Thursday, 4th February 2010

Brazilian meatpacker Marfrig Alimentos has closed its takeover of Uruguayan leather exporter Zenda for US$50 million, in a deal spanning nine jurisdictions.

Marfrig used its Brazilian in-house team and Uruguay’s Guyer & Regules for the deal, turning to other outside lawyers for local tax advice and due diligence in the countries where Zenda’s processing plants and sales offices are located – including Ritch Mueller SC in Mexico, Uriburu-Bosch & Asociados in Argentina, independent practitioners in Chile and the US, and other firms in Germany, South Africa and China.

Uruguay’s Lapique & Santeugini gave local advice to Zenda, and used its membership of the International Alliance of Law Firms to find other counsel in Latin America – Martorelli & Gouveia Advogados in Brazil, Segal Turner & Asociados in Argentina, D&A Morales & Asociados SC in Mexico and Ramirez Asociados Abogados in Chile.

Under the deal, which was announced in October and closed on 20 January, Marfrig has bought a 51 per cent stake in Zenda and will acquire the remaining 49 per cent in tranches over the next three years.

Zenda, established in 1890 and formerly wholly owned by Uruguay’s Branáa family, produces upholstery leather for use in cars, aircraft and furniture. Its tanneries in Uruguay, Argentina and South Africa process around 7,000 rawhides per day. Marfrig says the deal will guarantee Zenda a reliable flow of raw material.

Other press clippings:

• International Law Office: $50 million acquisition Marfrig Alimentos SA, Grupo Zenda
• Leather International Magazine: Marfrig buys controlling stake in Zenda
• AIN: Zenda Joins Marfrig To Complete Process Chain
• EL PAÍS: Marfrig ya controla la curtiembre Zenda
• EL PAÍS: Marfrig compra parte de Zenda
• EL PAÍS: Marfrig se amplía en Uruguay y se queda con el 51% de Zenda
• OBSERVA: Grupo Marfrig compra Zenda por U$S 49,5:

You may read an introduction to the book and view its cover, index and foreword here (in Spanish only).

In December 2003, Act 17.703 which regulates trusts was approved, giving Uruguay the possibility to develop and use an instrument which is used in different countries and used for different purposes for investments, guarantees, net worth administration, asset securitization and solutions to companies in bankruptcy proceedings.

The possibility of using Uruguayan Trusts with Uruguayan Corporations that can have bearer shares and are exempt of taxes, if their activity, operations, income or assets are not Uruguayan, make the combination of these two instruments an ideal way to plan different operations which can be exempt of taxes.

2. Parties

2.1 Grantor or Trustor

The Grantor is the proprietor of the assets being transferred to the Trust, and they must be destined and administered according to the Trust Agreement. The assets can exist at the time the agreement is signed or can be expected to exist in the future.

The Trustor can be an individual or a legal entity, for example a Uruguayan corporation with bearer shares and a director furnished by our firm.

2.2 Trustee

The Trustee will be in charge of the administration of the Trust in order to achieve the purpose of the Trust. Trustees must comply with the instructions stated in the Trust Agreement and are able to transfer the assets and rights in the Trust fund.

The Trustee can be an individual or a legal entity, for example a Uruguayan corporation with bearer shares and a director furnished by our firm. Trustor and trustee may be the same person.

If a Trustee acts as Trustee in more than five Trusts during the year, applicable law considers it a professional Trustee and filings and disclosure obligations apply.

The Trustee has the legal obligation to have a separate accounting for the Trust and maintain secrecy regarding the Trust’s operations, agreements, assets and other information related to the Trust.

Trustees are required to fulfill fiduciary duties, and are liable according to the same standard used for directors of corporations. They are responsible for the taxes the Trust must pay, if the Trust does not make the corresponding payments.

2.3 Trust Beneficiary

The Trust Beneficiary will receive the assets or profits from the Trust Fund. The Trust Beneficiary can be the Grantor or a third party, which may be an individual or a legal entity, like for example a Uruguayan corporation with bearer shares and a director furnished by our firm. It can also be a persona that will be born or an entity that will exist in the future and there can be more than one Trust Beneficiary.

The Trustee cannot be the Trust Beneficiary, except in Trusts used as guarantees which are executed for the benefit of a financial institution.

3. Trust fund

The assets and rights that compose the Trust fund are separated from the assets and rights of the trustee, Trustor and beneficiary. This means that:

• Creditors of the Grantor or Trustee may not reach the assets or rights of the Trust Fund.
• Creditors of the Trust Beneficiary can also not reach the assets and rights while they are in the Trust Fund.
• The trustee is not liable with its own assets for the obligations of the Trust Fund.

4. Tax issues

According to the territorial tax system applicable in Uruguay, if the activity, operations, profits, or assets of the Trustor, Trustee, Trust Beneficiary and Trust are abroad, no taxes will be levied.

If the Trustee is a Uruguayan Free Zone Corporation, taxes will also not be levied on the income or retribution of the Trustee.

It the Trust, Grantor, Trustee or Trust Beneficiary have income or assets in Uruguay, they will be levied with taxes, unless they are Free Zone Corporations.

5. Constitution formalities

The Trust is a simple private agreement which requires certification of the signatures of the parties involved or the necessary participation of a public notary if there is real estate involved in the assets transferred to the Trust Fund.

The Trust can be constituted in Uruguay or abroad, in this last case the Trust agreement must be legalized for Uruguay.

The Trust agreement must be filed with the National Register and the names, domicile, nationality and passport of the Trustor and Trustee must be stated. If they are national legal entities or from abroad, the following must be stated: type of legal entity, domicile, filing before the IRS in Uruguay, assets in the Trust Fund and destination of the assets. Foreign companies that act as Grantors are not required to comply with filings as a branch in Uruguay.

6. Examples of possible operations

6.1 Net worth administration

A Trust used for the administration the net worth of a person can be used for estate planning, tax planning, family distribution of assets, anonymity in relation with certain assets o just the mere administration of the net worth by a Trustee.

If the assets are transferred to a corporation with bearer shares that will be the Trustor and then another corporation with bearer shares is used as Trustee, can make this operation totally anonymous and the Trust can be administered by “controlling” a director of the corporation that acts as Trustee, which can be provided by our firm.

Our firm can provide the corporations with bearer shares and directors in 3 day in order to build the mentioned structure and start operating.

6.2 Collateral

Using a Trust fund as collateral can make recovery for creditors much faster and much cheaper, avoiding repossession procedures and public auctions.

6.3 Investments with different investors

In complex projects such as highway constructions, real estate developments, financial operations, the trust can be used to control the flow and distribution of cash and protect the different rights of participating parties with different interests and expectations.

6.4 Project financing

Credit can be obtained by separating the funds flow in a Trust, and issuing securities in exchange.

6.5 Bankruptcy proceedings

The Trust can allow the constitution of guarantees and refinancing methods, with an independent third party acting as trustee.

6.6 Administration of institutions

Finally, Trusts can be used to give a professional third party the administration of institutions such as sports clubs, private parks, scientific institutions, universities, etc.

The main aspects that bring Uruguay into consideration at the time of planning offshore regional or international business operations are:

• no limitations to move funds and currency exchange,
• good financial system and bank secrecy as well as
• corporations with bearer shares that allow the anonymity of shareholders.

II. Corporations

Three different types of corporations exist in Uruguay that can be used to develop different offshore operations, with excellent tax benefits.

1. The Sociedad Anónima Financiera de Inversión (SAFI)

SAFIs, usually referred to as offshore corporations, must have their business, activities or operations outside Uruguay. They can invest in securities or real estate as well as develop commercial activities. SAFIs pay an annual tax of 0.3% on their net worth, being exempt from any other tax on income, net worth, etc.

The Tax Reform Act prohibited the incorporation of new SAFI as of July 1st, 2007 and also established that SAFIs will maintain their specific tax regimen until December 31st, 2010.

2. Free Zone Corporations (FZC)

Free zones are free commerce and industrialization zones, controlled and looked after by Uruguayan authorities and administered by the State and/or private companies, who manage the premises.

Free Zone Corporations that become Free Zone Users, acquire the right to operate in the free zone by signing a contract with the operator of the zone.

They have total exemption of national taxes (net worth, income, VAT, etc.) on operations done by user entities, total exemption of import-export taxes on the entrance and exit of goods or services to and from the free zone.

The main operations that are usually performed by this type of corporation are: distribution and warehouse centers, call centers, shared services, financial services and professional services, software development. The highly qualified workforce at low wages, give Uruguayan free trade zones a great advantage to develop these activities.

3. Domestic Corporation

The domestic corporation is the normal corporation that is used to develop business in Uruguay, but it can also be used to perform activities outside Uruguay without being subject to taxes since Uruguay only taxes income or assets in obtained or in Uruguay. The advantage of the domestic corporation with relation to the SAFI is that the domestic corporation is not internationally considered an offshore corporation.

4. Main characteristics of Uruguayan Corporations

It is possible, and frequently done, to buy a company already incorporated and authorized by public authorities with no prior activity, which enables the company to start its activities immediately (off the shelf companies).

Once the company is incorporated, it can have only one shareholder. The shareholders may be individuals or legal entities, national or foreigners, residents or not residents of Uruguay. The shares can be nominative or bearer and must have par value. The shareholders can be represented by proxy letter, telex or any other written way.

According to what the articles of incorporation state, the board of directors can be made up of one or more members, who can be individuals or legal entities, Uruguayan residents or not. The board of directors can meet in Uruguay or abroad whenever it considers it necessary*.

The corporation must have at least one Shareholders Meeting during each year, in which the balance sheet should be approved. This Meeting will decide the destination of the profits and will appoint the new board of directors, unless the articles of incorporation establish a longer period of time for the director’s offices. The Shareholders Meeting must take place in the country, but since shareholders can give proxies, this is not a problem.

5. Possible Uses of Uruguayan Corporations

They are useful to multinational companies to execute trading operations, in which these financial corporations can be used to mediate in international purchases between third countries. In such international commerce operations the corporation acts as buyer before the company of the exporter country and as seller before the company of the importer country. The merchandise is sent directly from the country of origin to its final destination, and there is no need to pass it through Uruguay.

Accomplishing collections and payments abroad originated by different types of operations, such as rendering of services, counseling, commissions, etc., in order to concentrate earnings in the financial corporation and pay only a tax of 0.3%.

Concentration of the treasury with the consequent increase in efficiency in relation to the management of funds, which implies gathering and distributing them according to the global needs of a certain area or regional group, etc.

The property of a trademark or patent may be licensed to different companies, concentrating the earnings in the corporation in order to decrease the tax to be paid for them.

With a pervious capitalization or funding by means of indebtedness, it can serve as an appropriate vehicle for different types of investments, that is, in real estate in foreign countries or in stocks: risk investments, securities of different countries, securities, etc.

In order to evade inheritance regulations, the bearer shares allow the corporation to be owner of real estate for instance, and freely transmit it.

The bearer shares also allow the owners of certain assets to maintain their anonymity; hence the foreign tax office has no knowledge of who are the owners. Therefore it is possible to decrease the income and wealth taxes of individuals and corporations. This is possible due to the bankers and the professional’s duty of secrecy in our country and given that it is possible for the SAFI to have bearer shares.

- – -

* Our firm can provide directors for specific operations.

Some of the topics treated in this website are: