Uruguay is one of the least known but most enticing locations for high net worths and their businesses thanks to low taxes and friendly laws: Josh Spero reports from South America’s best-kept secret
BACK IN THE days when being compared to Switzerland was a compliment, Uruguay, the best country never to have stolen a moment of your attention, was known as ‘the Switzerland of the South’. Sandwiched between Brazil and Argentina, a powerhouse and a basket case respectively, Uruguay still has many of the charms which made Switzerland attractive for foreign money — only nobody knows it yet.
Just like Switzerland, Uruguay had — and to some extent still has — tight banking secrecy laws. Just like Switzerland, Uruguay has a tax regime which makes foreign investors loosen their ties and undo their collars. It is also an ideal place for those who like to come and visit their money, enjoying its Mediterranean summers as we suffer Scandinavian winters.
Unlike Switzerland, however, Uruguay has survived the Great Recession without enduring global humiliation as a rotten example of all that is wrong with finance — but only after being brought to its knees a decade earlier.
Uruguay has always been the kid brother of Argentina — its GDP is one-thirteenth of Argentina’s and its population one-twelfth — but it has also long acted as a safe haven for private Argentinian money. Through the Peronist era and the military dictatorship, and for the decades of democracy which have followed, wealthy Argentinians moved their money next door.
During the crisis of 2001, when Argentina suffered a bank run and defaulted on its international debt, it emerged that 54 per cent of deposits in Uruguayan private banks were in fact from Argentina. The consequent run on Uruguayan banks and the wider economic problems which leached across the border sent the economy into collapse, with GDP down 20 per cent in four years. Unemployment, inflation and foreign debt surged.
But as the deputy finance minister of Uruguay, Andrés Masoller, points out in his office (which fortuitously resembles something from the Marx Brothers’ Duck Soup), it was precisely this explosion which meant that the one of 2008–09 did not hurt Uruguay nearly as much as many other countries: ‘We restructured our banks after the Argentinian crisis to ensure that they had a higher capital ratio, which was why we did not see a similar collapse here.’ Adrián Zak, who is in charge of promoting inwards investment through Uruguay XXI, a governmental body set up to internationalise the Uruguayan economy, concurs.
THE SOUTH AMERICAN recovery since then has been typified by Brazil, although Uruguay can actually report faster growth in GDP: 7.0 per cent in 2006 (Brazil: 3.7), 7.4 in 2007 (Brazil: 5.4) and 8.9 in 2008 (Brazil: 5.1). Even though Uruguay’s growth in GDP in 2009 fell to 0.6 per cent, Brazil barely escaped annual contraction with 0.1 per cent, and it will (probably) rise to 4 per cent this year.
A figure which better reflects external confidence is the level of foreign direct investment in Uruguay: from a post-crash $397 million in 2004 to $2.2 billion in 2008, with Spain, Argentina and the United States as the three largest (in descending order). Argentina’s current high inflation, economic uncertainty and populist government of Cristina Fernandez de Kirchner have all conspired to keep this growing. (Fernandez nationalised private pension funds, for example.)
Part of what has been driving this foreign investment is Uruguay’s seductive taxation rules, both for individuals and corporations. Until 2007, there was no income tax for non-residents, and although there now is (12 per cent), it only applies to income which derives from Uruguay, so non-residents can run their foreign income through Uruguay without the government touching it. (This is one of the charms of Delaware, a renowned low-tax jurisdiction.)
Uruguay’s standard offshore vehicle — sociedad anonima — is similar to an English trust: it pays no tax on offshore income and assets, except for a $390 annual fee. No records need be published, nor shareholders disclosed; it just has to have a registered director, file and pay its taxes and close its books every year. Leandro Molina, South American specialist at wealthmonitor, points out that wealth managers are just now starting to advise people to look into Uruguay as a sensible place to put their money.
The advantages for entrepreneurs are even more striking. Free trade zones (FTZs) were created in 1987; according to a government document, they ‘permit all types of commercial, manufacturing, industrial and service activities’ conducted with overseas firms to be ‘exempt from all domestic taxes’ as long as the General Trade Authority is aware of them and a minimum of 75 per cent of employees are Uruguayan. Any goods imported into and re-exported from FTZs are also duty-free. (This is an idea that Singapore has recently promoted, showing that Uruguay is on a par with much larger, apparently more sophisticated offshore competitors.)
Companies such as the Tata Group (India’s largest multinational), PepsiCo and Sabre Holdings (developer of travel technology and owner of lastminute.com) have already moved chunks of their service operations into these FTZs. According to Adrián Zak of Uruguay XXI, Uruguay is Latin America’s number one software exporter per capita partially thanks to FTZs.
A major turn-off is slow bureaucracy, which can prove frustrating, but this is not due to corruption: Uruguay was 23rd out of 180 countries in Transparency International’s 2008 Corruption Perception Index. The population is highly educated, too, and the brain-drain of the past two decades has gone into reverse as Uruguayans see the opportunities opening up at home. The return to democracy in 1985, after twelve years of military dictatorship, has allowed ultimately Uruguay to thrive.
THERE ARE OPPORTUNITIES for entrepreneurs everywhere you turn in Uruguay. It is clear in Montevideo that a lot of the city, especially by the port (one of South America’s busiest), is dilapidated. An entrepreneur could buy several blocks, knock them down and put up shopping arcades and hotels and office space. There is currently little competition in these arenas, and it is a great chance to make a mark in a city ripe for revival. It is already flooded with those escaping from Buenos Aires, although they tend to be moving through to the highly fashionable city of Punta del Este. With a redevelopment, perhaps they might be persuaded to stay in Montevideo.
Land has always been a popular investment. The broad plains of Uruguay are fertile, good for soya and cattle, and an alternative for Argentinian farmers penalised by swingeing national tax rates on agriculture and threatened by the populist government.
Farmland is not such good value any more, having risen to $2,300 per hectare — a fivefold increase in the past five years — but its quality in the west of Uruguay is superb, reaching 150 on the CONEAT productivity scale (where 100 is average and beach is 40). Once you have tasted Uruguayan beef, you will understand what 150 really means. The original Vestey brothers, in fact, made their money in South American meat and ran their finances from Uruguay.
The alternative is to buy land not for agriculture but for property, pleasure and space. A friend has bought hundreds of hectares of Uruguayan land because it is a sound investment, given the rise in land prices, and because he can enjoy it in person thanks to a startlingly beautiful villa he has refurbished in a small town nearby. Zak says a popular strategy is to buy 1,000 hectares, which ‘allows horse-riding for hours and you won’t see anybody’, and someone recently mentioned that an English friend of theirs was looking for 30,000 hectares.
Many industries are up for sale. There are still some government monopolies, but several have been dismantled over the past twenty years and even those industries in which monopolies still exist are allowed to make contracts for services with foreign-owned companies. For example, the government is planning on letting the state-owned oil company, ANCAP, make deals with foreign partners, and while fixed-line telephony is controlled by the state, anything beyond that in telecommunications is up for grabs.
There is an almost pathological streak in the Uruguayan government devoted to enticing foreign investment. Tax incentives have been lavished on this effort: up to 100 per cent of total investment is deductible against income tax for 25 years, dependent on job generation, innovation and other factors. There are also regular roadshows to promote the country around the world.
Juan Barboza, the commercial secretary to the Uruguayan Ambassador to Great Britain, says it is a long-term and comprehensive effort: ‘Uruguay’s government has been promoting investment and commerce to the UK for a long time. In terms of investment, we are planning for November of this year to host a one-day investment promotion seminar in London, where we will be inviting the UK’s leading companies in the industries Uruguay’s government is interested in attracting, to show them that Uruguay is an excellent environment for many businesses.’ A recent Chinese trade fair indicated that the Far East is starting to pay attention to the Far West.
THIS EXTERNAL FRIENDLINESS has not changed since the election of President Jose Mujica last November. Mujica was suspected by many of being anti-big-business as he is a former guerrilla leader, but his declaration to Argentinian businessmen that he would continue his predecessor’s open attitude has been warmly welcomed.
‘We need investments, because we need more and better jobs,’ he said. ‘And that has a previous condition: clear and tangible rules of the game which respond to an objective analysis that promotes the right atmosphere for investments. This means there are no strides or short cuts.’
Similarly, one of the chief arguments of deputy finance minister Masoller is that Uruguay is not just politically stable but fiscally consistent: a change of government has not meant a change of policy. A long tradition of honouring contracts and recognising property rights has meant that the expropriations which occur in other South American nations are almost unthinkable in Uruguay.
Uruguay’s problem is that it has not caused any trouble of late: if it had teetered on bankruptcy during the recent financial crisis, you could be sure that newspapers would have been publishing lists of the top ten Uruguayan exports, famous Uruguayans and potted biographies of its politicians. Instead, it has flown beneath global notice precisely for that reason, because it has been a small but consistent success.
Just like the good, quiet child who gets ignored — unlike Switzerland, the noisy, naughty child — Uruguay has continued to develop as an economy and offer its varied enticements to those in the know. Which now includes you.
Illustration by John Catherall
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