URUGUAY: An Introduction to Private Wealth Law
Uruguay’s Legal Renaissance: Paving the Way for Investment Opportunities
For the past few years, there has been a steady but increasing wave of transformation in Uruguay’s legal system. This is largely due to Uruguay positioning itself as an oasis in Latin America and being recognised as a promising investment destination. Internationally known for its political, social and democratic stability, Brazil and Argentina’s “little brother” has gained its seat at the grown-ups’ table.
In our previous article, we discussed Uruguay's approval of various legal frameworks that have contributed to its recognition as a regional hub. These frameworks, such as the free zone regime, international trading and the benefits given to the software industry, have boosted the economy. Another important decision that Uruguay has made to transform itself into an international platform for exporting financial services was the modification of a law approved during 1996 related to investment funds.
Ultimately, it is Uruguay´s continuous efforts to meet the needs of its neighbours and adapt to requests from the international community that make the country a great place to live, do business and eventually retire.
Uruguay’s commitment to update its legal framework
After successfully complying with the European Union’s requests and being removed from the EU Code of Conduct Group (Business Taxation) Annex II, Uruguay once again became a co-operative jurisdiction for tax purposes.
In this regard, Uruguay made some relevant modifications to its corporate income tax (CIT) regime by creating exceptions to the territoriality criteria adopted for foreign passive income obtained by CIT taxpayers who are part of a multinational group and do not comply with the minimum economic substance requirements of the country.
From November 2022 to the present day, the above-mentioned amendments have been well received. An increasing number of international holding companies have adequate economic substance in Uruguay to comply with the requirements, thus exempting themselves from the payment of CIT on all foreign passive income.
Amendments to investment fund law
During recent years, the investment fund industry has undergone constant development, largely because it has responded to the sophistication and dynamisation of capital markets, allowing for better returns along with a decrease in risks. Investment funds also constitute a source of risk capital financing for ventures and projects with high capital demands, and they generate tax revenue and highly specialised jobs.
In line with the above, and consistent with the commitment to stay in the “major leagues”, following the examples of Luxemburg and Brazil, Uruguay has passed some amendments to update the rules regarding investment funds. In this context, the executive branch has sought to modernise the existing regime by including articles amending investment fund law in Budget Act No. 19,924.
The modifications were introduced on the basis of two key concepts:
(a) the "qualified investor", which allows investment funds directed at this class of investors to be exempted from the investment limits established for investment funds in general; and
(b) permission for investment fund-management companies to delegate the management of fund assets to professional managers, be they local or foreign. In this way, additional business generators are incorporated, enabling enhanced utilisation of the instrument.
Qualified investors
The principal amendment made to investment fund law is the introduction of the new concept of private investment funds for qualified investors; for these funds, there are no investment limitations, contrary to the rules applicable to general investment funds. In this context, the new regulations define a qualified investor as follows: “those individuals or legal entities who possess the necessary experience and/or knowledge to understand, evaluate, assume, and adequately manage the risks inherent to any investment decision”. The regulations include an exhaustive list of entities that shall be considered as qualified investors, such as insurance companies, investment advisors, portfolio managers, investment fund managers, financial fiduciaries and representatives of foreign financial institutions, among others.
In addition to listing the entities eligible for qualified-investor status, the law specifies certain criteria for individuals and entities seeking to be classified as qualified investors, the first of which is a balance of financial assets of no less than USD633,000 or an annual income no less than USD237,000. Additionally, individuals and legal entities must comply with any one of the following conditions.
(a) Possess a professional degree and prove completion of certain training courses (eg, relevant courses on the securities market or a postgraduate degree in the area of finance).
(b) Have held, during at least two consecutive years, a position related to investment decision-making, providing investment advisory services or portfolio management within an institution that is regulated and supervised by the Uruguayan Central Bank or by the securities market regulatory body in their country of origin.
(c) Have executed, during the last year, a minimum of 40 operations with a total amount equal to or greater than USD1,200,000, involving instruments similar in nature and risk to the type of product to be purchased. It is specified that operations that have been executed within the framework of portfolio management mandates will not be considered.
Delegation powers
The other amendment to investment fund law expressly establishes that investment fund-management companies may manage the assets comprising investment funds directly, or through external services. This represents a major amendment, since this was not previously permitted by the Uruguayan Central Bank.
Additionally, it is expressly stated that investment funds do not constitute companies, lack legal personality and must be managed by an investment fund-management company to which powers of domain are attributed without being the owner, such that – on behalf of the contributors – an adequate composition of assets is assured, directly or through external services, considering risks and returns.
Furthermore, regarding responsibilities, the Investment Fund Act was also modified such that, regardless of whether assets are managed directly or indirectly through external services, the management company and its directors, legal representatives, trustees, administrators and auditors shall be jointly liable for any damages that may be caused to its investors by not complying with the applicable law and regulations of the Investment Fund Act.
Lastly, the new Investment Fund Act stipulates that funds aimed at qualified investors may vary in par value and characteristics. This facilitates the creation of different classes of participation within the same investment fund, providing asset pools independent from the assets of other classes of participation.