Article by Andrés Durán Hareau1

I. Introduction

It is well known that one of the main variables considered by foreign investors, to make an investment decision in another country, is the quality of its legal framework, in particular the applicable rules regarding investment protection.

Uruguay has traditionally been considered as a country with a friendly legal framework for foreign investments. Strong public policies have been implemented in order to attract additional foreign investments into the country, and evidence indicates that FDI’s rates have been consistently growing during the last years.

One important reason for this growth is the implementation of "Project Orion" - a massive investment carried out by the Finnish company Oy Metsä-Botnia Ab (hereinafter "Botnia"), consisting in the construction and operation of a greenfield bleached eucalyptus kraft pulp (BEKP) mill, with annual capacity of one million tons, in Fray Bentos, Uruguay, with an estimate investment of US$ (hereinafter the "Project", "Project Orion" or the "Botnia Project"). The feasibility studies and the permit process of the Project begun in 2003, the investment decision was made in 2005, and project completion is expected during the last quarter of 2007.

Project Orion is a landmark case in Uruguay since it represents the largest foreign direct investment ("FDI") ever made in this country. It also represents the largest investment ever made by a Finnish company outside Finland. Such an investment would not have been possible in a country with a weak legal framework regarding foreign investments. Indeed, in our opinion, the Botnia Project has been feasible, among other considerations, due to the strong investment rules applicable in Uruguay, which provided the investor enough comfort about the protection of its investment.

This article will describe the main aspects of the above referred legal framework. In particular, after a brief overview of the general investment rules applicable in Uruguay, this article will analyze the main characteristics of two essential legal tools that made Project Orion possible: (i) The Free Trade Zone Regime in Uruguay, and (ii) the Uruguay-Finland Bilateral Investment Treaty. As indicated below, the Botnia Project has been implemented in a Free Trade Zone, specifically created for this purpose, and the Botnia Project has been backed-up by a comprehensive Bilateral Investment Treaty between Uruguay and Finland.

II. Overview Of General Investment Rules

The main general rules regarding investment development and protection are given by Act Nº 16.906 (the "Investment Law") and Act Nº 14.178 (the "Industrial Promotion Law"). These Acts are complemented, with respect to certain relevant matters described below, by the Corporate Act Nº 16.060, and the Free Trade Zone Act Nº 15.291, among others. From the analysis of this legal framework, it is important to highlight the following features of Uruguayan Investment General Regime:

  • Uruguayan Law provides no discrimination whatsoever with foreign investors vis a vis national investors;
  • Foreign investments are admitted without any previous authorization or filing requirement, before the Central Bank or any other governmental agency;
  • There are no restrictions or limitations regarding the percentage of equity that foreigners may own in local businesses (save for certain exceptional areas subject to specific regulations);
  • There are no restrictions or limitations to appoint foreigners as Directors of Uruguayan companies, residents or not;
  • There are no restrictions or limitations for foreign investors seeking to set up a local operation with respect to the kind of business form they are allowed to use;
  • Uruguayan Law provides total economic and exchange freedom;
  • Foreign currency inflows and outflows are subject to no restrictions; Uruguayan Law guarantees the free remittance of capital and profit abroad in freely convertible currency, as well as other investment-related funds.
  • Bank secrecy is provided for and protected by law;
  • Investors can obtain important fiscal benefits for their investment projects and the State is under the obligation to pay them damages if it changes or eliminates the benefits granted.

It is possible to ascertain, without any difficulty, that the above referred characteristics of Uruguay’s Investment Legal Framework make it very easy for a foreign company to establish an investment in Uruguay, with total freedom, and with enough guarantees.

The following chapters will address the specific legal framework of Uruguayan Free Trade Zones, and the main characteristics of the Uruguay-Finland Bilateral Investment Treaty; both played an essential role in the Botnia Project and, as explained hereunder, are also great indicators about the friendly legal environmental for FDI Projects in Uruguay.

III. Free Trade Zone Legal Framework

The Free Trade Zone Act Nº 15.291 (the "FTZ Act"), its modifications and their Regulatory Decrees contain the main provisions governing Free Trade Zones. The FTZ Act declared the national interest in the promotion and development of Free Trade Zones, with a view to "promoting investment, expanding exports, increasing the use of domestic labor, and encouraging international economic integration".

Free Trade Zones are public or private areas in the national territory, effectively fenced and isolated, established by the Executive Power. All types of industrial, commercial and service activities can be undertaken in Free Trade Zones, including installation and operation of manufacturing establishments. Users of Free Trade Zones (as explained below) are subject to an exceptional beneficial tax regime.

The two main players of this legal regime are the Free Trade Zone Operators and the Free Trade Zone Users. Free Trade Zone Operators refer to those public or private persons that are authorised to operate Free Trade Zones and that are entitled to provide direct or indirect Free-Trade Zone Users, in exchange for a price, the necessary infrastructure to carry out their activities within the Free Trade Zone. Direct and indirect Free Trade Zone Users, refer to the Free Trade Zone Companies that carry out their activities inside the Free Trade Zone, and which are exempted from all present and future taxes, with the exceptions indicated below. Direct users pay a rent to the operator for the usage of space and services; and, in turn, indirect users pay a rent to the direct users.

Direct and indirect Free Trade Zone users are exempted from all present or future national taxes, including those requiring a specific exemption. In this connection only two exceptions are applicable: a) the Corporate Income Tax on the dividends or profit credited or paid to individuals or legal persons domiciled abroad, when such income is taxed in the country where the beneficiary is domiciled and such country offers a tax credit on the taxes paid in Uruguay. When such tax credit is not available because the beneficiary has recorded a negative taxable income, such income will be considered to be exempt from this tax. In all other cases, the Corporate Income Tax payable is nil; b) Social Security taxes (provided however that if the foreign employees working in the Free Trade Zone have declared their will not to be covered by the Uruguayan social security system, no social security taxes will be payable). These foreign employees may not add up to over 25% of the total headcount of the company.

All goods, merchandise and raw materials, whatever their origin, introduced into the Free Trade Zones are exempted from all customs, import fees, duties and taxes generated from such transactions. Also, said goods are allowed to exit the Free Trade Zone to third countries exempted from all taxes applicable to export activities. Free Trade Zone companies cannot undertake activities outside the Free Trade Zone area in Uruguay, but they can carry out off-shore transactions.

It must be stressed that this particular legal regime is fully guaranteed by Law. Indeed, according to the FTZ Act, the State is under the obligation to pay any damages that might be suffered by a Free Trade Zone User if during the validity of its agreement with the Free Trade Zone Operator any tax exemption, benefit or right granted under the Free Trade Zone Act is eliminated or discontinued.

Project Orion has been implemented in a Free Trade Zone specifically created for this purpose. In effect, the Free Trade Zone of Project Orion is a private Free Trade Zone operated by a subsidiary of Botnia (Botnia Fray Bentos S.A.) and whose main Free Trade Zone User is another subsidiary of Botnia (Botnia S.A.). Hence, Project Orion enjoys all the above referred benefits, fully guaranteed by the Uruguayan State.

IV. The Uruguay-Finland Bilateral Investment Treaty

The Uruguay-Finland Bilateral Investment Treaty (hereinafter the "Treaty") was signed on March 21, 2002, and ratified by both Finland and Uruguay (Uruguay ratified it on May 12, 2004, by Law No. 17.759). The ratification of this Treaty was of ultimate importance for the investment decision of the Botnia Project since it provided an extra protection to the investor (in addition to the Free Trade Zone legal regime, and the general legal framework in force in Uruguay).

This Treaty also represents great evidence about Uruguay’s friendly legal regime for investment promotion and protection since, ultimately, these rules (specifically applicable to Finnish investors for their investments in Uruguay) are directly or indirectly already covered by Uruguayan Law for any investor. Moreover, it must be noted that Uruguay has ratified more than 20 Bilateral Investment Treaties of this kind, including with the US, China and several members of the EU. The Treaty’s main features are the following.

(i) Definitions of "Investment" and "Investor": The Treaty defines the term "Investment" as every kind of asset established or acquired by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with the laws and regulations of the later Contracting Party including, in particular, though not exclusively:

  1. movable and immovable property or any property rights;
  2. shares, stocks, debentures or other form of participation in a company;
  3. titles or claims to money or rights to performance having an economic value;
  4. intellectual property rights such as technical processes, know-how, goodwill;
  5. concessions conferred by law, by administrative act or under a contract by a competent authority, including concessions to search for, develop, extract or exploit natural resources.

The Treaty defines the term "Returns" as any profits, dividends, interest, royalties, capital gains or any payments in kind related to the Investment. The term "Investor" is defined as:

  1. any natural person who is a national of either Contracting Party in accordance with its laws or;
  2. any legal person such as company, corporation, firm, business association, institution or other entity constituted in accordance with the laws and regulations of the Contracting Party and having its seat within the jurisdiction of that Contracting Party.

(ii) Promotion and Protection of Investments: The Treaty provides that each Contracting Party shall, in its territory at all times, accord to Investments of Investors of the other Contracting Party fair and equitable treatment. In addition, each Contracting Party shall in its territory not impair by unfair, discriminatory, arbitrary and unreasonable measures the management, maintenance, use, enjoyment, acquisition or disposal of investments of investors of the other Contracting Party

Investments made by Investors of one Contracting Party in the territory of the other Contracting Party, or returns related thereto, shall be accorded treatment which is not less favourable than the host Party accords to the Investments and returns made by its own Investors or by Investors of the most favoured nation, whichever is the more favourable to the Investor. The Treaty excludes those benefits related to any treatment, preference or privilege by virtue of an existing or future free trade area, customs union, common market, regional labour market agreement or similar institutions to which one of the Contracting Party is or may become party

(iii) Expropriation: The Treaty provides that Investments by Investors of a Contracting Party in the territory of the other Contracting Party shall not be expropriated, nationalised or subject to any other measures, direct or indirect, having effect equivalent to expropriation or nationalization, except for a public interest, on a non-discriminatory basis, under due process of law, and against prompt, adequate and effective compensation. It also provides that such compensation shall amount to the fair market value of the expropriated investment at the time immediately before the expropriation was taken or became of public knowledge, whichever is earlier.

(iv) Compensation for Losses: The Treaty provides a prompt, adequate and effective restitution, indemnification, compensation or other settlement for Investors of one Contracting Party whose Investments suffer losses owing to war or other armed conflict, a state of national emergency, revolt, insurrection or riot in the territory of the other Contracting Party; The Treaty adds as cases in which compensation or restitution shall be provided: requisitioning of Investments or a part thereof by the armed forces or authorities, or the destruction of Investments or a part thereof by armed forces or authorities, which was not required by the necessity of the situation.

(v) Free Transfer: The Treaty regulates the free transfer of payments in connection with an Investment. Transfers shall be made without any restriction or delay, and in a freely convertible currency. The Treaty sets out examples of payments which will benefit from this disposition, as follows:

  1. the principal and additional amounts to maintain, develop or increase the Investment;
  2. returns;
  3. proceeds obtained from the total or partial sale or disposal of an investment, including the sale of shares;
  4. the amounts required for payment or expenses which arise from operation of the investment, such as loans repayments, payment of royalties, management fees, licence fees, or other similar expenses
  5. earnings and other remuneration of personnel engaged from abroad working in connection with an Investment.
  6. compensation payable for losses
  7. payments arising out of the settlement of a dispute.

(vi) Entry and Sojourn of personnel: The Treaty specifies that the Contracting Party shall permit natural persons of the other Contracting Party, and other personnel employed in connection with the Investment by an Investor of the other Contracting Party, to enter and remain in its territory for the purpose of engaging in activities connected with the Investment.

(vii) Disputes between an Investor and a Contracting Party: The Treaty provides that any dispute should be settled amicably between the two parties concerned. If the dispute has not been settled within 6 months from the date at which it was raised in writing, the dispute may, at the choice of the investor, be submitted either to:

  1. the competent courts of the Contracting Party in whose territory the investment is made; or
  2. arbitration under the rules of the International Centre of Settlement of Investment Disputes (ICSID), or
  3. arbitration under an ad hoc arbitration tribunal, which unless otherwise agreed upon by the parties, is to be established under the rules of UNCITRAL.

(viii) Application of other rules: The Treaty provides that if any rule of law of either Contracting Party, or current or future obligations under international law between the Contracting Parties, contain a regulation, whether general or specific, entitling Investments made by Investors of the other Contracting Party to a more favourable treatment that is provided in the Treaty, such provisions shall, to the extent that they are more favourable to the Investor, prevail over the Treaty.

Having analyzed the above referred characteristics of the Treaty it is easy to conclude that Project Orion has been carried out within the context of a comprehensive BIT, that complements the already strong general investment legal framework, and the Free Trade Zone legal regime.

This strong legal framework, protecting the Botnia Project, is even more evident in the light of the notorious international conflict between Uruguay and Argentina regarding this Project, which led Argentina to initiate proceedings before the International Court of Justice at the Hague ("ICJ"), alleging that Project Orion’s authorization, by the Uruguayan State, required prior consent from Argentina (based on the Uruguayan River Treaty signed by both countries). The positions of Uruguay and Argentina have been clearly stated at the ICJ, and it is not the purpose of this article to discuss the legal grounds of this conflict. Notwithstanding the foregoing, it is important to highlight that despite the conflict with Argentina, and all the inconveniences that this situation has caused to Uruguay so far (including important economic damages), the rule of law has always prevailed and the Botnia Project has been fully supported, in line with the legal framework referred in this article.

V. Conclusion

In order to attract significant FDI, a country must offer investors an adequate legal regime for the protection of their investments. Otherwise either the risks of the investments turn to be extremely high, and hence costly, or the investors decide to invest in other country.

Uruguay, as evidenced in this article, and as evidenced by the Botnia Project, has a friendly investment legal regime, offering enough security to foreign investors to establish high-profile investments in Uruguay and to guarantee their returns of investments.

The Botnia Case is undoubtedly a perfect example of Uruguay’s strong legal framework in investment matters, and should be a great background for future investors to invest in the country, fostering even more the FDI’s rates.


1. LL.M, Georgetown University. Member of Hughes & Hughes Law Firm, Montevideo, Uruguay.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.