URUGUAY - Free trade zones - Regime essentials kept despite rule changes
The regulatory Decree of Law 19.566, in force since 8 March 2018, amended the fundamental Law 15.921 of 1987 that established the original bases for the development and success of the current Free Trade Zone (FTZ) regime. We analyse below the main modifications introduced by the new regulations.
Spirit of the Free Trade Zone regime
Since its genesis, the Free Trade Zone regime was intended to be a driving force for development of the national economy through which new investments and employment generation are to be encouraged. The success of Law 15.921 allowed the development of private FTZs in a framework of security and legal stability guaranteed by the State, but with its minimal intervention. Important infrastructure, tax and customs exemptions and adequate and qualified human resources became very attractive for multinational companies that came to our country. The growth of FTZs specialising in rendering services has been exponential in recent years, achieving the success of the model and its undeniable contribution to the country. Currently, Uruguay has 11 operating FTZs in which almost 15,000 people are employed.
The recently approved rule changes keep in essence the objectives of the regime (investment increase, employment generation and exports growth), making some matters far more flexible, but increasing the Administration’s controls over companies. The additional controls and certain recently-approved limitations and restrictions have allowed the Uruguayan FTZ regime to comply with the OECD transparency standards established in the BEPS project.
Provision of services to non-FTZ areas
The main provision of the new regulatory framework refers to the possibility that FTZ companies may provide services to companies established in local Uruguayan areas (it was allowed to provide services exclusively for abroad or within the FTZ). The main condition required is that the entity receiving the service must be a regular taxpayer of the Corporate Income Tax (IRAE). We do not know to date the interpretation that will be made of this provision, because the concept of IRAE taxpayer can lead to different meanings. What is indisputable is that this modification makes the regime more flexible, and will allow several FTZ users to expand their target market.
It should be noted that entities providing services to local Uruguayan areas must be firstly authorised for such purposes by the “Área de Zonas Francas” (FTZs Administration Office) at the time of submission of its Business Plan that contemplates this alternative.
Entities that receive services from the FTZ will not be able to deduct the above-mentioned expense in their local Corporate Income Tax return (IRAE affidavit).
New permitted activities
FTZ user companies will be able to carry out exceptional activities (collection of debts by third parties) and auxiliary activities (not substantial, authorised by the Executive) within non-free territory. Those companies established in FTZs outside the Metropolitan Area may also exceptionally exhibit merchandise and carry out certain complementary activities in Montevideo (capital city). The new Law also enables the possibility of establishing thematic FTZs for audio-visual services and activities related to entertainment.
Restrictions and emphasis on controls
In order to modernise the regime with transparency measures and controls (and comply with international standards), certain restrictions and controls were established for FTZ users. First of all, contract terms have become limited:
- Direct FTZ user contracts may have a maximum term of 15 years for industrial activities, and 10 years for commercial and service activities.
- Indirect FTZ user contracts (those agreed with Direct users) may not exceed 5 years in all cases.
Longer deadlines may be authorised when the company commits to a significant volume of personnel and investment. Clauses for automatic renewal of contracts are prohibited, but every contract can be extended for further periods after a formal request and submission of a new Business Plan.
New regulations also grant greater powers to the FTZ’s Administration Office (“Área de Zonas Francas”), which can revoke the authorisation to operate when gathering evidence of the user not fulfilling the objectives set out in the investment project and business plan. To this end, controls were established for verifying that the commitments assumed have been reasonably met. The main focus will be on demonstrating that the activity was effectively carried out within the FTZ, that the company generated employment in sufficient quantity and quality to develop its activity, and effectively established its fiscal domicile in the FTZ.
Changes to a successful active regime generate expectation and uncertainty for affected agents. The increase of the Administration involvement in its control role has become necessary to comply with international demands. We understand that the recently approved regulations preserve the substance of the FTZ regime. In the long term, the criteria adopted by the FTZ’s Administration Office in the application of new regulations should lead to growth and improvement of this economy sector that has contributed so much to the development of Uruguay.