Sectorial report FREE ZONES: EXPORTS OF GOODS

June 2020

Free Trade Zones play an important role in attracting investment, generating skilled employment and diversifying the country's exports. This report focuses on the importance of free zones in 's exports of goods, either by using them as logistics centers (they are intermediate destinations for exports of grains or certain pharmaceutical products) or also as industrial processing locations (cellulose and beverage concentrate).

In 2019, Uruguay's total exports of goods were around US$ 9.1 billion. Of this total, approximately 31% was sent abroad from one of Uruguay's Free Trade Zones.

On the other hand, sales of goods from Uruguay to the Free Trade Zones explained 17% of total exports in 2019, totaling US$ 1.3 billion. These mainly correspond to wood for Free Zone and Punta Pereira Free Zone for cellulose production, and grain for Free Zone.

The large investments that have been made in the Free Trade Zones - favored by the current regulatory framework - have been the driving force behind their development. Based on data from the Free Zone Area of the Ministry of Economy and Finance, the total accumulated investment exceeded US$ 7.1 billion between 2005 and 2018. In the last year, the total investment in Free Trade Zones was US$ 380 million.

The Free Trade Zones also play an important role in the generation of highly skilled employment. They employ 15,337 people (not including non-dependents), according to MEF data. The total number of companies operating in Free Trade Zones is around 1,125.

The Special Economic Zones are a long-standing regime, which initially took the form of free ports, which facilitated the commercial operation of merchant ships with minimal involvement of local authorities. Modern Free Trade Zones emerged in the 1960s, and multiplied from the 1980s, in response to the export-oriented industrial development strategy of many countries. The acceleration of production and the growth of global value chains brought another wave of the 2000's.

According to UNCTAD, there are more than 5,400 special economic zones globally, in 147 countries. The criterion for identifying these areas is based on three aspects: a clearly defined geographical area, a regulatory regime that is different from that of the rest of the economy, and infrastructure support. These regimes are used in several developed countries, but mainly in developing countries.

Special economic zones can contribute significantly to growth and development by attracting investment, generating employment and boosting exports, both directly and indirectly. They can also leverage participation in global value chains, industrial development and diversification. However, the development of the Special Areas has been going on for decades and allows for the identification of some key points for their success, such as the strategic design of the applicable policy framework - harmonized with the rest of the economy - and their development program - linked to the country's competitive advantages and capacities. Increasingly, the inclusion of qualified resources, high levels of connectivity and first-rate service providers is also a prerequisite.

In Latin America, free trade zones have a long tradition, although their current regulations were established during the 1990s2. In a context of a general decline in FDI flows at the global level, the Latin American region received nearly 6% foreign investment in 2018 compared to 2019. The Special Economic Zones play a fundamental role in this sense, as a highly valued regime for attracting investment.

From 2010, the dynamism grows, and is expressed by the refocusing and expansion of the areas, as well as by the creation of new ones. Currently the region has more than 480 EEZs, where more than 10,000 companies are located, employing nearly 1 million people. Among the countries of the region, in addition to Uruguay, other countries such as Argentina, Brazil, Ecuador, El Salvador, Guatemala, Mexico, Paraguay and Peru have updated their Free Zone strategies in recent years, seeking to adapt the regime to current economic development needs.

The current boom in these facilities is a response to a new wave of industrial policies and growing international competition for investment. The format of these venues is diverse, ranging from a basic Trade Logistics Facilitation venue - common in developed countries - to others focused on industrial development at various levels.

1 Source: UNCTAD – “World investment Report 2019 – Special Economic Zones”. 2 At the Ibero-American level, some of the main Free Trade Zones are grouped together in the Association of Free Trade Zones of the Americas (AZFA) See: https://www.asociacionzonasfrancas.org/es/

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The Free Trade Zones are part of a set of policies whose main objective is to encourage investment in Uruguay among which are also the Law on Promotion and Protection of Investment, Free Port and Free Airport regimes, the Law on Public-Private Partnership (PPP), the Law on Industrial Parks, among others.

The first two Free Trade Zones installed in Uruguay were established in 1923 by Law No. 7593 with the aim of developing industrial poles in the interior of the country. They were subsequently reformulated by Law No. 15.921 of 17 December 19873 and regulatory decree 454/988 of 8 July 1988. This regulatory framework has proven to be successful in attracting investment, generating employment and diversifying exports for more than 30 years. However, the need to adapt it to the national and international context was noted, so in December 2017, and through Law No. 19,5664, the regulation was updated. The main changes covered various points including: an update of the objectives, a change in the requirements for operating under the regime, an extension of the eligible activities, changes in the minimum national employment requirement, and tax changes - without affecting previously agreed rights-.

The Free Zones can be exploited by the State or individuals, duly authorized. The private ones are managed by individuals and authorized by the government, which supervises and controls them through the Free Zone Area of the General Directorate of Commerce5.

For the installation of a Free Zone in Uruguay, a government resolution is required, detailing data such as: period of authorization for exploitation, area occupied by the Free Zone, the minimum investment that the operator or operators undertake to make and the fee they must pay, among others. The interested party in carrying out activities in the Free Zone must submit to the Executive Power the request for authorization accompanied by an investment project that demonstrates the economic and financial viability of the undertaking and the benefits of it for the country.

Any type of activity can be developed in the Free Trade Zones: commercial, industrial or service.

Commercial activities are understood to be the purchase and sale of goods or merchandise that enter the free zone where the activity is carried out or another free zone, and that have

3 Ley 15.921 4 Ley 19.566 5 Página web: https://www.gub.uy/ministerio-economia-finanzas/zonas-francas

both origin and destination outside of the national territory, or the national territory6, logistic activities are also counted within commercial activities.

For service activities, this includes the provision of various types of services from free zones, either within the same zone, to users or developers in other free zones, to third countries or to the rest of the territory - to companies that are IRAE taxpayers. The new law extended this authorization to other types of services such as call centers, mailboxes, distance education, and others that the Executive Branch may authorize7.

Law No. 19,566 also extended the activities authorized within the regime. In this regard, the main change lies in the authorization of Thematic Service Areas (Chapter VIII). The services covered are audiovisual, leisure and entertainment services, with the exception of games of chance and gambling, and their complementary activities.

The companies authorized to develop activities in Free Trade Zones can be natural or legal persons under any corporate form. Users must have as their exclusive object any of the activities provided for in the Law. Foreign investments do not differ from domestic ones, so they do not require special procedures or requirements to be established.

The activities of users of Free Trade Zones are exempt from any national tax, created or to be created, in particular they have the following benefits:

» Exemption from Corporate Income Tax (IRAE), Net-worth Tax (IP), and any other national tax.

» Tax exemption for dividends paid to shareholders domiciled abroad.

» Option for foreign staff (up to 25% of total employment8) to exempt social security contributions in Uruguay.

» Sales and purchases abroad of goods and services are not subject to Value Added Tax (IVA), nor are sales and services within the Free Trade Zone.

» Goods exchanged between the Free Zones and the rest of the world, are exempt from customs duties.

6 Monopolies, state exclusivity or public concessions must be respected. Services provided to the rest of the national territory will receive the same tax treatment as services provided from abroad.

7 Excluding those whose sole or main destination is the rest of the national territory. / These activities shall be covered by the general tax regime, which may be established on the basis of definitive tax withholding regimes, in accordance with the provisions of the Executive Branch.

8 Natural or legal citizens are counted. In justified cases, this percentage can be extended, with prior authorization from the government. In the case of service activities, the minimum percentage of Uruguayan citizens may be 50%, prior authorization and when the nature of the business developed so requires; always seeking the highest possible levels of participation of Uruguayan citizens.

Likewise, and as detailed in article 25 of Law No. 15,921: "The State, under responsibility for damages, assures the user, during the term of his contract, the tax exemptions, benefits and rights that he is entitled to". Also, Article 22 of Law No. 19.566 ensures that during the term of the contracts, users of free zones will maintain all their benefits, exemptions and rights agreed prior to the entry into force of the Law.

Sales from the rest of the country to the respective Free Zones are considered exports from Uruguay and sales from the Free Zones to the rest of the Uruguayan territory are considered imports, subject to the corresponding customs duties and national taxes9.

Notwithstanding the above, sales from Free Trade Zones to MERCOSUR are governed by Decision 33/15 of July 2015 of the Mercosur Common Market Council (CMC). It details that all goods originating from a State Party to Mercosur (or from a third country with the same rules of origin, according to agreement with Mercosur) will not lose their original character when they transit through a Free Zone, provided that such areas are under state control. In this respect, only operations intended to ensure the marketing, preservation, splitting or other similar purposes may be carried out within the premises, without altering the tariff classification of the product or the originating status as verified10.

Finally, it is important to note that Uruguay has in force with 30 countries, Agreements for the Promotion and Reciprocal Protection of Investments (APPRIs)11. Therefore, many of the foreign companies that are operators and users of Free Trade Zones are covered by such agreements.

9 One scheme used in connection with the Free Zone regime is the transit operation. This operation implies the suspension of the payment of taxes, when the goods are in transit between premises where the Warehouse, Free Zone or Port/Airport free regime applies. 10 See http://www.adau.com.uy/innovaportal/file/13024/1/dec_033-2015_es_zonasfrancas.pdf // If the merchandise is manufactured within the Free Zone, it has no tariff preference in Mercosur. There are bilateral exemption agreements for specific products. 11 For more information see: International Agreements - Uruguay XXI

There are currently 11 Free Trade Zones in operation in Uruguay: Nueva Palmira (state), Fray Bentos (UPM), Libertad, Punta Pereira (Montes del Plata), Colonia, Colonia Suiza, Floridasur, Zonamerica, WTC Free Zone, Parque de las Ciencias and Aguada Park12. Two of them were created before the Free Zone Law, in close connection with the port of the department of Colonia (Nueva Palmira and Colonia).

Figure Nº 1: Free Trade Zones in Uruguay - Location

Figure Nº 2: Free Trade Zones in Uruguay - Timeline

12 The Rivera Free Zone was closed by Resolution 89/016 of the Ministry of Economy and Finance.

In 2019, two more permits were granted to operate under the Free Trade Zones. Additionally, in April 2019 the scheme was approved for the second UPM project13. It will comprise a 350- hectare property, and will be located in the suburban area of Pueblo Centenario, Durazno. In November 2019, authorization was granted to the Audiovisual Free Zone that will operate in the department of Maldonado under this regime14.

The Free Trade Zones are part of the growth engine of the economy and are employment intensive, in several cases with a high level of training. The Free Trade Zones employed a total of 15,337 dependent workers, 48% of whom work in Zonamerica, while Aguada Park and World Trade Center (WTC) are the next largest employers. In total, 77% of the jobs in the Free Zone correspond to Zones located in Montevideo15.

Jobs in Free Trade Zones. represent about 0.94% of the total economically active population, a rate that has been growing for more than a decade. Most of the staff work in the non- traditional service sector, and are mostly young people under 30, which is remarkable considering that this segment has the highest unemployment rate in the country16.

Although the regulations set a ceiling for foreign staff, this represents approximately 10% of the total, while the remaining 90% of the staff employed are national workers.

Table Nº1: Staff employed according to Free Trade Zone -Year 2018

Source: Uruguay XXI based on Free Zone Area - FZD - FEM.

Also, according to the data of the MEF, there are about 733 non-dependent jobs, linked to the Free Trade Zones. This number corresponds to personnel whose services are contracted indirectly through another company or as personal services.

13 See: https://medios.presidencia.gub.uy/legal/2019/resoluciones/04/mef_1237.pdf 14 See Resolution in the following link. 15 Source: MEF – Free Zone Census - Contribution to employment in 2018 16 Ibídem

Zonamerica S.A. presented half of the non-dependent personnel, which is directly related to the hiring of professional services in this area. AguadaPark and WTC Free Zone represent between them about 20% of the total. Non-dependent staff is mainly composed of professionals and technicians (representing 77%) and other categories (23%).

The last census of Free Zones also presented an analysis of the contribution of Free Zones at the departmental level in relation to employment. Although they generally represent less than 1 per cent of the economically active population, their contribution to employment at the departmental level is significant. In this regard, it was assumed that if the free zones did not exist, unemployment by department would increase by the same amount as employment in the zones17. The analysis estimates that the national unemployment rate would be affected by 0.9% if the free zones did not exist. The analysis by department, shows that Cologne would be the most affected department in this scenario, because in that department are installed four free trade zones, two of them industrial. Table 2 - Contribution of free zones at the departmental level

Note: Nationals employed in each free zone/department are counted as unemployed Source: MEF - Census of Free Zones 2018 - Contribution to employment in 2018

17 It should be noted that indirect effects on employment generated by free zones, for example in the industry sector that has linkages to the interior of the economy, are not being counted. It should also be kept in mind that it is being assumed that such people are actively looking for work and have not found it (i.e. they are counted as unemployed).

As for the number of users, the last census of Free Zones was answered by 1,074 companies. Most of them are engaged in commercial activities. It is followed by those in the professional services sector, and other financial services. Table Nº3: Number of companies by Free Zone - Year 201818

Source: Uruguay XXI based on Free Zone Area - MEF 2018.

Favored by the current regulatory framework, foreign investments have been the engine of development of the Free Trade Zones and have generated great impact on the entire national economy. The total accumulated investment in these (national and foreign) has exceeded US$ 7,156 million in the period 2005-2018, led by the sector related to the production of cellulose. In particular, in 2018, the total investment in Free Zones was US$ 380 million, 3.87% of the total investment in the country.

Chart Nº1 - Investment in Free Zones as a percentage of national investment

Source: MEF - "Economic Impact of the FTZs in Uruguay" - Presentation by Rosa Osimani

18 Source: Free Zone Area – MEF. Link

Due to their characteristics, Free Trade Zones can be classified into four types: Industrial; Commercial and Logistics; Services -including Thematic Zones- and mixed.

They are those where most of the value of their production is industrial. In Uruguay they are: Colonia (where the main company is PepsiCo), Fray Bentos (UPM) and Punta Pereira (Montes del Plata). Colonia Free Zone: Created in 1923 and administered by Grupo Continental Zona Franca S.A. In this Free Zone, activities are concentrated in the industrial sector, as well as commercial and logistics activities. Corporate solutions are provided to the different companies established on the premises so that they can maintain their regional headquarters, currently developing consulting and financial services. The Free Zone of Colonia is a modern park of 22 hectares with 130,000 m2 built and has a strategic location just 50 minutes from and access to various routes. Some of the companies installed in Free Zone Cologne are: Pepsi-Cola, Cassis Int. Group, Compac Latin America, Rhein Chemie GmbH.

UPM Free Zone - Fray Bentos20: This is where the Finnish capital company UPM operates. It has a production capacity of 1.3 million tonnes of bleached eucalyptus short-fiber pulp.

Globally, UPM has production plants in 12 countries, more than 19,100 employees and annual sales exceeding EUR 10 billion. In 2009, it acquired the majority of the shares of Botnia S. A. The plant located in Uruguay began operations in 2007 and is the company's largest production capacity.

In Uruguay, UPM employs more than 500 people directly and, adding indirect and induced employment totals about 7,000 workers throughout its production chain, including operations in the nurseries, forest plantations, transport, plant and port. In addition to cellulose, UPM's plant produces energy equivalent to approximately 8% of the total energy produced annually in Uruguay. The surplus dumped in one year into the UTE networks is used to supply more than 150,000 households. In mid 2019, UPM confirmed the investment in a second plant, which is discussed in more detail in the section "Projects linked to Free Trade Zones".

19 Source: Elaboration of Uruguay XXI based on data from Free Trade Zones Areas - General Directorate of Commerce - MEF and Free Trade Zones Chamber. 20 Source: Information provided by UPM Uruguay.

Punta Pereira Free Zone: Located in Colonia, it is the Free Zone where the Montes del Plata industrial complex is located, with a production of 1.4 million tons of Eucalyptus cellulose per year, making the company one of the main exporters in the country. In addition to the cellulose plant, the complex has its own port terminal, made up by two piers: the oceanic one, which allows the arrival of key supplies and the direct loading of the ships that will reach their final destinations; and the river one, where wood is received in barges from its port terminal in Río Negro.

It also has a clean and renewable energy plant that positions Montes del Plata as the main private producer of electricity in the country. This energy allows the total supply of the complex and also a surplus equivalent to the consumption of 200,000 homes, which is poured into the national electricity network.

More than 1,000 Uruguayans work at the industrial complex daily, most of them from the department of Colonia. More than 6,500 people work in Montes del Plata's value chain in 13 departments, carrying out activities related to its production chain: research and development, nursery, forestry operations, river and land transport, and related services. The highest sustainability standards are applied in all its operations: 100% of its plantations are FSC and PEFC certified and its plant applies the most demanding standards in the sector and has ISO 14001 (environmental management), OHSAS (occupational health and safety) and ISO 9001 (quality) certifications.

This company is equally made up of two of the world's leading forestry companies: Arauco, with Chilean capital, and the Swedish-Finnish Stora Enso.

Libertad Free Zone (Lideral S.A.): Located at Km.49 of National Route Nº1, which begins at the Port of Montevideo and in approximately 30 minutes connects the port with Free Trade Zone Libertad, allowing for agile logistics with highly competitive costs. It is a commercial, industrial and service park located in 35 hectares, where you can find beaches for containers, vehicles and machinery, warehouses for storage of goods and multiple services.

Nueva Palmira Free Zone: It is located a few meters away from the port of Nueva Palmira, near the mouth of the , a key point to access the Paraná-Paraguay-Uruguay waterway, which is one of the river arteries leading out of the Brazilian, Bolivian and Paraguayan hinterland. Therefore, it has acquired a key role in the movement of goods from these origins, in addition to the national one. In 2019, some 6.5 million tons of merchandise circulated in this free zone, including soybeans, cellulose, iron and corn. In total, 49% of it was of foreign origin.

The Federal District may be accessed through Routes 21, 53 and 12. It lies 270 km away from Montevideo and 110 km away from Colonia by land. The terminals of Corporación Navíos and Ontour operate Within the Free Trade Zones.

Corporación Navíos Granos S.A.21:

It is the largest bulk terminal in the country and one of the largest on the waterway with a storage capacity of 460,000 static tons in silos with internal separations, which guarantees its customers the traceability, hygiene and safety of their products. They communicate with the docks through a system of tunnels and covered belts. It has a main dock of 240 m and 11 m of draught, with the possibility of being extended. It can receive ships of up to 85,000 DWT on its outer side. These are loaded by three davits at a rate of 30,000 tons per day. On its internal side it has a river pier of 170 m long and a draught of 4 m, which allows barges to be moored on both sides of it. This quay has a fixed continuous cycle crane for unloading at an average rate of 10,000 to 14,000 tons per day. There are three truck unloading areas with a total of 4 unloading platforms capable of unloading 1,200 tons/hour. Within the terminal there is a grain conditioning and drying plant capable of processing approximately 500 tons/day.

Corporación Navíos S.A.

It is a multipurpose bulk terminal that is dedicated to the movement of iron ore and manganese, being the largest mineral terminal of the Paraná-Paraguay waterway. This terminal was put into service in 2017, with an investment of US$ 150 million and allowed for a substantial increase in the logistics capacity of the port of Nueva Palmira.

The 290 m long ocean pier allows for the loading of up to 45,000 ton/day of ore through a mobile loader that moves along the pier. This dock can accommodate up to a maximum size of Baby Capesize. It also has a river quay with two modern cranes that allow two barges to be unloaded at the same time at a total capacity of up to 25,000 tons/day.

The ore stockyard has a capacity of 700,000 static tons and is equipped with a two-way stacker/reclaimer, the only equipment of its kind in the country, which allows loading from barges to the stockpile at a rate of 2,400 t/h and reclaiming from the stockpile to ships at a rate of 3,000 t/h. The terminal also has a barge docking facility that allows the reception and docking of up to 32 barges simultaneously.

Both terminals are interconnected by conveyor belts, allowing a unique flexibility in the region.

Ontur22: It offers a multipurpose terminal for the handling of general cargo, citrus, cellulose, fertilizers, bulk and containers. It has an area for the storage of these loads of 7,000 m2 and a deposit for cellulose of 30,000 m2. It has a 300-metre long river pier with a 5-metre draught and an ocean pier, with the possibility of reaching the foot of the ship with trucks, 180 meters long and 40 meters at its head. Its draft of 32 ft on its external face and 28 ft on its internal face. At its quay the Terminal has 2 cranes, a 20 ton fluvial gantry crane made to measure for forest products and a multipurpose one capable of handling loads up to 45 ton at 26 m from its axis. MAFI trailers and terminal tractors capable of moving up to 64 tons of payload are used

21 Source: Information provided by Zona Franca Nueva Palmira. 22 Source: Information provided by INALOG.

for cargo handling. They also have 16 ton forklifts for loading and unloading and a Reachstacker crane.

Aguada Park: This free zone is a 55,000 m2 complex located in a strategic point of the city of Montevideo. It has two modern buildings, the first one with 20 floors, and the recently inaugurated Building 3, with 3 floors of more than 2,000 sq. m. each for offices and 2 exclusive parking floors. It also has common recreational areas, different gastronomic offers, dressing rooms and a rooftop with one of the best views of Montevideo.

Aguada Park's clients come from diverse industries such as Contact Centers, Business Process Outsourcing & IT, Shared Services, Software, Internet, Financial Sector, Product Trading, Shipping, Professional Services, etc. Some of those clients are: Alorica, Mercado Libre, Globant, Corporación Navíos, Tradehelm and Ferrere, among others. Approximately 3,000 people work in Building 1 every day and about 1,000 more are expected in Building 3.

WTC Montevideo Free Zone24: Strategically located in Montevideo, it has a world-class building infrastructure, which gives its clients the possibility of working in the first LEED tower in Uruguay 25. It has 32,500 m2 built, from where currently more than 130 companies offer their services to the world, among which they stand out: PwC, Deloitte, Baker Tilly, Grant Thornton, LDC, Everest Group, The Hackett Group, COFCO, MVD Consulting, Graco, Nation Traffic, among others.

In addition, some of the main grain traders in the world, leading regional consultants in financial advice and professional studies of various kinds, provide their services from this Free Zone. Approximately 1,500 people work daily in Tower 1.

Given the very high occupation of Tower 1, WTC Montevideo Free Zone developed a construction project for a second Tower, which is scheduled to open in the second half of 2020.

Tower 2 will be located next to Tower 1 and will have 35,000 m2 built, 20 floors of flexible offices of up to 780 m2 with the possibility of subdividing the spaces according to the requirements of each client. Its green area will consist of a large Central Plaza of 3,200 m2, to enjoy the community of both towers together. You will have more than 350 parking spaces, 60 covered bicycle spaces, spaces for efficient or hybrid cars and, a gastronomic zone.

23 For more information on the service activities carried out from Free Zones, see: Global Export Services – Uruguay XXI. 24 Source: Information provided by Zona Franca WTC Montevideo Free Zone. 25 Leadership in Energy & Environmental Design - Sustainable Building Certification System, developed by the U.S. Green Building Council.

Its exterior design will be of glass and its structure of aluminum, giving the facades a rhythm of shadows during the day and reflections at night.

The new tower will meet the energy, construction and environmental standards required to be LEED certified. The planned investment is USD 30 million.

Zonamerica26: Located in Montevideo, close to Carrasco International Airport, Zonamerica is a place where infrastructure, corporate services and its modern business environment provide its clients with ample competitive advantages to do business with the region and the world. With over 30 years of experience, Zonamerica attracts qualified talent with technical skills and language skills vital to the global services industry.

Currently, Zonamerica employs approximately 10,000 people in some 350 companies, which operate in different business areas: Logistics, Financial Services, IT and Technology, Call Centers, Regional Offices, Biotechnology, Consulting and Trade in general. Some of the companies installed in the park are Airbus, Altisource, Assist-Card, Despegar.com, Finning, Merck, RCI, Ricoh, Sabre, Satellogic, SKF, Tata Consultancy Services, Trafigura, Verifone, among others.

The company operates a free trade zone of similar characteristics in Cali, Colombia, although it is dedicated exclusively to the service sector, being the first free trade zone with this characteristic in Colombia. The park was inaugurated in October 2018 with the aim of turning the Colombian city into a service export pole. This investment is considered to be one of the largest by a Uruguayan company outside the country, once the 18 buildings of the master plan are completed, and is estimated at US$ 350 million27. It currently has 30 clients in its first building, of 7500 square meters, and the construction of the second building, of 8500 square meters, is expected to start during 2020. In this operation, Zonamerica is associated with Organización Carvajal, one of the most important economic groups in Colombia.

In addition, the company has a representative office in Foshan, China. It consists of a platform to facilitate business for Latin American companies - and especially Uruguayan companies - in the Asian country. The project includes staff trained in Chinese language, administrative and legal procedures28.

26 Source: Information provided by Zonamerica Free Zone. Link 27 Source: Zonamerica Colombia 28 Source: Zonamerica China

Parque de las Ciencias29: occupies an area of 55 hectares and is located in the department of Canelones, on Route 101 and only 1 km from Carrasco International Airport, which provides a strategic location.

It has the capacity to host commercial, industrial and service activities. Its construction began in mid-2010 and currently there are approximately 55,000 m2 built with an investment in infrastructure that exceeds US$ 220 million among which are pioneering projects in production and development under the Free Zone regime of medicines for human use and others linked to life sciences, animal health and in recent years linked to the production of medicinal cannabis.

The anchor client of the free zone is the pharmaceutical company Megalabs, which has its main production plant of sterile, solid and ophthalmic products in the Park, covering 23,000 m2, and a state-of-the-art Research and Development Centre.

There are currently more than 50 users in the Park with different activities and approximately 1000 people working in the Park. Among the users are several pharmaceutical and technology companies, suppliers of raw materials, marketers of medical devices, logistics operators and service providers in various areas such as finance, intellectual property, marketing, design and engineering, among others.

It offers a varied range of spaces for rent, from small office spaces to large industrial buildings, with different levels of conditioning including turnkey options.

Colonia Suiza30: It is located in Nueva Helvecia where it was developed by a mainly industrial business group, with an uninterrupted trajectory of more than 80 years of activity in our country and in the region. It has an industrial, commercial and service park where a large number of activities can be developed.

Zona Franca Florida: It was the first private Free Zone in the interior of the country. It is located in the department of Florida, 93 km north of Montevideo, 300 km from Argentina and 400 km from Brazil.

There are currently more than 200 companies 31 operating in commercial, logistics, industrial and service activities. Among the specific activities of the users are the consolidation of loads, temporary labor and forklifts, humidity and controlled temperature, cold tunnels and chemical product qualifications. The cold storage rooms with qualifications from the USA, Venezuela, Cuba, Mexico.

It has more than 70,000 m2 of roofed space, in a 200,000 m2 area, with concrete streets, landscaped areas, electricity, drinking water, sanitation and fiber optic connection throughout its length.

29 Source: Information provided by Zona Franca Parque de las Ciencias. Link 30 Source: Information provided by Zona Franca Colonia Suiza. 31 Source: Zona Franca Florida

This area includes offices, warehouses, container yards and an open-air goods yard.

ZFF has a building for administrative offices of its users in the Old City of Montevideo, as enabled by Law 19566. It is adaptable to multiple corporate spaces.

It also offers advisory services - commercial, industrial and service -, administrative control, personnel selection and remote control of inventories, as well as packaging services, and management of permits and authorizations before public bodies.

In mid-2019, UPM confirmed the investment in a new plant, the third of its kind in our country 32. The project - which is already authorized to operate under the Free Zone regime - involves an investment of US$ 4 billion for the installation of the plant and improvements in logistics by the company. In addition, it will require a complementary investment of approximately US$ 1 billion by the government of Uruguay. Among the infrastructure projects with public financing, the "Ferrocarril Central" project stands out, which foresees the construction and reconditioning of part of the railway network. The railroad will connect Pasos de los Toros (center of the country) with Montevideo (capital and main logistic center of the country), and will have a length of 273 km. The estimated value of the investment in the construction of the railway is US$ 839 million. The government prepared a report that estimates that UPM's investment will increase the country's annual exports by US$ 1.15 billion in an average scenario. This can translate into additional revenue for the State of US$ 120 million. In terms of employment, it is estimated that the plant will contribute to the generation of 10,000 permanent jobs, of which nearly 4,000 will be directly dependent on the company and its contractors33. As for exports, three scenarios were developed assuming a price per ton of cellulose of between US$ 500 and US$ 600 and a plant production capacity of between 2 and 2.3 million per year. In principle, the plant is expected to have an annual production capacity of 2.1 million tons, which can be expanded by up to 11%. Annual exports would range from US$ 1 billion to US$ 1.38 billion and the average would be US$ 1.15 billion. The work also indicates that the direct and indirect jobs that the project will generate will be of quality34.

In this way, Uruguay would go on to produce around 5 million tons of cellulose per year, which would allow it to become the second largest exporter of short-fiber cellulose in the world, only surpassed by Brazil. Furthermore, it would become the country's main export product, with a share of more than 25% of total exports, thus exceeding beef and soybean exports.

32 See: “UPM realiza una inversión transformadora en una planta de celulosa de clase mundial en la zona centro de Uruguay”. 33 Source: UPM 34 Source: Presidencia “Gobierno pone a disposición de la ciudadanía documentos de UPM2 que envió en noviembre al Parlamento”

Through a resolution of November 201936, the Executive Branch authorized the first thematic Free Trade Zone in the country. The project, which required an investment of approximately US$ 25 million, is located in Maldonado and is called Punta del Este Film Studios. It corresponds to a specific scenography infrastructure for the audiovisual industry.

It has a 30-hectare property, which includes soundproof film studios, several sets and multipurpose office buildings, in order to house the so-called "creative industries" in the areas of research, development, production, storage, processing and distribution of audiovisual services.

In particular, the purpose of the free zone is to carry out the following activities:

 Pre-production, production and filming.  Image post-production (special effects, animation, renderings, augmented and virtual reality production, video game production, interactive developments, etc.)  Audio post-production (editing, mixing, sound engineering, etc.)  Storage service providers, OTT, VOD, streaming, IPTV and management platform.  Office rental and related services.  Rental of scenography square meters (backlots, sets and studios) with basic services such as camera and light equipment rental, energy services, catering services, technological and digital support.

The project has the same tax exemptions as the rest of the free zones, except that this FZ can carry out related activities outside the park while maintaining the benefit. This Free Zone is expected to be operational by the end of 2021.

35 Information provided by Punta del Este Film Studios 36 Link

Uruguay's exports of goods have shown great dynamism in the last decade, with a wide diversification of markets and products. Also, the Free Trade Zones have acquired relevance as intermediate destinations.

Their importance lies in the characteristics that make them ideal places for the formation of industrial complexes, the installation of manufacturing industries based on foreign or domestic raw materials, or use as a logistics or operations center to provide various services to the world.

Exports of goods from Uruguay to the Free Trade Zones grew at an average annual rate of 5.2% over the last decade, and represented 17% of total sales in 2019, when they totaled US$ 1.3 billion37.

Of the total exported to the Free Trade Zones in 2019, 98% was concentrated in placements to the Free Trade Zones of Nueva Palmira, Fray Bentos and Punta Pereira. The first one is one of the main exit doors of the agricultural production in Uruguay. The remaining two are the cellulose pulp production plants of UPM and Montes del Plata, respectively.

Chart Nº2 - Uruguayan exports (without Free Trade Zones) and share of exports to Free Trade Zones

Source: Uruguay XXI based on BCU data.

37 Source: Uruguay XXI based on BCU data.

Table 3: Exports of goods from Uruguay to the Free Trade Zones –2019

Source: Uruguay XXI based on the Central Bank of Uruguay

Exports of timber, agricultural products (soy, malt, wheat, rapeseed), and pharmaceuticals accounted for 97% of total exports to the Free Trade Zones in 2019.

Graph 3: Exports of goods from Uruguay to the Free Trade Zones (Part. % 2019)

Source: Uruguay XXI based on the Central Bank of Uruguay

To quantify Uruguayan exports, including sales of goods from the Free Trade Zones, the merchandise exported from the national territory is considered, discounting the inputs that are used for the production of goods within the Free Trade Zones. For this calculation, the following are considered:

» Exports of pulp from Montes del Plata and UPM, after deducting exports to Punta Pereira Free Zone and Fray Bentos Free Zone respectively. 38

» Exports of pharmaceutical products sent from Parque de las Ciencias Free Zone and Zonamerica to third countries, after discounting the sales of pharmaceutical products from Uruguay to both Free Zones.

» The sales of beverage concentrate of Pepsico, the main company of the Free Zone of Colonia, after discounting the sales from Uruguay to the Free Zone.

» Other exports made from Free Trade Zones in the period, discounting exports of inputs to these Free Trade Zones.

» In the case of grains entering the Nueva Palmira Free Trade Zone, no adjustment is necessary since this area functions as an intermediate destination.

Thus, it results that in 2019 the total exports of goods from Uruguay amounted to US$ 9,119 million. The value of gross exports from Free Trade Zones39, amounted to US$ 2,812 million in 2019, representing 31% of Uruguay's total exports.

38 It should be noted that part of the production of both plants is destined for Uruguay, so they are not counted as exports. 39 It takes into account the products produced or that had as an intermediate destination some Free Zone.

Table Nº4: Exports of goods from Uruguay (with Free Trade Zones) - Millions US$ Description 2015 2016 2017 2018 2019 Exports from Non-Free Territory* (Source DNA) (1) 7.652 7.020 7.742 7.440 7.584 Pulp exports 1.266 1.222 1.310 1.653 1.520 Exports from Uruguay to Fray Bentos Free Zone and Punta Pereira Free Zone -589 -625 -636 -593 -587 Net exports from Fray Bentos and Punta Pereira Free Trade Zones (2) 677 597 674 1.060 933 Exports of pharmaceutical products from Zona Franca Parque de las Ciencias and 88 108 128 97 86 Zona Franca Zonamerica Exports of pharmaceutical products from Uruguay to Zona Franca Parque de las -28 -21 -17 -13 -13 Ciencias and Zona Franca Zonamerica Net exports of pharmaceutical products (3) 61 87 111 84 72 PepsiCo Exports from Colonia Free Zone 546 563 495 472 524 Exports from Uruguay to Colonia Free Zone - 3 - 3 - 2 - 3 - 3 PepsiCo Net Exports (4) 543 561 493 469 521 Grain exports from Nueva Palmira Free Zone 861 684 623 297 683 Grain exports from Uruguay to Nueva Palmira Free Trade Zone - 861 - 684 - 623 - 297 - 683 Net exports from Nueva Palmira Free Zone (5) - - - - - Net exports of other goods (6) (*) - 1 0 1 - - Net exports from Free Zones (2+3+4+5+6) (a) 1.280 1.244 1.277 1.613 1.526 Gross exports from Free Trade Zones 2.761 2.577 2.555 2.519 2.812 Total exports from Uruguay with Free Zones 8.901 8.301 8.996 9.048 9.119

Annual variation -12% -7% 10% 0,6% 0,8% (*):Exports of leather, books and wood from Free Trade Zones are included (the export value is reduced by the component of inputs introduced into the respective Free Trade Zones from the rest of the Uruguayan territory). (a): It is considered as net exports from Free Zones, the value of the goods exported from the Free Zones abroad, minus the value of the goods entered into the Free Zones from Uruguay, either for use as input or for logistical activities. Source: Uruguay XXI based on data from DNA, BCU, Penta Transaction, Nueva Palmira and Montes del Plata.

Furthermore, based on own estimates with data from the DNA and BCU, when considering the total exports of goods from Uruguay by market (including sales from Free Trade Zones), it stands out that China remains the first destination of sales, with a share of 31% of total exports in 2019. 33% of sales to the Asian country in 2019 originated in one of the Free Trade Zones, with cellulose and soybean sales standing out.

Meanwhile, the European Union's share of total exports reached 17% in 2019. Sales to this block were mostly from Free Trade Zones, with 52% of the total.

Graph Nº4: Exports of goods from Uruguay (with Free Trade Zones)-By Destination (Part. % 2019)

Source: Uruguay XXI based on DNA data, Montes del Plata and Nuevo Sistema Nueva Palmira.

In addition, when the same analysis is made by product, it can be seen that both cellulose and beverage concentrate, and pharmaceutical products, produced in free territories, and soya and malt - exported from these premises - are positioned within the top ten export products of Uruguay. In particular, cellulose was Uruguay's second most important export product in 2019, while oilseeds -the third most exported product in the year- had 56% to the Nueva Palmira Free Zone as an intermediate destination.

Graph Nº5: Exports of goods from Uruguay with Free Trade Zones by product (Part. % 2019)

Source: Uruguay XXI based on DNA data, Montes del Plata and Nuevo Sistema Nueva Palmira.

The Nueva Palmira Free Zone is state-owned. It has 100 hectares of extension and an important infrastructure of silos for the storage of grains coming from Uruguay and the countries of the region. The good infrastructure of the Free Zone allows the use of facilities for the storage and transfer of barges to bulk carriers.

In this sense, the cereal and oilseed sector has been of great importance to the Uruguayan economy and to the region in recent years. The logistics related to the movement of this merchandise made the port activity grow exponentially.

Likewise, the Nueva Palmira Free Zone receives the barges with the production of cellulose paste from the Fray Bentos Free Zone for its subsequent reshipment in larger vessels. In addition to this, there are also general cargo operations: citrus fruits for export, import and export of bulk fertilizers, sugar and cars, among other goods.

In 2019, 51% of total movements from Nueva Palmira corresponded to domestic goods. If we analyze the agricultural goods, 56% of the movements in the free zone corresponded to national goods, and the rest to foreign goods, highlighting the soybean with a participation of 45%.

Table N°5 - Grain exports from Nueva Palmira Free Zone (Tons)

Note (*): Includes beans, flour and soya pellets.

Source: Developed by Uruguay XXI based on INALOG, DNA and Nueva Palmira

The soybean sector has been gaining ground in the Uruguayan economy and has been the country's largest rain-fed crop for several years. For a decade now, oilseeds have been among Uruguay's four main export products. In 2019 the value exported was US$ 994 million. In this context, the Nueva Palmira Free Zone plays a fundamental role as an intermediate destination for soybean exports from Uruguay and the countries of the region. In 2019, the volume of soybean and soybean product cargoes leaving the Free Trade Zone was 2.9 million tons, 56% more than in 2018. As for the final destinations of Uruguayan soybeans, the ranking continues

to be led by the main historical destination of this oilseed: China, which in 2019 had a 78% share of the total sold in dollars.

Considering the wheat originating in Uruguay that left from Nueva Palmira, Algeria was the main destination of sales in 2019.

From Zona Franca Nueva Palmira also exports corn, barley fodder and barley malt, although in smaller volumes compared to the placement of soybeans and wheat. In 2019, 100% of the corn transported was of Paraguayan origin, while all the malt was of Uruguayan origin.

The forestry sector has been very dynamic in recent years, driven at first by existing regulations - especially the 1987 Forestry Law - and later by the arrival of large investments in the country. These include the installation of UPM's and Montes del Plata's cellulose plants.

In the Fray Bentos Free Zone, UPM develops its activities, while in the Punta Pereira Free Zone, Montes del Plata develops its activities. Specifically, within both Free Trade Zones are the plants where cellulose paste is manufactured and other activities such as port operations are also carried out.

The main input for the production of cellulose pulp is raw wood, which is exported from the rest of the territory to both Free Trade Zones. After the wood is processed into pulp, it is sold to 13 countries around the world40.

While the cellulose produced by Montes del Plata leaves the country directly from the port located at the plant41, in the case of UPM, most of its production is transported as goods in transit from Zona Franca Fray Bentos to Zona Franca Nueva Palmira, where it is finally exported to other destinations.

In Uruguay, bleached short fibre cellulose (BHKP42) is produced, which is extracted from broadleaf species, especially eucalyptus, given its adaptability and fast growth cycle in our soils. Cellulose is the main component in the manufacture of paper and cardboard. It is also present in small quantities in various products such as photographic film, cellophane and explosives.

Thanks to these investments, Uruguay has managed to position itself as one of the world's leading exporters of short fibre pulp, maintaining third place among exporters in 2019, with 2.6 million tonnes sold.

40 2019 data 41 Part goes to the port of Montevideo to leave for the final destination and a small part goes overland to Argentina 42 Bleached Hardwood Kraft Pulp - Pasta de celulosa Kraft blanqueada.

Table 6 - World exports of bleached short fibre pulp

Tons (Millions) Part. %

2019 2019 Brazil 14,5 46% Indonesia 3,4 11% Uruguay* 2,6 8% Chile 2,4 8% Netherlands 1,6 5% Portugal 1,1 4% Canada 0,9 3% Spain 0,8 3% Others 4,0 13% Total*** 31,3 100% Note (*): The data for Uruguay are based on DNA and Montes del Plata. Note (**): The total data corresponds to the sum of the TradeMap data and the Uruguayan data, not accounted for in TradeMap because it does not have an Uruguayan customs origin. Source: Produced by Uruguay XXI based on TradeMap data. The volume of production enabled for both plants 43, added to an export price somewhat higher than the world average, and especially that of Brazil - the world's leading producer - allowed the cellulose to go from representing 8% of exports in 2008 to 17% in 2019, becoming the second largest export product of the country, behind beef.

Graph 6: Pulp exports from Uruguay (Millions of US$ and millions of tons)

Source: Uruguay XXI based on data from DNA and Montes del Plata.

43 The authorized production volumes for each plant are approximately 1.3 million tons.

Graph 7 shows the distribution by destination of the cellulose. Sales are concentrated in the European Union and China with respective shares of 47% and 32%. Uruguay is one of the main suppliers to the Chinese market - the world's leading importer of short-fibre pulp - behind Brazil and Indonesia. Italy is the second largest export destination for Uruguayan pulp, with amounts exceeding US$ 303 million in 2019. As for the Netherlands -the third largest import destination- it should be noted that this destination functions as a logistical hub within Europe and part of the exports to this country are redistributed within the continent.

Chart Nº7: Pulp exports (Destinations- Part. % 2019)

Source: Estimate of Uruguay XXI based on data from DNA, Montes del Plata and Nueva Palmira

PepsiCo is the main company installed in Colonia Free Zone, where it has been since 1993. From this site, the company exports concentrate for the production of beverages. Its sales reached US$ 524 million in 2019, representing an 11% increase in sales compared to 2018.

Chart Nº8: PepsiCo Merchandise in Transit (Millions of US$)

Fuente: Uruguay XXI en base a datos de DNA.

PepsiCo exported to 33 destinations in 2019 and Mexico leads the ranking since 2011. In the last year, the Aztec country had a 27% share of total sales. Chart Nº9: PepsiCo's Merchandise in Transit by Destination (2019 - Part. %)

Fuente: Uruguay XXI en base a datos de DNA.

The pharmaceutical industry has been very dynamic in recent years, gradually taking on greater importance in the Uruguayan economy, and within exports as a non-traditional product. The sector stands out both for the qualified personnel it occupies and for the added value it generates, as well as for being one of the main industries driving innovation and research.

The placements of the sector presented an average annual growth of 8% in the last decade, although those that were originated in Free Trade Zones had a markedly greater dynamism, going from US$ 7 million in 2008, to US$ 86 million in 201944. The relevance of these exports can be seen in Chart No. 10.

Graph Nº10: Uruguayan exports of pharmaceutical products (Millions US$)

Source: Uruguay XXI based on DNA data.

Both the Science Park and Zonamerica carry out activities related to the provision of logistics and packaging services for the pharmaceutical industry, among other activities.

The operation consists of sending pharmaceutical products, their excipients or raw materials to the Free Trade Zones, from where, after different value-added processes (conditioning, fractioning, etc.), they are sent back to other countries, declaring the merchandise as a transit for Uruguay. The main company that concentrates the exports of this type of products under the transit regime is Megalabs. The transnational company was formed by a strategic alliance of pharmaceutical companies between the Roemmers, Rowe, Poen, Medihealth, Panalab and Raymos laboratories, among others.

44 The sector's total exports in 2019 amounted to US$ 211 million.

The company exports the production of its own plant 45, making Parque de las Ciencias the first Free Zone in the country where the complete cycle of pharmaceutical production is carried out. The plant is one of the most modern in Latin America, meeting the most demanding standards of the industry

As for the origins within the sales from Free Trade Zones, the Free Trade Zone Parque de las Ciencias has been gaining participation uninterruptedly since the beginning of activities in 2012. While in that year they represented 47% of sales from Free Trade Zones, in 2019 almost all sales came from this site, which shows a strong and progressive concentration of industrial activities in the sector.

In terms of destinations, the sector's exports from Free Trade Zones present a high regional content, with South America and Central America concentrating 67% and 33% of total sales, respectively. Meanwhile, the distribution by country shows that Ecuador participates in one fifth of foreign sales from free trade zones. In the specific case of Panama, which receives 7% of exports from Free Trade Zones, it is worth noting the logistical characteristics of the country, so it can be inferred that part of the sales are subsequently redirected to other regional destinations.

Graph 11: Pharmaceutical sector exports by destination from Free Trade Zones (Millions US$- 2019)

Source: Uruguay XXI based on DNA data.

If exports are analyzed by product, medicines packaged for retail sale account for 67% of the total, while antisera account for 21%, with other types of pharmaceutical products accounting for 12%.

45 The investment at this stage was US$ 110 million and involved the creation of approximately 350 jobs.

Official name República Oriental del Uruguay Geographical location South America, bordering Argentina and Brazil Capital city Montevideo 176,215 km2. 95% of the territory is productive land Surface area suitable for farming Population (2019) 3,52 m Population growth (2019) 0,3% (annual) GDP per capita (2019) US$ 15.914 Currency Uruguayan Peso ($) Literacy rate 0,98 Life expectancy at birth 77 years Form of government Democratic Republic with a presidential system Political division 19 departments Time Zone GMT - 03:00 Official language Spanish

Indicadores 2015 2016 2017 2018 2019 2020e GDP (Annual % change) 0.4% 1.7% 2.6% 1.6% 0.2% -2.7% GDP (Millions of US$) 53,182 52,734 59,520 59,519 55,995 49,187 Population (Millions) 3.47 3.48 3.49 3.51 3.52 3.53 GDP per Capita (US$) 15,339 15,152 17,039 16,976 15,914 13,930 Unemployment Rate - Annual Average (% EAP) 7.5% 7.8% 7.9% 8.3% 8.9% 9.2% Exchange Rate (Pesos per US$, Annual Average) 27.4 30.1 28.7 30.8 35.3 42.7 Exchange Rate (Annual Average Variation) 17.6% 10.1% -4.8% 7.3% 14.7% 21.1% Consumer Prices (Annual cumulative % change) 9.4% 8.1% 6.6% 8.0% 8.8% 9.3% Exports of goods and services (Millions of US$)** 15,632 14,532 16,079 16,397 16,008 13,418 Imports of goods and services (Millions of US$)** 13,912 11,799 12,429 13,138 12,707 9,989 Trade Surplus / Deficit (Millions US$) 1.720 2.733 3.651 3.259 3.301 3.429 Trade surplus / deficit (% of GDP) 3,2% 5,2% 6,1% 5,5% 5,9% 7,0% Overall Fiscal Result (% of GDP) -3,6% -3,8% -3,5% -4,2% -4,8% - Gross capital formation (% of GDP) 19,7% 17,8% 15,2% 16,5% 16,2% - Gross Public Sector Debt (% of GDP) 59.3% 63.5% 65.3% 64.5% 66.4% - Foreign Direct Investment (Millions of US$) *** 905 -1.177 -837 -487 189 - Foreign Direct Investment (% of GDP) 1,7% -2,2% -1,5% -1,0% -1,0% -

46 Sources: Data on GDP were taken from the IMF; data on foreign trade, FDI, exchange rate, international reserves and external debt were taken from the BCU; rates of population growth, literacy, unemployment and inflation were taken from the National Institute of Statistics. Data estimated for 2018 based on BCU and Deloitte surveys.

** In 2017 the BCU adopted the methodology of the 6th Balance of Payments Manual. Data based on this new methodology include purchase and sale of goods and re-exports and are available from 2012.

*** In 2017, the BCU adopted the methodology of the 6th Balance of Payments Manual. The data are net flows and can therefore take negative values.