending on the case, must) appoint an internal control officer who has the right to participate at board of directors meetings and reports directly to shareholders (síndico). These internal control officers are not usually found in purely private companies, except when mandatory (such as in certain financial entities, publicly listed companies, or state-participated companies). Sindicos’ duties of care and loyalty are demanding, and require these officers to be in regular contact with auditors and managers, and to ensure the existence of a proper paper trail with respect to having properly discharged their responsibilities.
Labour regulations are intrusive, as in most Latin American countries, but board members are rarely held liable by courts. Although courts are reliable as to transparency, there is an academically driven ideological bias in labour law that permeates the judiciary, and may render outcomes predictable within the logic of labour law, but not aligned with purely rational predictability. Proper planning minimises these risks. Labour judicial procedures have been shortened,
weakening certain due process rights for employers. Although the Supreme Court declared segments of those regulations unconstitutional, the process to correct them has taken more time than anticipated. Another aspect linked to labour regulation, depending on the business structure and strategy, is that outsourced services create significant labour contingencies for the company outsourcing such services. However, directors are not liable for these types of claims either, except in unusual circumstances.
Tax regulations have been tightened and directors may be declared personally liable for certain unpaid taxes. The taxpayer has limited rights to defend itself when sued by tax authorities, which is particularly relevant because delays in the judicial review of provisional remedies take time, and such remedies are normally granted ex parte and with little actual judicial scrutiny. The court system tends to be fair in the end, although not sophisticated, but procedural rules make it unusually harsh for a taxpayer to defend itself from arbitrary behaviour. Pressure is mounting to balance current stronger tax enforcement rights, with due process guarantees for tax payers.
- 11.Are there any issues to be considered in connection with the limitation of liability under the laws of your jurisdiction?
Except for certain rules on taxation and labour regulation based on broad interpretations of ‘economic groups’, limited liability is respected, and piercing of the corporate veil follows rules are not materially different from those in developed jurisdictions.
The 2002 financial crisis triggered by the Argentine economic meltdown led to a temporary weakening of these standards and legal certainty was lost, but courts seem to be returning to the traditional, more predictable, application of the law once the commotion that followed the failure of several banks became viewed with more perspective. Although some cases are still pending, as a rule courts have been going back to the application of the traditionally more technical standards.
A corporation’s bankruptcy is not, as a rule, extended to shareholders or limited partners absent fraud. Recent changes in bankruptcy regulation increased the authority of liquidators but, despite the fact that the new statute has not yet been broadly tested, for the most part it should not change respect for limited liability in the absence of fraud.
- 12.What are the most common minority protection rights, whether granted by operation of law or contractual agreement ? Are there any special issues to be considered under the laws of your jurisdiction?
The following minority rights are afforded by Uruguayan law:
- Appraisal rights: Certain resolutions, such as for mergers, demergers, material changes in the corporate purpose, transfer of domicile to a foreign country, and capital increase or capital restoration, trigger appraisal rights for shareholders. In the absence of particular provisions in the by-laws or shareholders’ agreements, rules on appraisal may not provide enough of a fair compensation depending on the circumstances;
- Anti-dilution: When accepting capital contributions, the corporation must prepare special accounting statements in order to capitalise certain net worth items, like losses, gains, reserves, etc. The implementation of this awkward provision was intended to afford some sort of anti-dilution protection;
- Minimum dividend payments: Unless approved by a special majority vote Uruguayan corporations must distribute 20 per cent of their annual net income as dividends;
- Information rights: Shareholders have the right to request written information about board resolutions, financial statements, and so forth. Information rights are however limited, absent evidence of wrongdoing;
- Opposition to shareholders’ resolutions: Shareholders are entitled to
challenge in court shareholders’ resolutions that are illegal or detrimental to their legitimate rights, provided that the challenging party opposed, or was absent, when such resolutions were adopted;
- Pre-emptive rights: Shareholders have pre-emptive rights pro rata of their participation in the company’s equity. Pre-emptive rights have few exceptions, cannot be waived in advance, and are reinforced by a right to treble damages.
- 13.What are the main exit strategies used by private equity investors in your jurisdiction? Are there any limitations to the enforceability of exit arrangements? Have you seen a shift away from or towards certain exit strategies over the past year?
The high level of PE activity is recent, so most of the companies have not yet reached the exit stage. So far exits have been related to strategic investors’ acquisitions, in some cases for attractive multiples given the country’s outstanding economic performance and the bullish mood towards the region.
The first IPO of a Uruguayan company at the NYSE is scheduled for mid-2011, and, if successful, it is likely that more IPO activity will follow.
- 14.What are the key legal issues to be considered when appointing or replacing directors and officers?
Under Uruguayan law, directors have fiduciary duties of loyalty and care.
Violations of the duty of loyalty are treated most rigorously as they involve wilful misconduct, normally associated with conflict of interest situations. In turn, the duty of care imposes diligent performance of directors’ duties, with a reasonable business criterion which does not mean the absence of wrongful or potentially better decisions. No explicit business judgment rule defence exists under Uruguayan law, but such standards are a relevant framework reference.
The 1989 Commercial Companies Act provides, as a general principle, that: “[a]dministrators and representatives [including directors] shall act with loyalty and with the diligence of a good businessman. Those who breach their obligations shall be jointly and severally liable vis-à-vis the company and its partners for the damages that may result from their acts or omissions.”
In a provision specifically applicable to corporations, the Act also states that:
“[d]irectors shall be jointly and severally liable to the corporation, other shareholders and third parties for damages resulting directly or indirectly from the violation of the law, the bylaws or the internal regulations, for their bad performance... abuse of power, wilful misconduct, or gross negligence.”
In order for the director to be protected from liability for decisions adopted when absent, the director must formally notify the board of his or her disagreement within 10 days of learning about the respective decision.
The bases for the generation of directors’ liability have traditionally been considered as grouped by the law into three independent hypotheses:
- violation of applicable rules (law, by-laws, or internal regulations);
- bad performance of their duties assessed under the standard of loyalty and care of a ‘good businessman’; and
- abuse of power, wilful misconduct, or gross negligence.
Although the standard for directors’ liability is not defined in clear-cut terms, the following criteria help narrow the ambiguity of local law:
- At a very general level the standard of a ‘good businessman’ is accepted to be at the same time more stringent and more lenient than the classical civil law standard of a ‘good paterfamilias’. On the one hand, the standard is more stringent because it implies more diligence and technical expertise or business skills that are not part of the concept of a good paterfamilias. On the other hand, it is more lenient since risks are accepted as an inherent part of business life and business activities imply taking ‘calculated risks’ without ‘being held liable due to mere business failure’;
- The standard of negligence that plaintiffs are required to prove in a claim for bad performance under the good businessman standard is not unanimously settled by applicable judicial precedents that in most cases merely repeat the text of the law. There is no explicit business judgment rule protection yet developed by local jurisprudence;
- The concept of external director is not specifically contemplated by Uruguayan law. Published opinions by acting judges however acknowledge that:“directors need to rely on the information they receive from management and on the basis of such information adopt decisions or proposals, which has led to the statement that the power of information equals the power of decision.”
Directors and officers may be additionally liable for company’s unpaid taxes if they have acted without diligence in connection with same. Directors are even subject to a regime of strict liability with respect to Income Tax. Specific provisions on directors’ liability also exist with respect to reorganisations, antitrust, temporary tax-free imports of inputs, and so forth.
D&O insurance is still unusual but the market has started to develop slowly in recent years. Options are still scarce, which is specifically an issue because Uruguayan insurance regulation states that this type of insurance has to be purchased from companies authorised by the Central Bank of Uruguay.
Uruguayan social security contributions are mandatory if directors are remunerated.
- 15.Please describe the most significant issues commonly considered under the laws of your jurisdiction in connection with purchase and shareholders’ agreements.
Shareholders’ agreements are regulated by the Uruguayan Corporations Act and their standard content provides for the following, among others:
- to regulate directors nomination, including mechanisms of class voting, cumulative voting, nomination rights, and so forth;
- set quorum requirements and special majority votes, as well as deadlock breaking mechanisms including put and call options, as well as a broad diversity of potential company valuation mechanisms:
- establish mechanisms for syndication or pool voting, or even voting trust agreements in certain cases:
- determine scope of activities, financing mechanisms and shareholders’ obligations, dividend policy beyond the minimum mandatory distributions, or the regulation of other financial rights or obligations;
- mechanisms for exercising pre-emptive rights or transfer rights, including rights of first refusal, first options, Russian roulette mechanisms, consent powers, buy back rights, or buy-sell agreements (clauses that in the old days were something taken for granted but which are currently much more carefully negotiated);
- rights to receive specific information or perform audits;
- special rights of certain shareholders with respect to management or operations such as nominating certain officers or managers, or to act as preferred suppliers;
- special obligations by certain shareholders such as to supply technical assistance, or license trademarks or other IP rights; and
- tag along, drag along and other exit-related rights.
Under Uruguayan law shareholders’ agreements may be challenged beyond the fifteenth year as from execution, so the content that needs to stay in place for longer periods is normally transferred to the by-laws, or subject to instruments of legal engineering to ensure or incentivise their survival.
In order for shareholders’ agreements to be valid vis-à-vis third parties, the 1989 Corporations Act establishes a specific formalisation procedure that includes the stamping of certificates, registration with a public registry, and communication to the corporation itself with a copy of the actual agreement.
Another relevant issue to bear in mind is the formalities imposed for holding a board of directors meeting. Although highly debatable as a technical issue, the Corporation Oversight Authority has sometimes interpreted that the provision requiring directors to perform their obligations personally restricts their ability to grant proxies. Only when the quorum to validly hold session is met with directors present in person are directors allowed, in this oversight body’s interpretation, to grant proxies. Legislation is not explicit about the validity of video conferences participation in board meetings.
- 16.Please describe the main issues related to dispute resolutions under purchase, shareholders’ and other principal private equity agreements. What are the most common dispute resolution mechanisms selected in these agreements?
Uruguay’s regulation on forum shopping and choice of law is restrictive.
However, as a party to the 1958 New York Convention, local courts allow significant deference to choice of venue and applicable law in the context of arbitration. In this context, private equity-related agreements are usually subject to arbitration clauses, which entitle the parties to choose the venue as well as decide freely on the application of foreign law.
Foreign arbitration awards are enforceable in Uruguay, as long as they do not violate Uruguayan public order. For this purpose Uruguayan courts apply a strict interpretation of public order, which mostly reflects issues of material violations of due process.
- 17.What are the most common funding structures? Are there any significant issues commonly confronted in implementing such structures?
Uruguayan law does not interfere with the most common structures used for funding PE transactions. Inter-company funding and bank lending are common. Transfer pricing rules apply to intercompany funding, for which purpose tax rules follow OECD guidelines. Debt private placements are feasible but unusual because local capital markets for private securities are shallow and illiquid. If negotiable obligations are offered to the public, the corporation becomes subject wholesale to securities regulations.
Capital increases do not have major tax implications for the Uruguayan company and, from a tax point of view, there are (so far) no thin capitalisation rules. Uruguayan companies paying interest to non-resident entities or individuals must withhold the non-resident income tax (IRNR) at a 12 per cent rate. Interest can be deducted for determining net taxable income provided the beneficiary of the interest income pays the respective income tax at a rate equal to or higher than 25 per cent. When this is not the case, interest payments are deductible in proportion to the income tax actually paid by the beneficiary as compared with the 25 per cent Uruguayan rate.
Entities in the business of microfinance or other non-bank lending activities, of which there have been several PE transactions, face increasing regulatory restrictions on their permitted funding.
- 18.Is there a domestic financing market for private equity deals? Has there been a shift in the sources of funding over the past few years? Where do you expect to see financing come from in the next 18 months?
Domestic financing markets for PE deals in Uruguay, though recently increasing, are still unsophisticated and shallow. There are signs that this aspect is changing fast, and it is most likely future deals will include a larger share of local financing than past ones.
- 19.What are the principal accounting considerations that arise in private equity transactions? Are there any contemplated or ongoing shifts in regulatory accounting standards in your jurisdiction?
Mandatory accounting standards in Uruguay follow the International Financial Reporting Standard (IFRS) adopted by the International Accounting Standards Board (IASB). These provisions impact issues such as the need to recognise good will value and then amortise it when applicable. Audited financial statements are mandatory for an increasing number of companies, and in the case of highly regulated industries, regulatory authorities may even request audited financial statements from shareholders.
- 20.Are there any disclosure, registration or licensing requirements affecting private equity funds investments currently in effect or under consideration by regulators?
No specific disclosure, registration or licensing requirements apply to PE funds. In the case of targets, registration or licensing requirements depend on the form of SPV that is used for the transaction (investments funds, trusts or corporations). Also, the need for disclosure arises from general rules that apply independently of the SPV for certain industries or types of companies.
- 21.Please describe any restrictions, requirements or protections applicable to foreign investors in connection with private equity investments.
With few exceptions, Uruguayan regulations do not discriminate between foreign and domestic private investors. The financial market is completely free and no prior authorisation is required to trade foreign currency, or repatriate either capital or dividends. There is no need to register foreign investments or obtain clearance from governmental authorities.
PE investments, per se, do not constitute a permanent establishment in the country.
- 22.Are there any government approvals required in connection with private equity investments in certain industries or any industry-specific regulatory schemes that can affect private equity investments? What are the main requirements to obtain such approvals? Have there been any observable trends recently in the posture of specific regulators or the regulatory environment generally in connection with the review or approval of such investments?
Certain industries have specific regulatory regimes that can affect PE investments. While some of these restrictions affect only foreign investors, most affect both foreign and local private investors:
- Utilities - Certain utilities such as fixed telephone lines, power distribution and water supply can, with caveats depending on the case, only be owned by the state, so both foreign and local private investors are equally excluded;
- Broadcasters - Radio transmitters and open TV services must be Uruguayan citizens domiciled in Uruguay;
- Aviation - Owners of aircraft must be registered. Only individuals and companies incorporated and domiciled in Uruguay and with registered shares will be granted registration. In case of providers of aviation services, 51 per cent or more of the capital stock must be owned by Uruguayan residents;
- Transport - Restrictions apply on the holding of capital stock in companies which operate road transport of goods or passengers. More than 50 per cent of capital stock of the Uruguayan company must be held by Uruguayan citizens domiciled in the country;
- Banking and financial services - While there is no provision affecting foreign investment in the financial sector, any transfer of shares requires Central Bank authorisation. The Central Bank has broad and discretionary powers to authorise or reject new shareholders in financial institutions, and issues such as the credit rating of the company or the country of origin of the shareholder, GAFI standing, and so forth are relevant for such decisions;
- Rural Real Estate - While there is no discrimination between local and foreign investors with respect to the ability to acquire rural land, only individuals, or companies with registered stock owned by individuals, may own rural real estate properties and farming operations. The above restriction does not apply if the corporate investor with no registered stock owned by individuals obtains a government waiver.
- 23.Please describe any antitrust approvals or other competition law requirements that may apply in connection with private equity investments.
Antitrust regulation is extremely flexible and lightly enforced in Uruguay. It only requires prior authorisation regarding transactions that create a de facto monopoly (100 per cent of the relevant market).
Mere communication to the Antitrust Agency is necessary (with no clearance) if:
- the parties participating in the transaction obtain more than a 50 per cent market share as a consequence of the transaction; or
- if the annual turnover of the parties to the transaction is US$80 million. If none of those thresholds are met, no filing is necessary.
Antitrust regulation admits a newcomer exception, which applies for the notification duty, as long as the newcomer (with no assets in the country) only acquires a single company.
- 24.Are there any anti-money laundering or other similar financial regulations that should be considered when structuring a private equity transaction or setting up a vehicle?
Anti-money laundering regulations are increasingly strict and vigorously enforced as a result of international reviews and rankings to which the government pays significant attention. Applicable anti-money laundering regulations are linked to the form of SPV under which the private equity fund is organised. If the fund is incorporated as an SPV which is subject to the regulatory authority of the Central Bank of Uruguay (CBU), it will need to comply with the following obligations:
- report to the CBU Division of Information and Financial Analysis (DIFA) any transactions that, in light of what is customary for each activity, are either unusual, presented without evident legal or economic justification, or presented with unusual or unjustified complexity; financial transactions involving assets of suspected illegal origin. Non-compliance with this provision is subject to administrative liability. Likewise report existence of assets linked to persons identified by the United Nations or declared by judicial decisions to be terrorists or related to terrorist groups;
- have policies and procedures to prevent and detect money laundering operations (including know-your-client policies and procedures). This includes the obligation to identify final beneficiaries of transactions;
- have policies and procedures to assure a high level of integrity among the company’s personnel as well as continuing training of personnel in anti-money laundering issues;
- have a compliance officer who is responsible for setting up an anti-money laundering system and conducting follow-ups and controls. The compliance office would also be the link with the UIAF, which is the anti-money laundering unit within the CBU; and
- perform an enhanced control of transactions linked to individuals who reside in countries that are not GAFI members (or similar) or in countries where the GAFI is taking special measures.
The obligation to comply with anti-money regulations also applies to certain agents and professionals not subject to the general control of the CBU, such as money and valuables remitters, real estate agents, notaries participating in some transactions, free trade zone operators and, any individual who engages in financial transactions or participates in the administration of business organisations as an agent of third parties.
- 25.Are there any exchange controls that typically affect how foreign private equity investments are structured in your jurisdiction?
There are no exchange controls and there have not been any for almost 40 years. Foreign exchange market operations are completely free on the basis of fluctuating rates determined by supply and demand. The purchase and sale of foreign currency and payments made abroad in foreign currency are not restricted in any way, and, in fact, a significant percentage of purely domestic transactions are denominated and closed in foreign currency.
- 26.What are the basic tax issues affecting private equity investments in your jurisdiction?
Dividend distributions are subject to 7 per cent income tax withholding, regardless of the nature or domicile of the shareholder (a lower rate may apply in case of countries with which Uruguay has a Double Taxation Treaty such as Mexico and Spain). The sale of registered shares by foreign shareholders is subject to income tax at a 2.4 per cent rate on the transfer price. Sale of bearer shares is exempt from taxation. Income tax at the corporate level is applied at a 25 per cent rate on Uruguay-source income. There are no thin capitalisation rules and the carry-forward term for losses is five fiscal years.
With regards to funding, capital contributions can be made tax free.
Interest payments on intercompany loans are subject to a 12 per cent withholding (the rate may be lower if Double Taxation Treaties apply) and to transfer pricing regulations (following OECD guidelines). Deduction of interest payments by the local company may be capped depending on the tax treatment that the interest rate revenue receives in the lender’s jurisdiction. Interest payments are fully deductible if the beneficiary pays income tax at a rate equal to or higher than 25 per cent. Otherwise, interest payments are deductible in proportion to the income tax actually paid by the beneficiary and the 25 per cent Uruguayan income tax rate.
- 27.What impact are recent and projected macroeconomic trends in your jurisdiction and abroad and your government’s reaction to these trends having on private equity activity in your jurisdiction? When did you start to see an impact?
The Uruguayan economy experienced a slowdown (but never went into recession during the 2008 financial crisis), and rapidly recovered high growth rates. During 2010 the Uruguayan economy grew at an average rate of 8.5 per cent recording its eighth consecutive year of growth. Since 2004, cumulative growth of more than 45 per cent has been recorded with an average annual growth rate of 6.3 per cent.
This exceptional economic growth is currently favoured by three international shocks that add to the government’s fairly reasonable macroeconomic management:
- high demand and record prices for the core of the Uruguayan export products;
- low international interest rates; and
- record inflows of FDI as a consequence of the recession and lack of investment opportunities in developed markets.
Local markets also have enjoyed sustained domestic demand because of record low unemployment and rising salaries.
This environment, characterised by high growth rates and high capacity levels of production resources, is putting upward pressure on inflation. These variables, aided by the context of rising commodity prices (particularly energy and food) continue to fuel inflation trends.
Commodity prices are an important component of Uruguay’s exports and quickly returned to high price levels, owing to structural as well as cyclical and specific factors. One key structural change is the rapid growth in emerging economies, which has changed the international pattern of commodity consumption. Supply responses have been slow with production running into sharply higher marginal costs.
As a result of these factors, and since the trajectory of the inflation rate in Uruguay in recent months has been outside the 3 per cent to 7 per cent range set by the Central Bank, the monetary authority recently decided on a drastic increase of 100 bps (basis points) in the benchmark interest rate (from 6.5 per cent to 7.5 per cent). It seeks to dampen overall demand through monetary policy mechanisms, making credit more expensive. The main goal is to reduce consumption and cool down the economy. However, as a consequence of interest rate increases and strong economic prospects, the Uruguayan peso continues to appreciate affecting the competitiveness of exports not enjoying the particularly bullish moment (namely manufactured goods and service exports).
Although these macroeconomic trends will cause a slight increase in the share of fixed income at the expense of equities, the impact on the PE market is likely to be small.
- 28.Please describe any other regulations applicable to private equity funds and private equity investments not discussed in your answers to the above questions.
The above describes the main applicable regulations with an impact on PE funds and investments.
- 29.Please describe any other recent trends observed in your jurisdiction affecting how private equity transactions are conducted or how these investments are structured.
Since mid-2010 Uruguay’s PE market is experiencing a clearly perceived bullish period that, far from slowing down, continues to accelerate. As long as there are no material changes in the driving forces behind this trend (low interest rates, high growth in the Asian area resulting in high demand for Uruguay’s exports, and slow growth prospects in the developed world driving investors to seek options in emerging markets) the prospects are for the continuation of high and even increasing PE activity.
- 30.Please describe any other relevant legal considerations or new developments related to private equity investments in your jurisdiction not discussed in your answers to the above questions.
PE activity has gone from strength to strength in the recent past, and new PE funds are showing interest in opportunities in the most diverse areas of the Uruguayan economy.
In addition to powerful international economic factors, Uruguay’s strong institutional framework has also allowed it to tempt investors from jurisdictions, such as the Scandinavian countries and Canada, that seek predictable jurisdictions and were not relevant 10 years ago. The diversification in the origin of FDI is as important a trend, as is its rapid increase in absolute and relative terms. All of this is giving PE a significant boost that is affecting both the attractiveness for new PE investments as well as the availability of attractive exits for earlier ones.
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