Uruguayan Offshore Corporations

This memorandum describes the principal characteristics of the Uruguayan offshore corporations, usually known as Financial Investment Corporations ("Sociedad Anónima Financeira de Inversión", hereinafter "SAFI"). A financial investment corporation or "holding company" is defined as a corporation whose main activity is to invest abroad in securities, bonds, shares, notes, debentures and property, on its own account or on behalf of others (Art. 1 of law No. 11.073 of June 20, 1948). The main advantage of this form of business enterprise is that it is only subject to an annual tax of 0,3% (three per thousand) on its net worth, regardless the income of the company and provided its assets meet certain requirements. Different aspects of these corporations are discussed below.

A SAFI may be incorporated by a private or a public instrument. In any case such instrument must state the company’s object, duration, capital and manner of constituting it, domicile, method of administration, conditions of issue of shares. In order to do business, an administrative authorization - granted by the General Inspection of Finance - is also required. Corporate documents and respective authorizations must be recorded with Registry of commerce and an excerpt must be published in the Official Gazette and in other daily. The SAFI may start doing business as a corporation under formation immediately after the articles of association or by-laws is executed, but while its approval and registration is still pending. However, during this period, the founders are jointly liable for the activities of the corporation. Incorporation procedures may involve a period of not less than four months. Due to this time-frame, it is customary to purchase an already incorporated "virgin" SAFI, which has performed no activities. Prices of incorporated SAFIs are very reasonable. Purchase of such SAFIs entails no legal risk for the purchaser relating to eventual prior liabilities. Amendments into by-laws require the same proceedings necessary for incorporation, with a similar tame-frame involved.

Shareholders Shares may be nominative or shares may belong in whole to one shareholder or be divided among several shareholders. Shareholders may be individuals or corporate entities. No restrictions are placed in terms of the shareholders nationality or domicile. Liability of shareholders is limited to the capital they have subscribed. The Shareholders Ordinary Meeting must approve balance sheet, decide upon the distribution of dividends if any, and as mentioned below, appoint new members of the Board of Directors, pursuant to by-laws provisions.

Board of Directors The company may be administered and represented by a single Administrator or by a Board of Directors comprised of two or more members as provided in the by-laws, whether individuals or corporate entities, nationals or foreigners, residing in Uruguay or abroad. If directors are domiciled abroad, at least one of them must appoint an attorney-in-fact in the country, who shall be responsible before tax offices. In the absence of specific provisions, Directors are elected by the Shareholders Meeting for a one year term. However, articles of incorporations may set forth a different tenure. They may normally be represented at Board Meeting by telex, telefax or proxy. Directors powers are restricted to those defined in the articles of association or by-laws.

Restrictions imposed over Offshore Companies’ Activities

Pursuant to Law No. 11.073 (Arts. 1 and 2), SAFIs may not engage in the following activities: a) Offer stock for public subscription, or list securities in Uruguay's stock exchanges; b) Receive deposits in cash from the public, or engage in banking, mutual credit or capitalization activities; c) Hold stock, debentures or any kind of securities issued by local corporations other than SAFIs shares; d) Hold real estate or mortgage credits in Uruguay; e) Partake in Uruguayan public or private bids; f) In any one year, transfer funds to Uruguay stemming from the SAFI's direct investments abroad in excess of 50% of the SAFI's paid-up capital and reserves; g) Transfer funds to Uruguay stemming from the realization of foreign assets; h) Participate in the offering of local public debt stocks, debentures or any other commercial papers; i) Partake in the financing of public utility companies; j) Enter into loan operations with the Central Administration, City Halls or any other commercial papers; k) Execute any loan or investment transaction that would result in control over local corporations; and l) Hold for more than one year, stock in excess to 30% of the total capital stock issued by each of two or more foreign companies principally engaged in the same industry in the country of their incorporation.

Taxation of Uruguayan Offshore Corporations

SAFIs are only subject to an annual tax at the rate of 0.3% (three per thousand) on their net worth, and are exempted from any other taxes or duties or contributions, whether on their income or capital. This preferential tax treatment applies when the SAFI has no assets located in Uruguay, other than (i) National Debt, Mortgage Instruments or Municipal Titles, and/or (ii) bank accounts in foreign currency not exceeding 10% of the SAFI's total assets. The tax may be paid in advance for up to 15 years, in which case the corporation is free from succeeding changes in tax rates. The present tax rate of 0.3% has been applied since the original SAFI statute was enacted in 1948 and there has not been any discussion in the country about an eventual increase. Regarding calculation of the applicable tax, when total liabilities exceed twice the paid in capital of the corporation, the net worth computed for tax purposes is increased by the excess. An adequate assets-liability relationship allows a reduction in the applicable tax down to an optimum of 0.1% (one per thousand) on total assets. For instance, a SAFI with a paid in capital and total assets of US$100,000 would pay a tax of U$ 300. It would still continue to pay US$300 when its total assets increase to US$300,000, if such assets derive from a US$2000,000 loan. As you note, the effective tax rate on total assets would, in the example, be reduced to 0.1% (one per thousand).