Punta del Este MY second home

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1 PROPERTY GUIDE Punta del Este MY second home best Quality of Life, Naturally Punta del este my second home 1

2 Jose Ignacio s Lighthouse 2

3 contents INTRODUCTION Introduction Information Geography and weather conditions Population and language Political system and Goverment Living in Uruguay Excellent Background Combined with modern infrastructure for quality of living Property Rights in Uruguay Ownership of Real Estate Leases Apartment buildings Country Clubs Land and Planning Trusts Real Estate Transactions Registration of real estate rights Structure of the real estate operations Financial real estate transactions Taxes applicable to real estate transactions Foreigners Rights to residence and Citizenship in Uruguay Legalization of Documents coming from abroad Inheritance Laws taxes investment promotion General Regime Tourism Sector General regime/tourism sector The purpose of this work is to provide foreigners who are interested in making real estate investments in Uruguay with a general introduction to the main features of the country s legislation which may be of interest to someone considering it for a real estate investment or for a second residence, as well as with a guideline to the main legal aspects involved in selecting, purchasing and utilizing real estate in Uruguay. It is important to point out from the start that no limitations are imposed on foreigners for the purchase of real estate in Uruguay and no requirements exist for such foreigners to have any kind of domicile in the country. Any person or legal entity, regardless of its nationality or place of domicile, may own real estate in Uruguay, whether in tourism or agricultural areas with no limitations of any kind and at any time when selling their property may repatriate the result of its investment as well as rents derived form their investment without the need for any kind if authorization or intervention by Uruguayan authorities. In the last few years foreign investment in real estate has increased most significantly in the following main areas: a) Punta del Este and its adjoining locations of La Barra, Manantiales and José Ignacio, the department of Rocha with its still underdeveloped oceanic beaches, Colonia del Sacramento and the costal areas of the Río Uruguay, which have experienced the construction of important tourism projects together with a constant flow of individuals in search of holiday retreats; and b) agricultural lands spread out far and side across the country for all kinds of projects such as agriculture, cattle grazing, forestry, viticulture and dairy projects. Also the purchase of large rural estates to set up hunting reserves has become quite common punta for sale Punta del este my second home 3

4 information About Uruguay An Outline of Uruguay Geography and weather conditions Uruguay is located in South America, on the Atlantic Coast, between Brazil on the North and Argentina on the West. It has an area of approximately 176,000 km 2 (68,000 square miles) excluding territorial waters. There are no remarkable topographical features. Most of the surface consists on rolling hills crossed by long rivers. The most densely populated city is Montevideo, the capital city, which has the most important port, followed by Paysandú and Salto (on the shore of the River Uruguay) and Las Piedras (near Montevideo). Punta del Este, on the Atlantic coast and 130 kilometers from Montevideo, is one of the most popular bathing resorts in South America, highly active during the summer season (January and February). Population and language Weather conditions are enjoyable and healthy throughout the year. Summer temperatures average between 21 ºC and 27º C (70º F and 80º F), Winter temperatures vary between 10º C and 16º C (50º F and 60º F) and there are some cold days occasionally. Rainfall may occur on any season, but it is usually heavier during the months of Autumn. Uruguay s population, according to the census carried out in 2004, is 3.3 million, of which near 1.3 million live in Montevideo and its surroundings. For the whole country, approximately 89% of the population is urban. 4

5 There are no indigenous people; a high percentage of Uruguayans are descendants of European immigrants, mainly Spanish and Italian. The rate of population growth is one of the lowest in Latin America: 3 per thousand per year, similar to that of most developed countries. Spanish is the official language and the one normally used. Teaching English and French has been a tradition in the country, and English is mostly used by the business community. Currently, the study of Portuguese is also consolidating as a consequence of the integration process in MERCOSUR. Political system and Government Uruguay is politically organized as a democratic republic with a presidential system. The State is organized in three independent Powers: Executive, Legislative and Judicial. Living in Uruguay In Uruguay life can be safe, placid, healthy and pleasant. The country offers the highest security level in South America in a broad sense. Crime rate is very low in comparison with the other countries of the region. There are no racial, religious or other types of conflicts, and political meetings are held peacefully. The movement of vehicles is smooth, even in city centers. Time spent on commuting is reduced; Montevideo may be crossed from one end to another by car in a little more than an hour, at any time of day. Cities have large green spaces and thanks to the continuity of the winds and the absence of polluting industries, there is no environmental pollution. This positive statement is also valid for rivers and coastal sea, also facing Montevideo. The benefits of the climate and the absence of environmental pollution, the range of the sanitary and drinking water networks and the scope of medical care, provide a high level of healthfulness to the people. Epidemics of any type are practically inexistent. Due to its territorial extension, the distances to travel in order to access to recreational areas (for example the countryside, beaches and river shores) are reduced. The most popular beaches extend over a distance of almost 300 km between Montevideo and the border with Brazil. The national sport par excellence is football, which attracts the vast majority of the population of all social levels. There are several private clubs with sports fields, particularly excellent golf courses, as well as state sports facilities, which can be acceded at very low costs or also for free. There also is an important cultural activity which is translated into a wide range of theatrical, musical and cinematographic shows. The Uruguayan market offers vehicles, electrical appliances, beverages, food and other consumer goods of any origin and quality. maldonado punta ballena la barra manantiales josé ignacio montevideo maldonado punta del este Punta del este my second home 5

6 information Excellent Background Uruguay has a strong democratic tradition, characterized by political and social stability. Open, Stable and rapidly developing economy with reliable and high level institutions. Ranking Low Corruption (Transparency International 2010) Uruguay in South America 2 Uruguay in the World 24 One of Latin America s highest GDP growth rates. Democracy Index (The Economist Intelligence Unit 2010) 1 21 Modern and attractive investment regime. Economic Freedom Index 2 33 (Heritage Foundation 2011) There are no racial or religious conflicts. Uruguay is free from epidemics and natural disasters. Quality of Living (Mercer Eco-City Ranking 2010) 1 70 Nice weather and absence of natural disasters plus abundance of water. Low cost of living (Mercer Cost of Living City Ranking 2010) 4 13 Combined with Modern Infrastructure for quality of living World-class port facilities in Montevideo, a regional hub par excellence for South America s Southern Cone region. Latin America s most dense highway network. 2009: new terminal at Montevideo airport, new Colonia ferry port and new Montevideo ring road. Health Care and highly specialized medicine institutes, widely covered by affordable private local and international health insurance companies. High quality golf courses with modern amenities strategically located throughout the country within short distance from major cities. Highest internet, broadband, PC and telephone penetration in Latin America (e.g. 123 mobile lines per 100 residents in 2009). Polo fields hosting international tournaments within short distance from main international airports. 98% of territory with access to low-cost electricity (mostly from renewable sources) and drinking water. 6

7 Quality of electricity supply (ranking) Broadband penetration (ranking) Global Peace Index (ranking) US 23 Uruguay 46 New Zealand 1 Ireland 25 Chile 47 Ireland 6 Chile 30 Argentina 48 Uruguay 24 Spain 36 Brazil 54 Spain 25 Uruguay 37 Panama 57 Chile 28 Hungary 46 Colombia 61 Italy 40 Italy 47 Costa Rica 63 Argentina 71 New Zealand 56 Brazil 83 Brazil 63 US 85 Argentina 93 World Economic Forum s Global Competitiveness Report World Economic Forum s Global Competitiveness Report Economist Intelligence Unit 2010 Punta del Este s Shore Punta del este my second home 7

8 Property Rights in Uruguay Terramar Christie s The following, is a summary of the general principals governing real estate property rights in Uruguay. Ownership of real estate Real estate property may be owned by one or more individuals, partnerships and corporations, or a combination of the same. Under a lease agreement (contrato de arrendamiento), the owner of the property (lessor) grants to another person (lessee) the right to use and benefit from the property for an agreed period of time, subject to the limitations and conditions set forth in the lease agreement. At the expiration of the term of the lease agreement, possession returns to the lessor and lessee loses all rights to the property. The legislation in force limits the term of lease agreements to a maximum of 15 years. Apartment buildings The nationality or legal residence of such individuals, partnerships or corporations is not relevant as far as acquiring the property is concerned. The transfer of real estate from owner to purchaser and its requirements is addressed below. The only current restriction in force refers strictly to agricultural land: Law 18,092 of January 7, 2007 (as amended by Law 18,172) imposes certain restrictions on the ownership and exploitation of rural or agrarian land in Uruguay. Basically it establishes that agrarian land may be owned or exploited solely by individuals or by certain types of companies, corporations or associations. Leases The legal existence and property rights over each apartment of a condominium, the administration of the building and the rights and obligations of the owners of such units are governed by Law 10,751. Such law establishes the requirements for each apartment to become independent real estate properties separate from the building, the rights of the individual owners of each apartment as well as their rights to use the common areas and amenities of the building. As a general principle, each apartment is recognized by law as an independent real estate property only upon the completion of the building, the inspection and approval of construction by the municipal authorities, the registration of the construction plans and the mandatory execution of a deed (the Reglamento de Copropiedad) which regulates the rights and obligations of the owners of the units and establishes a mortgage over each of the apartments of the building in favor of the owners of all other apartments as security for the payment of said common expenses. A special regime is created by law 16,760 for buildings which are financed by banks. 8

9 During the construction phase however, the execution and registration of promises of sale with respect of the future apartments is admitted by law, granting the purchaser the rights described below. Country Clubs Housing in the form of private country clubs has become increasingly common in Uruguay. Law 17,292 regulates property rights of plots in country clubs as well as the contribution of each plot to the common expenses, the administration and use of the common areas, the size of the plots and other matters pertaining to the premises to be built by the owner of each plot. Under this law the independent legal existence of each plot will be the result of the granting of the municipal approval of the infrastructure works carried out in the country club, the registration of the respective map identifying plots and common areas and the execution and registration of the Reglamento de Copropiedad with similar characteristics to the those mentioned in the previous paragraph. Land Use Planning Pursuant to LOT, the Municipal Governments are empowered to issue land use instruments to regulate all aspects relating the construction and future developments of urban communities such as -among othersthe categorization of lands as belonging to urban, suburban or rural areas, the determination of the type of construction and activities admissible in each area, the minimum size of plots and the consecration of certain areas as of special environmental protection. Trusts Under Law 17,703 of 27 October 2003, trusts, so common in other legislations, were introduced in the Uruguayan legal regime. A trust is a legal vehicle to hold fiduciary property, as a separate patrimony from that of other persons. The fiduciary property consists of certain assets or rights transferred by one or more persons, (the Trustor) to the trust in order for another person (the Trustee) to dispose of or administrate, or exercise the rights in question, as the case may be, in accordance with the instructions imparted in the trust agreement and for certain pre-established purposes, for the benefit of a third party or parties (the Beneficiaries). Under Law 18,308 dated 18 June 2008 (Ley de Ordenamiento Territorial, or LOT ) a new legal framework has been created regarding land use planning, which purpose is to organize the use of land, improve the quality of life of citizens and environmental use of natural resources. Trusts may be constituted by an agreement enter into by the parties or by means of a will or testament. All trusts must be executed by a written instrumented irrespective of their purpose, and must be executed as a public deed when such formality is required by law (for example, if the fiduciary property consists of real property). Punta del este my second home 9

10 REAL ESTATE TRANSACTIONS Registration of real estate rights Structure of the real estate operations Uruguay has an excellent real estate regime in place under which title to real estate and all rights pertaining to real estate, in order to be valid before third parties, must be registered before the pertinent public registry. The chronological order in which such rights are registered grants precedence to the various rights registered with respect of a property. The system is so safe that title insurance is unheard of in the country. Further, all real estate transactions and most contracts which create rights over real estate property (including security on real estate) must be executed before a lawyer specialized in such matters (an Escribano) in the form of a public deed and registered with the Real Estate Public Registry. In the case of the purchase and sale of real estate, it is the buyer who has the right to appoint the Escribano who is to act in the transaction and authorize the purchase agreement. Said Escribano shall conduct a due diligence on the title deeds of the property, obtain information from the public registries and further check that all the taxes and fiscal obligations have been paid and all other legal requirements complied with. a) The preliminary agreement It is customary that the parties, upon reaching an agreement on the commercial terms for the purchase of any kind of real property (whether a house, an apartment or a ranch or agricultural land), execute a preliminary agreement (a Boleto de Reserva). With the execution of such preliminary agreement, a percentage of the purchase price -usually 10%- is deposited by the buyer with the acting Escribano, to be kept in escrow as security for the compliance of the obligations of the buyer under the agreement and released in the moment in which the agreed trasnacation is executed. It is common practice that preliminary agreements will establish a 30-day term for urban properties or 60 day term for agricultural land to conduct due diligence work and title search to confirm good and clean title in the name of the seller. Such terms are not mandatory and other may be agreed upon. It is also common that the agreement provides that upon the existence of substantiated observations to the title deeds with respect of which the parties do not reach an agreement the matter be deferred Terramar Christie s 10

11 to the opinion of the Asociación de Escribanos del Uruguay (the Uruguayan Association of Escribanos). Some preliminary agreements establish that the buyer may unilaterally desist of the operation if said buyer s Escribano formulates duly grounded observations. Since this preliminary agreement will contain all the main negotiated aspects of the deal, it is advisable that the buyer upon reaching a commercial agreement with the seller and/or the real estate agentimmediately contact his Escribano to make sure this agreement and all other contractual documentation is correctly negotiated and prepared. b) The registered promise of sale Uruguayan law contemplates, in case of real estate transactions where the purchase price is to be paid in installments or where there are deferred obligations to be complied with by the parties, the execution of a promise of sale (Compromiso de Compraventa), which principles are regulated by Law 8,733. This promise of sale shall be executed before the Escribano appointed by the buyer - substantially in the form of a definitive purchase agreement - and, upon registration, shall grant full protection and preemption to the rights of the buyer over the real estate property over any other right subsequently created regarding such property: attachments or encumbrances, purchase and sale or lease agreements affecting the property or any other circumstance which could affect the property right of the seller or its right to dispose of its property. Additionally, the buyer is entitled to assign to third parties his o her rights acquired in virtue of this promise of sale. This law further stipulates that, if the seller were to default in its obligation to execute the purchase agreement or were unable to do so for any reason (including death), the pertinent court, upon verification that the purchase price has been either paid in full or deposited with such court, shall execute the purchase agreement in the name and on behalf of the seller and in favor of the buyer (or the successors or assigns of the same). This structure is commonly used to purchase apartments in buildings under construction, allowing the buyer to obtain secure title to the property being built and the seller to receive payment in installments during the construction period. Punta del este my second home 11

12 REAL ESTATE TRANSACTIONS c) The purchase agreement Real estate purchase agreements must be executed before an Escribano in the form of a public deed which is entered into said Escribano s book. As stated above, the role of the Escribano is not only limited to the drawing up of the agreement and its authorization under his signature and seal; the said professional further acts on behalf of the State as a controlling agent that confirms that the seller is up to date with the payment of certain taxes, that all pension funds contributions related to the construction of the premises which are part of the property have been paid as per certain certifications issued by the pension funds institution, that all necessary permits and authorizations have been obtained, etc. Reference to such controls as well as the inclusion of other clauses in the purchase agreement is mandatory for the due registration of purchase agreement in the Real Estate Public Registry. Additionally certain taxes to be paid at the execution of the agreement are collected by the Escribano who will be responsible for their subsequent payment to the tax authorities. Registration of the purchase agreement with the pertinent registry will cause it to be valid and enforceable against third parties as of the date of registration. If not registered, the agreement will only be valid between the parties thereto. Financing real estate transactions Financing for the purchase of real properties in Uruguay is available through banks and financial institutions, even though such practice is far from as common as it is in Europe and the United States, and many real estate transactions are carried out without such financing on a cash on hand basis or with financing provided by the seller. Customarily, the lender will participate in the deal through its own legal advisors and Escribano who will Jose Ignacio s Lighthouse 12

13 be in charge of carrying out the due diligence described above and drafting a mortgage agreement over the property in question (in the event of a purchase agreement) or a pledge over the buyer s rights (in the event of a promise of sale). 1. Land Transfer Tax All real estate purchases are subject to a land transfer tax, or Impuesto a las Trasmisiones Patrimoniales, (the LTT ) which amounts to four per cent (4%) of the fiscal value of the property and is paid in equal parts by both the buyer and by seller (i.e, 2% each). In practice the fiscal value of properties is considerably lower than their market value, and may be estimated at about 50% of the market price or less even though of course, this is only an estimation and in certain cases not applicable. Mortgages must also be executed as a deed before an Escribano, who, in this case, is customarily appointed by the creditor and registered with the Real Estate Public Registry. The security rights created by the mortgage shall only rise and become enforceable as of the date of registration. The LTT is deposited with the Escribano upon the execution either of the promise of sale or the purchase agreement, who shall be in charge of making the corresponding payment before the fiscal authorities prior to registration of the purchase deed together with other taxes. Taxes applicable to real estate transactions 2. Stamp Duties Stamp duties, or Montepíos Notariales, are applicable to all transactions in which an Escribano participates. In case of a real estate purchase agreement and mortgage agreements, stamp duties amount to approximately 0,55% plus VAT (22%) of the purchase price. Punta del Este s Port Punta del este my second home 13

14 FOREIGNERS RIGHTS TO RESIDENCE AND CITIZENSHIP IN URUGUAY Obtaining a resident permit in Uruguay does not pose great difficulties. Foreigners are admitted to reside permanently in the country if they comply with the following three general conditions: a) to be of good health, b) to prove to be of good conduct and, c) to have enough means to support themselves and their family. Legal citizenship may be obtained by non nationals if they have resided in the country for a term of at least three years (if they have resided with their families) or of five years (in case they have resided on thier own) and - in both cases - have been of good conduct. Furthermore, foreigners who have retired or obtained a pension abroad and who wish to obtain permanent residence in Uruguay shall have the right to the following benefits, as prescribed by Law 16,340 and decree number 119/2004: 1. The introduction into Uruguay, with the first 6 months of the obtaining of the permanent legal residence, free of any and all customs duties and taxes of the following goods: (a) the furniture and household appliances of their residence, in reasonable quantities as the customs authorities may estimate; and (b) a motor vehicle which they will not be authorized to transfer for a period of 4 years as from the moment of its introduction into the country. 2. The granting of a common passport to the person in question, his or her spouse and children under 18 years of age who have also obtained permanent legal residence. 3. Maintenance within the Uruguayan territory of life insurance policies and those related with the pension funds coverage which may have been contracted abroad. These persons, in order to benefit from this regime, must either: (A) Purchase real estate to be destined to their habitation within the Uruguayan territory for a value of not less than 100,000 US dollars, which they will not be able to sell for a period of 10 years; or (B) acquire bonds issued by the Uruguayan government for a minimal nominal value of 100,000 US dollars, which will remain in deposit with the Banco de la República Oriental del Uruguay for a period of not less than 10 years. Further, upon other required documentation, these persons will need to submit to the Dirección Nacional de Migraciones (the National Immigration Agency) certifications issued by the entity or pension fund serving the retirement pension attesting to the existence of the same, which must exceed a minimum of 1,500 US dollars a month and be of a permanent and periodical nature. Foreigners are admitted to reside permanently in the country if they comply with the following three general conditions: a) to be of good health, b) to prove to be of good conduct, c) to have enough means to support themselves and their family. 14

15 LEGALIZATION OF DOCUMENTS COMING FROM ABROAD INHERITANCE LAWS Uruguay is not a signatory to the Hague Convention Abolishing the Requirement for Legalization for Foreign Public Documents and therefore does not accept legalization of documentation by means of the apostille. All documents coming from abroad must be legalized before the Uruguayan consulate of the place in which the document was issued or before the Uruguayan consulate with jurisdiction over such place. In the event that there effectively is no Uruguayan Consulate with jurisdiction over such place, indirect legalization is accepted. In this case, the document is legalized before the consulate of any country in which there exists a Uruguayan consulate and then legalization is completed before such Uruguayan Consulate. It is advisable to consult with Uruguayan counsel before embarking in legalization of documents since legalization requirements are observed quite strictly. Under Uruguay law, upon the demise of a person, the direct descendants of the deceased, whether legitimate or natural, and in their absence, his or her ascendants together with the surviving spouse are considered as forceful heirs of the estate of the deceased. In the absence of both parents and spouse, the siblings of the deceased whether legitimate or natural shall be the heirs. The law reserves for such forceful heirs a mandatory portion of the estate. Even by means of a will, a person who at the time of his death has forceful heirs may not dispose of more than a certain percentage of his or her estate in the benefit of third parties or may not alter the percentage of the estate that corresponds to any one of such forceful heirs. The percentage of the estate assigned to such heirs depends upon their number. In the case of one single child, the percentage of the estate that can be freely bequeathed to other individuals is 50%; if there are two children a person may dispose by means of a will of up to 1/3 of his estate to others, other than his or her forceful heirs, and in the case of three or more, this percentages is reduced to 25% of the estate. If there are no children and the forceful heir or heirs are one or both parents, the testator may dispose freely of fifty per cent of his estate. The Uruguayan Civil Code regulates the legal actions forceful heirs have at hand in order to be compensated for the breach of their rights in the estate. Punta del Este s Bay Punta del este my second home 15

16 Land Conveyance Tax ( ITP ): Transfer of real estate is subject to ITP, payable both by the seller and the buyer. The tax rate is 2%, applicable over the fiscal value of the property duly adjusted for inflation. Income Tax ( IRAE, IRPF or IRNR, depending on the holder of the property): The applicable income tax varies according to who the holder of the real estate is. In the case of sale of property held by an individual or a foreign company, same will pay income tax (IRPF / IRNR) at a 12% rate over the difference between the sales price and the purchase price. Once the property is sold the shareholder can repatriate the money withtaxes Aside from spectacular landscapes, Uruguay offers very interesting investment opportunities in the real estate market. Investing in real estate in Uruguay is becoming more and more attractive, not only because the economic environment is very favorable, but also because taxes do not substantially affect investor s returns. Taxes over real estate transactions and holding of real estate are lower in Uruguay than in most countries in the region. Buying Real Estate: Applicable taxes threshold below which the tax is not applied. For the year 2010, this threshold was of approximately USD 111,000 for single individuals and USD 222,000 for married couples who elect to be taxed as such. State Property Tax ( Contribución Inmobiliaria ): Real estate properties in urban and suburban areas are subject to a property tax, imposed by State Governments. The tax base is the local cadastral value of the property. The tax rates vary depending on the State. In Maldonado (State where Punta del Este is located) the tax rate is 6.8%. Land Conveyance Tax ( ITP ): Transfer of real estate is subject to ITP, payable both by the seller and the buyer. The tax rate is 2%, applicable over the fiscal value of the property duly adjusted for inflation. Value Added Tax ( IVA ): If the house is bought to the construction company, the sale will be subject to IVA at a 10% rate. Owning Real Estate: Applicable taxes Net Worth Tax ( IP ): If you own real estate in Uruguay you will have to pay Net Worth Tax every year. The tax will depend on the vehicle that you use as holder of the real estate. If you decide to hold the real estate through a legal entity (be it a local or foreign company), Net Worth Tax will apply at a 1.5% rate on the revalued purchase price of the property. If you own the real estate in a personal capacity, Net Worth Tax is applied at progressive rates ranging between 0.7% and 2%, applicable over the property s fiscal value. Different deduction rules apply to companies and individuals. In the case of individuals, there is a net worth Real estate properties in rural areas are subject to a similar tax, imposed by the national Government and collected by the State Governments. Primary School Property Tax ( Impuesto de Primaria ): A national tax is also levied on real estate properties in Uruguay, destined to the financing of the public primary school system. The tax base is the cadastral value of the property. The tax rates vary from 0.15% to 0.30%. Selling Real Estate: Applicable taxes 16

17 Terramar Christie s out paying any other tax. This favorable tax treatment is not applicable if three or more real estate properties are sold within one year. If the real estate is held through a Uruguayan company, income deriving from the sale of the property will be subject to corporate income tax (IRAE) at a 25% rate. Profit on sale of the property is determined by the difference between the sales price and the cost of acquisition, updated for inflation and amortized. Also, dividends distributed by Uruguayan companies are subject to withholding tax of 7%. Preferential tax treatments may be available for certain type of Uruguayan companies. Renting Real Estate: Applicable taxes Income Tax ( IRAE, IRPF or IRNR, depending on the holder of the property): If you are the landlord: The applicable income tax varies according to who the holder of the real estate is. In the case of lease of property held by an individual or a foreign company, same will pay income tax (IRPF / IRNR) at a 12% rate over the lease price. Dividends remitted abroad by the foreign company will not be subject to tax withholding in Uruguay. If the real estate is held through a Uruguayan company, income deriving from the lease of the property will be subject to corporate income tax (IRAE) at a 25% rate. Also, dividends distributed by Uruguayan companies are subject to withholding tax of 7%. Preferential tax treatments may be available for certain type of Uruguayan companies. If you are the tenant: A recent law allows individual tenants who are Uruguayan tax residents to deduct from their Income Personal Tax ( IRPF ), a 6% of the rental payments, if they report the identity of their landlord to the Tax Authority. This may be extended in the future to holiday rentals. Value Added Tax ( IVA ): IVA does not apply to the lease of real estate. Punta del este my second home 17

18 INVESTMENT PROMOTION General Regime (Decree 455/007) Benefits Scope Commercial and service companies are eligible to apply for tax benefits for their projects. The highlights of the investment promotion regime are: 1. Direct exemption from business income tax (IRAE). a. Income tax Under the former regime companies could access an exemption on taxable income equivalent to 50% of the investment financed with own funds, or with or with funds generated by the project itself for three years, as of submission of the benefit application. 2. Does not require investments to be financed with own funds in order to access IRAE exemption. 3. Investments considered to be in the national interest include the acquisition of movable assets to be used directly in company activities, fixed improvements and intangibles (to be determined by the Executive). 4. Investments made as of six months prior to the application date can be included. 5. Rules classify projects, depending on the investment amount measured in indexed units (UI), as small, medium (tranches 1 and 2), large (tranches 1 to 3), and high economic impact. Project Category Small Amount in millions of UI less than 3.5 Amount in millions of USD less than 0.3 In turn, they could defer the remaining nonexempt 50% by self-channeling until the fifth year following that of the investment. Companies with qualified projects can access IRAE exemption of up to 100% of the eligible investment (regardless of source of financing), depending on the investment amount, which determines project category, and position within the category. a.1 Project rating To determine the amount of the benefit and the period for IRAE exemption, projects are rated based on the matrix of objectives and indicators appearing in the following table For small projects, companies must select one of the following objectives: Job creation Increase in research and development and innovation (R&D+i) Increase in exports Use of cleaner technologies Medium T Medium T Large T Large T Large T , High economic impact over 7,000 over

19 Objective Indicator Points (0 to 10 points) Job creation Decentralization Increase in exports Increase in national value added Use of clean technologies Increase in research and development and innovation Number of net jobs (annual average) Human Development Index (HDI) for Department where project is located Variation in exported amount (with project w/o project) Ratio of wages and local purchases to total sales with and w/o project Investment in cleaner production (CP) with respect to total investment in project (Investment in R&D+i / total investment), or (number of employees in R&D+i / total employees) One point for every 3 jobs [(HDI max. HDI Dept. / (HDI max. HDI min.)] x 10 One point for every USD 200 thousand in exports {[(Wages + local sales) / Sales]w/p / [(wages + local sales) / Sales]w-o/p} -1) x 10 One point for every 10% of investment in CP as share in total investment One point for every 10% of investment in R&D+i for chosen indicator Project s impact on economy Increase in GDP generated by project One point for every 0.003% of increase in country s annual GDP Depending on the points scored, projects will have access to an IRAE exemption ranging from 51% to 60% of the investment during a period of from 3 to 5 years, per the following table. Other projects will be rated based on their scores on the objectives and indicators matrix, weighted according to the investment amount. Depending on scores, they may access the following exemption percentages: IRAE exemption amounts and terms for small projects, per points scored Project category IRAE exemption amount Term Points IRAE exemption % of amount invested Term (years) Medium Tranche 1 70% of amount invested x matrix score / 6 25 years x matrix score / % % 3 Medium Tranche 2 80% of amount invested x matrix score / 8 25 years x matrix score / % % 54% 3 3 Large Tranches 1 and 2 90% of amount invested x matrix score / years x matrix score / % % 57% 4 4 Large Tranche 3 100% of amount invested x matrix score / years x matrix score / % 59% 5 5 High economic impact 100% of amount invested 25 years 10 60% 5 Punta del este my second home 19

20 INVESTMENT PROMOTION Projects having high economic impact must score over 60% on the matrix to access the exemption established. a.2 Matrix selection Medium and large projects may opt for application of the matrix for their category or the matrix applicable to small projects. In this last case, requirements for generating points in the employment generation indicator depend on the type of project and the amount of staff at the company, being more demanding the larger the project or the larger the company. a.3 Exemption ceilings Exemptions cannot exceed the following percentages of income tax payable: a) 90% - years included in the first 50% of the maximum term granted. b) 80% - subsequent years corresponding to 10% of the maximum term. c) 60% - subsequent years corresponding to 10% of maximum term. d) 40% - subsequent years corresponding to 10% of maximum term. e) 20% - subsequent years corresponding to 10% of maximum term. f) 10% - subsequent years corresponding to 10% of maximum term. In all cases, exemption period is computed as of the year in which taxable income is obtained, provided four years have not elapsed since qualification of the project. b. Net Worth Tax Companies can access net worth tax exemption for the full useful life of movable assets applied to the project. In the case of investments in construction works, the term is 8 years if located in Montevideo, and 10 years if located in the interior. c. Import duties and taxes Regulations establish an exemption from import duties and taxes on fixed assets certified as not competitive with Uruguayan industry by the National Office of Industries (DNI) of the Ministry of Industry, Energy and Mining (MIEM). d. Reimbursement of Value Added Tax on construction work Eligible projects can benefit from reimbursement of VAT on local purchases of materials for construction and services hired in connection with construction work. e. Fees and wages for technological development of priority areas For income tax purposes, the regulation permit computing one and a half times the amount of fees and wages for project work in scientific and technological development in priority areas (per articles 49, 52 and 55 of Decree 150/007). Follow-up and control Beneficiaries must file their Financial Statements with COMAP within four months following the close of each business year, accompanied by a public accountant s report (Audit in the case of Large Taxpayers, Limited Review for companies categorized for tax purposes as CEDE Sector firms, and Compilation in other cases) containing information permitting calculation of indicators. The regulation set tolerance margins for achieving the projected points. Additionally, for exceptional reasons alien to the company, unforeseeable at the time of project submission, there is a possibility of obtaining suspension of the time schedule for meeting project targets, and to recompute the terms and benefits. New investments and reclassification If a company complies with the requirements set for a higher category than the original one, it can request the benefits of such category. 20

21 In turn, if new investments are made during the period in which benefits are available, they will be considered in addition to the original investment, and the company may obtain reclassification and extension of terms. Tourism Sector Decree 175/003 Scope Tourism companies are eligible to apply for tax benefits for their tourism projects. The procedures and benefits under this system are applicable to: a) tourism activities providing lodging, cultural, commercial, congress, sports, recreational, entertainment and health services, which constitute a complex unit for the purpose of attracting tourists (hereinafter called Tourism Projects) approved pursuant to Law 16,906 as regulated in the decree. b) Hotels, Aparthotels, Inns, Motels and Vacation Ranches constructed or to be constructed. Applicability A tourist activity will be declared to be promoted when it contributes: To the geographic and touristic development of infrastructure in the area in which the project will be located. To the total or partial coverage of specific needs in the area s tourist offering. To the generation and attraction of tourism. To the creation of innovative tourist services. Tax benefits Tax benefits will be applicable to Tourism Projects promoted under Law , on a step basis, according to progress on implementation of the works and the schedule approved. They are as follows: a. Business Income Tax (IRAE) For purposes of computing IRAE, investments in construction, improvement or expansion of the Tourism Project, pursuant to the terms set forth in the promotion declaration and to the conditions set forth in the Decree, may be amortized over fifteen years, and investments in equipment in five years. b. Net Worth Tax (IP) For purposes of computing IP, investments in infrastructure and building work for construction, improvement or expansion of the Tourism Project, pursuant to the terms set forth in the promotion declaration and to the conditions set forth in the Decree, will be computed as exempt assets at the close of the year in which the works commenced and the ten following years. Investments in fixed assets will be considered exempt at the close of the year in which the asset was acquired and the four following years. c. Value Added Tax (IVA) Credit for IVA included on local purchases of goods and services for use in construction, improvement or expansion (infrastructure and construction works) of the Tourism Project. Exemption from IVA on imports of goods for the same purposes. For investments in fixed assets a credit for IVA will be granted for assets acquired locally and an exemption from tax on imports. d. Import taxes Exemption from 50% on all taxes on imports of materials and goods for construction, improvement or expansion of fixed assets for furnishing the Tourist Project. Investments made under paragraph b above can only make use of benefits for Net Worth Tax, Value Added Tax and Import Taxes when they are made in furnishings and equipment. Option for investors: general or special regime Investors in hotels and tourism complexes have the possibility to choose between the general benefits Punta del este my second home 21

22 INVESTMENT PROMOTION under Decree No. 455/007 and the specific benefits established by Decree No. 175/003 for tourism promotion (investors can choose benefits for certain taxes under one regime and benefits for other taxes under the other). Operator: The furniture for the tourism Project s furnishing, which are incorporated by the operator, throughout life. Use and/or usufruct of the units given by the owners to the operator, for 11 years. Decree 404/010 Scope Promotion of tourism ventures operating under the Condominium Hotels or Condohotels regime. The promotion affords benefits similar to those granted to hotels operating under a traditional scheme. Below is a summary of the benefits which could be obtained by each of the parties involved in a Condohotel. Tax benefits Tax benefits will be applicable to Condohotels according to the following description: a. Business Income Tax (IRAE) Developer: The IRAE generated on the sale of units by the developer is excluded from the exoneration. Operator: Small Projects: up to 60% investment, for up to 5 years Medium Projects: up to 80% investment, for up to 20 years Big Projects: up to 100% investment, for up to 25 years(3) b. Net Worth Tax (IP) Developer: IP exoneration on goods incorporated in construction works, for the period they remain in the developer s estate, for a term up to 11 years as of incorporation. c. Value Added Tax (IVA) Developer: IVA exoneration on goods imported for construction works. IVA credit for purchase in the Uruguayan Market of goods and services for use in the construction works. Operator: IVA exoneration on imports of fixed assets, for use as furnishing. IVA credit for purchase in the Uruguayan market of fixed assets to be used for furnishing d. Import taxes Developer: Exoneration on construction materials and goods imported as necessary for construction works. The developer must choose one of the following options: 100% of the taxes levied on goods which are declared non-competitive with national industry. 50% of the taxes levied on all imported goods. Operator: Exoneration on imports of fixed assets for furnishing. The operator must choose one of the following options: 100% of the taxes levied on goods which are declared non-competitive with national industry. 50% of the taxes levied on all imported goods. This exoneration includes the property where the construction works take place. 22

23 General regime/tourism sector (including Condohotels) Regime Beneficiary IRAE Exoneration Net-Worth Tax (IP) Exoneration Value Added Tax (IVA) Exoneration Import taxes Exoneration General regime Decree Nº 455/007 (*) (Act. Nº ) All Enterprises Small Projects: up to 60% investment, for up to 5 years Medium Projects: up to 80% investment, for up to 20 years Big Projects: up to 100%, for up to 25 years Moveable goods Construction Works IVA Exoneration on acquisition of construction materials and services to be used in construction works Import taxes exoneration on imports of noncompetitive moveable goods Tourist sector Decree No. 175/003 Touristic complexes Depreciation of investments made in: Construction, improvements or expansions (to be amortized over 15 years) Equipment (to be amortized over 5 years) Construction, improvement or expansion (infrastructure or construction works), for a 10 year period (includes properties where the works are located) Fixed assets, for a 4 year period Credit for purchases made in the Uruguayan market and import taxes exoneration on: Goods for final use in construction, improvement or expansion of (infrastructure or construction works) Fixed assets for furnishing or renovation 50% exoneration from all taxes levied on imports of: Construction materials and goods for construction, improvement or expansion Fixed assets for use in furnishing Hotels, apart-hotels, lodging facilities, motels and tourist ranches Only for equipment Only for equipment Only for equipment Condohotels Decree Nº 404/010 Devolper The IRAE generated on the sale of units by the developer is excluded from the exoneration. The furniture for the tourism Project s furnishing, which are incorporated by the operator, throughout life. Use and/or usufruct of the units given by the owners to the operator, for 11 years IVA exoneration on imports of fixed assets, for use as furnishing IVA credit for purchase in the Uruguayan market of fixed assets to be used for furnishing Exoneration on construction materials and goods imported as necessary for construction works. The developer must choose one of the following options: 100% of the taxes levied on goods which are declared non-competitive with national industry. 50% of the taxes levied on all imported goods. Operator Small Projects: up to 60% investment, for up to 5 years Medium Projects: up to 80% investment, for up to 20 years Big Projects: up to 100% investment, for up to 25 years(3) For the investments executed by the developer and the operator. The furniture for the tourism Project s furnishing, which are incorporated by the operator, throughout life. Use and/or usufruct of the units given by the owners to the operator, for 11 years IVA exoneration on imports of fixed assets, for use as furnishing IVA credit for purchase in the Uruguayan market of fixed assets to be used for furnishing Exoneration on imports of fixed assets for furnishing. The operator must choose one of the following options: 100% of the taxes levied on goods which are declared non-competitive with national industry. 50% of the taxes levied on all imported goods. Punta del este my second home 23

24 Permanent or summer residence Punta del Este offers multiple options to enjoy in summer, with a complete and improving infrastructure that brings an increasing number of persons to choose it as the option for residence or second residence. For summer vacations or for year round living, available options include various houses and chalets of excellent construction, that generally have 2 or 4 bedrooms (1 or 2 en suite), living room, fireplace, kitchen, service room, bathroom, garden, barbecue and swimming pool. Starting Price US$ Private Neighborhoods Private neighborhoods or Countries are an interesting home option: a closed residential area in which you can acquire a parcel of land from 500 to 2,000 m 2 to build your desired house according to your personal preferences or buy built ones. Security and services such as the Club House with pool, barbecue, playgrounds, sports fields and gymnasium are shared. Starting Price of Parcels US$ 80,000 Houses from US$ 200,000 24