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Doing Business in Latin America IBA Latin American Regional Forum March 2016 Coordination Committee Costa Rica Batalla Salto Luna Juan Carlos Rocha BLP Philippi, Prietocarrizosa Ferrero DU &Uría Pacheco Coto David Gutiérrez BLP Ecuador Coronel & Pérez Abogados Luis Carlos Rodrigo Pérez Bustamante & Ponce Rodrigo Elías & Medrano Abogados El Salvador Arias BLP Participant Firms Mexico Argentina Basham Abogados A&F Allende Ferrante Abogados Goodrich, Riquelme y Asociados Estudio Beccar Varela Ramírez, Gutiérrez-Azpe, Rodriguez-Rivero y Hurtado SC Estudio Zang Bergel & Viñes Nicaragua Marval O’Farrel & Mairal BLP Bolivia Consortium Legal Bufete Aguirre Soc Civ Panama Moreno Baldivieso Arias Fabrega & Fabrega Brasil Fabrega Molino Mulino PinheiroNeto Advogados Peru TozziniFreire Advogados Estudio Echecopar – Member Firm of Baker & McKenzie Veirano Advogados International Velloza & Girotto Advogados Associados Philippi Prietocarrizosa Ferrero DU &Uria Chile Estudio Rodrigo, Elías & Medrano - Abogados Alessandri Abogados Uruguay Cariola Diez, Pérez-Cotapos Bado, Kuster, Zerbino & Rachetti Carey Ferrere Prieto & Cia Guyer & Regules Colombia Hugues & Hughes Brigard & Urrutia Sanguinetti & Asociados Gómez-Pinzón Zuleta Abogados Venezuela Lloreda Camacho & Co D’Empayre Reina Abogados Philippi Prietocarrizosa Ferrero DU &Uría Hoet Peláez Castillo y Duque Posse Herrera Ruiz Tinoco, Travieso, Planchart & Núñez

Doing Business in Latin America MARCH 2016 Acknowledgements

The Latin American Regional Forum (LARF) of the International Bar Association is proud to present this ﬁrst Doing Business in Latin America guide, which covers main topics on 14 different jurisdictions in the region.

This is the ﬁrst publication of LARF intended to be updated every two years and feature coverage on all Latin American jurisdictions.

We are thankful for the contributions from all participant ﬁrms, which made a tremendous effort not only to cover the legal aspects, but also to work together in the best interest of our legal community.

We believe this publication is an important tool for both investors and the legal profession when approaching certain critical aspects in our jurisdictions.

We also thank the International Bar Association for its continuing support to this initiative and encourage all members of the Latin American Regional Forum to contribute to the coming editions.

Disclaimer

This Doing Business in Latin America guide is a publication from the Latin American Regional Forum of the International Bar Association.

This work is a product of the participant ﬁrms and therefore, the International Bar Association does not necessarily own each component of the content included in the work. The International Bar Association and the Latin American Regional Forum do not warrant that the use of the content contained in the work will not infringe on the rights of third parties. The risk of claims resulting from such infringement rests solely on the user of the materials contained there.

The findings, interpretations, and conclusions expressed are the product of the work of the different participant firms in their jurisdictions and do not necessarily reflect the views of the other participant firms, their governments, the Coordination Committee or the International Bar Association.

Neither the Coordination Committee nor the International Bar Association guarantees the accuracy of the data included in this work. The information included in the different maps, the boundaries, denominations, and other information shown in this handbook do not imply any judgement concerning the legal status of any territory or the endorsement or acceptance of such boundaries.

The information included in the different chapters has informative purposes and cannot be considered as legal advice of any kind, therefore the participant ﬁrms are not held liable for any inaccuracy or the use of the information contained herein for investment purposes.

Doing Business in Latin America MARCH 2016

Contents i. Argentina 5

A. Foreign investment 6

B. Offshore vehicle providers in Latin American countries 17

C. Development of ample/integrated capital markets and joint activities between Latin American countries 22

D. Rendering of public services 25

E. Real estate – limitations for private parties 28 ii. Bolivia 33

A. Foreign investment 34

B. Rendering of public services; treatment of foreign investment 37

C. Real estate 40 iii Brazil 45

A. Foreign investment in Chile 46

B. Rendering of public services 52

C. Real estate 59

D. Development of ample/integrated capital markets and joint activities between Latin American countries 64

E. Offshore vehicles providers in Latin American countries 66 iv. Chile 71

A. Foreign investment in Chile 72

B. Rendering of public services 77

C. Real estate 80

D. Development of ample/integrated capital markets and joint activities between Latin American countries 83

E. Offshore vehicles providers in Latin American countries 86 v Colombia 89

A. Foreign investment in Latin American countries 90

Doing Business in Latin America MARCH 2016 1

B. Rendering domestic public services 109

C. Real estate 112

D. Development of ample/integrated capital markets and joint activities between Latin American countries 114 vi. Costa Rica 121

A. Foreign investment 122

B. Rendering of public services 130

C. Real estate 132

D. Development of ample/integrated capital markets and joint activities between Latin American countries 137

E. Offshore vehicle providers in Latin American countries 139 vii. Ecuador 143

A. Foreign investment 144

B. Public services 149

C. Real estate 150

D. Development of ample/integrated capital markets and joint activities between Latin American countries 153

Viii. El Salvador 155

A. Foreign investment 156

B. Rendering of public services 160

C. Real estate 165

D. Development of integrated capital markets and joint activities between Latin American countries 169

E. Offshore vehicles providers in Latin American countries 170 ix. Mexico 173

A. Foreign investment 174

B. Rendering of public services 180

C. Real estate 182

D. Offshore vehicle providers in Latin American countries 185

2 Doing Business in Latin America MARCH 2016 x. Nicaragua 189

A. Foreign investment 190

B. Rendering of public services 199

C. Real estate 203

D. Development of ample/integrated capital markets and joint activities between Latin American countries 205

E. Offshore vehicles providers in Latin American countries 206 xi. Panama 207

A. Foreign investments 208

B. Rendering of public services 217

C. Real estate 219

D. Development of ample/integrated capital markets and joint activities between Latin American countries 222

E. Offshore vehicles providers in Latin American countries 223 xii. Peru 231

A. Foreign investment in Latin American countries 232

B. Rendering of public services 243

C. Real estate 245

D. Development of ample/integrated capital markets and joint activities between Latin American countries 248 xiii. Uruguay 251

A. Foreign investments 252

B. Public services 260

C. Real estate 263

D. Development of ample/integrated capital markets and joint activities between Latin American countries 264

E. Offshore vehicle providers in Latin American countries 265 xiv. Venezuela 269

A. Foreign investment in Latin American countries 270

B. Real estate 277

Doing Business in Latin America MARCH 2016 3

4 Doing Business in Latin America MARCH 2016 Argentina

Doing Business in Latin America MARCH 2016 5 i. Argentina

A. Foreign Investment i. Authorisations vs limitations or prohibitions

A. ARGENTINE FOREIGN INVESTMENT REGIME

In general terms, foreign investments in Argentina are regulated by a framework of international treaties and Argentine laws that establish, among others, the rules for choice of law and jurisdiction, legal treatment of foreign investors, monetary policy and foreign exchange.

Particularly, foreign investments are governed by the Argentine Foreign Investments Law No. 21,382 which states, as a general principle, that foreign investors enjoy the same status and have the same rights that the Argentine Constitution affords to local investors. However, there are certain regulated areas that impose restrictions on foreign investors, such as antitrust regulations, foreign exchange matters, the broadcasting industry, or the acquisition of rural land.

B. FREE CHOICE OF LAW AND JURISDICTION

1 Choice of law

Argentine law generally permits parties to a contract to select the laws that will govern their agreements as long as some connection to the system of law that is chosen exists. Further, the choice of foreign law will only be valid to the extent that it does not contravene Argentine international public policy (orden público or public order). Typical public policy laws include criminal, tax, labour and bankruptcy law, as well as inheritance and family rules.

Rights associated with real estate (such as in rem rights), the ability to acquire real estate and the formal requirements with regard to legal acts connected with real estate are all governed exclusively by local laws. The same principles apply with respect to movable property permanently located in Argentina.

2 Choice of jurisdiction

Argentine courts have jurisdiction whenever: (1) the defendant is domiciled in Argentina; (2) the place for performance of any of the obligations is located in Argentina; or (3) Argentine courts have been chosen as the applicable forum (subject to certain restrictions). With respect to debtors domiciled abroad, local courts have jurisdiction only to the extent that the debtor has assets in Argentina, in which case insolvency proceedings will only cover such assets.

Argentine courts acknowledge that parties to a contract may choose a jurisdiction other than Argentina for the settlement of any disputes arising under a contract provided that there is a connection with such jurisdiction and the dispute relates to pecuniary rights.

6 Doing Business in Latin America MARCH 2016 C. FOREIGN EXCHANGE MATTERS

1 Foreign exchange controls

As a general rule, all transfers of foreign currency to and from Argentina must be made through the Argentine Foreign Exchange Market (the ‘FX Market’) and are subject to numerous restrictions and requirements set forth in the applicable foreign exchange regulations, as periodically issued by the Argentine Central Bank (the ‘Central Bank’). All transfers should be made in an Argentine licensed financial entity or foreign exchange agency, and are registered through foreign currency exchange forms executed with the financial entity or exchange agency that participates in the transaction. The Central Bank has established a list of concepts (códigos de concepto in Spanish) under which authorised transfers can be made. If a transfer of foreign currency to or from Argentina does not fall under a specific concept, a special request must be filed with the Central Bank.

Apart from the restrictions set forth by the Central Bank, other governmental agencies – like the Argentine Tax Authority (AFIP for its Spanish acronym) and the Customs Agency (Dirección General de Aduanas in Spanish) – have also implemented a series of measures aimed at protecting the ﬂow of foreign currency out of the country, which derives mostly from the payment of proﬁts and services abroad and from the purchase of goods. Nonetheless, irrespective of whether local companies would comply with all the legal requirements for purposes of executing the foreign exchange transaction to make payments to non-Argentine residents, it cannot be ruled out that de facto or informal measures may limit or delay the ability of Argentine residents to acquire foreign currency in the FX Market.

2 Foreign ﬁnancing of Argentine residents

According to current foreign exchange regulations, any cross border loan of Argentine residents granted by non-Argentine residents would be subject to the following rules:

(1) The foreign currency proceeds disbursed must be transferred to Argentina and sold for Argentine Pesos in the FX Market within 30 days following the date of disbursement (the ‘Mandatory Repatriation’);

(2) Principal repayments thereunder are subject to a 365-day waiting period (the ‘Mandatory Waiting Period’), during which principal cannot be paid unless the transaction qualiﬁes for an exemption (but accrued interest can, upon fulﬁlment of certain formal requisites). The Mandatory Waiting Period is applicable regardless of the method of payment that is used (ie, with or without access to the FX Market);

(3) Funds transferred and sold in the FX Market will be subject to the constitution of a mandatory nominative deposit in US dollars for one year equal to 30 per cent of the transaction, unless an exception applies to the cross border loan (the ‘Mandatory Deposit’); and

(4) Loans must be reported to the Central Bank pursuant to the foreign debt information regime.

3 Foreign investments in Argentina

In general, foreign investments can be classiﬁed as ‘portfolio’ or ‘direct’ investments. Direct

Doing Business in Latin America MARCH 2016 7 investments are participations in a local company of at least 10 per cent of its ordinary shares or voting rights.

Portfolio investments include, among others, participations in local companies below that cap, as well as holdings of Argentine currency, deposits in local banks, and debt securities of Argentine issuers. Generally, funds transferred to Argentina by non-Argentine residents for portfolio investments are subject to the Mandatory Deposit and the Mandatory Waiting Period. Repatriation of such portfolio investments is limited to an aggregate amount of US$500,000 per calendar month; in addition, certain speciﬁc requirements are to be met (which must be validated by the local bank participating in the transaction), such as the Mandatory Repatriation.

Funds transferred to Argentina by non-Argentine residents for direct investments and the purchase of real estate located in Argentina are subject to the Mandatory Waiting Period, but are exempted from the Mandatory Deposit, provided that certain conditions are met. Non-Argentine residents qualifying as direct investors in an Argentine company may repatriate their direct investments by reducing or selling their Argentine investment, provided that the direct investment has been maintained in Argentina for at least 365 calendar-days, and that other speciﬁc requirements are met (to be validated by the local bank participating in the transaction). Furthermore, for any direct investment made on or after 28 October 2011, the direct investor must provide evidence that the funds originally paid for such investment were transferred to Argentina and sold in the FX Market for Argentine Pesos (ie, the Mandatory Repatriation).

4 Foreign trade

Argentine residents are required to bring to Argentina and sell for Argentine Pesos in the FX Market the foreign currency proceeds collected abroad from their export of goods and services by the applicable regulatory deadlines, which in the case of the goods, varies according to the nature of the type of exported good.

The Central Bank has delegated to local financial institutions the responsibility to oversee and follow- up the compliance with the obligation to transfer and sell for Argentine Pesos in the FX Market the foreign currency proceeds collected from the export of goods. Exporters must appoint a financial entity for purposes of carrying out the follow-up of the export and the transfer and sale of the foreign currency export proceeds corresponding to the relevant bills of lading. Foreign exchange regulations require financial institutions to inform any breach of the obligation of the exporter once the applicable term expires. On the contrary, foreign exchange regulations do not establish such a follow- up regime in the case of exports of services. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

The Federal Government and some provincial governments as well, have enacted regulations to foster private initiative in public interest-related projects.

Some of these jurisdictions have passed regulations that allow private investors to propose public works or projects to governmental authorities in order to satisfy public needs. Should such proposals

8 Doing Business in Latin America MARCH 2016 be declared of public interest, the private investor – who initially ﬁled the proposal – receives advantages in the subsequent competitive bidding process.

Legal frameworks for the participation of private investors in the design, construction, operation, maintenance and ﬁnancing of infrastructure works are in place both at federal level and in some provinces. Both project ﬁnance and turn-key schemes are also being contemplated. There is room too for partnership with governmental entities through the creation of corporations with mixed equity participation.

From an environmental law standpoint, as a rule, major infrastructure projects must be approved by the corresponding regulatory agencies (federal or provincial, as the case may be) for which purpose an environmental impact assessment has to be approved and a public hearing must be held. In practice, in Argentina, most of the important infrastructure projects have been developed by means of a concession of public works agreement.

At a Federal level, the regime for private public partnership (PPPs) was implemented by means of Decree No. 967/2005 (the ‘Decree 967/05’), which stated that PPPs are vehicles through which private investors and the Federal Government may associate in order to provide public services, carry out public works or perform other governmental duties. PPPs may be incorporated as corporations or trusts and shall be publicly listed. Decree 967/05 also establishes certain guidelines to be used for association between public and private parties. For instance, the Federal Government may make its contribution to the PPPs through, among other things, cash, tax credit assignments, tax beneﬁts and the granting of rights over public or government rights (with the exception of property rights). iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

A. OIL AND GAS

1 Domestic policy on oil and gas

A decade of state intervention, subsidies and price control discouraged hydrocarbon exploration and boosted the consumption of fuels and natural gas fostered by economic growth. This combination led to a loss of hydrocarbon self-sufﬁciency and forced Argentina to import natural gas and liqueﬁed petroleum gas (LPG) to meet domestic demand. Liquid fuels (that is, fuel oils) are also imported.

The current policy of the Federal Government is aimed at regaining self-sufﬁciency in hydrocarbons supply.

Law No. 26,741 of May 2012 declared the country’s hydrocarbon self-sufﬁciency, as well as hydrocarbon exploration, production, industrialisation, transport and marketing, to be in the public interest as it furthers economic development and social equity, fosters employment, increases competition between the different economic sectors and promotes the equitable and sustainable growth of the provinces and regions. To achieve this goal, proposed means include: the increase and maximisation of investments and resources; the integration of public and private capital, both domestic and international; and the promotion of industrialised hydrocarbons with high added value.

Doing Business in Latin America MARCH 2016 9

2 The regulatory regime

According to the Argentine Constitution, natural resources, including hydrocarbon reserves, belong to the provinces in whose territories they are located and are severable from the general ownership of property. However, ownership does not entitle the provinces to legislate on hydrocarbon matters because the Argentine Constitution empowers the federal Congress to issue legislation on hydrocarbons matters.

Pursuant to the legislation passed by the federal Congress, the national policy on hydrocarbon exploration, production and marketing is dictated by the National Executive Branch. Meanwhile, the granting, administration and control of exploration permits and concessions is entrusted to the provinces.

On the other hand, offshore upstream activities beyond 12 marine miles are subject to exclusive federal legislation and jurisdiction.

Law No. 17,319 of 1967, as amended, (the ‘Hydrocarbons Law’) is the main piece of legislation governing exploration and production activities at federal level. The Hydrocarbons Law regulates the granting of exploration permits and production concessions, and their terms and conditions. This federal law applies to concessions that were granted by the Federal Government and are currently subject to provincial administration.

Effective as of November 2014, Law No. 27,007 amended the Hydrocarbons Law.

Law No. 27,007, besides amending some aspects of the Hydrocarbons Law, mostly linked to the exploration and production of unconventional hydrocarbons, the extension of the concessions and the royalties rates, also modiﬁed the promotional scheme for the industry established in 2013, among other key issues for the sector.

Some signiﬁcant amendments to the Hydrocarbons Law approved by Law No. 27,007 were as follows:

(1) Concessions for unconventional production: Law No. 27,007 conferred legal status to production concessions for unconventional hydrocarbons (CENC). For this purpose, ‘Unconventional Hydrocarbon Production’ is deﬁned as the extraction of oil and gas through unconventional stimulation techniques applied to deposits in geological formations characterised by the presence of rocks with low permeability: shale or slate rocks – shale oil and shale gas-, compact sandstones – tight sands, tight oil and tight gas-, and layers of coal – coal bed methane.

CENCs may be requested by the holders of exploration permits or conventional production concessions, which are currently in force or which may be granted in the future. The duration provided for the CENCs is of 35 years with the possibility of subsequent extensions for 10-year periods.

(2) Duration of exploration permits: The basic term of permits for conventional exploration is divided into two periods of up to three years each plus a discretionary extension up to ﬁve years. Thus, the maximum possible duration of exploration permits is reduced from 14 to 11 years. For unconventional exploration, the basic term of the permit is divided into two four-

10 Doing Business in Latin America MARCH 2016 year terms, plus one discretionary extension of up to 5 years; this is a maximum of 13 years.

In the case of offshore permits, the two periods of the basic term are of up to 4 years and the extension for ﬁve year is foreseen.

(3) Duration of production concessions: The term of conventional production concessions was maintained in 25 years. For CENCs, a 35-year term is provided, including an initial pilot plan of up to ﬁve years. For offshore production, concessions will be granted for a period of 30 years. In all cases ten-year extensions are foreseen.

(4) Duration of transport concessions: According to Law 27,007, transport concessions will be granted for the same term as the production concession from which they originate, plus the possibility of an extension for a ten-year term. Thus, transport concessions arising from a conventional production will be granted for a 25-year term and those originating in a CENC for a 35-year term. Until present all transportation concessions were granted for 35 years.

3 Regulatory bodies

Jurisdiction over hydrocarbons located on shore and offshore up to the 12 marine miles from the shore is shared between the federal State and the provinces.

In 2007, administration over all oil and gas ﬁelds located in the territories of the provinces, including the territorial sea up to 12 marine miles from the shore, was transferred by the federal State to the provinces where the ﬁelds are located (Law No. 26,197). Hydrocarbon reserves in the Argentine continental shelf and beyond the 12 miles remain the property of the federal State and are subject to exclusive federal jurisdiction.

The federal regulator for the oil industry is the Secretariat of Energy of the Ministry of Federal Planning, Public Services and Infrastructure (the ‘Secretariat of Energy’) which is also the enforcement agency for the Hydrocarbons Law.

Although natural gas transportation and distribution are under exclusive federal jurisdiction, these activities are subject to a separate regulatory framework (Law No. 24,076, as amended and implemented) (the ‘Gas Law’) and the regulator for these matters is the national gas regulator Ente Nacional Regulador del Gas (ENARGAS for its Spanish acronym).

Crude oil transportation, hydrocarbon downstream activities (reﬁning) and the LPG industry are also subject to exclusive federal jurisdiction.

In each oil-producing province (that is, Salta, Jujuy, Formosa, Mendoza, La Pampa, Neuquén, Río Negro, Chubut, Santa Cruz and Tierra del Fuego) there is an agency with speciﬁc regulatory powers over hydrocarbon upstream operations.

4 Oil and gas rights

The Hydrocarbons Law provides for the grant by the owner (the federal State or the provinces, as the case may be) of the mineral rights, surface survey permits, exploration permits and production concessions to private investors. Permits and concessions were granted by the federal State until 2007

Doing Business in Latin America MARCH 2016 11 when jurisdiction over the hydrocarbon reserves was transferred to the provinces. However, most of the hydrocarbons currently produced come from concessions granted by the federal State.

Under the Hydrocarbons Law, the holder of an exploration permit has the exclusive right to perform the operations necessary or appropriate for the exploration of hydrocarbons within the area covered by the permit. Usually, exploration permits set minimum commitments consisting of seismic survey and wells. If the holder of an exploration permit discovers commercially exploitable quantities of crude oil or natural gas, it may apply for, and is entitled to acquire, an exclusive concession for the production and development of these reserves.

5 Transportation by pipeline

Hydrocarbon pipelines that run across the territories of two or more provinces or into another country are subject to exclusive federal jurisdiction. Pipelines conﬁned to the territory of one province only are subject to that jurisdiction. Most of the pipelines in the country, including the high pressure natural gas pipeline system connecting most of the provinces, are subject to federal exclusive jurisdiction.

In both cases, hydrocarbon pipeline transportation is a public service and is subject to open access and regulated tariffs.

At the federal level, natural gas pipelines can be built and operated under licences, concessions or permits granted through public bidding by the National Executive Branch under the Gas Law. Gas pipelines operated under this framework are regulated by ENARGAS.

Alternatively, crude oil and natural gas pipelines can be built and operated under concessions granted under the Hydrocarbons Law to holders of production concessions to deliver their own product. Pipelines operated under this framework are regulated by the Secretariat of Energy or the provincial hydrocarbon authorities, depending on their location.

B. MINING ACTIVITIES

The basic statute which governs mining in Argentina is the Mining Code. Argentine law is based upon the principle that all mineral deposits are state-owned. Each province or the federal government is considered as the owner of the minerals located within their jurisdictions. However, individuals and legal entities may obtain concessions from such bodies to explore and develop those deposits and may freely dispose of the minerals extracted within the area of the concession.

1 Exploration of mineral resources

Prior to the commencement of exploration works, the mining company must obtain an exploration permit from the provincial mining authority (whether the land to be explored is public or private property). The exploration permit grants the explorer the exclusive privilege to explore and, eventually obtain a development concession to work any deposit of any mineral (this right is not limited to those mentioned in the petition) discovered within the area of the grant.

12 Doing Business in Latin America MARCH 2016 2 Development of mineral resources

If a discovery is made during the course of exploration, the discoverer must register the discovery with the provincial mining authority. This territory may not be explored nor developed by third parties until the end of the staking proceedings. The next step is to define the final limits within which the concession may be developed. The discoverer must file a petition for a development concession with the mining authority.

3 Mining concessions

c.1. Acquisition: Mines are acquired through a legal concession. Mines capable of being acquired through a concession (original acquisition) are: (1) discoveries; and (2) null and vacant mines.

c.2. Effects: A mining concession makes the concessionaire owner of every deposit found within its boundaries. However, the discoverer must inform the Mining Authority of the existence of any mineral different from the one registered. This information is relevant to decide the mining fee and the capital investment required.

c.3. Withdrawal: Mining concessions can be withdrawn by the concessionaire through a direct and spontaneous act demonstrating before the Mining Authority the decision not to pursue with the mining works. A written declaration must be also ﬁled with the Mining Authority.

c.4. Mining fee: Mines are awarded through the payment of an annual fee established by the Argentine Congress and paid to the Federal Government or the Provincial Governments, according to the location of the mines.

c.5. Investment plan: After the mine is granted, the concessionaire must submit an estimate of the plan and amount of the capital investment to be made to the Mining Authority. Investments must be destined to: (1) the execution of mining labour works; (2) the building of camps, roads and other constructions for exploration purposes; and (3) the acquisition of machinery, facilities and exploitation equipment concerning the production capacity to be introduced permanently into the mine.

c.6. Termination of the mining concession: Mining concessions can expire for the following reasons: (1) lack of payment of the annual fee; (2) lack of filing of the estimation of the plan and magnitude of the capital investment; (3) investments made contrarily to the requirements of the Mining Code; (4) investments lower than three hundred (300) times the annual fee; (5) lack of filing of the annual affidavit on the development of the investment plan; (6) fraud of the annual affidavit on the development of the investment plan; (7) lack of compliance with the estimated investments; (8) modification and reduction of the estimated investment without prior notice; (9) withdrawal of assets included in the investment resulting in its reduction; and (10) inactivity of the mine for over four years.

c.7. Speciﬁc tax treatment: Mining activities have special tax incentives, which should be carefully analysed in the decision-making process for a new investment in the area. Legal statutes on tax incentives provide for: (1) the ﬁnancing or reimbursement of Value Added Tax payments

Doing Business in Latin America MARCH 2016 13

made by mining companies; (2) a 30-year tax stability regarding taxes in force at the time the feasibility report is submitted; (3) the beneficiaries’ right to deduct from their income tax statement 100 per cent of the amounts invested in prospecting, special research, mineral and metallurgical tests, pilot plants, applied research and other works aimed at determining the technical and economic feasibility of a project; (4) the possibility of accelerating (over three years) the depreciation of investments made on housing, transportation, construction of plants and equipment required for mining activities; (5) the exemption from paying income taxes derived from profits of the mines and mining rights, used as payment for the subscription of shares of registered beneficiary companies; (6) a three per cent cap on royalties, calculated on the ‘pit-hole’ value (similar to NSR royalties) of the mineral extracted; among others. iv. Treatment of Foreign Investment in Real Estate

A. RESTRICTIONS

Foreign ownership of real estate is unrestricted except for limitations on: (1) ownership or possession of rural lands; and (2) acquisition of properties located within national security zones.

1 The rural lands regime

The Rural Land Law No. 26,737 and its implementing Decree No. 274/2012 (the ‘RLL’) impose limits on the ownership or possession of rural lands by foreign persons or legal entities. a.1. Scope: The RLL’s purpose is to regulate, with regards to individuals and legal entities, the limits to ownership and possessions of rural lands which are deﬁned as any piece of land outside the urban grid, regardless its location or destiny. Foreign ownership over property or possession of rural lands is deemed as any acquisition, transfer, assignment of possessory rights, whatever the type, name and extension of time imposed on the parties, in favour of the subjects reached by the RLL’s scope. a.2. Restrictions: The RLL sets forth the following limits to individuals, legal entities or contractual forms of association:

(1) Foreign ownership of rural land shall not exceed 15 per cent of the total amount of ‘rural lands’ in the whole Argentine territory or in the territory of the relevant province or municipality where the relevant lands are located;

(2) Individuals or corporations of the same nationality will not be able to own or possess rural lands that represent more than 30 per cent of the 15 per cent previously mentioned;

(3) Ownership or possession by the same foreign owner shall not exceed one thousand (1,000) hectares in the ‘core area’ or the ‘equivalent surface’ determined according to the location of the lands that is to be deﬁned by the Interministerial Council of Rural Lands (‘Consejo Interministerial de Tierras Rurales’ in Spanish);

(4) Foreign legal entities or individuals shall not be owners of rural lands that comprise or are

14 Doing Business in Latin America MARCH 2016 located beside ‘permanent and signiﬁcant bodies of water’; and

(5) Foreign legal entities or individuals shall not be owners of lands located in Security Zones, other than in accordance to the exceptions and the procedures established in the Security Zones’ regulations. a.3. Subjects reached by the RLL: They are:

(1) Foreign individuals, except those who: (1) have a ten-year residence; (2) have Argentine children and have a five-year residency; and (3) have been married to Argentine citizens for at least five years prior to the transfer of the property and have a five-year residency in the country.

(2) Legal entities in which more than 51 per cent of the stock or a portion sufﬁcient to prevail in corporate decisions is held by foreign individuals or legal entities held by foreign individuals or legal entities. Other forms of ‘control’ or legal vehicles are also subject to the limitations of the RLL. a.4. Consequences of non-compliance: The RLL sets forth that all legal acts that are executed in breach of its provisions shall be null and void, and the authors and participants shall not have any right to claim a compensation for their illicit act. The pretended appearance of Argentine individuals as owners to comply with the ownership required by law, in order to breach the provisions of the RLL, is prohibited. Such circumstance shall be considered an illicit and fraudulent simulation.

2 Security zones

The national security zones (the ‘Security Zones’) are areas surrounding international borders and certain military and civil facilities in the interior of Argentina. The width of the Security Zones varies from case to case. The National Executive Branch can amend the width of the Security Zones taking into account the situation, population, resources and national defence interests. In no case, may a Security Zone exceed 150 kilometres from an international border.

The Security Zones’ regime states that it is in the national interest that properties located within Security Zones belong to native Argentine citizens. For this reason, any and all sales, transfers or leases of properties located within the Security Zones are subject to the prior approval of the Security Zones Commission (SZC). Likewise, the SZC’s prior approval is required for: (1) mergers and transfers of the controlling stocks in companies that own a property located in a Security Zone; and (2) the conversion, merger or spin-off of a corporation that owns properties in a Security Zone. Only Argentine individuals are exempted from the Security Zones’ regulations.

B. ZONING AND RELATED MATTERS CONCERNING THE USE AND OCCUPATION OR REAL ESTATE PROPERTY

Real estate’s developments in Argentina are basically governed by provincial and municipal zoning regulations and building codes; therefore, they differ in each jurisdiction. The Federal Government

Doing Business in Latin America MARCH 2016 15 sets the minimum environmental standards for the protection of the environment, and the provinces and municipalities establish speciﬁc standards and implementing regulations.

Control of proper zoning, land use, building codes and other restrictions is carried out by provincial and municipal authorities. Environmental compliance is controlled at the federal, provincial and municipal level. v. Treatment of Foreign Investment in the Rendering of Public Services

A. INTRODUCTION

Argentina is organised as a federal system. The Federal Government coexists with 24 local governments (23 provinces and the City of Buenos Aires) and more than 2,000 municipalities.

Administrative law is of ‘local’ nature. The Federal Government, each province, the City of Buenos Aires and the municipal governments may enact or issue their own laws or regulations on administrative matters. Such laws and regulations must comply with the Argentine Constitution, as well as with the Constitution of the relevant province or of the City of Buenos Aires. Public procurement is considered a typical administrative matter; therefore, it is governed by administrative law. Thus, contracts executed by administrative agencies are governed mostly by administrative law rather than by civil or commercial law. Each province may enact its own laws and regulations regarding public procurement.

B. PROCUREMENT REGULATIONS

Procurement laws and regulations are generally applicable to most of the contracts entered into by the government including, inter alia: (1) public works contracts; (2) public service concessions or licences (ie, utilities); (3) supply agreements; and (4) consulting services agreements, etc. Generally, government contracts are governed by the rules set forth in the relevant legislation, as supplemented by the speciﬁc bidding terms and conditions issued ad-hoc when the bidding and tender process is called; and the particular terms of the contract.

The general principle is the need that procurement must be done by means of a competitive bidding process that must ensure equality between all bidders. The bidding terms and conditions usually impose certain economic and technical requirements (eg, expertise in similar works, a minimum net worth, certain debt ratios, etc) for the granting of public contracts.

C. PUBLIC WORKS AND UTILITY CONCESSIONS

Depending on their location and scope, public works and utilities’ contracts may be subject to federal, provincial or municipal regulations. Thus, the authorisations required to carry out public works or to operate a utility may vary from one jurisdiction to another. Currently, major contracts for the construction and/or the operation of large nuclear and hydropower generation projects are being carried out. There are also important gas and electricity transportation projects, as well as a number of thermal generation power initiatives being considered for future tenders.

16 Doing Business in Latin America MARCH 2016 B. Offshore vehicle providers in Latin American countries i. Introduction

From a legal perspective, Argentina follows a continental or civil law tradition, and it is organised as a federal republic. Consequently, in accordance with the Argentine National Constitution, each of the 23 provinces and the City of Buenos Aires issue their own norms,1 delegating certain powers to the federal government.2 Hence, within its attributions, the National Congress is vested with the power to enact the civil and commercial codes,3 which include those matters related to companies with proﬁt-making purposes.4 Particularly in the ﬁeld of corporate law, the General Company Law (in Spanish, ‘Ley General de Sociedades 19,550’, hereinafter referred to as ‘GCL’)5 is the ‘federal’ legal instrument (ie, applicable throughout Argentina) that comprehensively regulates all matters relating to the different types of companies, including those issues concerning the recognition of companies organised abroad as well as the activities they perform in Argentina.6

On the other hand, due to the federal organisation, each province retains the power to regulate on local control and registration of companies that aim to perform main activities within their respective territories. Indeed, registration procedures may vary from one jurisdiction to another. The most representative case is the regime applying within the City of Buenos Aires due to the fact that this is the Capital City and the principal port of the country, thus being the paramount destination of foreign investors for trade and businesses. Because of the limitations of the purpose hereof, this report does not intend to cover all aspect regarding offshore companies, but rather to present a short practical guide about the most typical topics to be considered when doing business within or along with Argentina –referring particularly to the local regulations adopted in the City of Buenos Aires. ii. Offshore Companies Under the GCL

a. RECOGNITION OF COMPANIES ORGANISED ABROAD

Firstly, it must be stressed that the GCL upholds the constitutional principle of equality under the law; consequently, companies formed in Argentina and those organised abroad must be treated in parity.7 Nevertheless, in harmony with the constitutional principle of sovereignty, the law requires companies organised abroad aiming at doing businesses within the country to be registered and to accomplish certain formalities before the registry of commerce organised in the chosen jurisdiction.

Secondly, the general principle regarding recognition of the existence of companies organised

1 In 1994, after a constitutional reform, the City of Buenos Aires was recognised governmental and legal autonomy similar to the ones empowered to the provinces. 2 Argentine National Constitution, Articles 5, 121 and 126. 3 National Constitution, Article 75.12. 4 Following an integral and broad legal reform, Law 26,994 derogates the National Civil Code and the National Commercial Code, adopting the uniﬁed National Civil and Commercial Code effective as of 1 August 2015. 5 Law 26,994 – effective as of 1 August 2015 – eliminates the division between civil and commercial companies. Now, the GCL solely refers to companies with lucrative purposes regardless of the activities included in the purpose of the company. 6 Additionally, listed companies are subject both to the GCL and to the provisions of Law 26,831 and related norms governing the Argentine capital market. 7 Law 19,550, Explanatory Statements of the Law, Chapter I, Section XV.

Doing Business in Latin America MARCH 2016 17 abroad is provided by Article 118, ﬁrst part, of GCL, which upholds the locus regit actum canon and thus provides that ‘the existence and form of a company set up abroad shall be governed by the laws of the place where it was organised.’ b. DIFFERENT FORMS FOR COMPANIES ORGANISED ABROAD TO PERFORM ACTIVITIES IN ARGENTINA

The GCL regulates three legal ways for companies organised abroad to perform activities in Argentina. Hence, a foreign company can: (1) carry out isolated acts; (2) establish a permanent representation (ie, branch, agency, etc); or (3) organise or participate as members of local companies (ie, subsidiaries). Different requisites apply in each case, as follows.

In the ﬁrst place, companies organised abroad are qualiﬁed to perform isolated acts and to be on trial without need of prior registration or any further formalities.8

In the second place, companies organised abroad may regularly perform activities consistent with their main business by setting up a branch, agency or any other type of permanent representation in Argentina. For this purpose, the foreign company must fulﬁl certain prerequisites, among them, the company must: (1) prove its existence pursuant to the laws of the country of origin; (2) ﬁx a domicile within Argentina; (3) comply with certain publications and registrations similar to the ones required by the GCL to local companies; (4) justify the decision to create such representation; and lastly (5) appoint the person who shall be in charge thereof. 9

Finally, companies organised abroad may opt to form or participate in local companies. For this purpose, the company must fulﬁl the following requirements ﬁrst: (1) it must produce evidence that it has been incorporated in accordance with the laws of its country of origin; (2) it must register it by- laws and other qualifying documents; and (3) it must appoint its legal representatives in Argentina.10

Furthermore, it is worth mentioning that the GCL upholds the phenomena of companies formed in fraudem legis. In this regard, when a company organised abroad has its principal place of business or its main purpose is to be accomplished in Argentina, then it shall be linked to a local company insofar as its incorporation, charter amendments and supervision are concerned. Thus, the company will only be recognised as a regular entity once it fulﬁls all the relevant requirements to set up a local company under the GCL.11

Regarding listed companies, capital market regulations apply correspondingly the principle of equality before the law. However, all companies applying for a permit to make public offers have to demonstrate that they have no restriction or legal prohibition to perform activities according to their by-laws within the country of organisation or registration. Hence, offshore companies are excluded from participating in public offers.12

8 GCL, Article 118. 9 GCL, Article 118. Also, according to Article 119, GCL, when the company is organised under a form not provided for by the GCL, the register shall stipulate the formalities to be fulﬁled, subject to the strictest application of the provisions of the GCL 10 GCL, Article 123. Although the GCL literally refers to the formation of local companies, the doctrine and the jurisprudence have unanimously agreed that it also allows foreign companies to acquire a participation in companies already organised and existing in Argentina. 11 GCL, Article 124. 12 National Exchange Commsission, General Resolution 604/2012, Article 2.

18 Doing Business in Latin America MARCH 2016 iii. Regulatory Norms Regarding Offshore Companies in the city of Buenos Aires

Since the last 12 years, offshore companies have been subject to regulatory norms adopted by local registers in certain jurisdictions. Hence, in 2003, the Public Registry of Corporations in the City of Buenos Aires (PRC) initiated an integral regulatory reform leading a tendency that seriously restricts the activities of offshore companies. Basically, PRC’s regulations are aimed at enhancing the level of transparency, supervision and protection of stockholders and creditors through increased preventing measures (ex ante legal strategies). This reform also obeyed to the international legal trend promoted by, among other international organisations, the Financial Action Task Force (ie, FATF or GAFI by its acronym in Spanish) through the recommendations to ﬁght again terrorism and money laundering. Ultimately, the tragedy occurred in Argentina in 2004 (locally known as the ‘Cromagnon Case’) was the straw that broke the camel’s back.13 The case evidenced the need of reinforcing controls over companies organised abroad, particularly referring to offshore or tax haven jurisdictions, mainly because of the archetypal difﬁculty to know who are the accountable individuals behind the corporate veil.

As a result, the set of norms adopted by the PRC – then collected in General Resolution 7/05 – includes measures aimed at preventing offshore vehicles’ activities in Argentina. The following statements upheld by the PRC when referring to offshore companies are very useful to help understand the PRC criterion: ‘[...] offshore companies are useless for a real investment economy orientated to the production of goods and services and the creation of employment sources, and at this point nobody can deny the truth in the generalised awareness that offshore companies are instruments of fraud, concealment or hiding of assets, the violation of public policy rules, the legitimizing of assets derived from unlawful acts or activities including very serious organised criminal activities (sex trafﬁcking in women, child prostitution, trafﬁcking of drugs and weapons, terrorism, and the like), among others [...].’14

A. OFFSHORE VEHICLE PROVIDERS GENERAL CONCEPT

According to General Resolution 7/05, offshore companies are those companies organised abroad which pursuant to the laws of the jurisdiction of organisation, incorporation or registration thereof are imposed with prohibitions or restrictions regarding to all business or main business transacted thereby within the area of application of such laws. Likewise, General Resolution 7/05 deﬁnes offshore jurisdictions as those jurisdictions – in the broad sense of the term, including independent or associated States, territories, domains, islands or any other territorial units or areas, whether independent or not – in which, pursuant to the applicable laws, prohibitions or restrictions are imposed upon all or a given type of companies organised, incorporated or registered therein with regard to all business or main business transacted thereby within the area of application of such laws.

Additionally, General Resolution 7/05 also refers to companies which without being offshore are companies organised in States, domains, territories, jurisdictions, associated States and speciﬁc tax

13 The Cromagnon Case resulted in almost 200 fatal victims and at least 1,400 injured people in a tragedy event occurred in the nightclub known as ‘Cromagnon Republic’ in December 2004. The PCR carried out an investigation in order to discover the actual owners of the companies –mostly offshore entities– running the business. For further explanations see PRC Resolution 431/05 in re: ‘Nueva Zarelux S.A. y National Uranums Corporation.’ 14 PRC, General Resolution 2/05.

Doing Business in Latin America MARCH 2016 19 regimes other than those considered jurisdictions that cooperate with Argentina for the purpose of fiscal transparency;15 or they are organised in jurisdictions that do not cooperate in the fight against money laundering and transnational crime.16 They are the so-called de facto offshore companies and they are also subject to specific regulations under General Resolution 7/05.17

B. REGISTRATION OF OFFSHORE COMPANIES WITH THE PRC

As mentioned above, one of the goals sought by the General Resolution 7/05 is to restrict and control the use of offshore companies organised abroad. Hence, a company organised abroad that requests to be registered with the PRC, whether for setting up a branch, agency or to participate in a local subsidiary, must comply with three additional and essential requirements, this is, supplementing those general requirements described above under the GCL. In this respect, the company is obliged to provide the PRC with documentation, signed by a corporate officer, whose representation powers shall be attested to by a notary public, evidencing that: (1) the company is not subject to any prohibition or restriction to carry out all its business activities or its main activities at its place of organisation, incorporation or registration; (2) the company has, outside Argentina, one or more agencies, branches or representative offices in good standing and/or non-current fixed assets or rights to operate third-party property qualifying as non-current fixed assets and/or interests in other non-listed companies and/or customarily engages in investment transactions on stock exchanges or securities markets as provided for in its corporate purpose; and (3) the company must also identify its partners at the time of adopting the decision to apply for registration.18 Consequently, the general principle is that the PRC shall not register offshore companies originating from offshore jurisdictions. Offshore companies intending to perform activities for the attainment of their purpose and/or organise or hold an ownership interest in local companies, shall first comply in full with Argentina laws similarly to local companies.19

Also, General Resolution 7/05 provides for speciﬁc exceptions to this principle (see point iv below).

Regarding the so-called de facto offshore companies (see definition above), the PRC shall apply a restrictive criterion upon assessing the fulfilment of the requirements that the company is actually engaged in significant business at its place of organisation, registration or incorporation and/or in other countries and the identification of its partners. For such purpose, the PRC may request the company to provide, among other documents: (1) its most recent approved financial statements; (2) a description, in a document to be signed by the competent authority of the country of origin or a company officer – whose capacity and sufficient powers shall have to be duly evidenced – of the main transactions carried out during the fiscal year to which the financial statements refer or during the next preceding year if the periodicity of such statements were shorter, stating the transaction dates, parties, purposes and amounts; (3) documents evidencing title to non current fixed assets or

15 Effective 1 January 2014 Argentina switched from a blacklisting system of low-tax or no-tax jurisdictions to a white-listing system that includes the jurisdictions that have entered into agreements with Argentina for exchange of information as well as those that have initiated the process of negotiation and ratiﬁcation of a double taxation agreement. The white list can be consulted on www.aﬁp.gob.ar (Decree 589/13 and AFIP Resolution 2576/13). 16 These are jurisdictions characterised as such in accordance with the criteria established by the Financial Information Unit (FIU) of the Ministry of Justice and Human Rights or by the FATF or other international organisations. 17 PRC, General Resolution 7/05, Chapter VI, Article 248. 18 PRC, General Resolution 7/05, Article 188 et seq. 19 PRC, General Resolution 7/05, Article 193.

20 Doing Business in Latin America MARCH 2016 contracts conferring rights to operate non current fixed assets, if the document mentioned in (2) above is deemed insufficient; and (4) background information about its partners’ financial and tax condition.20

For the sake of clarity, General Resolution 7/05 explains that upon assessing the business carried out by companies abroad for the purpose of determining whether it should be construed as main business in comparison with the activities carried out by its office, branch or representation office in Argentina, the PRC shall avoid focusing its review exclusively on the value of assets and/or volume of transactions, being entitled to ponder – based on the documentation to be submitted for registration purposes – other relevant factors such as: (1) the nature of the company’s activities; (2) its integration in a group of international renown characterised by the division and/or interrelationship of activities; (3) the extent of human resources involved; and (4) any other element that reasonably evidences the localisation and significance of the activities carried out abroad by the company.21

C. MAINTENANCE OF THE REGULAR STATUS: ANNUAL REPORT

Once the company organised abroad has been registered with the PRC, it must comply annually with a reporting duty, performed within sixty business days as from the closing of its ﬁscal year. Basically, the company must provide evidence that it continues to carry out its main activities within the jurisdiction of organisation, registration or incorporation and/or in third countries. Also, the company must provide evidence of its ownership structure, if there are variations there in.22 Non-compliance with the reporting duty may constitute an indication that the company organised abroad is in fact a company in fraudem legis, and thus the PRC may require the company to start a regularisation procedure to fulﬁl Argentine laws within a period which shall not exceed one hundred and eighty days. Otherwise, the PRC shall request in court the cancellation of the registration and the liquidation of assets, as may be applicable.23

D. LEGAL EXCEPTION: VEHICLES OR INVESTMENT MEANS

As already indicated, acknowledging the reality of international businesses and the proliferation of groups of companies worldwide, General Resolution 7/05 provides for an exemption appropriate to offshore companies when they apply for registration solely for the purpose of acting in Argentina as a vehicle or investment mean of other companies that directly or indirectly control them. 24 In other words, a company acting as a mere investment vehicle of another company within the same group is exempted from submitting (1) that it is not subject to prohibitions or legal restrictions to carry out, in its jurisdiction of incorporation, all of its activities or the most important of them, and (2) evidence regarding activities performed abroad. Instead, the controlling company must comply with these two requirements and the remaining ones described above.25 Furthermore, the vehicle company must

20 PRC, General Resolution 7/05, Article 192. 21 PRC, General Resolution 7/05, Article 211. 22 PRC, General Resolution 7/05, Article 205 et seq. 23 PRC, General Resolution 7/05, Article 244, et seq. 24 For the purpoese thereof, controlling company means a company that holds directly or indirectly sufﬁcient equity interest, irrespective of the nature thereof, to grant it the votes required to adopt corporate decisions. 25 Exemption of requirements shall also apply in case of joint control, either direct or indirect, in which case such requirements shall have to be fulﬁled by the controlling entities. PRC, General Resolution 7/05, Article 190 et seq.

Doing Business in Latin America MARCH 2016 21 submit: (1) a certificate issued by the controlling company declaring that the vehicle company is an investment instrument that it uses solely for that purpose; (2) a certificate issued by the vehicle company declaring that it is an investment instrument that the controlling company created solely for that purpose; (3) an organisational chart showing the controlling interest regarding the vehicle company; and (4) a certificate identifying the vehicle’s shareholders. For the sake of clarity, both the controlling company and its vehicle (whether offshore or not) must be registered with the PRC and accordingly they must comply with the annual reporting duty as explained in the previous section.

Finally, upon registration of the vehicle company, the PRC shall report the case to the Federal Administration of Public Revenue in order for it to rule on the legality of the corporate interposition from a ﬁscal point of view.26 iv. Final Words

The lack of provisions concerning offshore companies at the federal level along with the trend started in 2003 in order to restrict or limit the activities of this type of companies in speciﬁc jurisdictions within the country, oblige foreign investors intending to do business in Argentina to learn about both legal requirements provided for by the GCL and local norms in the jurisdiction where the company intends to perform its main activities. Qualiﬁcation of ‘main activities’ is always a matter of fact and as such, it demands a case-by-case analysis.

Ultimately, it is very important to highlight that after the company organised abroad is registered with a local register in the place where it will perform its main activities, then the company is allowed to do business throughout Argentina.

C. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: Attempts vs Realities

The Lima Stock Exchange (LSE, BVL) and the Colombia Stock Exchange (CSE, BVC) have executed a Memorandum of Understanding (MOU) in order to merge both stock exchanges. The aim of the merger is to create a new player prepared to afford the globalised capital markets challenges, complementing the aims of the MILA (Mercado Integral Latino Americano) markets and strengthening commercial ties between the two countries.

In connection with this, Francis Stenning, the CEO of the LSE, established: ‘the merger of the LSE and CSE generates a strategic alignment in the two countries, which strengthens our position in the capital market in the region and enhances and complements the integration of markets by leveraging a more rapid growth and solid.’

Also referring to the expectations of the MOU, Mr Juan Pablo Cordoba, President of the CSE, said: ‘the agreement enhances the creation of economic blocks that trascend nations. Therefore, the merger represents an opportunity for our industry to increase company value through operational

26 PRC, General Resolution 7/05, Article 190.

22 Doing Business in Latin America MARCH 2016 efﬁciencies and developing new products for both markets.’

Despite the merger, both stock exchanges will continue to operate in their countries. Thus, it is important to highlight that the merger will increase the amount of local operations in each stock exchange.

Finally, the new organisation will only have shares with voting rights. These shares will have the following characteristics:

A) Entered into the National Registry of Securities and Intermediates;

B) Listed in the CSE and LSE; and

C) Administrated by the Superintendencia Financiera de Colombia and the Public Registry of Securities Market National Supervisory Commission for Companies and Securities Peru.

A local example of a merger of capital markets is Bolsas y Mercados Argentinos S.A. (ByMA). The ByMA was formed as a result of the association between MerVal S.A. (Mercados de Valores S.A.) and BCBA (Bolsa de Comercio de Buenos Aires). The main objective of ByMA is to create a local capital market that offers more quality and options for its investors. Other objective is to apply new technologies so that investors can operate with shares and all kinds of ﬁnancial assets in any part of the country and all over the world.

Furthermore, there is another case of local integration of the capital markets. That is the case of the Rosario Stock Exchange, which merged with the Mendoza Stock Exchange with the aim of increasing the traded volume. ii. MILA Market: Current Results and Expectations

The Latin American Integrated Market (LAIM; MILA – Mercado Integral Latinoamericano) is the result of an agreement signed by the stock exchanges of Bogotá, Santiago and Lima, together with the CSD’s, Deceval, DCV and Cavali.

The LAIM began to operate on 30 May 2011. The main achievement of this integrated market is to enable investors to purchase and sell shares and equities from the three stock markets in their local currency and through the local broker.

The integration of the three stock markets is the result of three measures:

1. The use of technological tools.

2. The adaptation and standardisation of the regulations on trading in capital markets.

3. The custody of securities in the three markets.

Thus, the LAIM is not a merger of markets or a global corporate integration. Each of the three markets not only complements each other but maintains their independence and regulatory autonomy.

Doing Business in Latin America MARCH 2016 23

Current results:

To show the signiﬁcance of this market, below we specify the traded volume in the MILA markets in some months of the years 2013 and 2014. (Source: ofﬁcial page of LAIM).

The total traded volume in the MILA markets reached in November 2013 US$4.70bn, with a negative variation of 18.09 per cent as compared to the previous month, term in which US$5.73bn was reached. So far in 2013, the total volume traded in the MILA markets reached US$69.13bn.

The total traded volume in the MILA markets reached in March 2014 was of US$5.23bn, with a positive variation of 14.60 per cent as compared to the previous month. In 2014 year-to-date, the total traded volume in the MILA markets reached US$16.02bn.

Expectations:

To continue promoting the participant growth of ﬁnancial businesses and integrating the stock markets of the member countries.

To become the most attractive securities market in the region. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliances is a regional integration initiative created on 28 April 2011. It is comprised of four countries: Mexico, Colombia, Peru and Chile.

The main objectives of the alliance are:

1. Free movement of goods and people among the member countries, and

2. Creating a more dynamic ﬂow of trade among the members.

The official page of the Pacific Alliance states that ‘the purpose of the Pacific Alliance is the integration of member countries in order to move progressively closer to the free movement of goods, and generate a greater dynamism in the flow of trade between countries.’

In this sense, on 10 February 2014 the presidents of the member states subscribed an agreement that consisted in the elimination of the 92 per cent of the universal tariff (the remaining 8 per cent will be eliminated progressively and according to what the parties agree).

There are also some topics that are nowadays being discussed, such as the transparency of information exchange and the creation of sanitary and phytosanitary standards, best practices, and procedures and requirements for import and export.

Nevertheless, the more ambitious aim that the governments of the member states proposed is the free movement of people, goods and services among the member countries. It is a huge challenge but realistic and possible, taking into account the achievements of the member states in trade matters and integration. iv. IPO’s of Multilatina Companies in Latin American Capital Markets

The Multilatina Companies are gaining power in the world businesses landscapes. The most

24 Doing Business in Latin America MARCH 2016 important Multilatina companies are in Mexico, Brazil and Chile. It is important to understand that these companies were local leaders companies that, with management innovations and investments, have been able to expand all over the region.

Furthermore, few companies merged with other leading companies in the region to achieve this expansion. This is the case of LANTAM. On August 2010, LAN and TAM, Chilean and Brazilian respectively, merged in order to create the largest airline in Latin America (LANTAM).

Nevertheless, capitalisation is essential to accomplish such objective. Some examples of IPOs Multilatina Companies in the Latin American markets show this fact.

Petrobras, one of the largest oil companies in the world, announced on September 2010 the biggest ever initial public offering (IPO), 1.59bn preferred shares valued at US$65.4bn.

In February 2013, the Mexican Grupo Sanborns – the retail unit of billionaire Carlos Slim’s Grupo Carso – raised $12.09bn ($950m) through an IPO.

Also, in March 2013, Mexican Terraﬁna – a unit of Prudential Real Estate Investors – raised $765m in its IPO.

Finally, Infraestructura Energética Nova raised $600 in the ﬁrst ever IPO by a Mexican energy company.

However, the main goal of Multilatina Companies nowadays is to attract investments and to be at the same level of the traditional Global Companies.

It is worth highlighting the importance of encouraging Multilatina companies in the region, but always keeping the balance with the foreign and local investments that are not opposite but complementary.

D. Rendering of public services i. General Framework

During the 1990s, Argentina embarked on a privatisation programme as part of a major economic reform.

Following the noticeable trend observed in the region, State-owned companies, which had been in charge of rendering telecommunications services, electricity and gas supply, oil production, water and sewerage services, airports, railroads, among others, were declared subject to privatisation after more than ﬁve decades of State’s monopoly.

This process was aimed at improving market efﬁciency and increasing private investment in order to enhance the quality of public utilities. The State changed its role from supplier to regulator. Foreign private investment in public utilities was also encouraged.

After Argentina’s 2002 economic crisis, some public utilities returned to the State’s control through different mechanisms – nationalisations, expropriations, State’s intervention, etc – such as water and sewerage services (at both national and local level), railroads, the major oil producer, among others.

Doing Business in Latin America MARCH 2016 25

In addition, public services rendered by private companies were greatly affected by the measures taken since the Law 25,561 (‘Emergency Law’) was passed. As a result of this major political shift, Argentina shares nowadays State-owned enterprises and private companies in the public utilities sectors. ii. Governmental Monopoly vs Private Initiative

The Argentine Constitution remains silent as to whether public services should be rendered by the State or by private companies. According to Article 42 of the Constitution, ‘Legislation shall establish… regulations for national public utilities’.

This Constitutional provision leaves the decision open to the legislator. Therefore, the Legislative Branch has discretion to decide which economic activity will be performed by the State or the private sector and, in the last case, which legal requirements should be complied.

Argentine Constitution also promotes the introduction of competition and market mechanisms wherever possible. Article 42 of the Argentine Constitution calls the public authorities to defend ‘competition against any kind of market distortions’, which naturally includes economic activities declared as public services. iii. Privatisation General Rules

Argentina lacks a general framework of public utilities. Each industry has its own regulatory framework which covers its particular features.

The most important public utilities that are still rendered by private companies are: power, natural gas and telecommunications.

A. POWER

The regulatory framework of the power sector (still privatised) has been approved by Law 24,065 in 1992. Its main features are: (1) electricity transportation and distribution are considered ‘public services’ (ie,: natural monopolies) while generation has been qualiﬁed as an ‘activity of general interest’ carried out within the framework of a competitive market; (2) there are cross ownership restrictions for private companies between these economic activities; and (3) the creation of (a) the Wholesale Energy Market Administrator (CAMMESA) whose main functions involve coordinating dispatch operations, determining wholesale prices and administering the economic transactions, and (b) an autonomous Government agency (ENRE) which regulates the market and control public utilities.

And company willing to operate through the wholesale market requires that it be previously authorised by CAMMESA.

Transportation and distribution services are rendered by concessionaires.

The transportation system was divided into (1) high-voltage energy transportation that links electric power regions and (2) trunk distribution electric power transportation, which is supplied within each region.

26 Doing Business in Latin America MARCH 2016 Tariffs charged by electricity transportation companies include: (1) a connection charge; (2) a transport capacity charge; and (3) a charge that rewards the energy transported. Revenues incoming from system expansions are regulated separately.

The main features of the distribution concession agreements are: (a) service supply quality standards are deﬁned and failure to meet those standards would entail penalties on the distributors and compensation to affected users; (2) a 95-year concession agreement for service supply was granted, and (3) tariffs were originally ﬁxed on the basis of economic criteria (price caps, following pre- determined procedures concerning their calculation and adjustment) until the Emergency Law was entered into force in 2002.

B. NATURAL GAS

Production of natural gas is governed by Hydrocarbons Law 17,319. As a result of the enactment of Law 24,076 in 1992, transportation and distribution segments were vertically divided, and where applicable, horizontally split.

Transportation and distribution were characterised as a public utility due to its monopolistic nature.

The main features of the licence agreements for the distribution of natural gas are: (1) service supply quality standards were deﬁned and failure to meet those standards would entail penalties upon the distributors and compensation to affected users; (2) a 35-year licence agreement for service supply was granted with the possibility for the licensee to extend this term once for a ten-year period; at the end of the stated term, the majority stock of the corporation had to be offered for sale again; (3) tariffs were ﬁxed on the basis of economic criteria, until the Emergency Law was entered into force in 2002.

C. TELECOMMUNICATIONS

Telecommunications services were privatised in 1990 and two private companies were granted exclusivity rights until 1997.

In 2000, Decree No. 764/00 entered into force and provided full deregulation for the telecommunication industry.

The main features of this sector are: (1) free competition, (2) transparent licensing rules (only one licence is sufﬁcient to provide any telecommunications service), (2) universal service regime (which tends to grant access to the services to the population at affordable prices), (3) national interconnection rules based on a non-discriminatory and transparent criteria, (4) the telecommunication spectrum is administrated exclusively by the State iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

As a general rule, there are no limitations or prohibitions to private parties for rendering public services in Argentina.

Unless the service is a legal or natural monopoly (such as natural gas or electricity transportation and distribution), private companies are allowed, as a general principle, to render public services under the State’s regulations.

Doing Business in Latin America MARCH 2016 27

E. Real estate – limitations for private parties i. Introduction

As a general principle, our National Constitution grants the right to private property and states that expropriation due public use has to meet speciﬁc requirements to be admissible.

More speciﬁcally, real estate in Argentina is mainly regulated by the Argentine Civil Code. The Argentine legal system regards ownership under the numerous clausus principle, therefore real estate rights are only those expressly recognised in the Civil Code or special laws. On 1 August 2015 a new Civil and Commercial Code shall enter into force that, although it introduces some changes in real estate regulations, does no change this principle of numerous clausus. There are also other particular regulations; in this sense real estate is also regulated by other laws such as Condominium Law No. 13,512 (which regulates the subdivision of buildings into independent dwelling or business units) and Law No. 24,441 (related to housing and construction), which also provides for regulations of trusts. These regulations will be included in the new Civil and Commercial Code.

Real estate may also be affected by Borders Security Zone regulations and by Law No. 26,737 (Rural Lands Law) that impose restrictions on the ownership (and holding in the case of Borders Security Zone) of rural properties by foreign citizens.

Properties are subject to provincial and local regulations related to the organisation and use of the properties as well as to regulations protecting historic places (which may also appear on a national level). Many jurisdictions also have laws on large commercial zones that regulate the use of large plots of land affecting mainly supermarkets, malls and department stores.

Environmental regulations may appear on a federal (national), provincial and municipal level. Federal laws provide the minimum standards and provinces and municipalities establish speciﬁc standards and implement speciﬁc rules and obligations in order to comply with those standards. These regulations may result in limitations on the use of properties or in obligations for the owners, among other effects. Environmental laws apply both to urban and rural properties.

Finally, limitations may arise from agreements or conditions imposed by private parties in the manner of easements or conditions of sale, as the case may be, that are usually registered in the Real Estate Public Registry and/or arise of the title to the property. There may also be so called ‘administrative easements’ that are imposed by local authorities usually for the use or provision of public services companies (energy, water, etc).

It is also worth mentioning that investments in the acquisition or development of real estate projects may need to give proper consideration in their structuring to other general regulations (exchange controls, taxes, etc) that may have speciﬁc rules for real estate investments. ii. Urban Properties

Limitations for private parties in the use of urban properties are mainly those related to zoning, land use and construction codes. These regulations are enacted on a municipal level (following directives of general rules or standards issued at a provincial level).

28 Doing Business in Latin America MARCH 2016 Zoning regulations rule those matters related to a more general use given to the property (commercial, residential, etc). Land use refers to the speciﬁc activities developed in such properties (restaurant, shop, etc). Each city has its own urban planning code or a similar regulation including a zoning map of the city.

Construction codes include regulations on the construction itself and on the requirements to obtain authorisations.

These regulations have also provisions on the square metres and heights that constructions may have in a given plot of land and how it may be subdivided.

On provincial level many provinces have regulations regarding large plots of land when they are used for certain commercial purposes (clothing, food, construction materials, etc). These regulations establish particular requirements that owners or developers of these plots have to fulﬁl as well as how the activities should be developed in those plots. In addition, there might be regulations for properties on the riversides and coast lines that may result in limitations in the development and use of properties located in those areas.

In reference to Border Security Zone Law although it is applicable both to rural and urban properties, there are many urban areas within the Security Zones which plots located are excluded from the application of this law.

Limitations imposed by laws or regulations may also be imposed not as a general rule but to a particular property. In this sense a property may be subject of a so called ‘administrative easement’ that are easements imposed by regulations and usually related to the provision of public services (energy, water supply, etc). These limitations affect only a portion of the property and shall be mentioned in the title and in the corresponding registry in the Real Estate Public Registry.

Other limitations may arise as a consequence of the regime to which a property is subject due to decisions in its development. An example of this type of limitation would be those resulting from the subdivision according to Law 13,512. For the subdivision under this regime the parties have to execute a deed in which, on the one hand, the units or dwellings are identiﬁed as well as the common areas and, on the other hand, includes rules on the use that those unit may have (housing, ofﬁces, etc, always as permitted by zoning and construction codes), how the decisions are made, how the owners of each unit shall contribute to the expenses of common areas and services, among other matters. In addition, the parties may issue internal rules of use that provide for more contingent matters such schedules and places for disposal of garbage, procedure to use common salons, etc.

Other limitations that may be a result of the decision or agreement by private parties are easements granted to neighbours in order for example to give right of way or conditions or charges imposed by the seller or donor of a property that an speciﬁc use is given to the property (eg, for a sport club). This kind of limitations has to be included in the title and mentioned or referred in the Public Registry in order to have effect on a subsequent buyer.

It is important to mentioned that transfer of real estate as well as the creation, change or extinction of real rights, has to be made through a public deed with the intervention of a notary that has the obligation to verify the status of the title, verify the existence of registered limitations and restrictions of the property, and obtain certiﬁcates from the authorities in regards to the property.

Doing Business in Latin America MARCH 2016 29

In reference to the exploitation of an urban property, leases are subject to regulations both by the Civil Code and the Urban Leases Law No. 23,091. According to these regulations, the minimum length of a lease is two years for housing leases and three years for commercial leases and the maximum length is of ten years regardless of the purpose.

Tenants may also terminate lease agreement provided that six months of the lease agreement have passed and subject to previous notification of at least 60 days. In case tenants terminate the lease (after six months and with previous notice) they shall pay the equivalent of one and a half of the monthly price of the lease if the termination if during the first year and one month if the termination is after the first year.

These rules are mandatory thus parties may not agree on the contrary and if they do the terms provided by law shall apply. Another restriction that may affect leases, especially in an inﬂationary scenario, is the prohibition of indexation or adjustment of prices, according to which it will require the inclusion of a mechanism in the contract to maintain the price of the lease in market prices throughout the term of the contract.

All these rules, with some changes, will be incorporated in the new Civil and Commercial Code. iii. Rural Properties

Limitations for rural properties resulting from local (municipal or departmental) or provincial levels would probably be mainly related to the possibilities to subdivide the plot or to particular rules for speciﬁc activities or uses of rural lands as well as environmental laws, water regimes, etc.

In addition there are legal obligations to give right of way to properties that have no access to routes or other ways. If applicable, this obligation will most probably be regulated in an easement between the parties with the agreement on how the right of way is granted. Other easements that are common to ﬁnd in rural properties are those related to the use of water or the access to water sources in addition or in accordance to those provisions of the water regime laws of the jurisdiction that rule the use of rivers, lakes and water reserves in each jurisdiction.

All rural properties within Borders Security Zones will be reached by its regulations that impose restrictions to foreign entities and individuals to acquire properties in the so called ‘Borders Security Zones’ that are determined in these regulations.

In case a foreign individual or company intends to acquire a real estate property located within these Zones a special authorisation granted by the National Commission of Security Zones is required in order to complete the acquisition. It is important to mention that local companies controlled by foreign shareholders are deemed to be foreign companies for this regime and thus any acquisition of properties by these companies shall require the authorisation. In the same sense if a foreign individual or company intends to acquire a local company that owns properties in the Security Zones the acquisition will have effects due to these regulations.

The term to obtain this authorisation is around six months but in some cases it takes longer.

Moreover, in December 2011 Law No. 26,737 (‘Rural Lands Law’) was enacted which provides for the Regime for Protection of National Domain on Ownership and Possession of Rural Lands. In February

30 Doing Business in Latin America MARCH 2016 2012, the Rural Lands Law was completed by Regulatory Decree No. 274/2012.

Rural Lands Law intends to regulate the limits to ownership and possession of rural lands by foreign persons – individuals or companies – irrespective of its use or the production to which it might be dedicated.

Rural Lands Law considers the following as ‘foreign persons’:

Foreign individuals.

Entities controlled by foreign individuals or entities.

Trusts that have more than 25 per cent of foreign (individuals or entities) beneﬁciaries.

Joint ventures in which foreign persons participate in a percentage that is over that authorised by Rural Lands Law.

Foreign Public Entities

Simple associations controlled by foreign individuals or entities.

Rural Lands Law establishes the following limits to ownership or possession by foreign persons:

As a general limit: a maximum of 15 per cent of ownership or possession by foreign persons in the Argentine territory.

Persons of a single nationality may not own or possess more than 30 per cent if the limit mentioned in a)

Each proprietor shall have a limit of 1,000 hectares or the equivalent according to the location.

Prohibition of ownership or possession of lands next to permanent and relevant corps of water as well as those located in Security Zones unless authorisation according to Borders Security Zones regulations.

Rural Lands Law also creates a National Registry of Rural Lands that will have a registry of lands with foreign proprietors and that may impose sanctions in case of non-compliance with Rural Lands Law. iv. Expropriation Events

As a general principle the right to private property is granted by the Federal Constitution which only admits expropriation for cause of public utility if: the Congress has declared the public interest; and prior and due compensation has been paid to the owner.

On a provincial level the respective Constitutions include similar provisions.

Both on a federal and a provincial level there are laws that regulate the process of declaration of public interest or utility and the procedure to determine the compensation of the owner. According to this procedure if the parties (ie, the Executive Branch and the owner) do not reach an agreement regarding the amount of the compensation the determinations shall be made by the courts taking into consideration the constitutional guaranty and the applicable law.

Doing Business in Latin America MARCH 2016 31

32 Doing Business in Latin America MARCH 2016 Bolivia

Doing Business in Latin America MARCH 2016 33 ii. Bolivia

A. Foreign investment i. Authorisations vs Limitations or Prohibitions

As part of a nationalistic trend, inaugurated in Bolivia in 2006 with the assumption into power of President Evo Morales Ayma’s indigenous and popular movement, a Constitutional Assembly proposed and a national Referendum approved a new Political Constitution enacted on 7 February 2009. This long and complex set of legal rules is contained in 411 Articles and 10 interim provisions. Two main general features constitute the distinctive mark of the Constitution: the preeminence of indigenous peoples rights and the preeminence of the State as the responsible entity for the social and economic direction of the economy, within a framework of a democratic republic with the traditional separation of the three powers (legislative, executive and judicial – ordinary and constitutional) plus an electoral power and a special separate jurisdiction for agro environmental affairs.

Amongst numerous rights contained in different chapters of the Constitution, Article 56 recognises the right of every person to individual or collective private property provided this complies with a social function. Expropriation can occur for reason of public need or use, determined pursuant to the law and with prior just compensation. Urban real estate property generally cannot be subject to reversion.

The Bolivian economic model is deﬁned as plural. Plural economy is constituted by economic community organisations, state, private and social-cooperative forms which are to interact between them under certain principles. Amongst the features of this economic system, the Constitution provides (a) the State is to exercise the integral direction of economic development and its planning processes; (b) natural resources belong to the Bolivian people to be managed by the State; (c) industrialisation of natural resources is a key element; (d) the State can participate in all of the productive chain of strategic sectors (such as oil & gas, mining and others); (e) Entrepreneurial initiative and legal security are respected and (f) the State is to promote the communitarian area of the economy as an solidarity alternative in the rural and urban areas.

Under Article 308 of the Constitution, the State recognises, respects and protects private initiative, for it to contribute to economic and social development and to fortify the economic independence of the country. Freedom of enterprise is guaranteed as well as full exercise of entrepreneurial activity, to be regulated by law.

Bolivian investment is to have priority treatment as compared with foreign investment. Foreign investment is subject to Bolivian jurisdiction, laws and authorities. It cannot claim any exceptional treatment or appeal to diplomatic claim in order to obtain a favourable treatment. The relationship with foreign states and companies is to be conducted on grounds of independence, mutual respect and equitable treatment.

As required by the 2009 Constitution on 4 April 2014 a new Law (No. 516) for the Promotion of

34 Doing Business in Latin America MARCH 2016 Investments was enacted. Under this law:

1. General Direction: The State in its promotional and directional role of economic and social development directs investments to activities promoting economic and social development, generating digniﬁed employment and contributing to the eradication of poverty and the reduction of inequalities;

2. Destination: Investments can be made in any sector of the economic activity of the country and are to be implemented by entrepreneurial and contractual forms as permitted by applicable law. There are a number of laws and regulations by sectors of the economy: mining, hydrocarbons, ﬁnancial and banking, telecommunications, electricity, insurance, etc. Rules by sectors do and may contain speciﬁc and diverse rules dealing with authorisations, limitations or prohibitions, which cannot be generalised for all investments.

3. Means: investments are made through private commercial companies, public companies, mixed economy companies with state participation and other agreements or instruments of joint investments. Commercial entities (companies of different structures) can freely be organised to operate in the diverse areas of the economy. Requirements for specific sectors of economic activity are to be met pursuant to applicable regulations (see 1.3 to 1.7 below). The basic incorporation of commercial companies is governed by the Commercial Code. All commercial companies, local, mixed or foreign, depending on their specific structure (stock company, limited liability, etc) need to be registered with the Commercial Registry, independently from the specific authorisations or requirements to be accomplished or met depending on their economic activity ad purpose. No specific general authorisation to invest is required. The Investment Law requires that all foreign investments and international transactions be registered with the Bolivian Central Bank. Registration with the Bolivian Internal Revenue Service and with the municipality where the company is to have activity is compulsory. Registration with the private entrepreneurial association corresponding to the company’s purpose and activity is also compulsory.

4. General limitations or prohibitions include: (a) no foreign individual or company can hold title or possession on property within 50 kilometres of the international borders (security zone) whether directly or indirectly; (b) neither can they receive direct adjudication of rural land from the State. ii. Treatment of Foreign Investment in Infrastructure Initiatives

Foreign companies can be established and registered as any other local company wishing to concur in the infrastructure initiatives’ market. Whilst there are no restrictions to operate in the private market to the extent allowed by applicable rules, as it concerns the more relevant market of state and public initiative and projects, the State would commonly use one of the following methods to hire companies (local and/or foreign) as part of its procurement for infrastructure projects, depending on the characteristics, scope and cost/price of each speciﬁc project: international public bidding; national public bidding; direct national and/or international invitations.

A project could be of a national importance, in which case it’s the central government which applies the corresponding procurement laws and regulations; if it is a departmental or municipal project, the

Doing Business in Latin America MARCH 2016 35 procurement laws and regulations corresponding to these jurisdictions apply. Specialised agencies of the State may be involved. For example, the so called national Autoridad Boliviana de Carreteras (ABC) is actively, constantly and regularly applying procurement procedures for the construction of national roads. State companies entrusted with speciﬁc areas would call for procurement of infrastructure projects. For example, the Empresa Nacional de Electricidad (ENDE) would procure services for state infrastructure projects in the electricity sector which it controls. The state oil and gas company Yacimientos Petroliferos Fiscales Bolivianos (YPFB) would proceed similarly in respect of infrastructure projects. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

With respect to oil and gas, the state company Yacimientos Petroliferos Fiscales Bolivianos exercises a monopoly of most of the activities in the hydrocarbons sector. Under the Constitution, however, it is authorised to contract with private investors, whether national or foreign, for the implementation of any, a part or all of the activities of the productive oil and gas chain (exploration, development, exploitation). Those contracts take the form of service agreements. Industrialisation, transportation and trading (internally or externally) are to be carried out by YPFB, which, however, can constitute mixed economy companies for conducting these and other activities of the chain. YPFB is to hold at least 51 per cent of the paid in capital of said companies. All contracts and mixed companies require approval by law of the Legislative Plurinational Assembly (Congress). A new Law of Hydrocarbons is pending approval in Congress for the implementation of the general rules of the Constitution.

On mining, a 1997 Mining Code which regulated mining activities has been substituted by a new Mining and Metallurgical Law No. 535 of 28 May 2014. All pre-existing mining concessions are to be transformed into administrative mining contracts with the Jurisdictional Administrative Mining Authority. Under a separate law, a number of concessions have been reverted to state control due to inactivity. Exploration or exploitation rights in free areas can be obtained from such authority complying with a number of requirements, including the presentation of a working and investment plan. A licence can be issued by the authority for a maximum period of ﬁve years. A preferential right to enter into an administrative mining contract for development and exploitation is recognised, such kind of contract applies for direct recognition of rights for exploration, exploitation, etc. Any of such contracts (other than contracts for transforming current rights, yet pending implementation during 2015) require approval by the Bolivian Congress. The state mining companies can enter into association agreements or with respect to their mining rights, upon the condition of holding a participation in net proﬁts of 55 per cent. Recognition of mining rights generally, does not create ownership rights or title on the mining areas. Title is obtained only on production. iv. Treatment of Foreign Investment in Real Estate (rural and urban properties) and in Agribusiness Activities

There are very distinct and speciﬁc laws and regulations regarding rural and urban properties. For rural properties there are numerous set of rules (constitutional and others) which have resulted from the Agrarian Reform of 1953. As they relate to private holdings and investments, agro livestock and agro commercial – industrial activities are recognised and protected provided they meet requirements of maximum extension and working obligations to avoid reversion of title to the State. A general

36 Doing Business in Latin America MARCH 2016 condition and obligation to hold and retain title on rural land is conducting work compliance with which obligation is subject to supervision and veriﬁcation by a specialised administrative state entity. The specialised jurisdiction for agro environmental cases and controversies is also in place. Urban properties are subject to standard private civil and commercial law rules. Investments can be made to acquire and trade urban properties. Municipal requirements are to be met and respected. Private construction projects, condominiums and similar are extensively implemented.

B. Rendering of public services; treatment of foreign investment i. General Framework

Besides other Systems, Law No. 1178, of 20 July 1990 on Governmental Administration and Control creates the state System of Goods and Services Administration, which establish the procedures for procurement, handling and disposition of state goods and services.

It is an attribution of the Minister of Economy and Public Finance to act as ﬁscal authority and Governing Body of the public governance and procurement rules, with faculties of updating the systems of Governmental Administration and the Regulations of the state System of Goods and Services Administration.

Supreme Decree Nº 0181, of 28 June 2009 (as amended) approves the currently in place Regulations of the state System of Goods and Services Administration, as a technical and administrative set of rules that regulates the procurement of goods and services and the handling and disposition of goods belonging to public/state entities.

The purposes of the Regulations are: a) to establish the principles, rules and conditions applicable to the administration of state goods and services and the obligations and rights related thereto and b) to establish the fundamental elements of organisation, operation and internal control related to the administration of state goods and services.

Fundamental Principles set by the Regulations are:

a) Solidarity: Public resources must beneﬁt all Bolivian citizens;

b) Participation: Bolivian citizens have the right to participate in the procurement of goods and services;

c) Social Control: Bolivian citizens have the right to look after the proper implementation of public resources, results, impacts and quality of the goods and public services;

d) Good faith: There is a presumption of the righteous and ethical behavior of public ofﬁcers;

e) Economy: Procurement procedures must be developed with celerity and saving resources;

f) Effectiveness: Procurement procedures must allow the achievement of the programmemed objectives and results;

g) Efﬁciency: Procurement procedures must be timely developed and with the lowest possible costs;

Doing Business in Latin America MARCH 2016 37

h) Equality: Proponents may participate in equal conditions, restrictions and in accordance to their capacity to produce goods and offer services.

i) Free participation: State contracting must allow the free participation, the broadest attendance of proponents through publicity mechanisms, in order to obtain the best conditions as to price and quality.

j) Responsibility: Public ofﬁcers must comply with current regulations on procurement, handling and disposal of goods and services and assume the consequences of their actions and omissions during ofﬁce.

k) Transparency: Activities, documents and information on procurement procedures, handling and disposal of goods and services are public.

Public entities must prepare their own internal Regulations of the System of Goods and Services Administration using the model prepared by the Governing Body, who revises and approves the document.

The Regulations of the System, approved by Supreme Decree Nº 0181, of 28 June 2009 have been amended several times, by means of the following main instruments: Supreme Decree No. 0843, of 13 April 2011; Supreme Decree No. 0956, of 10 August 2011; Supreme Decree No. 1200, of 18 April 2012; Supreme Decree No. 1497 of 20 February 201327; and Supreme Decree No. 1981 of 23 April 2014.

The Regulations must be applied in all public entities, with no exceptions, comprising the State’s Presidency and Vice-presidency, ministries, administrative units of the General Comptroller and electoral courts; the Central Bank of Bolivia, Authorities of Supervision and Social Control, Development Corporations; public ﬁnancial intermediation entities; the military and police; departmental and municipal governments and all other entities where the State owns the majority of the patrimony.

Legislative and Judicial Branches must also apply the Regulations to their administrative units in accordance to their purposes, plans and policies.

The Regulations apply to contracts with private participants (mostly of an administrative and not of commercial nature) for the procurement of goods, construction works, rendering of general and consulting services.

There are several procedures to be followed for the procurement processes, which vary depending on the amount/value of the contract to be awarded and other factors. This will also determine the need or not of a public bidding process and the possibility of a direct contracting. Certain state companies are treated as of strategic interest and authorised to directly procure and acquire goods and services, whether in Bolivia or abroad. A contract with a foreign supplier which is not domiciled in Bolivia (rules may require that it be domiciled) can be subject to foreign laws and clauses freely negotiated on applicable law, jurisdiction and resolution of controversies (including arbitration which is not allowed in Bolivian contracts).

27 In force as of 20 April 2013.

38 Doing Business in Latin America MARCH 2016 There can be public bidding procedures in which foreign entities may participate. The Basic Document of Procurement, depending on the scope and nature of the required goods or services, would determine whether the foreign entity is required to set up a local branch or subsidiary. So there is no general rule and both methods have been used in bidding procedures. Typically, for example, if a bid is for the construction of public works the foreign beneﬁciary would be required to set up a local branch or subsidiary, both for tax purposes as well as for purposes of compliance with other laws, like labour and social security laws. ii. Governmental Monopoly vs Private Initiative

In Bolivia there are currently two forms of PPPs (associations-public/private), as above mentioned, association agreements in the mining sector. One of the requirements for such new kind of agreements is that the State Mining Company holds at least 55 per cent participation on net proﬁts. The State Mining Company should also have control of management of the contract. When in an Association Agreement the operator is the State Mining Company, the rules on Procurement for such State company would apply.

The second form is by way of so called Mixed Economy Companies, which are stock companies with participation of a State company or entity and a private participant, either national or foreign. These companies are governed by the Commercial Code and consequently should not be subject to the Estate Procurement regulations, even when the State stock holder or stockholders constitute a majority. However, this case is not fully regulated and express provisions excepting the company from public Procurement regulations are being developed for speciﬁc regulations for this type of companies. These types of companies may apply to State participations in various economic sectors as needed (hydrocarbons, telecommunications, energy, electricity and others, depending on rules by sectors).

Public entities may directly purchase goods or procure services provided by other Public Entities as explained above. There are no regulations on Public-public JVs as such. Mixed intergovernmental companies are foreseen as a speciﬁc tool under the so called Law of Public Companies. iii. Privatisation General Rules

Since the beginning of the ﬁrst term of the current Government, in 2006, the state policy has been ‘contrary’ and adverse to privatisation. On the contrary, most of the assets, companies and ventures which were privatised before by various methods, especially during the 90s, have been partly or totally nationalised or rights reverted to the state. Prior privatisation rules have been totally derogated and a ‘nationalisation’ policy implemented.

At present, the Government is fostering a policy of attracting private investments (both foreign and national) under new rules in which the State and State entities and enterprises are and will be the key players. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

As above mentioned, the new Political Constitution of 7 February 2009, with a strong nationalistic

Doing Business in Latin America MARCH 2016 39 orientation, provides that economic policies are declared to be based on the plurality of participants (state, private and community sectors). Private investment is guaranteed in order for it to contribute to social and economic development. Numerous rules govern the various sectors of economic activity.

Regarding speciﬁc public services, the Constitution determines that:

(1) The development of the productive chain in generation, transportation and distribution of electricity is the private faculty of the State. This could be achieved through public companies, mixed economy companies, non-for proﬁt organisations, cooperatives, private companies and communal enterprises. It also determines that the energy productive chain cannot be subject solely to private interests and cannot be granted under concession. Law must regulate private participation and the new electricity law to implement this constitutional provision is still pending enactment.

(2) The provision/supply of basic services is the State’s responsibility through public entities, mixed economy companies, cooperatives and communal companies. In the cases of electricity (as explained above), gas to domiciles and telecommunications, said services may be rendered through contracts with private companies.

(3) Access to water and sewage system cannot be subject to privatisation and concession, and are subject to a licence regime in accordance to law. The new water law to implement this constitutional provision is still pending enactment.

More generally, procurement of goods must be aimed towards national production. For goods not produced in the country, the entity may purchase imported ones. Public entities are prohibited from incorporating in the Basic Document of Procurement technical requirements focused only in the external appearance of the good and must guarantee its functionality and usefulness.

Special Preferential Margins and Adjustment Ratios apply to the purchase of goods in certain cases. Micro and small enterprises, associations of minor suppliers and peasant organisations are also beneﬁtted with preferential treatment.

C. Real estate i. General Overview

The legal system in effect in Bolivia focuses the property phenomenon, from a dual perspective. First of all, under the chapter corresponding to the economic and social rights, the Political Constitution of the State of Bolivia (CPE by its acronym in Spanish) consecrates the right of property as a fundamental human right. Second of all, the aspects inherent to the creation, exercise, modiﬁcation and extinction of the right to property, are found regulated in a detailed manner within the norms of the Civil Code of Bolivia (CCB by its acronym in Spanish) as well as within the laws and special norms, related mainly to agrarian, registration and expropriation matters.

In this sense, the protection provided within the juridical system in effect in Bolivia to those who acquire property rights over urban or agrarian properties, is found adequately developed from a

40 Doing Business in Latin America MARCH 2016 normative point of view, allowing the effective exercise and enjoyment of the attributions inherent to the condition of owner.

On the other part, the value of equality constitutes one of the essential foundations of the Bolivian State. Discrimination based on reasons of nationality, among others, is found prohibited and sanctioned in an express manner. Consequently, within the exercise of the attributions inherent to the right of property, both nationals and foreigners are found legally situated on an equal footing.

Notwithstanding the foregoing, the CPE establishes a subjective limitation regarding the acquisition of the right of property. Attending to reasons of security of the State, the CPE establishes a frontier security zone of 50 kilometres starting from the border line. Within the same, no foreign person, individually or in a partnership, can be the titleholder of property rights, directly or indirectly, or possess due to any title rights over water, soil or subsoil. In all cases, the own CPE reduces the mentioned limitation in cases of State necessity duly declared by an express law approved by the two thirds part of the Plurinational Legislative Assembly. Finally, the CPE states that the property or possession affected in case of noncompliance with this limitation will pass to the beneﬁt of the State, without any class of indemniﬁcation.

From an objective point of view, the CPE contains an additional limitation which links both nationals as well as foreigners. No person can be the titleholder of, or possess, surfaces of land greater to ﬁve thousand hectares.

Lastly, the CPE establishes that the expropriation of urban or agrarian properties proceeds only with the prior declaration of public need and interest and with the payment of a just indemniﬁcation. ii. Holding Title to Real Estate

Within the subject of immovable properties located in the urban area, the registration of real rights is found at the charge of the Ofﬁce of Registration of Real Rights (ORDR by its acronym in Spanish). Under this framework and in accordance to the provisions of the CCB, the condition of owner or titleholder of any other real right subjected to registration, acquires publicity, opposability and is deﬁnitively perfected in front of third persons, from the moment of its registration in the ORDR.

On the other hand, the ownership of immovable properties located in the rural area is perfected through the granting of the respective title by the National Institute for the Agrarian Reform (INRA by its acronym in Spanish). Subsequently, once the INRA issues the ownership title over rural immovable properties, the same is registered as well at the ORDR. However, the determinant and central aspect within matters of property rights over agrarian immovable properties centres on the issuance of titles and the registration of lands in charge of the INRA. iii. Transferring Real Estate

From a legal viewpoint, the right of property is a right of a strictly patrimonial content. In virtue thereof, its titleholder possesses the attribution to freely dispose and alienate (ius abutend1) the property over which the same is constituted. The purchase and sale is the main operation through which the ownership right is transferred.

Doing Business in Latin America MARCH 2016 41

The forms or manners to acquire the right of property are found normed mainly in the CCB, as well within the legislation regulating the activities of the INRA.

Within the agrarian subject, some classes of properties are found excluded from acts of transfer by reason of their scarce surface extension or due to their collective ownership in favour of determined groups. This is why, for example, the CPE prohibits the transfer (purchase and sale, exchange or donation) of rural lands that would have been given freely in favour of the native indigenous farmers, the native intercultural communities, Afro-Bolivians and the farmer communities.

When concerning urban immovable properties, the transfers are registered in the ORDR in a direct manner. In cases of rural immovable properties, the transfers must be previously registered before the INRA and subsequently before the ORDR.

The onerous transfer of urban or rural immovable properties generates tax effects. The rate of the applicable tax is of 3 per cent of the price of the transfer. The Law states that the seller is the taxable person that is found obligated to pay the tax; notwithstanding, in practice, the tax burden for an act of disposition is usually negotiated among the parties participating therein. In all cases, it is convenient to clarify that no private agreement entered into among individuals, results enforceable or renders effects in front of the Tax Administration. iv. Financing Real Estate Acquisitions

The financial markets in Bolivia are found scarcely developed and are less profound. The ways of financing of real estate projects and acquisitions concentrate mainly over the loans granted by banking entities, authorised to operate within the local financial system.

Likewise, the State of Bolivia has tried norms tending to promote the access to credit for social interest housing projects. Since 2013, maximum active interest rates were set for housing loans and were established the percentages or minimum portfolio levels which must be maintained within this class of loans. The impact was quick; the local banks have created new products which include ﬁnancing options without the need of contributing an initial fee. v. Leasing Real Estate

The urban real estate leasing market is found extensively developed and regulated in Bolivia. The CCB distinguishes between the leasing of properties destined for commercial uses and those used for housing purposes.

Currently the judicial proceedings for the eviction of leased immovable properties are processed relatively at a slow pace; however, from 6 August 2015, will enter into effect a new Civil Procedure Code, which verbal bases seek to speed up the processing the generality of the civil proceedings, among which are found precisely the eviction of properties subjected to the leasing regime.

On the other hand, regarding the leasing of rural lands, the CPE of 2009 prohibits all types of land income generated by the speculative use of the land. In accordance to the local norms, which date back to the year 1953, the leasing of lands represents a form or type of land income. Consequently, could be interpreted that from the year 2009, the leasing of rural lands would have remained at the margin of the juridical acts allowed by the Agrarian Law.

42 Doing Business in Latin America MARCH 2016 Notwithstanding the foregoing, at present there is no case law precedents pronouncing in this regard, so we would have to wait to know the manner in which will be implemented the constitutional provisions which would prohibit the leasing of rural lands, in function of the prevalence of the principle of ‘the land belongs to its workers’. vi. Construction

The economy of Bolivia grew in an accelerated manner since the mid-2000s. This growth brought along the extraordinary dynamisation of the construction sector. Currently, Bolivia continues to go through a real estate boom which found certain stability between the years 2011 and 2012.28

In like manner, the recently approved norms, regarding the maximum interest rates and the minimum portfolio levels applicable to housing loans, constitute a factor which tends to consolidate the favourable environment for the construction sector, of which expansion has been notorious, mainly in the most important capital cities of Bolivia, La Paz, Cochabamba and Santa Cruz. vii. Expropriation Events

The juridical institute of expropriation is found regulated by the CPE, as well as by the CCB and other special laws.

Among the latter can be highlighted the special laws applicable within matters of rural lands, mining, hydrocarbons and, particularly, the Law of 30 December 1884, regarding the expropriation of urban immovable properties for the conduction and execution of works declared of public interest.

A. EXPROPRIATION FROM A CONSTITUTIONAL PERSPECTIVE

The CPE establishes that the expropriation will be imposed due to a cause of public necessity or interest, qualiﬁed in accordance to law and with a prior just indemniﬁcation.

In this sense, the only cause which would allow the expropriation pursuant to the CPE is the public need or interest. Likewise, the constitutional conditions to allow the expropriation are (1) that the public need or interest would have been qualiﬁed in accordance to law, and (2) the existence of a prior and just indemniﬁcation.

B. THE REVERSION OR RURAL LANDS

The rural lands, as well as the immovable properties located in the urban area, are found subjected to expropriation. However, the latter is not the only mechanism legally recognised which can be employed by the State of Bolivia to extinguish the right of property of private persons over rural lands. The reversion to the domain of the State, without the payment of any compensation, also constitutes a legal way through which the property over rural properties can be hindered.

The causes which motivate the reversion of rural lands are set forth in the CPE and within the law. The CPE foresees that the noncompliance of the economic social function and the holding of lands

28 Cerezo Aguirre, Sergio, Central Bank of Bolivia, Boom within the Real Estate Sector in Bolivia: Bubble or economic fundamentals?, http:// www.bcb.gob.bo/eeb/sites/default/ﬁles/6eeb/docs/sesiones%20paralelas/6EEB%20SP-08-3.pdf

Doing Business in Latin America MARCH 2016 43 with surfaces greater than ﬁve thousand hectares (latifundium), constitute causes for reversion. On its part, the Law states that the abandonment of the land or the holding of land in a manner that is contrary to the collective interest, would give rise to the reversion. The absence of payment of taxes for the property, would allow presuming that the land has also been abandoned.

Finally, it is important to highlight that the CPE expressly excludes urban properties from any kind of reversion.

44 Doing Business in Latin America MARCH 2016 Brazil

Doing Business in Latin America MARCH 2016 45 iii Brazil

A. Foreign investment i. Introduction

Brazil is a Federative Republic divided into 26 states, a Federal District (with Brasilia the capital since 1961) and 5,565 municipalities. With more than 190 million inhabitants, Brazil is the sixth most populous country in the world after China, India, the United States, Indonesia and Russia. Brazilians share a common multi-ethnic and multiracial background and due to Portugal’s inﬂuence Brazil is the only Portuguese-speaking nation in the Americas. Immigration from Europe, Africa and Asia (mostly Japan) was the primary source of Brazilian population growth up to the 1930s.

Inflation was a major problem in Brazil during the 100 years that followed the proclamation of the Republic in 1889. The problem became more severe after the 1970s and several measures were taken to control inflation in the 1980s and early 1990s. Over a period of 27 years, Brazil had seven different currencies and the inflation rate reached an historical high of 6,821.31 per cent in January 1990. After the failure of six monetary changes, Plano Real was created in 1994 by the then Finance Minister Fernando Henrique Cardoso, who would launch the plan as the base of his presidential run a couple of months later. Plano Real’s success was the hallmark of Fernando Henrique Cardoso’s two terms in presidency and the fight against inflation has been also a major theme under the presidencies of both President Luis Inácio Lula da Silva and Dilma Roussef.

Brazil has moved up the ranks of the world’s largest economies while achieving much more inclusive growth than in the past. Stable and predictable macroeconomic policies underpinned these gains. More recently, demand has been supported by macroeconomic stimulus, which has encouraged the expansion of the non-tradable sector, while manufacturing is suffering from declining competitiveness, and supply-side constraints appear to be biting. Inﬂation has remained high and has been allowed to drift momentarily above the tolerance band, and monetary policy credibility risked being undermined by political statements about the future trajectory of interest rates.

The central bank started a tightening cycle in recent years. The fiscal rule has also been undermined, as the inflexible fiscal target - defined in terms of a primary surplus – has required unusual but legal measures to account for cyclical weakness and meet the target, reducing clarity. Fiscal challenges in the longer term are rising as the population will start to age fast in a decade from now and pension expenditures are already rising.

In recent years fiscal performance has deteriorated and inflation has risen significantly. Consequently, rebuilding confidence in macroeconomic policies remains the priority. Continuous vigilance to ensure a return of inflation to the target is warranted. Recent government commitments for fiscal adjustment are welcome and also lay the grounds for stronger growth. More specifically, recent adjustments of social benefits, lower support to public banks and cost-covering electricity prices are correcting past distortions and are important initiatives on the supply side.

46 Doing Business in Latin America MARCH 2016 The planned launch of a new round of concessions, especially in transportation, is fundamental to addressing bottlenecks and promoting higher growth. The recent decision to restart trade negotiations with the EU and the start of a wide-ranging free-trade agreement with Mexico are welcome. Progress on a comprehensive reform of indirect taxes, lowering trade barriers and reducing administrative burdens could spur competition and accelerate the recovery signiﬁcantly. The commitment to inclusive growth, including through further improvements in education and well- targeted social transfers, should be maintained.

At less than 20 per cent of GDP, Brazil’s level of investment has traditionally been low by international and Latin American standards. This partly reﬂects Brazil’s relatively low domestic saving. Over the past four years, however, investment has been trending down due to policy uncertainties and lack of conﬁdence. These factors have recently been compounded by corruption allegations surrounding the national oil company, Petrobras. Business investment is projected to pick up in 2016 as activity accelerates and some of the previous risks are being addressed.

Brazil is an active Key Partner of the Organisation for Economic Co-operation and Development (OECD), but is not a member of the International Centre for Settlement of Investment Disputes (ICSID). ii. General Features

Foreign capital in Brazil is governed by Law 4,131/1962 (the ‘Foreign Capital Law’), and Law 4,390/1964. Both of these laws were put into effect by Decree 55,762/1965 and subsequent amendments. According to the Foreign Capital Law, ‘foreign capital is considered to be any goods, machinery or equipment that enters Brazil with no initial foreign exchange disbursement, intended for production of goods and services, and any funds brought into the country for use in economic activities, provided that they belong to individuals or corporate entities domiciled or incorporated abroad.’ iii. Registration of Foreign Capital

Foreign capital must be registered by means of an Electronic Statement of Registration – Foreign Direct Investment Module (RDE-IED), on the Central Bank Information System (SISBACEN). For the purposes of the Electronic Statement of Registration, foreign direct investment is deﬁned as permanent holdings in Brazilian companies or, in accordance with common market practices, long- term ownership by non-resident investors; individuals or corporate entities residing, domiciled or incorporated abroad, through ownership of shares or stock in Brazilian companies, or investments in foreign companies authorised to operate in Brazil.

Foreign investments to be made and registered are not subject to prior review or veriﬁcation by the Central Bank. The declaratory nature of the statement implies that the Brazilian company receiving the investment and/or the representative of the foreign investor are responsible for the registration. All foreign investments must be registered with the Central Bank of Brazil. Such registration is required for remittances abroad, repatriation of capital and registration of proﬁt reinvestment.

Doing Business in Latin America MARCH 2016 47 iv. Currency Investments

No prior ofﬁcial authorisation is required for investment in currency. To subscribe capital or purchase stock in an existing Brazilian company, the investor must only transfer the funds by means of a banking institution authorised to operate with foreign exchange. However, authorisation of the exchange contract is conditional upon presentation of a RDE-IED registration number for the foreign investor and for the Brazilian company receiving the investment.

The investment must be registered through the RDE-IED System by the Brazilian company receiving the investment and/or the representative of the foreign investor, within 30 days of closing the exchange contract. In the event that the registration of the foreign investment is to be paid from a non-resident account in Brazil, it can be made in Brazilian currency. All transactions relating to such investments must be carried out through the non-resident account, with updating of the corresponding investment registration by means of the RDE-IED Module. v. Investment via Conversion of Foreign Credits

Conversion into investment of foreign credits duly registered in the RDE-IED Mode is not conditional on the Central Bank’s prior authorisation. Conversion into foreign direct investment is deﬁned as ‘transactions whereby credits eligible for transfer abroad, under current rules, are used by non-resident creditors to purchase or pay up holdings in a Brazilian company’. In order to effect registration, however, the investor and company in which the investment is to be made must provide: (1) a statement from the creditor and committed investor, deﬁning precisely the due dates of installments, the respective sums to be converted and, with respect to interest and other charges, the period they refer to, and the respective rates and calculations; and (2) a binding statement from the creditor, agreeing to the conversion. vi. Investment via Import of Goods without Exchange Cover

Investment in the form of imports of goods without exchange cover (applicable only to tangible goods), made as a means of acquiring paid-up stock, do not require prior approval from the Central Bank. Registration of foreign direct investments, resulting from the import of intangible assets without coverage of an exchange contract, requires prior approval from DECIC. For tangible assets, the value recorded on the Register of Financial Transactions (ROF) Module of the RDE System, linked to the Import Declaration (DI); and the currency stated on the corresponding ROF may be used. Registration through the RDE-IED Mode requires that both tangible and intangible assets be exclusively intended for paying-up of capital.

Registration of foreign capital that enters Brazil in the form of assets must be made in the currency of the investor’s country or, at the express request of the investor, in another currency, with exchange parity preserved. Foreign capital is deﬁned as any goods, machinery or equipment that enter Brazil with no initial disbursement of foreign currency, intended for production or marketing of goods or provision of services. Imports of used goods are conditional on the absence of similar goods in Brazil. Used goods must be employed in projects that foster the country’s economic development. Once the tangible goods have been cleared by customs, the Brazilian company has a 90-day deadline to register the investment with the Central Bank of Brazil.

48 Doing Business in Latin America MARCH 2016 vii. Capital Market Investments

Non-resident investors, whether individuals or corporate entities, can invest in the Brazilian financial and capital markets individually or collectively. Non-resident investors can now use the same registration to invest in the fixed- and variable-income markets and can migrate freely from one type of investment to another. To access these markets, foreign investors must appoint a representative in Brazil to register the transactions by filling out a form attached to Resolution 2689/2000 and to make the required registration with the Brazilian Securities Commission (CVM).

Bonds and securities belonging to foreign investors must be kept in custody by entities authorised by CVM or by the Central Bank or, as appropriate, registered with the Special Settlement and Custody System (SELIC) or in the registration and ﬁnancial settlement system managed by the Clearing House for Custody and Financial Settlement of Securities (CETIP). viii. Remittance of Proﬁts

No restrictions are applied to the distribution and remittance of profits abroad. Dividends or profits distributed to shareholders or partners of companies headquartered in Brazil, even when remitted abroad, are not taxed, except those derived from profits booked before 1 January 1996. Profit remittances must be registered as such through the RDE-IED Module, considering the stake held by the investor in the total shares or stock as a proportion of paid-up corporate capital in the company. ix. Reinvestment of Profits

Reinvestments are proﬁts of companies established in Brazil and paid to persons or companies residing or domiciled abroad which are reinvested in the company that produced them or in another sector of the domestic economy. Reinvested earnings are registered in the currency of the country to which such earnings are to be remitted, while reinvestments derived investments in Brazilian currency are registered in Brazilian currency. Foreign investor proﬁts to be reinvested in Brazilian companies (even if the companies in question are other than those in which the earnings were obtained) for purposes of paying up or purchasing shares and/or stock must be registered as Investment in the RDE-IED System.

Such reinvestments must be registered as foreign capital (in the same manner as the original investment) and thereby increase bases for tax assessment on any future repatriation of capital. In cases of reinvestment of proﬁts, interest on net equity and proﬁt reserves, the stake of foreign investors vis-à-vis the total number of paid-up capital stock in the company in which the earnings were generated must be observed. x. Repatriation

Doing Business in Latin America MARCH 2016 49

(even if the companies in question are other than those in which the earnings were obtained) for purposes of paying up or purchasing shares and/or stock must be registered as Investment in the RDE-IED System.

Acquirers, whether they are individuals or legal entities residing or domiciled in Brazil, or their attorney in- fact, in the case of acquirers residing or domiciled abroad, are responsible for withholding and paying income tax on capital gains earned by individuals or legal entities residing or domiciled abroad that transfer property located in Brazil. Foreign purchasers are entitled to register capital in the same amount as the registration previously held by the selling company, regardless of the price paid for the investment abroad. Nonetheless, the registration number on the RDEIED Module of the Central Bank of Brazil should be changed to reﬂect the name of the new foreign investor, which is essential to allow the new investor to remit/reinvest proﬁts and to repatriate capital. xii. Restrictions on Remittances Abroad

Remittance of funds abroad is restricted when such funds are not registered on the RDE-IED System, since remittance of proﬁts, repatriation of capital, and registration of reinvestment are all based on the amount registered as foreign investment. xiii. Restrictions on Foreign Investment

A. PROHIBITIONS

Foreign capital investment is prohibited in the following activities: (1) activities involving nuclear energy; (2) mail and telegraph services; and (3) the aerospace industry.

B. LIMITATIONS

The acquisition, operation or lease of rural lands by a Brazilian company under foreign control, an alien residing in Brazil or a foreign-based legal entity authorised to operate in Brazil are subject to certain conditions provided for in the law, as well as to congressional authorisation in certain cases. For national security reasons, limitations are applied to the acquisition of property alongside border areas. Acquisition of land in such areas is conditional on prior authorisation from the Secretariat General of the National Security Council. Restrictions are also applied to the participation of foreign capital in ﬁnancial institutions, although these restrictions may be waived in the national interest.

A concession is required for operating regular public air transportation services. By law, such concession can only be granted to Brazilian legal entities (those incorporated and managed in

50 Doing Business in Latin America MARCH 2016 Brazil) in which at least 80 per cent of the voting capital is owned by Brazilians, which limitation also applies to increases in capital stock. Moreover, such companies must be exclusively managed by Brazilians. Finally, foreign capital participation cannot exceed the authorised limit of 20 per cent of voting capital and requires approval from aeronautical authorities. Restrictions are applied to foreign ownership and management of newspapers, magazines and other periodicals, as well as of radio and television networks. Brazilian companies, even if under foreign control, can request and be awarded permission to operate in the mining sector. xiv. The Brazilian Foreign Exchange Regime

A. GENERAL FEATURES

The foreign exchange (FX) regime consists in a means to set the exchange rate in a country. The choice of such a regime is an economic policy decision and is related to the FX market in which the exchange rate will be set, eg, an official exchange rate market or a floating exchange rate market. Historically, the Brazilian FX regime has been defined by the Brazilian government through exchange control measures. Exchange controls in Brazil are applied not only through FX rules and regulations, but also by means of tax and foreign trade rules and regulations, for the purpose of either encouraging or discouraging inflows of foreign capital and investments of Brazilian capital abroad.

In this context, Brazilian tax authorities made changes to tax regulations recently to increase tax rates applied to foreign capital entering Brazil with the aim of curbing the increasing appreciation of the Brazilian currency against other foreign currencies, such as the US dollar.

B. FX CONTROL

Exchange control in Brazil is closely linked to the regulation of foreign capital flows. Historically, such regulation has imposed barriers on the outflow of funds to protect the Brazilian currency. In the 1930s, following sharp reductions in the price of basics products that accounted for a high percentage of Brazilian exports, Brazilian authorities issued the first rules designed to structure an exchange market in Brazil.

For this purpose, rules were issued to establish the obligation that funds from Brazilian exports should be brought back to the country, such as Decree no 23,258/1933, which has been revoked, and the Brazilian government began to apply strict controls on exporters to avoid funds from exports from being kept abroad. Such exchange controls were justiﬁed because, back then, funds from exports constituted the main source of funds to ensure equilibrium in the Brazilian balance of payments. It was only in the 1960s that the two main legal instruments applied to foreign capital and FX markets were issued in Brazil, namely, Law 4,131/1962 and Law 4,595/1964. Law 4,131/1962 provides for key rules deﬁning foreign capital in Brazil, lists categories of foreign investments and requires that foreign capital must be registered with the Central Bank upon entering Brazil.

Law 4,595/1964 sets out general rules for the Brazilian ﬁnancial system and creates the Brazilian Monetary Council (CMN) and the Central Bank. After this law was passed, the CMN and the Central Bank began to control and regulate the Brazilian FX market. The CMN is in charge of drawing up

Doing Business in Latin America MARCH 2016 51 the general foreign exchange policy, and according to its guidelines, exchange controls, regulations affecting foreign capital, and the management of international reserves fall under the Central Bank’s jurisdiction. Law 4,131/62 and Law 4,595/64 changed the legal environment of the FX market and foreign investments in Brazil and are fundamental legal instruments regulating these areas that are in force to this day.

C. THE BRAZILIAN EXCHANGE REGIME AND FX MARKET

Up to 1988, the exchange rate regime in Brazil was one based on ofﬁcial exchange rates set by the Brazilian government, rather than by demand on the market. The FX market was therefore the ofﬁcial exchange market, fully regulated by the Central Bank.

The official exchange rate regime reflected the successive FX crises faced by Brazil, which led the Brazilian government to impose limits and bureaucratic requirements on the purchase of foreign currency. As a result of such ‘official’ exchange market and strict FX controls, a ‘parallel’ FX market developed that was not provided for in any regulation or recognised by the Brazilian authorities. In this parallel FX market, foreign currencies were illegally bought and sold at rates different from the ones set in the official market.

B. Rendering of public services i. Introduction

Public tenders are the formal procedure whereby the State selects the best contractor for providing services, implementing civil construction projects, or supplying or buying goods. Their purpose is to ensure that the Public Administration selects the most advantageous proposal for contracts in the public interest.

Public managers are under the obligation to abide by tender procedures. The 1988 Constitution, in its article 37, clause XXI, provides that civil construction works, services, purchases and transfers may be contracted by the direct and indirect public administration of any of the Branches of the Union, the States, the Federal District and the Municipalities by means of public bidding, taking into account legal exceptions provided for in speciﬁc laws, when contracts may be entered into directly with a vendor.

Article 175 of the Constitution of 1988 requires tenders for concession and licenses to provide public services, which are regulated by Law 8,987/1995 with the amendments made thereto by Law 9,648/1998. Prior to the new standards introduced by the 1988 Constitution, licenses were granted and revoked at the discretion of the administration and were not subject to tenders. For this reason, Law 8,987/1995 requires formal licensing by means of a contract, while maintaining the unilateral revocability by the granting authority.

Law 8,666/1993, with the amendments made thereto by Law 12,349/2010, regulates the abovementioned clause XXI of article 37 and provides for general rules for tenders and contracts with the Public Administration. There are various modalities of public tender that may be used in accordance with criteria deﬁned by law. The main factor to be considered in choosing the modality of tender is

52 Doing Business in Latin America MARCH 2016 the estimated value of the contract to be signed. There are, however, situations in which the object of a tender leads to other considerations prevailing over the contracting value.

Regardless of the modality of tender selected, the supremacy of the public interest must always prevail. The procedure must always seek to secure the most efficient result for the Public Administration and preserve of its economical-financial balance by preserving the initially agreed relationship between the parties, ensuring fulfillment of the contractor’s obligations and fair remuneration by the Public Administration for the contracted work or service. ii. Applicable Principles

In order to fully comprehend both the bid proceeding and the rules that apply to contracts with the government, it is necessary to brieﬂy address the main principles that apply thereto, which are established in both the Federal Constitution and in Law 8.666/1993. They are:

a. Principle of equality: This is a constitutional principle that is also established in the Public Bid Law, being one of the basic pillars of the public bid. According to this principle, all private parties have the right to participate in equal conditions in the bid and the corresponding bid invitation cannot establish discriminatory clauses or conditions that favor or imply in the favoring of one of the bidders to the detriment of the others;

b. Principle of legality: While private law is governed by the principle of the parties’ free will to contract, which means that ‘what is not prohibited is allowed’, the government agent is only allowed to act within the limits that are established by the law, that is, only what is expressly established in the law is allowed. Accordingly, the principle of legality determines that the bid proceeding must strictly abide by the procedural rules established in Law 8.666/93, the Government not being allowed to change such procedural rules or establish participation or decision criteria different than the criteria established by the law;

c. Principle of impartiality: The principle of impartiality – which is closely bound to the principles of equality and objective awarding, establishes that all bidders must be treated equally in regard to their rights and obligations and that the Government must be guided by an objective criteria that supports its decisions. The Government cannot, therefore, take into account the personal conditions of the bidder or any advantages that the bidder may offer that are not foreseen in the law or in the bid invitation;

d. Principle of morality (honesty): The principle of morality requires that the governmental administrator must abide by the standards of morality and proper costumes and that the administrator’s conduct must envision primarily the public interest;

e. Principle of publicity: The principle of publicity establishes that the bid proceeding must be public, in no event secret or conﬁdential, and that any interested party may access the acts and decisions that occurred in the course of the proceeding;

f. Principle of abidance by the bid invitation: The principle of abidance by the bid invitation determines that the rules, conditions and awarding criteria established in the bid invitation must be abided by both the bidders and the Government in all phases of the bid proceeding,

Doing Business in Latin America MARCH 2016 53

since the opening thereof up to the signing of the governmental contract related to the bid. If, in the course of the bid the Government deems necessary to change any part of the Bid Invitation, then it will be required to restart the entire bid proceeding, re-publish the Bid Invitation and allow all interested parties to submit new bids;

g. Principle of objective awarding: Closely bound to the principle of abidance by the bid invitation, the principle of objective awarding establishes that the government’s decisions on the qualiﬁcation of the bidders and on the bidders’ bids (proposals) must always be supported by objective criteria previously established in the bid invitation. Thus, this principle intends to evade discretionary decisions by the Government in the selection of the winning proposal, which must necessarily be the bid that best fulﬁlls the requirements established in the bid invitation; and

h. Principle of formal procedure: This principle compels the Government to abide by all rules and provisions established in the law and regulations for development of the bid proceeding and ensures compliance with the principles of equality and legality, to the extent that all the participating bidders ‘have a subjective public right to the full compliance with the related proceeding’. Therefore, the principle of formal procedure is intended to ensure and monitor application of the other principles described above. iii. Parties entitles to participate in bids – Domestic and international bids

Any individual or company that fulﬁlls the requirements for qualiﬁcation established by the law and the corresponding bid invitation may participate in the bid. There are rules that apply to the participation of foreign companies in bid proceedings opened by governmental entities. In this regard, Law 8,666/1993 establishes two types of bids, designated domestic bids and international bids.

The subject matter of national bidding procedures is necessarily to be performed in Brazil, and the respective payment must also be made in the country, in Brazilian currency. In addition to domestic companies, foreign companies may also be invited to participate in national bidding procedures when duly authorised to operate in Brazil under a presidential decree.

The international bids allow foreign companies that are not registered or operate in Brazil to participate in bids in which the subject matter of the bid is performed in a foreign country and the price proposals are established in foreign currency.

Law 8,666/1993 also foresees the holding of bids for the purchase of products and services in which the payment thereof shall be made with financing extended by an international financial institution or a cooperation agency. In these cases the bid proceeding may be governed by rules established by such institutions or agencies, provided that they do not conflict with the Public Law provisions established by the Federal Constitution. iv. Procurement Modalities

Tender modalities are provided for in art. 22 of Law 8,666/1993 and no other modalities or combination thereof is allowed. These are call for bids (concorrência); price consultations (tomada de preços); letter of invitation (convite); contests (concurso); and public auction (leilão). In addition

54 Doing Business in Latin America MARCH 2016 to these modalities, the federal legislator created the procurement auction (pregão), disciplined by Law 10,502/2002.

Call for bids is the most complex modality of tender procedure and entails proof of capacity to fulﬁll minimum requisites called for the call for proposal and a so-called prequaliﬁcation phase, when the commercial proposals will have already been received. Price consultation (tomada de preços) is quite similar to the call for bids and is a modality whereby evaluation of bids takes place beforehand, since they must be registered before the commercial proposals are received.

Letter of invitation (convite) is a procurement modality in which bids are requested from interested parties, whether registered or not, and a minimum number of three are chosen. Other registered parties may request to participate in the proceedings.

Contests are the method used to select technical and artistic works from among any parties, and payment is effected by award or remuneration to the winners. Auction is a modality reserved for the sale of assets of no use to the public authorities, seized assets, pledges, assets delivered to courts or given in payment. These are sold to the highest bidder, above a minimum ﬂoor value.

Finally, the procurement auction (pregão) was instituted to select contractors or procure common goods or services, occasionally or routinely, with no limitation of value. Such contracts are awarded in a public session based on written proposals or verbal bids, with the aim of obtaining the most economic, safe, and efﬁcient purchase. Procurement auctions are often conducted using information technology (electronic bidding). However, this modality is not appropriate for contracting engineering works and services, or for lease or transfer of real property.

Whatever the modality of tender employed, public sector procurement must always be guided by principles of legality, neutrality, morality, transparency and efﬁciency, with the objective of selecting the proposal that is the most advantageous to the Public Administration, while ensuring equality of conditions to all participants prior to announcement of the winner, establishing technical and economic qualiﬁcation standards, and preserving the conditions effectively expressed in the proposal. v. Authorisation, Concession, and Licence to Provide Public Services

In article 21, insets XI and XII, the Federal Constitution provides that the following services are to be exploited by the Federal Administration: (1) telecommunications and radio broadcasting; (2) services relating to electricity and exploitation of waterways for electricity production; (3) air, aerospace and airport infrastructure; (4) railway and waterway transportation services between Brazilian ports and borders; (5) interstate and international highway passenger transportation services; and (6) services related to sea, river and lake ports.

The execution of these services can be carried out directly or by means of authorisation, concession or licence. The Union is authorised to delegate provision of these services, mainly through concessions or licences, to Corporate Entities of private law with competence to provide them. Authorisation is a unilateral, discretionary administrative act whereby the Public Authorities delegate public services provision to the private sector, and which may be revoked at any time.

A concession entails a formal administrative contract, awarded by means of a tender procedure under the call for bids modality, upon which the delegation of responsibility for providing the service is

Doing Business in Latin America MARCH 2016 55 legally transferred by the Public Authorities to a company or a consortium that, for its part, assumes the risks inherent to the business for the duration of the contract and is remunerated by rates charged from users of the services.

The aforementioned contract is also intended to fulfil conditions of regularity, continuity, efficiency and moderate rates in the provision of services. Standards for public service concessions are provided for in by Law 8,987/1995, with the amendments made thereto by Law 9,648/1998, whereas Law 9,472/1997, with the amendments introduced by Law 9,986/2000, provides for concessions of telecommunication services. Permission to provide a public service, as previously emphasised, is a simple, discretionary and ephemeral act of unilateral delegation by public authorities through a contract of adhesion that can be revoked at any time or to which the public authorities can add new conditions to be observed by the grantee. vi. Qualification

To institute a public tender, the Public Authorities must publish a justiﬁcation for the licensing procedure deﬁning the objective, scope and duration of the contract prior to a call for proposals. The tender procedure is constituted upon publication of call for proposals, which serves as the by-laws of the tender and must be observed by both the Administration and the bidders. The principle of binding the tender procedure to the terms of the call for proposals is provided for in article 3 of the Tender and Contracts Law (Law 8,666/1993).

Any party interested in participating in the tender must fulfill the requirements stated in the call for proposals and specific registry requirements for each modality and submit legally-required documentation demonstrating legal, technical, economic and financial capacity and that it is current on taxes.

If the call for proposals permits formation of consortia, each component company must submit all the above-mentioned documentation as if it were an individual bidder. Having fulfilled these requirements, bidders are qualified to present their proposals in compliance with the requirements set forth in the call for proposals. At this point, any person can view the documentation, including certificates, decisions, contracts, or opinions relating to the tender and to the concession or permission in question. It should be stressed that article 34 of the Tender and Contracts Law provides for the possibility of maintaining a record for qualification purposes, valid for a maximum of one year, containing documents pertaining to participants in public tenders.

Companies included in this record receive a Certiﬁcate of Registration, enabling them to participate in price consultations, which according to paragraph 2 of article 36 of that Law replaces the documentation required for other modalities of tender. Criteria for appraisal of proposals are: (1) lowest price, when the selection criteria speciﬁed in the call for proposals is that the winning proposal will be the one which presents the lowest price; (2) the best technical proposal; (3) a combination of the best technical proposal and price; or (4) highest offer, in cases of sale of assets or concession of in rem right to use assets.

In case of deadlock between two or more contenders, after analyzing compliance with all speciﬁed conditions in the call for proposals, selection is by lot in a public session to which all bidders

56 Doing Business in Latin America MARCH 2016 are summoned, registered in the minutes. Law 12,349/2010 created a margin of preference for manufactured goods and services that meet the Brazilian technical standards, in other words, preference for products and services of national origin. Preference margins are up to 25% and they are determined, by decree, by the Interministerial Commission for Public Procurement established by Decree 7,546/2011, which regulated the application of preference margins. vii. Termination of the government contract

Article 78 of Law 8.666/1993 establishes the events of termination of government contracts, among which: (1) non-performance or delay to perform by the contractor; (2) the subcontracting, total or partial assignment or transfer of the performance of the contract when not allowed under the bid invitation; (3) the amalgamation, split or merger of the contractor without prior notice to the Government or changes in the corporate structure that pose difﬁculties to the performance of the contract; (4) the repetition of defaults in the performance of the contract; (5) the declaration of the bankruptcy, civil insolvency or dissolution of the contractor; (6) reasons of public interest, highly relevant and widely acknowledged; (7) the interruption in the performance of the government contract at the order of the Government, for more than 120 days; (8) a delay of more than 90 days in the payments owed by the Government; (9) the non-release by the Government of an area, site, objects or materials that are needed to perform the contract; and (10) occurrence of fortuitous or force majeure events.

In the cases mentioned in (1) to (5) above the termination of the government contract may be unilaterally declared by the Government and the contractor shall not have the right to any indemnity for the termination thereof (however the contractor is entitled to be indemniﬁed for all of the work and services that were performed up to the termination of the contract). In the cases of termination of the contract for reasons of public interest or the Government’s failure to comply with its contractual obligations, which are mentioned in (6) to (10) above, the Government shall be obligated to indemnify the contractor for all the losses that the contractor suffered, provided that properly proven. Hence, the contractor is entitled to claim, also, the return of the guarantee that it offered to the Government to warrant the performance of the contract, the payments owed up to the termination date and payment of demobilisation costs. viii. Public-Private Partnerships

Law 11,079/2004 set out rules for Public- Private Partnerships (PPPs). The PPP Act was further amended by Law 12,024/2009 and by Law 12,409/2011. Under these new rules, the Government aims to attract local and foreign private investment of roughly US$13bn for basic infrastructure projects, particularly in the ﬁelds of transportation and sanitation. These new rules enable the transfer of responsibility for execution of public works and delivery of public services to the private sector, and may be applied by all executive branch agencies, special funds, government agencies, foundations, state-owned companies and other entities controlled by the Federal Government, States and Municipalities.

Furthermore, common public service concessions (described in the previous section and governed by Public Service Concession Law – Law 8,987/1995), two new modalities of public service concessions

Doing Business in Latin America MARCH 2016 57 were created. The ﬁrst of these is the sponsored concession (concessão patrocinada), whereby the private concessionaire is remunerated not only by rates paid by users of the services, but also by transfers of funding from the public partner.

The second is the administrative concession (concessão administrativa), undertaken by means of a service provision contact, when the Public Administration is the direct or indirect beneﬁciary of the service (as in the case of construction and management of public buildings), even if it involves execution of works or supply and installation of goods. The difference between the new modalities of concession and the common concession, which is still effective as described above, consists exactly in the remuneration of the private entity by the Public Administration. Therefore, when the concession does not involve any remuneration from the Public Administration, it will not be a PPP contract, but rather a common concession.

The PPP law also sets limits for Public-Private Partnerships. For instance, it forbids contracts (1) under the amount of R$20m; (2) with a duration shorter than ﬁve years; or (3) for the sole purpose of labor supply, supply and installation of equipment, or execution of public construction works.

Administrative contracts under the rules established by the PPP Law contemplate periods for return of capital compatible with that of investments in the private sector: never less than ﬁve or more than 35 years, including any possible extensions. For a PPP contract to be entered into, establishing a Speciﬁc Purpose Company is required for the sole purpose of implementing and managing the PPP project.

A highly significant innovation introduced under the PPP law was the creation of an up six-billion dollar Guarantee Fund (comprised of shares of state-owned companies, real estate properties, liquid assets, etc). This fund underwrites financial obligations of the public-sector partner assumed under contract to the private partner, and its assets serve as collateral against any possible claims filed against the Public Partner.

The law also innovates by contemplating the possibility of arbitration in disputes arising under a PPP contract. Previously, the law did not allow the Public Administration to participate in arbitration procedures. Because the government’s principal aim in introducing the framework for PPPs was to streamline procedures for timely execution of infrastructure works to enhance and sustain development, it was necessary to introduce new mechanisms in public tender procedures to speed them up. In addition to Federal Legislation, the Brazilian states, within their jurisdictional sphere, also enacted laws to facilitate implementation of local projects (without interference of the Federal Administration) that provide for new forms of guarantees, including the establishment of new state- owned companies responsible for signing and management PPP contracts. São Paulo, Minas Gerais, Santa Catarina, Bahia and Rio Grande do Sul are the main that have passed laws for PPPs.

It is interesting to note that, according to recent estimates, Brazil will need investments of more than R$100bn to comply with the commitments involved in hosting the 2016 Olympic Games. This initial appraisal included improvements in the transportation sector, in electricity generation and distribution, in basic sanitation systems, and in ports and airports, among others. PPPs are expected to play a decisive role in ensuring the feasibility of major infrastructure projects, for which purpose quick action on the part of the government to formalize these partnerships is a must.

58 Doing Business in Latin America MARCH 2016 C. Real estate i. Introduction

Under Brazilian law, issues relating to property are subject to the law of the country where such property is located (lex rei sitae). Essentially, issues relating to real estate property in Brazil are governed by the Brazilian Civil Code. The Brazilian Civil Code classiﬁes assets by physical criteria, whereby they can be divided into two broad categories: movable assets and immovable assets. Movable assets are those that can be removed by external forces or by themselves without causing their own destruction or devaluation.

Immovable assets (land and buildings) are, by nature, immobile or fixed to the soil, naturally or artificially, and cannot be partially or totally removed without causing their own destruction or devaluation, ie, without substantially altering or destroying them. Immovable property encompasses land, and anything that has been naturally or artificially incorporated thereto. Brazilian law further confers certain rights with the status of immovable assets for legal purposes. This is the case with deeds to immovable property, government stock incorporating an inalienability clause, and inheritance right to property though succession, even when inheritance is comprised only of movable assets. As a general rule, owners of land also own the subsoil.

Therefore, a landowner may excavate to a reasonable depth for construction of basements or subterranean garages. The landowner cannot, however, prevent third parties from engaging in activities at depths that do not put his property at risk, provided that such activities are carried out in the public interest (eg, excavation of subway lines, passages for conduits, etc). Land ownership rights, according to the Brazilian Civil Code, do not encompass mineral deposits, mines and mineral resources, potential hydroelectric power sources, archeological sites, or other assets referred to in speciﬁc laws. It thus makes a clear distinction between land ownership and rights to such elements of the subsoil (mineral and hydroelectric resources), which are considered Federal Government property.

Thus, federal authorisation or a licence is required for exploitation of mineral and hydroelectric resources. Air space is subject to similar rules. A landowner may build vertically on his land, provided he observes limitations foreseen in law (eg, zoning rules). He may refuse construction by third parties on his land, or block the building of structures that may place him in jeopardy. He may not, however, interfere with activities taking place above a certain height, and that pose no risk (aircraft routes, installation of power lines at a safe height, etc.).

Foreign individuals or foreign-owned companies may acquire real estate in Brazil under the same conditions as Brazilian individuals or companies. However, according to Internal Revenue Service Order (Instrução Normativa) 200, non-resident individuals or organisations must be registered with the General Register of Corporate or Individual Taxpayers (CNPJ or CPF) prior to purchasing any real estate in Brazil. Furthermore, special conditions apply to ownership by foreign individuals or companies of property located in coastal or frontier zones, as well as in certain speciﬁcally designated national security areas. Foreign individuals or foreign-owned companies may acquire rights in rem relating to immovable property. Rural areas can also be acquired, as well as rights in rem related to them, provided that certain restrictions, are observed.

Doing Business in Latin America MARCH 2016 59 ii. Possession and Ownership

A. RIGHT OF POSSESSION

The right of possession stems from use of the land by an agent as if he were its owner. When said agent acting on his own behalf behaves as if he were the owner, he assumes the right of possession. Possession thus implies the right to exercise certain powers typical of ownership, such as: the right to claim, maintain, or recover the possession of property, the right to its fruits (including rents and other incomes therefrom), the right to be compensated for necessary improvements effected, and the right to retain possession.

Possession ceases when, by voluntary or involuntary means, power is no longer exercised over the asset. This may occur when the property is forfeited by abandonment, by transference, by loss or destruction; if it becomes ineligible for purchase or sale, if possession is lost to third party, in the event of failure to maintain a claim or reinstate possession, or when the party legitimately in possession transfers his right to another, maintaining the asset in his power in the name of the acquirer (constituto possessório).

B. RIGHT OF OWNERSHIP

The right of ownership is most relevant of all property rights and it is deﬁned by the Civil Code as the right of an individual to use, enjoy, and dispose of his goods, and to recover them from whoever may unlawfully have taken possession of them. It is an absolute and exclusive right. Full right of ownership implies that all the legal powers (to use, enjoy and dispose of the asset and to recover it from whoever unlawfully possesses it) are concentrated in the same hands. Limited right of ownership implies that some such powers are in the hands of, and may be exercised by, another person. It should be noted, however, that in cases of joint ownership, or condominium, in principle, full ownership rights, rather than limited ownership, applies. Under a condominium, each co-owner has rights to an undivided fraction of the asset. As a rule, powers deriving from the ownership can be exercised simultaneously by all co-owners. iii. Acquisition and Loss of Ownership

A. GENERAL PROVISIONS

Under Brazilian law, ownership of real estate property is constituted upon the registration of the public or private instrument (deed) whereby the sale was accomplished at a Real Estate Registry in the jurisdiction where the property is located. However, an instrument involving real estate property that has not been duly registered at the respective Real Estate Registry is only binding only between the parties to the purchase/ sale agreement and, thus, is not be enforceable against third parties. Real estate property is acquired upon registration of the deed of transfer, which may be: (1) by the sale agreement signed by the parties; (2) by accession (ie, expansion of a property as a result, for example, of a displacement of a land strip case by natural forces); (3) squatters rights (ie, acquisition of ownership rights by occupation and possession over a certain period of time, in law); and (4) by inheritance.

60 Doing Business in Latin America MARCH 2016 One of the principles that govern the real estate registration system is the principle of priority, whereby the person who ﬁrst registers a real estate property or presents deeds for registration has priority. Likewise, any action which modiﬁes, extinguishes, transmits or creates rights relating immovable properties must be registered with the competent Real Estate Registry. These include: (1) court decisions enabling undivided land to be divided among various owners; (2) court orders winding-up the estate of a deceased person or division of property for composition with creditors; (3) public auctions or adjudications; and (4) rulings on separation, divorce, and annulment of marriage, when settlement of rights in rem to immovable properties is involved.

The main grounds for extinguishing real estate ownership are: (1) Expropriation, ie, a unilateral act of public law whereby individual ownership is transferred to a government authority, upon prior payment of fair and compensation, in the public interest; (2) transfer, meaning transmission to a third party, by an inter vivos transaction or as a legacy, for a payment or free of charge; (3) waiver (for example, when an heir renounces rights of inheritance); and (4) neglect or destruction of the property.

B. GENERAL CONSIDERATIONS AND REQUIREMENTS FOR PURCHASING REAL PROPERTY

The most usual way of acquiring real property in Brazil is by inter vivos transaction of real estate property, which entails a formal sales agreement between the purchaser and the seller. If said property is acquired by an individual purchaser, as opposed to a condominium, then he/she has absolute title thereto. In cases of multiple ownership, ie, a condominium, each owner can exercise any rights of ownership not compromised by the indivisibility of the property (ie, one party to the condominium cannot sell the property without consent of all the other owners, and any revenues from sale of the property must be divided among them).

Prior to promulgation of the New Brazilian Civil Code, Law 4,591/1964 provided for condominiums of apartments and/or offices, being an autonomous and independent unit of property, on a single piece of land. In this case, the indivisibility mentioned in the previous paragraph does not apply. Significant changes to Law 4,591/1964 were introduced by the New Civil Code, including the introduction of fines on co-owners who fail to comply with their duties (ie, paying condominium fees, not effecting construction work that might jeopardise the safety of the property, not to use the property in a manner that disturbs the peace, etc.)

Aside from speciﬁc requirements relating to the transfer of immovable property, Brazilian law requires, for all types of contract, that parties to a sale agreement be capable of fulﬁlling the transaction. They must be of full legal age, in sound mental health, or duly represented. It is also advisable that any real property acquisition is preceded by an analysis of the situation of the real estate and of its current owners, in order to avoid that facts not acknowledged by the purchaser jeopardize the transaction and even result in annulment or ineffectiveness of the juridical transaction.

Therefore, it is advisable to obtain and analyse the: (1) copy of the updated real estate record and 20-year clearance certificate and clearance certificate regarding liens and claims; (2) fiscal clearance certificates relating to the real estate (IPTU tax, for example); (3) fiscal clearance certificates relating to the owners of the real estate; (4) clearance certificates issued by the local courts to verify the existence of lawsuits involving disputes on the real estate that could compromise the owner’s assets

Doing Business in Latin America MARCH 2016 61

(hindering, as a result, the alienation of the real estate or resulting in the reversal of the transaction).

C. ACQUISITION OF RURAL LAND BY FOREIGNERS

Under Brazilian law (Law 4,504/1964), rural property ranges from rustic buildings to continuous areas, regardless of location, devoted to extractive activities, farming, cattle-raising or agro-industry, whether by the private sector or under public land tenure policies. A foreign individual residing abroad cannot acquire rural property in Brazil. This restriction is not applied only in the case of legitimate succession (ie, if the foreigner is called upon to acquire the rural property as a legal heir of the previous owner). According to the laws currently in force, foreigners who have permanent residence in Brazil: (1) are free to acquire or lease one (a) rural property not exceeding three (b) modules for indeﬁnite exploitation (MEI). The MEI is a unit of rural land established by the National Institute for Colonisation and Agrarian Reform (INCRA) for geographic areas sharing the same socioeconomic and ecological characteristics, according to the type of rural exploitation they are best suited for; and (2) Cannot acquire or lease rural real estate exceeding 50 MEIs. Similar restrictions to those applicable to foreign individuals with permanent residence in Brazil are applied to foreign legal entities.

The law provides that: (1) foreigners who have permanent residence in Brazil can only acquire or lease rural property for the purpose of implementing agricultural, cattle-raising, industrial or settlement projects. In addition, in the case of foreign entities, such projects must be contemplated in their articles of association. These projects must be approved by the Brazilian Ministry of Agriculture, Livestock and Supply (MAPA) and, depending on the type of project (industrial, colonisation, agricultural project, etc), other federal government bodies in charge of the respective activities may be called upon to review the application as well; and (2) Congress must authorise the acquisition or lease of areas exceeding 100 MEIs. Additionally, the total area acquired or leased by foreign entities or individuals must not exceed 25 per cent of the total area of any given municipality. Also, foreigners of the same nationality (including foreigners who control Brazilian entities) cannot hold more than 40 per cent of those 25 per cent of the area of the municipality. All the restrictions described above also apply to transfers of rural real estate as a result of transactions involving corporate restructuring (such as mergers, spin-offs, acquisitions, changes in corporate control, etc).

Any transaction made in violation of the foregoing restrictions is null and void. The President of Brazil may, by speciﬁc decree, authorise the acquisition of rural land beyond the provisions of the current law, in cases in which such property contributes toward priority projects under national development plans. Acquisition of rural property by Brazilian companies with foreign equity control is a subject that has given rise to heated debates since mid-2010.

The 6th Constitutional Amendment of 1995 revoked article 171 of the Brazilian Federal Constitution, which provided for differential treatment to companies incorporated under Brazilian Law if they were Brazilian companies with Brazilian capital directly or indirectly controlled by individuals residing in Brazil or not, that is, with direct or indirect equity control held by foreigners. Since then, there has been no debate on the legality of Brazilian companies with foreign equity control acquiring rural property in Brazil. However, the Federal Attorney General’s Ofﬁce issued an opinion in August 2010 arguing that article 1 of Law 5,709/1971, which subjects Brazilian companies with foreign equity

62 Doing Business in Latin America MARCH 2016 control to the same regime imposed on foreign companies, is consistent with the Constitution. After being approved by the President of Brazil, this opinion became mandatory for all agencies of the Federal Administration, which must comply with it strictly. In this new scenario, Brazilian companies with foreign equity control are subject to the same regulatory framework as that imposed on foreign companies. iv. Taxation

The Inter-Vivos Transfer Tax (ITBI) is a tax assessed by the municipalities which is due when real property or rights in rem to any real property (except those in guarantee) and assignment of rights for the acquisition of property are transferred for remuneration. The rate established for the municipality of São Paulo, for example, ranges from two to 0.5 to 2 per cent, depending on the value of the transfer.

The ITBI tax is not assessed when the transfer of real property or rights to any such property takes place to pay up the capital of a company or when resulting from merger, consolidation, spin-off or liquidation of the legal entity, unless the acquirer’s chief activity is the purchase and sale of such assets and rights. The ITBI tax is not assessed when the transfer of real property or rights to any such property takes place to pay up the capital of a company or when resulting from merger, consolidation, spin-off or liquidation of the legal entity, unless if, in any of the above mentioned cases, the legal entity’s predominant activity is the purchase and sale of such assets and rights, the lease of real property or the commercial lease of real estate property, in compliance with the applicable provisions of the municipal law. v. Real Estate Investments Funds

Real Estate Investment Funds were created to provide funds for developing real estate ventures for subsequent sale, letting or leasing. They began to be regulated by Brazilian law in the 1990s, more speciﬁcally by Law 8,668/1993, which was updated by Law 9,779/1999. Ruling n. 472/2008 of the Brazilian Securities and Exchange Commission (CVM), with the wording given by Ruling n. 498/2011, regulates the establishment, management, operation, public offer of quotas and disclosure of information for Real Estate Investment Funds.

Real Estate Investment Funds are currently being used for raising funds for building several shopping centers and implementing large-scale infrastructure projects throughout Brazil. Previously, pension funds were the main source of direct investments in real estate projects, but they are currently investing in this market indirectly, through the purchase of shares in real estate investment funds.

Both individuals and corporations residing or domiciled abroad are entitled to acquire such shares, provided that the funds resulting from the investment are duly registered with the Central Bank of Brazil, allowing for the investment and respective gains to be remitted abroad. According to the law in force, capital gains resulting from such investments are subject to income tax (IR) at a rate of up to 20 per cent, assessed upon disposal or withdrawing of Real Estate Investment Fund quotas.

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D. Development of ample / integrated capital markets and joint activities between Latin American countries i. Stock Exchange

Stock exchanges are in charge of organizing, maintaining, registering and overseeing operations involving securities, among other responsibilities. For this purpose, stock exchanges can set additional rules to those issued by CVM. The main Brazilian stock exchange is the BM&FBOVESPA S.A. – Bolsa de Valores, Mercadorias e Futuros (BM&FBOVESPA).

A number of securities may be traded at BM&FBOVESPA – (1) securities, (2) rights, (3) indexes, (4) derivatives, (5) government bonds and (6) other negotiable bonds issued by private entities – as long as previous authorisation is granted by the Central Bank and/or CVM, as appropriate. BM&FBOVESPA offers a ‘homebroker’ system, allowing investors to deliver their orders through the Internet to their brokers, who are in turn connected to the electronic systems of BM&FBOVESPA.

In December 2000, BM&FBOVESPA launched the New Market, Level 2 and Level 1, which are special listing segments of the stock market designed for companies that accept to abide by stricter corporate governance rules and disclosure standards than those provided for in the Brazilian law. The New Market is a listing segment that requires companies to comply with higher corporate governance standards than those applied to Level 2 and Level 1.

Under the New Market, companies (or their controlling shareholders, as the case may be) undertake, among other things, to (1) keep their capital stock represented only by common shares with voting rights, (2) keep at least 25 per cent of their shares in the free float, (3) offer to all shareholders the same terms and conditions as those enjoyed by the controlling shareholders in case of sale of the controlling stake (100 per cent tag along), (4) launch a tender offer to repurchase their shares from all shareholders for at least the economic value, in case of delisting or cancellation of the agreement with BM&FBOVESPA that formalised the company’s adhesion to the New Market, (5) keep a board of directors made up of at least five members, 20 per cent of whom are independent members, with a two-year mandate at most, (6) provide annual financial reports prepared in accordance with an internationally accepted standard, (7) issue more complete financial reports, including quarterly cash-flow reports and consolidated reports reviewed by an independent auditor, and (8) disclose, on a monthly basis, the trading, by its officers, executives and controlling shareholders, in securities issued by it.

Level 2 imposes similar obligations to those of the New Market, and companies adhering to it may have their capital stocks represented by common shares with voting rights and preferred shares with restricted or no voting rights. Under certain circumstances, preferred shares are granted with voting rights, such as for approval of merger and acquisition transactions involving the company and agreements between the controlling shareholder and the company, whenever these decisions are subject to approval at a shareholders’ meeting.

Level 1 requires adhering companies to, among other things, (1) keep at least 25 per cent of their shares in the free float, (2) disseminate more complete financial data, (3) issue annual financial reports prepared in accordance with an internationally accepted standard, and (4) disclose, on

64 Doing Business in Latin America MARCH 2016 a monthly basis, the trading, by its ofﬁcers, executives and controlling shareholders, in securities issued by it. BM&FBOVESPA also created the BOVESPA MAIS, a special listing segment designed to make the stock market more readily accessible mainly to small and medium enterprises. Overall, the BOVESPA MAIS listing rules are similar to those applied to the New Market, and companies adhering to the BOVESPA MAIS can have their capital made up of preferred shares, which cannot, nevertheless, be traded. Custody and clearance of transactions involving securities are carried out by a clearing house of BM&FBOVESPA and are carried out, as a general rule, on the second and third business days following the respective transaction date (ﬁnancial and physical settlement, respectively). ii. Going regional

Back in the early 1990s, economists and policymakers had high expectations about the prospects for capital market development in emerging economies. This led to significant reforms, including financial liberalisation, the establishment of stock exchanges and bond markets, and the development of regulatory and supervisory frameworks. These reforms, together with improved macroeconomic fundamentals and capital market-related reforms, such as the privatisation of state-owned enterprises and the shift to privately managed defined contribution pension systems, were expected to foster financial development.

In November 2014 the São Paulo Stock Exchange (Bovespa) expressed its intention to acquire up to 15 per cent of the main Latin American Stock Exchanges. Even though it cannot be considered as a merger proposal between both stock exchanges, it has prompted debate as to how important it is to move forward with regional stock exchange integration to improve their competitiveness. iii. The Organised OTC Market

The Organised OTC market is a trading environment managed by institutions authorised by and subject to the oversight of CVM that offers a trading system and establishes self-regulatory rules and mechanisms. A number of securities may be traded at the Organised OTC market (1) shares, (2) debentures, (3) audiovisual certiﬁcates of investment, (4) quotas of closed-end investment funds, including real estate funds and credit rights investment funds, (5) warrants, (6) indexes representing share portfolios, (7) put and call options over securities, (8) subscription rights, and (9) subscription receipts. CETIP S.A. (Balcão Organizado de Ativos e Derivativos) is an Organised OTC entity that also operates as custody and clearing house. iv. Brazilian Financial and Capital Markets Association – ANBIMA

ANBIMA is a private regulatory agent that currently represents more than 340 institutions, including commercial, multiple and investment On 1 June 2011, ANBIMA approved a new self-regulatory code (‘ANBIMA Code’) that sets out certain disclosure standards to be followed by its members while coordinating public offerings of securities in the Brazilian market. The ANBIMA Code establishes operational standards similar to those established in more mature countries in terms of capital markets organisation.

The objective of the ANBIMA Code is to establish full disclosure standards on which the activities

Doing Business in Latin America MARCH 2016 65 of financial institutions in the Brazilian capital market must to be based on. Going beyond the requirements provided for in the Brazilian law, the self-regulatory regime regulated by the ANBIMA Code is similar to the ones adopted in modern self-regulatory regimes throughout the world and it created uniform rules for the public distribution of fixed and variable income securities in the primary and secondary markets. According to the ANBIMA Code, financial institutions acting as coordinators of underwriting syndicates (underwriters) are also responsible for the contents of prospectuses and Brazilian 10-K-like forms (formulários de referência). They are also required to conduct independent due diligence to verify all material information concerning the issuer’s business, properties and financial status, relevant securities and other material facts that may have a bearing on an investor’s decision with regard to offered or requested investment funding.

The ANBIMA Code also establishes comprehensive rules for the minimum content of the prospectuses and Brazilian 10-K-like forms (formulários de referência), namely: (1) information concerning risk factors, with no mitigations, (2) description of the issuer’s main sector-related aspects, (3) description of the issuer’s business and corporate governance, environmental protection and social responsibility policies, (4) management’s discussion and analysis of the issuer’s ﬁnancial condition and results of operations carried out in the three previous ﬁscal years, (5) information about the issuer’s existing securities and securities to be issued, (6) relevant administrative and judicial proceedings that affect the issuer, (7) description of operations with related parties and underwriters for issuance of securities, and (8) description of operations with underwriters acting as coordinators of the offering. v. Financial and Capital Market

Non-residents that invest in Brazilian financial and capital market under the 2,689 Regime are subject to a more favorable tax treatment: (1) income arising from swaps, investment funds and non-deliverable forward agreements effected outside the Brazilian stock exchange are subject to taxation at a flat rate of 10 per cent; (2) fixed income investment and income arising from financial transactions carried out outside the Brazilian stock exchange are subject to a 15 per cent rate; and (3) capital gains derived in stock exchanges, commodity exchanges, futures exchanges and others alike are exempt from taxation. Brazilian law prevents the abovementioned more favorable tax treatment from applying to foreign investors residing or domiciled in black-listed jurisdictions.

E. Offshore vehicles providers in Latin American countries i. General Features

After World War II Brazil played a major role in efforts to establish a free trade zone in Latin America and was one of the founders of the Latin American Free Trade Association (LAFTA), created under the Montevideo Treaty of February 16, 1960 signed by Brazil, Argentina, Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, Uruguay and Venezuela. The main goals of LAFTA were the gradual establishment of a Latin American common market and the promotion of integration efforts at regional level.

With the signing of the Montevideo Treaty in August 12, 1980, those same states founded the

66 Doing Business in Latin America MARCH 2016 Latin American Integration Association (LAIA), ‘in order to advance the integration process and promote economic and social development, harmony, and balance throughout the region’. The 1980 Montevideo Treaty sets forth important principles regarding the integration process: (1) pluralism; (2) convergence; (3) ﬂexibility; (4) differentiated treatment; and (5) multiplicity. Those principles signiﬁcantly differ from the main contours of the trade liberalisation scheme set forth by the 1960 Montevideo Treaty which established LAFTA.

Within the scope of limited trade agreements (enabled under the LAIA Treaty of 1980) Brazil and Argentina have signed important bilateral treaties, laying the groundwork for a fast growing bilateral common market area. These included: the Integration Development and Cooperation Treaty, signed in Buenos Aires on November 29, 1988; twenty-four Protocols, followed by other bilateral agreements on speciﬁc topics, including a Treaty for the Establishment of a Statute for Brazilian-Argentine Bi- national Companies, signed on 6 June 1990. Further efforts on regional integration process led to the establishment of MERCOSUR in 1991, according to the provisions of the Asunción Treaty, which was concluded between Argentina, Brazil, Uruguay and Paraguay on 26 March 1991. ii. LAIA

The main legal framework of LAIA speciﬁes three mechanisms for the establishment of preferential trade areas in Latin America, namely: (1) regional tariff preferences for products originating in a LAIA Contracting Party, regarding tariffs applicable to exports to third countries; (2) regional scope agreements to be negotiated and concluded among Contracting Parties; and (3) partial scope agreements between two or more LAIA Contracting Parties (see for instance Resolution No. 2 of the Foreign Ministers Council of 12 August 1980, on partial scope agreements concluded under the LAIA umbrella).

Regional or partial scope agreements are designed to cover tariff relief and trade promotion, as well as other policy aspects concerning regional integration, such as economic complementation; agricultural trade; cooperation in ﬁnancial, tax, customs and health matters; scientiﬁc and technological cooperation; environmental protection; pharmaceutical goods in transit; tourism promotion; technical standards and other areas. Under the framework of LAIA, Brazil has also signed multilateral economic agreements with Argentina, Chile, Mexico, Uruguay and Venezuela in 1995, and, bilaterally, Economic Assistance Agreements with Chile (1996, 2006), Bolivia (1997, 2005) and Mexico (2002) and a Limited Economic Assistance Agreement with Suriname (2005).

Particularly with regard to limited agreements, Contracting Parties may negotiate several matters related to the regional integration process, such as (1) rules on trade conduct: subsidies and countervailing duties; unfair trade practices; licenses and import procedures; and (2) other rules on non-tariff matters: payments; financial cooperation; tax cooperation; cooperation in animal and plant health; customs cooperation; transport facilitation; and government procurement. In addition, within the context of LAIA Contracting Parties have implemented several preferential systems comprised of market liberalisation lists and cooperation programs, such as in the fields of business, investment strategies, financing and technological support. LAIA Contracting Parties have also accorded preferential treatment to certain landlocked countries in the region (such as Bolivia, and Paraguay), by means of countervailing measures aimed at favoring their full participation in regional integration.

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Since the Montevideo Treaty of 1980 is a ‘framework treaty’, the institutional and normative development of the integration process between Latin American countries is further complemented and shaped by other multilateral regional agreements, treaties and organisations, such as the Andean Community, MERCOSUR, the G-3 Free Trade Agreement and UNASUL. In this sense, LAIA has established a consensus as to the ﬂexibility and convergence of principles guiding the regional integration processes in Latin America, for the purpose of deepening and expanding a common economic area. This initiative was based on a market- oriented approach, but also on a gradual and open development of the integration process. iii. MERCOSUR

The Asunción Treaty signed in Paraguay on 26 March 1991 announced the creation of the Common Market of the South – MERCOSUR, with the aim of establishing a common market between Brazil, Argentina, Uruguay, and Paraguay (the primary MERCOSUR State Parties), wherein the following objectives were established:

a. Free circulation of goods, services, and production factors among member countries, by means of elimination of tariff and nontariff barriers to trade among such countries;

b. Establishment of a common external tariff and adoption of a common trade policy at the regional and international levels;

c. Coordination of macroeconomic sectoral policies among member countries, in such areas as foreign trade, agriculture, industry, tax issues, foreign exchange, capital, services, customs policy, transport and communications, and any other items that might subsequently be agreed upon; and

d. Commitment on the part of member states to harmonize their laws, with a view to achieving full integration.

The institutional framework of MERCOSUR is based on rules established under the Asunción Treaty and the Ouro Preto Protocol (Additional Protocol to the Asunción Treaty on the Institutional Framework of MERCOSUR of 1994), which stresses the objectives and principles of the organisation, particularly the implementation of a Custom Union as one of the stages for consolidating a Common Market.

This process, as previously mentioned, is characterised by the gradual elimination of the domestic tariff and regulatory constraints. Advances in the consolidation mechanisms of MERCOSUR are proof that the integration process in Latin America, or at any rate in the Southern Cone are no longer merely theoretical, but an important step towards regional integration and cooperation. After 20 years of existence, MERCOSUR has proven that its Member States and Associate Members have actually achieved positive and concrete results. iv. Favourable Tax Jurisdictions and Privileged Regimes

Law 11,727/2008 introduced a new concept of tax haven in the Brazilian legislation, recognizing the difference between Favorable Tax Jurisdictions and Privileged Tax Regimes. On 7 June 2010, the

68 Doing Business in Latin America MARCH 2016 Brazilian Internal Revenue Service (Receita Federal) issued two separate lists: (1) the ﬁrst one lists countries and dependent territories/areas that do not tax income or tax it at a rate of less than 20 per cent at most or whose law does not grant access to information about the corporate structure of legal entities or their ownership (also known as the ‘Black List’); and (2) the second one lists regimes that are considered Privileged Tax Regimes under Brazilian law (also known as the ‘Grey List’).

According to Brazilian tax rules, the following jurisdictions fall under the classiﬁcation of Favorable Tax Jurisdictions: Andorra, Anguilla, Antigua and Barbuda, Dutch Antilles, Aruba, Ascension Island, Commonwealth of the Bahamas, Bahrain, Barbados, Belize, Bermuda, Brunei, Campione D’Italia, Channel Islands (Alderney, Guernsey, Jersey and Sark), Cayman Islands, Cyprus, Singapore, Cook Islands, Republic of Costa Rica, Djibouti, Dominica, United Arab Emirates, Gibraltar, Grenada, Hong Kong, Kiribati, Lebuan, Lebanon, Liberia, Liechtenstein, Macau, Madeira, Maldives, Isle of Man , Marshall Islands, Mauritius, Monaco, Montserrat Islands, Nauru, Niue Island, Norfolk Island, Panama, Pitcairn Island, French Polynesia; Queshm Island, American Samoa, Western Samoa, San Marino, Saint Helena Island, St Lucia, the Federation of Saint Kitts and Nevis, Island of Saints Peter and Miquelon; Saint Vincent and the Grenadines, Seychelles, Solomon Islands, St. Kitts and Nevis, Swaziland, Switzerland (currently suspended from the list by ADE RFB n.11/2010), Sultanate of Oman, Tonga, Tristão da Cunha, Turks and Caicos Islands, Vanuatu, American Virgin Islands, British Virgin Islands.

According to Brazilian tax rules, the following jurisdictions fall under the classiﬁcation of Privileged Tax Regimes: Holding companies incorporated under Danish law with no substantial economic activity; Holding companies incorporated under Dutch law with no substantial economic activity (currently suspended from the list by ADE RFB n.10/10); International trading companies incorporated under Icelandic law; Offshore companies incorporated under Hungarian law; LLCs settled under US state law, held by non-residents and not subject to federal income tax in the U.S.; Entidad de Tenencia de Valores Extranjeros incorporated under Spanish law (currently suspended from the list by ADE RFB n. 22/10); International trading companies (ITC) and international holding companies (IHC) incorporated under Maltese law.

Doing Business in Latin America MARCH 2016 69

70 Doing Business in Latin America MARCH 2016 Chile

Doing Business in Latin America MARCH 2016 71 iv. Chile

A. Foreign investment in Chile

Chile is a country that stands out due to the development of its strong institutional framework; it is one of the Latin American countries which offer the best standards in politic, economic and social stability.

Evidencing this, as of May 2010, Chile is the ﬁrst South American country in becoming a member of the Organisation for Economic Co-operation and Development (OECD), which assembles 34 developed and emerging countries.

Furthermore, in Chile there are different and attractive alternatives for foreign investment within the different sectors: mining, infrastructure, energy, services, tourism and industry, among others. In the World’s Investments Report of the United Nations Conference on Trade and Development (UNCTAD) of 2014, Chile appeared within the ﬁrst 20 main world economies in receiving foreign investment.

Besides the local regulations that govern foreign investment, Chile has international policies in order to commit our country with many others into Free Trade Agreements, Investment Promotion and Protection Agreements and Treaties for the Avoidance of Double Taxation.

In addition, Chile is a member of the International Centre for Settlement of Investment Disputes, which provides facilities for conciliation and arbitration of international investment disputes. i. Local Rules in Foreign Investment

In general terms, these local rules have the purpose of, on one hand, promote the direct entry of foreign capital by giving the investors certain assurances and beneﬁts, and on the other, keep the Chilean Central Bank informed about the entrance and repatriation of such investments.

Notwithstanding the foregoing, foreign investors shall enter their capital through an entity which is a part of the Formal Exchange Market (Mercado Cambiario Formal), which is integrated by commercial banks operating in Chile and also other entities expressly authorised by the Chilean Central Bank.

In broad terms, there are two main mechanisms for purposes of entering capital into the country: the ﬁrst one is the reporting system of the Chapter XIV of the Central Bank Foreign Exchange Regulations (the ‘Chapter XIV’), which offers a fast route to foreign investments over US$10,000, and the other is the foreign investment regulation rules by the Foreign Investment Statute contained in the Decree Law No. 600 of 1974 (the ‘DL 600’). At the time of this publication, this second mechanism is currently going through some changes that the authority has approved and is pending of ﬁnal enactment. The amendments goal is to implement a system in accordance to the recommendations of the OECD, mainly to improve the incentives to attract direct foreign capitals to

72 Doing Business in Latin America MARCH 2016 the country. Consequently, this new regulation will partially amend the DL 600, being replaced by the new Foreign Investment Framework Law on 1 January 2016, or the later date of its enactment. These last two regulations (the Foreign Investment Statute and the new Foreign Investment Framework Law in its replacement) substantially grant to investors, among other guarantees, an equal treatment compared to local investors and other tax beneﬁts, but only for amounts over US$5m.

A. CHAPTER XIV OF THE CENTRAL BANK FOREIGN EXCHANGE REGULATIONS

As stated above, this mechanism provides an easy alternative to enter foreign loans, deposits, investments and equity contributions over US$10,000 into the country, since there is almost no intervention from the authorities. This mechanism requires the parties to inform to the Chilean Central Bank all foreign investments over the amount indicated above, through a simple and standard form. In case of foreign loans, for example, the information provided shall include some details about the borrower, the lender, the amount, terms, interest rates and purpose of the loan, guarantees, the schedule of payment and other special clauses. Once this form is received by the entity of the Formal Exchange Market, the later reports it directly to the Central Bank.

With respect to the repatriation of investments, please note that under Chapter XIV the investor may at any time repatriate the investment and the proﬁts derived from it without any amount limitation, as long as this remittance of foreign currency is conducted through a Formal Exchange Market entity and informed to the Central Bank.

B. FOREIGN INVESTMENT FRAMEWORK LAW, IN REPLACEMENT OF THE FOREIGN INVESTMENT STATUTE CONTAINED IN THE DL 600

The main guarantees granted to foreign investors by the new Foreign Investment Framework Law, also contained in the former regulations of the Foreign Investment Statute, are related to the remittance of the invested capital and the proﬁts; the access to the Formal Exchange Market; the guarantee of no arbitrary discrimination and some tax beneﬁts.

This regime is granted to the entry of foreign capital or assets owned by a foreign investor, or by a local company controlled by a foreign investor, for amounts over US$5m. It is also granted to foreign investments, over such amount, destined to acquire more than the ten per cent of a local company’s equity.

Those who qualify as a foreign investor, under the terms of the new Foreign Investment Framework Law, could obtain from the Agency for Foreign Investment Promotion the corresponding certiﬁcate to enter into the applicable regime to the foreign investors.

The beneﬁts granted to the direct foreign investment by the new Foreign Investment Framework Law are summarised as follows:

a. Foreign investors have the right to remit abroad the entered investment and the net proﬁts obtained from it, at any time and without any amount limitation, provided the prior compliance of all the Chilean taxes and/or duties;

b. Foreign investors have the right to access the Formal Exchange Market to sell their foreign

Doing Business in Latin America MARCH 2016 73

currencies to enter the capital into the country, and also to obtain the foreign currencies needed to remit abroad the entered investment and their proﬁts, at the exchange rate freely agreed between the parties;

c. Foreign investors have the right to the VAT exemption in the importation of capital assets destined to the development of the foreign investment business in Chile, as long as it fulﬁls with the VAT Law requirements; and

d. The foreign investors have the right to be subject to the common legal regime applicable to local investors, without any arbitrary direct or indirect discrimination. This guarantee is fully supported by the Chilean Constitution, according which all individuals in Chile are treated equally under the law, regardless their nationality, domicile, residence or any other arbitrary criteria that the law or any authority may impose breaching these Constitutional provisions.

Notwithstanding the above, the new Foreign Investment Framework Law will grant to the foreign investors who may prefer to be subject to the former regulation granted by the Foreign Investment Statute contained in the DL 600, the opportunity to transfer foreign capital into Chile under the terms of such DL 600, within the period of four years counted as of 1 January 2016, or the later date of enactment of such new law.

Therefore, foreign investors would enter into a legally-binding agreement with the State of Chile, for purposes of bringing capital over US$5m to the country, under certain terms and conditions that are not allowed to be modiﬁed by the sole discretion of the State. Under this agreement, the foreign investors shall bring their capital within a period of three years, and eight years in case of mining projects, as a general rule.

This mechanism requires that the investor file an application form into the corresponding authority, including relevant information as to the amount and purposes of the investment in Chile, and also providing some information regarding the identity of the investor. If the investment is approved by the corresponding authority, a foreign investment agreement shall be subscribed before a Notary Public in Chile, between the foreign investor and the Chilean State. Notwithstanding the later, foreign investors are allowed to enter the funds on the same date that the mentioned application is filed and to allocate these amounts to the foreign investment agreement that will be executed. Under this legally-binding agreement with the Chilean State, foreign investors have the right to be subject to a fixed income tax rate for a period of ten years counted from the beginning of the activities of the foreign investor. This period could be increase up to 20 years for some projects (ie, industrial and extractive investments of US$50m or more). Otherwise, the foreign investor could prefer to be subject to the regular tax rates.

The foreign investors, who already had entered into a foreign investment agreement with the Chilean State under the Foreign Investment Statute contained in the DL 600, will fully maintain their rights and obligations granted by such agreements, as long as they were subscribed before 1 January 2016. ii. Authorisations vs Limitations or Prohibitions

As a general rule, the Chilean law does not provide any speciﬁc limitation or prohibition about the participation of foreign investment in the different areas of the national economy. In fact, the

74 Doing Business in Latin America MARCH 2016 Chilean Constitution provides to all the individuals the right to develop any economic activity, as long as its corresponding regulations are duly fulﬁled.

There are some minor restrictions or limitations for the foreign investment; for example, in areas considered relevant for the national sovereignty as the ownership of real estate in the borders of the country; also the law has imposed some restrictions to the nationality of the owners, directors and representatives in the mass media businesses, in the cross-border transportation regime and according to the ﬁshing law, there are another special requirements regarding the nationality and residence of those who operate aquaculture licences. iii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

In Chile, the public infrastructure as highways, tunnels, airports, public hospitals, schools, buildings, prisons and telecommunication services, among other projects, are built and operated through a concession system created in 1991, in virtue of which the Chilean government and the licensees are bound under a model of public-private partnerships (PPPs).

Under the PPPs model, the government opens bidding processes to build, operate, repair and maintain public infrastructure needed in accordance with the public interests of the country. Once the projects are built and fully operational, the licensees will be able to recover their investment and get proﬁts in a long-term period, through the payments of the users of the project, or through the subsidy of the government. Finally, the licensees transfer the public infrastructure to the State.

According to the Concessions Law, public biddings could be local or international; and the individuals and companies either local or foreign who fulﬁl the legal requirements, are allowed to participate in such biddings.

However, in order to enter into the concession agreement with the Chilean government, foreign licensees, as well as local licensees, shall incorporate a Chilean company with the exclusive corporate purpose of execute, repair, maintain and operate such public infrastructure. iv. Treatment of Foreign Investment in Mining Activities

The mining activities in Chile are regulated by the Constitution, the Constitutional Organic Mining Law, the Mining Code and other speciﬁc regulations.

According to the Chilean Constitution, the State is the absolute and exclusive owner of all the mines, despite the property rights of the individuals or companies over the real estate where those mines are situated. The surface land will be subject to legal obligations and limitations in order to facilitate the exploration, exploitation and proﬁts or such mines.

There are no differences in the treatment of local or foreign investment in mining, based on the constitutional principle of no arbitrary discrimination. Therefore, individuals and companies are able to claim for an exploration or exploitation mining concession, regardless their nationality, domicile, residence or any other arbitrary criteria. However, there are some minor restrictions to foreign investors who are nationals of bordering countries to apply for mining concessions located in the border of the country.

Doing Business in Latin America MARCH 2016 75

Along the same lines, local and foreign investors shall comply with the same legal obligations in the execution of mining concessions; payment of mining licences, comply with mining safety regulations and environmental obligations, among others.

In general, the exploration and exploitation concessions can be granted for private individuals or companies, over all minerals resources permitted by the law, with the exception of liquid or gaseous hydrocarbons (oil and gas), lithium, deposits of any kind located in the sea under Chilean jurisdiction or located in areas deemed by law to be important for national security. Those mineral resources not subject to the concession system can be explored and exploited directly by the State or its companies, or by administrative concessions or special operation contracts.

Surface clays, artiﬁcial salt pits, sands, rocks and other materials used directly in construction, are ruled by the common law or by the special provisions set forth in the Mining Code to this effect; therefore, they are not considerate mineral substances and they are not subject to the mining concession system described in this section.

The mining concessions are granted by the civil courts, through a non-discretionary process, once the investor has fulﬁled the requirements established by the Mining Code. Such judicial award will have the duration and shall set the rights and obligations that the Constitutional Organic Mining Law indicates.

The exploration mining concessions are granted for two years. The concessionaire may request an extension for another two years period, prior waive of the half of the allocated area. Then, the owner of such exploration concession can apply preferentially for an exploitation concession, being in such case entitled to extract the mineral resources within the limits of such area, for an indeﬁnite period.

In case of the foreign mining investments of US$50m or more, entered into Chile trough the Foreign Investment Statute contained in the DL 600 that will be also available for a period of 4 years since the enforcement of the new Foreign Investment Framework Law, foreign investors will have the right, prior compliance of the requirements established in the Foreign Investment Statute, to be subject to a fixed rate in the specific mining taxes, for a period of 15 years counted from the beginning of their activities. Also, they will not be affected to any other new mining taxes or modifications in the calculation of the value of mining licences. v. Treatment of Foreign Investment in Real Estate (rural and urban properties)

As a general rule, there are no differences in the treatment of local or foreign investment in acquiring real estate in Chile, based on the constitutional principle of no arbitrary discrimination. Therefore, local and foreign individuals or companies who may invest in real estate shall comply with the same regulations, based on the fact that no governmental authorisations are required in this regard.

There are, however, some restrictions. For example, and as mentioned before, real estate located in border zones may not be acquired by foreign individuals from the neighbouring countries or by companies located in such border countries, with more of 20 per cent of its equity owned by entities of the same country. In these cases, the President could exempt the foregoing prohibition, through a supreme decree.

76 Doing Business in Latin America MARCH 2016 vi. Treatment of Foreign Investment in Agribusiness Activities.

According to the general rules stated above, there is not a special treatment for foreign investors in agribusiness activities, compared to local investors. The tax beneﬁts used by the participants in this area of the economy are available to both of them.

Actually, foreign investors have been very important in the development of the agribusiness industry, which includes wine, fruit and other products; also related to the processed food, ﬁshing and farm ﬁshing, and the industry of dairy products, meat and olive oil.

The Mediterranean climate of Chile, having wet winters and warm summers, and its other natural conditions offer the best scenario for this sector of the economy. This natural advantage allows having a year-round production, which jointly with the protection given by the natural barriers as the desert, mountains and the ice ﬁelds, makes Chile appearing as one of the countries with the best phytosanitary conditions to develop an agricultural and exportation business. vii. Treatment of Foreign Investment in the Rendering of Public Services

In the public services industry, there are no differences in the treatment of local or foreign investment in Chile. As described in relation with the PPP projects, local and foreign entities are allowed to participate in public biddings to provide public services.

Regarding the services provided by the privates to the government entities, the Supply and Services Agreements Law establishes that local and foreign entities are allowed to enter into supply and services agreements with the Chilean State, as long as they comply with some legal requirements, and only distinguishes different procedures depending on the amount of each agreement. In cases of major amounts, that provision of services will be awarded through public biddings, in other minor agreements through private biddings and in some cases the government entities will be allowed to enter into direct contracts with the suppliers of such services. In any of these scenarios, the candidates should be able to secure the seriousness of the offer, and the chosen suppliers also to secure the accurate and timely fulﬁlment of the obligations under the contract, according to the speciﬁc requirements established in the basis of the bid.

Notwithstanding the foregoing, as well as in the PPPs projects, as a general rule the foreign suppliers shall incorporate a Chilean company or an agency of the foreign company, with the exclusive corporate purpose of execute such agreement.

B. Rendering of public services i. General Framework

The rendering of public services system in Chile has changed several times throughout the last couple of decades, thus ‘making Chile one of the ﬁrst countries in introducing libertarian economic reforms regarding public services.’29

29 ‘Marco Regulatorio de los Servicios Básicos en Chile’, Eduardo Saveedra P, Iades, Universidad Alberto Hurtado, Julio 2005, pg. 3. http://fen. uahurtado.cl/wp-content/uploads/2010/07/inv167.pdf. Free Translation.

Doing Business in Latin America MARCH 2016 77

The economic world crisis in 1929 made politicians distrust the capitalist model and several Latin American governments, including the Chilean one, opted for an interventionist State. During the 1920s and 1930s, the Chilean State assumed a controlling role and reorganised the country’s economy by creating a Welfare State model. This new model promoted the creation of various State enterprises dedicated to overseeing several public services. New institutions such as area-speciﬁc Superintendencies were established under this model (ie: Superintendency of Banks), with the objective to supervise and enforce regulations and laws. In 1965 the state controlled only a quarter of enterprises that provided public services. However, by 1973, all (100 per cent) public services were controlled by State companies.30

By the begging of 1974 the economic model was reformed, in order to minimise State’s excessive intervention in matters of national economy. Thus, at the beginning of 1982, several privatisation reforms were applied to healthcare, housing sector, pension funds, telecommunications, electrical industry, amongst others.

The existence of several natural monopolies, made it necessary to establish a regulatory framework before the privatisation of this companies.

‘The laws enacted in 1982 that regulated electrical and telecommunications industry had the purpose of establishing several conditions that assured consumers the beneﬁts caused by the efﬁciency increase expected from their privatisation, also the adequate operation of the markets and the regulation of those services provided under monopolistic conditions.’31

Currently the telephone and electrical industries, sanitary services and seaports are mainly provided by private companies which operate under several laws, rules and public tenders established and organised by public authorities.

Unlike in other Latin American countries, Chile does not have a single entity regulating the rendering of public services. Instead, each industry is regulated by a speciﬁc legal framework which is established and controlled by a certain institution. ii. Governmental Monopoly vs Private Initiative

The current institutional structure of public services in Chile is characterised mainly by the participation of private companies operated by strictly private criterions. This is explained by the objective of the regulatory framework which is to stimulate the entrance to those potentially competitive market segments and to assure open access to all competitors. However, in those markets where competition is deﬁnitively not possible; fees, quality conditions and even technical norms are established among other means.32

This is strictly related with the subsidiarity principle established in the Chilean Constitution of 1980,

30 ‘La Transformación Económica de Chile’, Felipe Larraín y Rodrigo Vergara, ‘Privatizaciones: Reforma estructural pero Inconclusa, Chapter 4, Dominique Hachette A.de la F. See page 115, Chart 2 corresponding to ‘Participation of State Companies in Production’. Free Translation.

31 ‘Efectos de la Privatización de Servicios Públicos en Chile’, Serie de estudios Económicos y Sociales, Banco Interamericano de Desarrollo, Ronald Fischer and Pablo Serra. Pg 2. Free Translation. 32 ‘Marco Regulatorio de los Servicios Básicos en Chile’, Eduardo Saveedra P, Iades, Universidad Alberto Hurtado, Julio 2005, pg. 4. http://fen. uahurtado.cl/wp-content/uploads/2010/07/inv167.pdf. Free Translation.

78 Doing Business in Latin America MARCH 2016 by which the State intervention in markets is neatly delimitated. Although the constitution does not give a definition for this principle, it can be explained as the recognition of the supremacy of the human person above the State, and to allow individuals to create intermediate groups through which society is structured (ie, companies). In this regard there is a ‘Negative Perspective’ of the principle, which aims to set to the State those functions which are not possible to delegate, such as foreign affairs, administration of justice, national defence, among others, and a ‘Positive Perspective’ by which the State is allowed to provide, fulfiling certain requirements, some services or activities aimed to the common welfare, and that private organisations fail to provide. This principle is outlined in economic terms in article 19 n°21, where Chilean Constitution notes that ‘The State and its organisms may develop either corporate or business activities and engage in them provided a law of qualified quorum authorises them to do so’. Furthermore, those activities executed by state companies must subjected by common law, applicable to any private party, except for legal exceptions, also provided by a law of qualified quorum.33 iii. Privatisation General Rules

As mentioned above, the privatisation process of public services in Chile began over 25 years ago and ended in the 1990s with the privatisation of sanitary services.

Decree Law No 1056 of 1975, authorised State’s asset disposal. This process consisted of several mechanisms such as, company sales, public tenders and the sale of shares through the Stock Exchange. As a consequence, currently, there are no general rules which regulate the privatisation of public services.

‘To avoid the regulator’s arbitrariness in the privatisation process, several laws and rules for each industry were enacted. They established a ﬁxation fee method and their revision’s frequency, administrative and dispute resolution processes.’34 Moreover, one of the ‘main aspects of the Chilean regulatory model is that all laws do not distinguish the origin of the companies’ property.’35

Another important aspect of the Chilean legislation in this matter is the protection of consumers from monopolistic conduct displayed by basic services enterprises, as well as the stimulation of the companies’ owners to do the necessary investments in their provision. Chile’s antitrust and competition laws apply to all companies doing business in the Chilean market.

The Chilean regulatory framework intended to be equitable by assuring investors that the regulator would not act in an opportunistic or arbitrary way. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

The rendering of public services by private parties in Chile has no major limitations or prohibitions.

33 ‘Constitución Política de la Republica’, Chapter I, Article 1°, and Chapter III, Article 19° 21, Editorial Jurídica de Chile, 1980. Free Translation. 34 Marco Regulatorio de los Servicios Básicos en Chile’, Eduardo Saveedra P, Iades, Universidad Alberto Hurtado, Julio 2005, pg. 5. http://fen. uahurtado.cl/wp-content/uploads/2010/07/inv167.pdf. Free Translation.

35 Marco Regulatorio de los Servicios Básicos en Chile’, Eduardo Saveedra P, Iades, Universidad Alberto Hurtado, Julio 2005, pg. 5. http://fen. uahurtado.cl/wp-content/uploads/2010/07/inv167.pdf. Free Translation.

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The Chilean Constitution establishes in Article 19 n°21 the right to develop any economic activity, as long as it obeys moral conduct, public order or national security, and it respects the norms that regulate it.

The regulatory framework establishes different prohibitions and limitations speciﬁc to each industry.

In regards with the telecommunications industry; the General Law of Telecommunications (Law 18.168), establishes a regime of public concessions which may be granted to a legal entity or a corporate entity, for a 30-year period, which can be renewed. This law states that (article 21), the representatives of these entities must be legal residents in order to create a company in the telecommunications industry. As a prohibitory statute, this law states that Presidents, Directors, General Managers, Administrators and legal representatives of telecommunication companies cannot have been more than three years and a day in prison.

The decree of law No1 (also known as General Law of Electrical Services), deﬁnes a set of rules for public concessions. The Article 13 states that concession in the electrical ﬁeld may only be awarded to Chilean citizens and corporations formed under the country’s laws. However, may not be awarded to limited joint-stock partnerships.

Regarding ports industry, law 19.542 establishes a regime of public concessions, which is developed further on Decree 140 from the Ministry of Public Works. Article 8 of Decree 140 states that individuals who have been convicted for simple crime or felonies which qualify for jail sentences for more than three years and a day in prison, shall not be considered eligible bidders, nor be the non- rehabilitated bankrupt or representative. These causes shall not be applicable after two years since the end of compliance of the conviction.

Finally, according to law 19.886, article 4, in order to contract with the public administration, there are also certain prohibitions to participate in public tenders; this is the case in which providers are condemn for anti-union practices, are condemn for infringement of worker’s fundamental rights , or have been convicted by speciﬁc crimes related to this matter, this should happen within 2 years before to the presentation of the offer, the formulation of the proposal, or the signing of the contract.

C. Real estate

Chilean Law guarantees private property and grants the owner the right to freely dispose of the same, including the right to sell, assign or transfer it in any form, lease, constitute limitations and encumbrances, assign the right to use and occupy it, give it as security to a third party, etc. These matters are mainly regulated in the Chilean Constitution and in the Chilean Civil Code, besides applicable particular regulations depending on the involved industry, use, geographic area, etc. i. Rural Properties – Limitations for Private Parties

The main limitations to private parties regarding rural properties are:

A. INDIGENOUS PEOPLES ACT.

Law 19,253 provides that indigenous lands may not be disposed of, attached, encumbered or

80 Doing Business in Latin America MARCH 2016 acquired through adverse possession, except in favour of indigenous communities or individuals belonging to the same ethnic group. Nevertheless, they may be subject to liens upon authorisation by the National Agency for the Furtherance of Indigenous Peoples (CONADI by its Spanish acronym). These liens cannot include the home of an indigenous household and the land it needs to survive.

Lands belonging to ‘indigenous individuals’ may be leased, conveyed under bailment or assigned to third parties for their use, enjoyment or administration for a maximum of ﬁve years, but lands owned by ‘indigenous communities’ cannot be subject to those acts.

In any case, these indigenous lands, with the prior consent of CONADI, may be exchanged for non- indigenous lands having comparable commercial value, duly ascertained; the latter will then be deemed to be indigenous lands and the former will no longer enjoy this status.

B. BORDER TERRITORY

Decree Law 1,939 establishes limitations on the acquisition of real estate or State property in border areas.

Article 6 of the Decree states that ‘public lands located at a distance of 10 kilometres, measured from the border, can only be obtained in ownership, leasing or any other title, by Chilean naturals or Chilean legal entities. This provision applies as well to State property located to 5 kilometres of the coast’.

In addition, Article 7 of the aforementioned legal body sets forth a prohibition on nationals of countries bordering Chile (ie, Argentina, Bolivia and Perú) to acquire ownership and other rights or possession of State property situated wholly or partly in areas of the country, declared as ‘border territory’ under Decree with Force of Law Nº 4 of 1967, of the Ministry of Foreign Affairs, except in cases previously authorised by supreme decree of the President of the Republic of Chile, based on considerations of national interest. This prohibition extends to companies or legal entities with headquarters in a neighbouring country, or whose capital is owned 40 per cent or more by nationals of any of such countries, or whose effective control is exercised by the latter.

C. ACCESS TO BEACHES

Article 13 of Decree Law 1,939 provides that the owners of adjoining land with sea beaches, rivers or lakes, should provide free access to them for tourism and ﬁshing purposes, provided that no other roads or public pathways are available for that purpose. However, determination of the access is not arbitrary, but should be deﬁned by the competent Regional Governor, after hearing to the owners, lessees or tenants of the land.

D. MINIMUM SUBDIVISION

Decree Law 3,516 provides in Article 1 that agricultural property may be freely divided by their owners, but the resulting batches must have not less than 0.5 hectare. However, this limitation does not apply in speciﬁc cases as detailed in the same article.

The infringement of this provision is subject to the absolute nullity of any act or contract granted in

Doing Business in Latin America MARCH 2016 81 contrary. A ﬁne of 200 per cent of the ﬁscal value (for real estate tax purpose) could be applied by the competent Municipality Court. ii. Urban Properties – Limitations for Private Parties

The main limitation for private parties regarding urban properties are those resulting from urban planning and zoning regulations, which are established mainly in the General Urbanism and Construction Law and its Ordinance, and in the different types of planning instruments.

A. GENERAL URBANISM AND CONSTRUCTION LAW (LGUC BY ITS SPANISH ACRONYM)

LGUC is the general regulation that contains the principles, roles, powers, responsibilities, rights, sanctions and other norms that apply to public entities, professionals and private parties in relation to urban planning, urbanisation and constructions that are executed within the country.

B. GENERAL URBANISM AND CONSTRUCTION ORDINANCE (OGUC BY ITS SPANISH ACRONYM)

OGUC contain the regulations of the LGUC referring to administrative procedures, urban planning, land urbanisation, construction and technical standards for the design and construction which are required to execute such activities in the country.

C. TERRITORIAL PLANNING INSTRUMENTS

According to LGUC, Urban Planning is the ‘process conducted in order to direct and regulate the development of urban centres in relation to the national, regional and communal policies for socioeconomic development.’ Urban Planning is conducted at four levels of action: national, regional, inter-communal and communal. Each territorial planning instrument shall have its own area of jurisdiction in relation to a geographic area and to the speciﬁc matters covered by said instrument.

Territorial Planning Instruments or Zoning Plans may determine the permitted uses of land for a specific area, and what uses of land are excluded or prohibited in that area (Zoning Classification). Territorial Planning Instrument will also determine the regulatory framework applicable to constructions executed within the specified area.

There are six types of uses, which may be applicable simultaneously within a given area, as determined by the Territorial Planning Instrument: residential; equipment; productive activities (industries); infrastructure; public spaces; and green areas.

In order to determine which Zoning Classification applies to a specific land, a Certificate of Previous Information may be requested to the corresponding Municipality, which will identify the area, or subarea where the land is located and the applicable regulatory framework according to the respective Territorial Planning Instrument.

The only manner to change the permitted uses of land (Zoning Classiﬁcation) established in a Territorial Planning Instrument for a speciﬁc piece of land is by means of an amendment to the applicable Territorial Planning Instrument.

82 Doing Business in Latin America MARCH 2016 iii. Expropriation Events

Article 19 Nº 24 of the Constitution states that ‘Nobody can, in any way, be deprived from his/ her ownership, the underlying asset or any of the attributes or essential faculties related to the ownership, except by virtue of a general or special law qualified by the legislature that authorises its expropriation by reason of public benefit or national interest. Anyone whose ownership has been expropriated is enabled to claim before the ordinary courts about the legality of the expropriation act shall have in any event the right to receive compensation for patrimonial harm effectively suffered, which will be defined by mutual agreement or by the above-mentioned courts in a final sentence pronounced in accordance with the law’.

Based on the foregoing, any real estate is subject to the possibility of being expropriated by a ‘public utility’ or national interest cause, according to the Decree Law 2,186 which establishes the speciﬁc expropriation requirements and its conditions. Consequently, prior to acquiring a real estate, it is necessary to review the existing expropriation projects of the Municipality, the Housing and Urban Service and, the Ministry of Public Works.

As provided in the Constitution, in case of an expropriation, the Chilean State shall compensate the affected owner, who will have the right to ﬁle a complaint before the Chilean courts if he/she considers that the offered compensation is not fair.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: Attempts vs Realities

The Republic of Chile currently has three stock exchanges, named ‘Bolsa de Comercio de Santiago, Bolsa de Valores’ (Santiago Stock Exchange), ‘Bolsa de Corredores, Bolsa de Valores’ (Brokers Stock Exchange) and ‘Bolsa Electrónica de Chile, Bolsa de Valores’ (Electronic Stock Exchange). In Chile the stock exchanges are formed as open corporations. Thus, a possible merger of stock exchanges would be regulated by Law No. 18,046 (Corporations Act).

In Chile there have been no merger plans between different stock exchanges existing in Chile. Neither there have been any formal intentions to merge with other Latin American stock exchanges.

In November 2014 the São Paulo Stock Exchange (Bovespa) expressed its intention to acquire up to 15 per cent of the main Latin American Stock Exchanges, within which the Santiago Stock Exchange would be considered. Even though it cannot be considered as a merger proposal between both stock exchanges, it has prompted debate as to how important it is to move forward with regional stock exchange integration to improve their competitiveness. ii. MILA Market: Current Results and Expectations

The MILA Market, formally known as the ‘Mercado Integrado Latino Americano’, is the ﬁrst multinational stock market integration initiative without any mergers or corporate integration at a global level, and initiated by using only technological tools along with the adaptation and standardisation of

Doing Business in Latin America MARCH 2016 83 the regulations on trading in capital markets and the custody of securities in the four countries. The initial idea was to move forward as much as possible with the integration without having to make any legislative changes. MILA began operating on 30 May 2011 with the involvement of Chile, Colombia and Peru. Since August 2014 Mexico has also been incorporated to MILA.

The purpose of MILA is to increase the international exposure and proﬁle of the markets that integrate it, as well as broaden the offer of products and opportunities for local and foreign investors, originating more liquid, visible, attractive and diversiﬁed securities markets.

Part of this initiative has consisted in the mutual recognition of public offer securities issued in each country, thus making possible the free trading of shares by order routing through the brokers of the participating exchanges of Chile (BCS), Colombia (BVC), Peru (BVL) and Mexico (BMV) to the markets of origin.

One of the most important characteristics of MILA is the fact that none of the exchanges sacriﬁces their independence or their regulatory autonomy. However, the premise of the participating markets is to jointly achieve growth in a context of complementarity.

Likewise, all MILA transactions are performed in the respective local currency, and with book-entry through the local broker; thereby providing easier international transactions with this tool.

Currently, MILA is number one in Latin America with over 700 listed companies in total in the four countries, the largest market in Latin America following Brazil in terms of market capitalisation and number three in terms traded volumes, making it one of the most attractive markets in the region. In addition, six investment funds follow this market, and indices have been created in relation to it: a special index (S&P MILA Andean 40) and two sectorial indices (S&P MILA Andean Financials and S&P MILA Andean Resources).

The total traded volume in the MILA market reached in December 2014 US$18.8bn. The BMV represented 79.05 per cent (US$14.86bn), followed by the BCS with 10.84 per cent (US$2bn), then the BVC with 8.08 per cent (US$1.5bn) and the BVL with 2.03 per cent (US$383m).

In 2016 MILA plans to incorporate the negotiation of ﬁxed income securities in the stock markets of member countries, as well as new indices for the quotation of energy and mining sectors.

Among the main challenges for MILA are the incorporation of credit risk agencies and the adoption of rules that will lead to operational and regulatory harmonisation. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance is a regional integration initiative whose member states are Chile, Colombia, Mexico and Peru. The Paciﬁc Alliance was created on 28 April 2011.

The Paciﬁc Alliance is a strategic platform that seeks to achieve a deep integration of services, capital, investment and movement of people. It is an open and non-exclusive integration process, consisting of countries with related visions of development, and that promote free trade as a driver for growth. It is a dynamic initiative with high business potential.

84 Doing Business in Latin America MARCH 2016 It is focused on modernity, pragmatism and political will to establish an initiative to address the challenges required by the international economy. It offers competitive advantages for international business, with a clear focus on the Asia-Paciﬁc region.

As a whole, the Paciﬁc Alliance constitutes the eighth largest economy and represents the seventh largest exporting entity worldwide. In Latin America and the Caribbean, the block represents 36 per cent of the GDP, concentrates 50 per cent of the total trade and attracts 41 per cent of the direct foreign investment that ﬂows to the region.

The Paciﬁc Alliance has competitive advantages, in the following industries: mining, forestry, energy, agriculture, automotive, ﬁshing and manufacturing, among others.

It is an effective environment of cooperation that promotes innovative initiatives in areas such as: Free mobility of people; Preservation and respect for the environment; Creation of a network of scientiﬁc research on climate change; Academic and student exchange; Cultural promotion; Integration of securities markets; Opening of joint commercial ofﬁces and participation in fairs and exhibitions in shared space; Improved competitiveness and innovation of Micro, Small and Medium-Sized Enterprises; and Tourism.

The following are some of the milestones achieved by the Paciﬁc Alliance:

On 24 August 2012: the ‘Reglamento General de la Plataforma de Movilidad Estudiantil y Académica’ (General Rules of the Platform for Academic and Student Mobility) that seeks to grant up to 100 scholarships per year for undergraduate and postgraduate studies conducted in one of the member countries, as subscribed in Chile.

In September 2012: the Promotion Agencies of all member states opened a joint Trade Ofﬁce in Turkey.

On 21 May 2013: Peru removed the requirement of a Temporary Visa for business travelers for nationals of Mexico, Colombia and Chile.

On 22 May 2013: during the VII Pacific Alliance Summit the ‘Acuerdo para el establecimiento del Fondo de Cooperación de la Alianza del Pacífico’ (Agreement for establishment of the Cooperation Fund of the Pacific Alliance), which will allow the joint development of projects in various areas, was signed.

19–20 June 2013: in Cali, Colombia, the ‘I Macrorrueda de Negocios de la Alianza del Pacíﬁco’ (I Business Matchmaking of the Paciﬁc Alliance) was performed, where 700 exporters and importers, from all four countries, were involved, closing business transactions for an aggregate of US$3.8bn.

23–24 August 2013: in Santiago de Chile, the first meeting of Ministers of Finance of Pacific Alliance was held, where issues such as fiscal and tax exchange information, customs matters, treatment of and restrictions on capital flows, coordination in international financial bodies, regulatory and tax rules for capital markets, volatility in public debt markets, were analysed, among others.

26 August 2013: the conclusion of negotiations on the trade component was announced, waiving tariffs on 92 per cent of the products immediately and the remaining 8 per cent gradually. This

Doing Business in Latin America MARCH 2016 85 was part of the comprehensive agreement included in the Additional Protocol to the Framework Agreement.

10 February 2014: the Additional Protocol to the Framework Agreement was signed.

10–11 June 2014: the II Business Matchmaking Paciﬁc Alliance was performed.

The last Paciﬁc Alliance Summit (IX) took place on 20 June 2014, where the member states declared their conviction and commitment to further advance in the objectives and guidelines of the Alliance. The cornerstones of the Alliance reside, ﬁrst, in the principle of free movement of goods, services, capital and people and, secondly, in cooperation among member states.

On that occasion, several initiatives were proposed by the member countries. Among which a highlight was the presentation of the entrepreneurship agenda in relation to Small and Medium Enterprises (SMEs) of the Paciﬁc Alliance, which seeks to explore a mechanism for ﬁnancing, investment and support for the entrepreneurs of member countries.

Furthermore, on such occasion the work programme of the Technical Innovation Group was presented, in order to design, propose and coordinate programmes and activities that promote productive and competitive improvements in the member states of Paciﬁc Alliance.

The Pacific Alliance is in constant activity. Proof of this is the ‘First public-private meeting on financial integration between member countries of the Pacific Alliance’ which was held in Chile, on 11 March 2015

E. Offshore vehicles providers in Latin American countries i. General Concept: Legal Framework and Scope of the General Activities

Law No. 20,712 on the management of third party funds and individual portfolios came into force on 8 May 2014 (the Law), with the aim of transforming Chile into an exporter of ﬁnancial services, particularly by turning Chile into a preferred domicile for funds with a Latam strategy.

To encourage foreign investment in Chilean funds, the Law provides several tax incentives. Before the Law was enacted, foreign (ie, non-resident) investors participating in closed-end Chilean funds had to pay a tax at a rate of 35 per cent on capital gains that resulted from such investment. In replacement of the current and higher withholding rates, a withholding tax rate of 10 per cent on capital gains and dividends will now apply (‘10 per cent Flat Tax’).

In addition, net beneﬁts, dividends and capital gains paid to foreign investors are exempted from paying the ‘10 per cent Flat Tax’, provided the locally registered fund has invested primarily in non- Chilean assets.

Indeed, the income and capital gains tax exemption for foreign investors will apply provided the following conditions are met: (1) no less than 80 per cent of the fund’s portfolio should be invested abroad in those securities described by the Law; and (2) said percentage should be fulﬁled at least during a period of 330 continued or discontinued days in a calendar year. Capital gains from the

86 Doing Business in Latin America MARCH 2016 transfer of the shares of the fund are eligible for the exemption provided these requirements were fulﬁled during the 2 years preceding the transfer of title.

None of these tax exemptions apply to foreign shareholders investing in private investment funds (ie, non-registered funds, in Spanish fondos de inversión privados or FIPs). In this case, the current 35 per cent tax burden on capital gains and dividends (with the corporate tax credit in the latter case) will remain in force.

As to the VAT applicable to commissions owed to fund managers at a 19 per cent rate, it should be noted that it will not be levied on those fees charged to foreign investors.

The above exemptions (capital gains, dividends and VAT) are designed to create an incentive for foreign fund sponsors to choose Chile as a domicile for their funds with a Latam strategy and to use local asset management capabilities.

Doing Business in Latin America MARCH 2016 87

88 Doing Business in Latin America MARCH 2016 Colombia

Doing Business in Latin America MARCH 2016 89 v. Colombia

A. Foreign investment in Latin American countries i. Authorisations vs Limitations or Prohibitions

A. GENERAL ABSENCE OF RESTRICTIONS

According to Decree 2080 of 2000 (‘Decree 2080’), in general foreign investment is freely allowed in all sectors of the economy, except for the following activities:

– Defence and national security; and

– Processing and disposal of hazardous or radioactive products not produced in Colombia.

The Colombian foreign exchange regime is divided into two different markets: (1) the foreign exchange market and (2) the free market.

The foreign exchange market consists of all foreign exchange transactions that must be completed through (a) authorised foreign exchange intermediaries or (b) compensation accounts (foreign bank accounts registered with the Central Bank and subject to periodic reports). Since foreign exchange transactions must be completed entirely through the foreign exchange market the same cannot be offset or condoned, in principle.

Pursuant to Regulation 8 of 2000 issued by the Colombian Central Bank (‘Regulation 8’), the following transactions are deemed regulated foreign exchange transactions and thus must be timely registered before the Colombian Central Bank: (a) import and export of goods, (b) foreign indebtedness operations, (c) foreign investments, (d) guarantees and collateral in foreign currency and, (e) derivatives transactions.

The foreign exchange market is strictly regulated by the Colombian Central Bank and its compliance is jointly supervised by the Superintendence of Companies, the Finance Superintendence and the Tax Authority. Failure to duly conduct foreign exchange transactions through the foreign exchange market is a violation to applicable regulations and may result in the imposition of ﬁnes.

Please note that foreign investments that are duly registered with the Central Bank confer foreign investors the right to (1) remit abroad or repatriate proven net profits generated by the relevant investment; (2) reinvest profits or retain them as surplus undistributed profits; (3) capitalise amounts with remittance rights and finally to remit them abroad; (4) remit any income received from purchasing the investment in Colombia, from liquidating the company receiving the investment, or from reducing its capital.

Moreover, investment repatriation conditions are those in force on the date on which investments are registered and may not be modiﬁed in any way that may be detrimental to the foreign investor, except on a temporary basis when Colombia’s international reserves fall below the equivalent of three months’ worth of imports.

90 Doing Business in Latin America MARCH 2016 Deﬁnition of foreign investment

Article 3 of Decree 2080 of 2000 deﬁnes as direct foreign investment (1) any contributions and/or participation in the capital of a Colombian company, (2) investments in trusts, (3) acquisition of real estate,36 (4) contributions in kind, subject to speciﬁc restrictions and registration procedures, (5) initial or supplementary investment in the assigned capital of a local branch of a foreign company, and (6) investments in private equity funds.

Furthermore, portfolio investment is deﬁned as any investment in securities registered in the National Securities and Issuers Registry (‘Registro Nacional de Valores y Emisores’).

B. NATIONAL, FAIR AND EQUITABLE TREATMENT

Pursuant to Decree 2080, foreign investors shall be treated equally vis-a-vis Colombian investors. This represents a guiding principle set forth in Colombian foreign exchange regulations.

C. FREE CHOICE OF LAW AND JURISDICTION

As a general rule, Colombia’s legal system adopts the principle of International Private Law of lex loci solutionis. This principle states that the applicable law to any contract is the law of the place of its performance. Particularly, article 869 of the Code of Commerce, states that the agreements executed abroad but performed in Colombia are governed by Colombian law. Also, it is generally accepted that dépeçage operates under Colombian law, therefore if the obligations under a contract are to be performed in different places, each obligation shall be governed by the law of the place of its performance.

Consequently, there is no private free will regarding the applicable law to contracts performed in Colombia, considering that the lex loci solutionis principle is mandatory. Nonetheless, it has been generally accepted that the parties exceptionally may choose a different substantive law if they have validly agreed to international arbitration, regardless of the place of performance of the agreement.

Pursuant to international arbitration, Law 1563 of 2012 (‘Law 1563’) states that the parties to a contract that provides for disputes arising thereunder to be resolved by international arbitration, are entitled to choose a foreign law as the governing law of the contract. Therefore, the parties to a contract may agree on a foreign substantive governing law so long as such agreement is included in an international arbitration clause.

According to said law, arbitration is considered to be ‘international’ when there is an international element. If the parties, at the time of entering into the arbitration agreement, are domiciled in different countries or if the place of performance of the substantial part of the contractual obligations directly related with the subject matter of the controversy is located outside of the country in which the parties have their principal domicile, it is understood that the international element is met.

36 Pursuant to Colombian laws, foreign entities or individuals are not entitled to acquire ownership of real estate properties located on the national coastline or in the boundaries set forth with neighbouring countries. Said real estate properties may be acquired only by Colombian nationals (L. 1415/40 art. 5).

Doing Business in Latin America MARCH 2016 91

Therefore, parties may agree to international arbitration with a foreign choice of law if one of the following conditions has been met: (1) the parties to have their domiciles in different countries, (2) a substantial part of the obligations of the agreement is to be performed outside of the country in which the parties have their principal domicile, or (3) the dispute affects international commerce or trade interests.

D. OPERATION PERMITS

As previously mentioned, foreign investments in Colombia are generally permitted in all sectors of the local economy (except for those referred to above) and no additional permits are required from the foreign exchange perspective.

Notwithstanding, foreign investment in Colombian ﬁnancial institutions is subject to the prior authorisation of the Colombian Superintendence of Finance. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

During the last three years, there has been a signiﬁcant development in infrastructure matters in Colombia, particularly due to the enactment of the PPP legal framework, that is, Law 1508 of 2012, Law 1682 of 2013 and all their regulatory Decrees. These laws seek to attract foreign investors in the infrastructure ﬁeld, in order to contribute with the development of the country in areas where it is urgently needed.

Colombian Government launched during 2012 called four generation of road concession contracts (‘4G’) which comprises 42 projects aiming to build roads for approximately 8,000 km (4.970 miles) long and require investments in the order of US$24.4bn.

For the purpose of attracting ﬁrst tier international contractors and investors to the 4G projects, the Colombian Government developed a series of incentive policies or measures, which can be summarised as follows:

On 10 January 2012, the Colombian congress enacted Law 1508 also known as the ‘PPP Law’. The PPP Law comprises a series of elements that are typical in traditional project ﬁnancing arrangements that are intended to establish basic principles to contribute to the bankability of those infrastructure projects which are to be developed under a PPP model.

PPP Law includes elements typical in traditional project financing structures that are intended to provide comfort for lenders. As an example, this law requires that the project’s resources must be administered through a trust fund, to which all assets and liabilities of the project must be transferred. This requirement provides greater reassurance to lenders with respect to outstanding payments and enforceability of any security interests. Likewise, the PPP Law expressly confers project lenders step-in rights in the event of a default under the applicable loan agreement. Additionally, the PPP Law requires that any PPP contract must include an early termination payment that should be determined by a formula, which serves as additional security for the lenders as an instrument to effectively cover the debt service obligations of the concessionaire under the financing agreements if the contract is early terminated. These provisions constitute important legislative developments that significantly improve lenders’ comfort and encourage them to finance projects to an internationally

92 Doing Business in Latin America MARCH 2016 commercial standard and in a cost-efﬁcient manner.

In addition to the foregoing, during 2013 the Congress enacted Law 1682, also known as the ‘infrastructure law’. This law provides mechanisms to solve the major bottlenecks that infrastructure projects in Colombia have encountered in the past, which are those related to the acquisition of the legal rights over the land required to develop the project, obtaining environmental licences and the removal and/or relocation of utilities networks and related infrastructure affected by the construction of the works.

For the purposes of dimensioning the impact of the aforementioned bottlenecks and highlighting the importance of Law 1682 of 2013, a survey undertaken by the Colombian National Planning Department (Departamento de Planeación Nacional) concluded that 53 strategic national infrastructure projects have issues related to said bottlenecks as follows: 80 per cent have issues regarding environmental permits and 23 per cent are encountering problems pertaining to land acquisition.

According to the Colombian government, with the enactment of the Law 1682 of 2013 the time to complete the land acquisition activities required by an infrastructure project is expected to have a 50 per cent reduction. The foregoing, by the implementation of, among others, the following measures: (1) setting out the obligation of the court to force the tenant or owner to deliver the land required to execute the infrastructure project as from the ﬁling of the corresponding expropriation law suit and not at the end of the expropriation process when the indemniﬁcation to the tenant or owner is established, (2) providing a clear set of rules regarding land appraisal, (3) reducing the timeframes set forth to exhaust the steps and requirements in the land acquisition process, as from the direct negotiation to the expropriation ruling.

On the other hand, aiming to expedite the process for obtaining an environmental licence for an infrastructure project, Law 1682 of 2013 provides different mechanisms such as establishing that environmental authorities are to be held liable for the damages suffered by third parties if the authority fails to comply with the term to issue environmental licences as set forth by environmental law; establishing that projects which entail maintenance, improvement and rehabilitation works do not require an environmental licence; and by providing that minor modiﬁcations to the project during the execution of the works do not require a modiﬁcation to the environmental licence previously approved for the project.

Finally, with respect to the relocation of public utility networks, Law 1682 of 2013 includes a clear set of rules regarding which party (ie, project company or the owner of the network) is responsible to bear the removal or relocation costs and provides that in the event the owner of the networks fails to initiate the relocation works in a given period of time, the Concessionaire is entitled to directly undertake the relocation works. In line with the foregoing, the Government has amended the speciﬁc regulation dealing with the proceeding for obtaining environmental licences, which is expected to have a positive impact in projects development in general.

A. PARTICIPATION OF FOREIGN BIDDERS

In order to determine the role that the foreign investors play and the status that the Colombian

Doing Business in Latin America MARCH 2016 93 legal framework gives to these investors in comparison with Colombian investors, it is important to establish that Colombian public procurement law sets forth a reciprocity principle that allows foreign bidders to participate in public procurement to execute contracts with state entities in Colombia, under the same conditions as a Colombian bidder may participate in procurement procedures in the foreign bidder’s origin country. Additionally, the requirements in terms of experience, ﬁnancial and legal capacity are included in the terms of reference or requests for proposals issued by the contracting entity, creating a scenario where both types of investors participate under the same conditions.

The Public Procurement Statute provides many possibilities for participating in public procurement in Colombia. Both national and foreign individuals and companies, with or without domicile or branch in Colombia, are allowed to participate in these bidding processes, provided that they comply with the particular requirements set forth in the corresponding request for proposal. Pursuant to Law 816 of 2003, foreign entities are allowed to participate in government bidding proceedings on equal basis with offers submitted by Colombian nationals when:

– A free-trade agreement so provides;

– Colombian offers are treated as national in foreign jurisdictions;

– The corresponding bidder is a member of the Andean Community of Nations.

Furthermore, it is important to establish the modalities by which foreign companies or individuals may participate in Colombian procurement procedures, as follows:

1 Direct Participation

Foreign individuals or companies that do not have a branch in Colombia are allowed to participate directly in the public entities’ procurement procedures, by submitting the documentation required by the terms of reference. In this case, if the foreign bidder is awarded with the contract, and its contractual obligations entail the development of permanent activities in Colombia, the bidder must open a branch before beginning to perform its obligations under the awarded contract.

2 Through a Branch

Foreign bidders are able to participate in procurement procedures through a branch registered in Colombia. Bearing in mind that the branch is not a separate legal entity, it has the possibility to credit the experience, ﬁnancial capacity, technical capacity and organisation capacity of the parent company.

3 Through a Subsidiary

Foreign bidders may already have a Colombian subsidiary of their companies, usually with the purpose of participating in public procurement through a special purpose vehicle, which allows them to separate liabilities. However, by adopting this method, and depending on the terms of reference of each particular procurement procedure, they may or may not be allowed to credit their experience, technical capacity and/or organisation capacity with the experience of their parent companies, given

94 Doing Business in Latin America MARCH 2016 that a subsidiary is a different legal person from its parent company.

Additionally, the Public Procurement Statute has provided various ways for investors to associate and present a joint proposal, by using one of the following associative forms: (1) Consortiums; (2) Temporary unions (uniones temporales); and (3) Promises of establishment of future companies. A distinctive feature of these associative forms is that all the members thereof shall be jointly liable with respect to the liabilities arising from the submitted offer and the contract, if awarded. In the case of consortiums and temporary unions, once awarded with the contract no separate legal entity is incorporated, whilst when the selected form of association is the promise to incorporate a company, such company must be incorporated prior to the execution of the awarded contract. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

In accordance with article 332 of the Colombian Constitution, in Colombia, the ownership of the subsoil and the non-renewable natural resources belongs to the State. Said disposition sets forth that all natural hydrocarbons reservoirs in existence within the Colombian territory, whatever their nature may be, including those inside national boundaries and under the territorial seabed, the continental platform and in the exclusive economic zone belong exclusively to the Republic of Colombia..

In that sense, the exploration and exploitation of minerals require the awarding of a mining title, materialised through the execution of a concession contract granting the contractor the right to explore the subsoil seeking for particular minerals and exploit them for a certain period of time. The concession contract shall be registered at the National Mining Registry (‘Registro Minero Nacional’) to be valid and enforceable.

On the other hand, As from 1 January 2004, pursuant to Decree 1760 of 2003, in order to carry out the exploration and exploitation of hydrocarbons in Colombia, both onshore and offshore, a contract shall be executed with the National Hydrocarbons Agency (ANH by its acronym in Spanish) in the form of a Exploration and Production (E&P) Contracts or a Technical Evaluation Agreements (TEA).

According to Decree 381 of 2012, the Ministry of Mines and Energy (MME by its acronym in Spanish) is vested with the power and authority to administer the non-renewable resources belonging to the State. Notwithstanding the above, the Ministry of Mines and Energy has delegated such power for the management of mining matters to the National Mining Agency (ANM by its acronym in Spanish), as well as to certain territorial entities, and for the management of oil and gas matters to the ANH. Both agencies are national public entities ascribed to the Ministry of Mines and Energy having its main seat in the city of Bogota D.C.

A. REGULATORY BODIES

1 Agencia Nacional de Hidrocarburos – National Hydrocarbons Agency (ANH)

The ANH is the regulatory body responsible for the Colombian crude oil industry. In particular, the ANH is responsible for managing hydrocarbons resources and deﬁning the contracting policy for the exploration and exploitation of hydrocarbons.

By means of Decree Law 1760 of 2003 the management and control of the Colombian hydrocarbons

Doing Business in Latin America MARCH 2016 95 resources were transferred from the state-owned company, Ecopetrol, to the ANH.

2 Agencia Nacional Minera – National Mining Agency (ANM)

The ANM is the regulatory body responsible for the Colombian mining industry. ANM is responsible for managing Colombian mining resources and deﬁning the contracting policy for its exploration and exploitation.

Decree 4134 of 2011 establishes the faculties, responsibilities and duties in charge of the ANM, as the governmental entity in charge of managing Colombia’s mining resources.

3 The Ministry of Mines and Energy (MME)

The MME is the governmental entity responsible for the management and regulation of the energy sector (including hydrocarbons and mining sector). This entity is empowered to adopt and execute policies, guidelines and technical regulations related to hydrocarbons and mining activities.

4 The Ministry of Environmental and Sustainable Development (‘Environmental Ministry’)

The Environment Ministry is a branch of the executive power in charge of managing environment and renewable natural resources, and it is responsible for guiding and issuing the environmental planning and development policies and regulations.

5 National Authority of Environmental Licensing (ANLA)

The ANLA is a specialised administrative unit in charge of granting environmental licences to large scale projects, including the O&G and mining sector. The ANLA is a dependency of the Environment Ministry, in charge of granting environmental licences to the activities listed in article 8 of Decree 2041 of 2014 on environmental licensing (projects which are considered of national importance, or which may cause severe environmental impacts due to its magnitude). The ANLA is also competent to exercise surveillance of the projects, works, or activities subject to environmental licences, in order to ensure that said projects effectively comply with the environmental regulation currently into force.

B. DEVELOPMENT OF OIL AND GAS ACTIVITIES

Oil and gas activities are mainly regulated in the Colombian Petroleum Code set forth in Decree 1056 of 1953 (as amended), which declares the petroleum industry and its activities of exploration, exploitation, reﬁnement, transportation and as of public utility.

Under Colombian laws (1) E&P Contracts shall be governed by Colombian law and subject to the jurisdiction of Colombian courts; (2) foreign companies must establish a Colombian branch domiciled in Bogota D.C. in order to enter into contracts in the hydrocarbons sector and perform exploration and exploitation activities in Colombia.

1 Contractual Regime

In accordance with the existent regulations (ANH’s Agreement 4 of 2012 – Conventional reservoirs

96 Doing Business in Latin America MARCH 2016 and ANH’s Agreement 3 of 2014 – Unconventional reservoirs), the exploration and exploitation of hydrocarbons owned by the State can be carried out by private investors through one of the following contractual structures:

Technical Evaluation Agreement (TEA), which purpose is to allow the investor to evaluate an area of interest in order to determine its production potential. Said contract consists of evaluation activities related to geology, geophysics, geochemical, cartography, phonology, surface exploration activities, and stratigraphic well drilling, among others, excluding exploration drilling. Part of the areas covered by TEA may be converted into an E&P Contract upon contractor’s request to ANH.

Exploration and Production Agreement (E&P), which purpose is to grant the contractor the right to explore the subsoil seeking hydrocarbon reserves and exploit them for a determined period of time. The E&P contract consists of three phases: exploration, evaluation and exploitation. The exploration phase has a term of six-years and is normally divided into yearly exploratory phases. Once a discovery is made, the area enters into a two-year evaluation programme as to determine the commercial potential of the discovery. After said evaluation, the contractor shall inform the ANH of its decision on whether to commercially exploit the discovery. The production phase is usually of up to 24 years and is extendable up to the economic limit of the commercial ﬁeld. Special terms have been set for the development of activities in unconventional reservoirs, including increasing the exploration and production periods as follows: the exploration period increased to nine years and the production period increased to 30 years.

2 Awarding of Areas

The terms of the allocation of areas for exploration and exploitation of hydrocarbons through E&P Contracts are regulated by means of the Agreement 004 of 2012 of the ANH. In this respect, the awarding of areas for the exploration and exploitation of hydrocarbons shall be made through one of the following processes:

Open Competitive Bidding Process (generally named ‘Rounds’ or ‘Rondas’ in Spanish):

Pursuant to an open competitive process, ANH awards based on certain capacity requirements set out in the relevant Terms of Reference issued for each Open Competitive Bidding Process.

Currently, Open Competitive Bidding Processes are the most common processes for awarding hydrocarbons areas. Several rounds have taken place since 2004, totalling 352 E&P Contracts and 94 TEA currently in force as of December 2014. Among those, the Ronda Caribe 2007 with nine contracts, the MiniRonda 2007 with 12 contracts, Heavy Oil process with eight contracts, the Ronda Colombia 2008 with 22 contracts, the Mini Ronda 2008 with 41 contracts, the Ronda Colombia 2010 with 68 contracts, the Ronda Colombia 2012 with 50 contracts allocated and ﬁnally the Ronda Colombia 2014 with 26 contracts allocated. (See: Resultados, Retos y Estrategias de Crecimiento del Sector de Hidrocarburos. ANH 2015)

– The qualiﬁcation criteria are determined in each open competitive process in accordance with the provisions of Agreement 4 of 2012.

The particular steps and requirements for the participation in the corresponding open

Doing Business in Latin America MARCH 2016 97

competitive processes are provided in the relevant Minutes of the Contract and Terms of Reference issued by the ANH for each process.

– Close Competitive Bidding Process or invitation:

In the Closed Competitive Processes, the ANH will invite a pre-established group of companies that meet certain capacity requirements to submit a proposal. Then the ANH will initiate the negotiation process with the bidder that has a satisfactory contracting proposal.

– Direct Assignment:

Finally, for the direct assignment of the corresponding contract for hydrocarbons exploration and exploitation a prior authorisation of the Board of Directors of the ANH is required. Please note that the ANH will exceptionally allocate areas that have been specially selected for said purpose, in accordance with the following conditions:

• Special condition or geographical localisation;

• Special geological conditions, based on ANH prior technical studies;

• Social and environmental restrains in the area;

• Lack of technical information about the subsoil or required exploratory study;

• For purposes of public interest, national security or public order;

• Special considerations on energy and economic policies.

3 Obligations of the Contractor

Once the corresponding contract is granted, the contractor shall comply with the obligations derived thereof and resulting from the hydrocarbons regulations. Following are the main applicable obligations to E&P contracts:

• Payment of surface right fees: The contractor shall pay a fee for the exclusive right to use the subsoil for evaluation, exploration and production of the relevant hydrocarbon deposit under the corresponding E&P Contract, based on US$ fee per hectare.

• Payment of royalties: The contractor shall pay royalties between 8 per cent and 25 per cent of the daily gross production based on the monthly average of hydrocarbons production under the relevant E&P Contract.

• Payment of high prices: Under certain E&P Contracts, the contractor must pay to the ANH a fee for ‘High Prices’, when a certain production level is reached at a certain base price.

• Environmental and labour bonds and guarantees: Under the corresponding E&P Contract, the contractor is obliged to grant guarantees to cover labour and environmental liabilities in the execution of activities.

• Proper Performance bond: Under the corresponding E&P Contract, the contractor shall grant a guarantee for the performance of each phase of the corresponding contract.

98 Doing Business in Latin America MARCH 2016 • Creation of the abandonment fund: Under the corresponding E&P Contract, the Contractor must establish a fund to guarantee the ﬁnancing of the required activities to perform the abandonment programme of the wells and the environmental restitution of the assigned areas for the production at the end of the production period.

• Transfer of technology: Under the corresponding E&P Contract, the contractor agrees to make certain scientiﬁc and technological activities, which objectives, terms, conditions and beneﬁciaries are determined by the ANH during the term of the contract.

• Additional Interest over Production (X Factor): Under E&P contracts that are awarded through a bidding process, the contractor is obliged to pay to the ANH, in cash or in kind, the X-Factor, which consists in a percentage of gross production after royalty offered by the contractor during the bidding process.

C. DEVELOPMENT OF MINING ACTIVITIES

The Mining Code, the law currently in force for the awarding of mining areas and mining titles, establishes the concession contract as the only valid mining title. However, said new form of contracting through the concession agreement does not affect the preexisting mining titles (licences, aportes and concessions), which shall continue to be in force until their expiration.

The term for the concession contracts is 30 years counted as from their registration in the National Mining Registry, divided into the following phases:

– Exploration: three years (extendable for additional periods of two years up to 11 years),

– Construction and Assembly: Three years (extendable for one additional year) and

– Exploitation: 24 years (extendable for 30 additional years)

As per Colombian laws, foreign individuals and corporations that act as mining concessionaires have the same rights as Colombian individuals and corporations. Thus, Colombian governmental regulatory bodies shall not request any additional or different requirements to such foreign parties.

The sole particular requirement, speciﬁcally established for foreign companies, is to incorporate a branch, subsidiary or afﬁliate in Colombia to be the titleholder of the mining concession.

In general terms, as to protect and preserve the rights of the applicants in accordance with the time and date of the application for the concession contract before the mining authority, Colombian mining law applies the principle ‘ﬁrst in time, ﬁrst in right.’ Nevertheless, there are certain areas that can be temporarily or permanently excluded from the areas to be granted in concession, which shall be awarded through public bidding processes initiated by the ANM. Those areas are:

• Special Reserves Areas: areas where informal and traditional mining activities are developed or areas for the development of a high scale mining project.

• National Security Areas: areas with respect to which the Government determines that mining activities are not permitted for security reasons.

• Excluded Areas: areas that have been legally declared and bordered as protected zones for the

Doing Business in Latin America MARCH 2016 99

development and protection of renewable natural resources and the environment.

• Restricted mining zones: areas that allow mining activities under certain restrictions.

• Therefore in Colombia mining titles may be acquired through three main mechanisms:

• Concession contracts granted by the mining authority prior request of the interested party;

• Concession contracts for strategic mining areas through public bidding; and

• Total or partial transfer of concession rights.

Once the concession contract is granted, duly executed and registered in the National Mining Registry, the corresponding concessionaire shall comply with all the obligations derived from Mining Code – Law 685 of 2001 and the relevant concession contract. Particularly, it is important to indicate that said obligations will depend on each stage or phase of the concession contract. Below are listed the main obligations that shall be complied by the concessionaire under the corresponding mining concession contracts:

1 Mining Environmental Insurance Policy

The concessionaire shall obtain a mining environmental insurance policy that covers the compliance with environmental mining obligations, the payment of potential ﬁnes and the consequences of an eventual early termination by the ANM of the mining title.

2 Payment of Surface Fee

The concessionaire must pay a surface fee in order to undertake exploration activities in the concession area during the exploration, assembling, construction and exploitation periods.

3 Payments of Royalties

The concessionaire shall pay royalties, which consist of a percentage, ﬁxed or progressive, of the exploited gross product, and its sub-products, calculated or measured on the mine head, payable in currency or in kind, as established in the relevant law.

D. COLOMBIAN SOCIO-ENVIRONMENTAL REGIME

In Colombia, any project, work and/or activity that involves the use of natural renewable resources and/or that may affect the environment, will require the interested individual/Company (hereinafter referred to as ‘beneﬁciary’) to request and obtain before the competent environmental authorities (either national, regional or district) the environmental licences, concessions, permits and/or authorisations (hereinafter referred to as ‘control instruments’), prior to the execution of the corresponding project.

Moreover, Colombian Constitution deﬁnes Colombia as a multicultural state in which several ethnicities coexist. Particularly important are indigenous and afrodescendants groups of people, for they have special protection according to the Colombian legislation currently into force. Apart from ethnically differentiated communities, other social actors are also entitled to actively participate in

100 Doing Business in Latin America MARCH 2016 the environmental procedures aiming at granting environmental permits and licences, and shall also be considered as an integral part of any mining and O&G projects.

In Colombia the key administrative instrument for the preservation of the environment and for controlling the use and exploitation of natural resources (control instrument) is the Environmental Licence. Said control instrument is regulated essentially by Law 99 of 1993 and the recently enacted Decree 2041 of 2014 (new environmental licensing regime).

The Environmental Licence shall only be applicable to those projects or activities which may imply the serious deterioration of the natural renewable resources, or that have the capacity to introduce considerable modiﬁcations to the landscape. Please note that in Colombia, said activities are limited and clearly deﬁned in articles 8 and 9 of Decree 2041 of 2014, which means that the Environmental Licence shall only apply to those activities which are effectively listed. iv. Treatment of Foreign Investment in Real Estate (rural and urban properties)

A. CLASSIFICATION OF REAL ESTATE

Real estate in Colombia is classified as either urban or rural land. Urban land is classified as such by each municipality’s Zoning Plan (POT for its acronym in Spanish) or the applicable planning instrument comprising the conditions, uses, limitations and prohibition to carry out certain activities in the different areas of the municipality. In addition, in order to develop an urban property a construction licence is required. These licences are granted by the competent local authorities (Curadurías Urbanas) or the Mayor’s Office, and establishes, among others, the occupancy rate, permitted height and construction prohibitions of a real estate property.

Farmland in Colombia (rural property) is classiﬁed according to the nature of the land, as follows: (1) vacant properties (baldíos),37 which are properties owned by the Government that according pursuant to the applicable legal regime at the time of the transferal (Law 34 of 1936; Law 135 of 1961, amended by Law 30 of 1988 or Law 160 of 1994), are transferred in favour of individuals,38 certain entities and corporations that comply with several requirements set by law; (2) properties subject to a parcel regime (régimen parcelario), which are plots formed on the basis of material divisions over properties acquired by the Government and later transferred to individuals, subject to various obligations and restrictions; and (3) properties ruled by general dispositions of the Colombian Civil Code considered as plots with private ownership.

B. PROPERTY ACQUISITION

When acquiring real estate property in Colombia, a foreign investor must consider that (1) Colombia protects private property, considering that by means of the Constitution legally acquired ownership rights cannot be affected by ulterior laws; (2) both nationals and foreigners have, in principle, equal

37 Article 675 of the Colombian Civil Code establishes that vacant lands are plots located within Colombian territory boundaries that do not have any owner but the Government. Nonetheless, vacant properties can be occupied and exploited by individuals. These individuals are empowered to obtain their property right over the land by the complying with several legal requirements. Provisions governing vacant properties are established in Law 160 of 1994. 38 According to articles 4, 5 and 6 of Decree 2664 of 2013, the persons capable of acquiring vacant lands are natural persons and private legal entities, public entities and corporations.

Doing Business in Latin America MARCH 2016 101 rights and concerning the acquisition of real estate property and (3) the use for a speciﬁc activity must be in compliance with the corresponding zoning dispositions.

1 Due Diligence

In order to be certain of the legal status of the property rights, it is advisable to at least, review the following matters:

(1) Title transfers, liens, encumbrances or registered lawsuits: These are specified by the study of the certificate of conveyance and good standing (certificado de libertad y tradición) of the property and conducting a title search.

(2) Allowed uses, development and construction potential: With an urban regulation report these aspects are established by the study of the corresponding POT and regulations, licences and permits of the property.

2 Acquisition Procedures

Pursuant to Colombian Law, property rights are only considered transferred as long as the legal formalities are dully executed (Section 748 of the Colombian Civil Code). Regarding real estate, such as formalities include: (1) executing a public deed before a Public Notary, by means of which title over the real estate is transferred such as sale, donation, or other type of title, or by adverse possession for a statutory period under certain conditions, and (2) registration of the public deed before the Public Registry Ofﬁce of the jurisdiction where the property is located. Once registration process is concluded, the property rights of real estate are considered to be fully transferred.

3 Zoning Regulation

The owner or the individual or corporation with the possession or tenancy of the land shall comply with the permitted uses listed in the corresponding zoning regulation plan. If the owner, possessor or tenant is willing to build or to perform any activity that requires urban licences, they shall obtain such licence through the competent authority. An environmental licence is required if the desired activity or operation in the property involves any environmental impact, such as forest use, production of pesticides, water-transfer schemes, among others.

4 Taxes

The following taxes and fees are required for the acquisition of real estate property in Colombia:

(1) Notary fees: The value of the notary fees of public deeds of purchase is appraised considering the price of the real estate property subject to transfer. In case the purchase price is lower than the cadastral valuation or self-valuation made by the owner, the fee will be based on the latter. The Public Notary also assesses the VAT, which is equivalent to 16 per cent over the notary fees, and charges for each of the pages of the public deed. This sum will depend on the length of the public deed and its annexes. The rate of this fee is 0.003 per cent of the Property’s value.

(2) Registry fees: registry fees are assessed by and paid to the corresponding Public Registration

102 Doing Business in Latin America MARCH 2016 Ofﬁce. This fee is appraised according to the real estate property’s price of purchase. In case the purchase price is lower than the cadastral valuation or self-valuation made by the owner, the fee will be based on the latter. The rate of this fee is 0.005 per cent of the Property’s value.

(3) Registry tax: This tax is charged by the Governor’s Ofﬁce of each department in Colombia, and is up to 1 per cent rate.

C. REGULATION OF FARMLAND IN COLOMBIA

1 Vacant Properties and their Transferals

In connection with vacant lands, the only way to transfer ownership rights in favour of private parties is by means of a resolution issued by INCODER39 (the ‘First transferal’). Colombian law does not require any Government approval for subsequent transferals if favour of any legal entity or individuals, for the execution of lease agreements or for the constitution of any in rem rights upon the property (derechos reales). However, the owner has a restriction with regards to the constitution of mortgages, since the land may only be subject to mortgages as guarantee to agricultural loans provided by credit corporations within the ﬁrst ﬁve years from the First Transferal.40

In addition, depending on the applicable law at the moment of the First Transferal, private plots originated by vacant land have limitations as for their accumulation. If the First Transferal was carried out by the Government under the enforceability of Law 30 of 1988, the acquisition of neighbouring properties is prohibited. If the First Transferal was carried out under the enforceability of Law 160 of 1994 and if the restrictions determined by article 72 of such law were expressed by INCODER on the transferal resolution, no person is entitled to acquire ownership rights of originally vacant properties, if their size exceeds the maximum unit for each municipality in Colombia (Unidades Agrícolas Familiares).

As to the requirement of local presence in the country to acquire vacant land by the First Transferal, among of the requirements listed in Law 160 of 1994 for the acquisition of a vacant land are (1) the occupancy of the plot for at least a period of ﬁve years and (2) the economic exploitation of at least two thirds of the land. An equivalent requirement is not provided by the law for ulterior transfers.

2 Properties Subject to a Parcel Regime

Regarding plots subject to the parcel regime, INCODER is also the only authority with the power to transfer such land in favour of individuals (the ‘First Transferal of Parcels’). Once parcels are transferred by INCODER on the First Transferal of Parcels, owners are required to obtain authorisation from INCODER for property right transferals, for the constitution of any liens or encumbrances and to lease the land within a period of time.41 After this period, owners are required to notify INCODER of any interest in transferring property rights, in order to provide INCODER the ﬁrst option to purchase the land.

39 A Government authority empowered to manage vacant plots. 40 Article 73 of Law 160 of 1994. 41 Article 39 of Law 160 of 1994. If the plot was transferred before the enforceability of Law 160 of 1994, this restriction applies for 15 years from the Government transferal. If the plot was transferred after said enforceability, the restriction is for 12 years from the Government transferal.

Doing Business in Latin America MARCH 2016 103

Parcel regime lands have no additional requirements for its acquisition.

3 Private Properties

Properties with private ownership governed by civil law are not subject to any government approval in order to transfer its property right of to constitute liens or encumbrances upon them or to be subject of lease agreements.

Properties under Civil Code regime do not contain any precedent requirements in order to take an interest in farmland

4 Incentives for Farmland Acquisition

Regarding incentives or encourage offered by the government to the acquisition of farmland, Colombian Government has established several programmes focused on the growth of productivity and competition within the agricultural sector, emphasising in the potential for exportations and development throughout the cooperation between public and private parties42. During the course of these programmes, various incentives to promote private investment (foreign and domestic) have been settled by means of direct governmental investment in the sector and incentives addressed to private investors.

One of the most effective encouragements for the acquisition of rural land are tax incentives, such as the exemption of income tax for delayed production crops and the application of a special system of import and export referred as Vallejo Plan (Plan Vallejo), by which exemptions or delay of tariff and VAT are granted for the import of inputs, raw materials and capital assets.

5 Liens and Encumbrances

Farmland is affected by the same liens and encumbrances of any real estate property in Colombia, such as mortgages, registered lawsuits, easements and seizures, among others. However, rural land can also be affected by special restrictions. Law 387 of 1997 created the Registry of Abandoned Properties (‘RUPTA’), which provides disclosure to situations of forced land abandonment, and intends to avoid transferals of real estate rights over abandoned property as a result of Colombian violence. v. Treatment of Foreign Investment in Agribusiness Activities

As a general rule, there are no particular restrictions on acquisition of real estate by foreign entities by itself or by means of a (1) vehicle, such as a corporation or a trust, in which the foreign entity has the control or a percentage of its shares or rights, correspondingly, (2) branch or (3), subsidiary or agreement, such as a joint venture. Even foreign individuals may acquire directly or indirectly land in Colombia without any special restriction.

Notwithstanding, below lies the main restriction for the acquisition of farmland in Colombia.

42 Productive Transformation Program, Ministry of Industry and Commerce, 2008.

104 Doing Business in Latin America MARCH 2016 A. RESTRICTIONS FOR ACQUISITION OF FARMLAND

It is important to point out that article 5 of Decree 1415 of 1940 sets forth that solely nationals (Colombians) by birth are allowed to acquire vacant land located in (1) domestic coastal waters, and (2) boundaries of neighbouring countries (regiones limítrofes con naciones vecinas). Additionally, said article establishes that later, these initial vacant lands are not allowed to be transferred to foreigners. Therefore, foreigners are allowed to acquire any type of land in Colombia, except for initial vacant lands comprising domestic coastal waters and boundaries of neighbouring countries. Incoder confirmed the aforementioned statement by means of Official Document named ‘EE009660 Consulta 0609 ante la Oficina Asesora Jurídica’, in which Incoder establishes that foreigners are not allowed to acquire initial vacant land comprising the zones determined in article 5 of Decree 1415 of 1940.

Notwithstanding the above, article 2 of Law 1579 of 2012 determines that one of the purposes of the real estate property’s recording system is providing any registered agreement or administrative act with the so-called publicity principle. This principle has as effect the enforceability against third parties (oponibilidad) of the corresponding deed or administrative act. In several judgements, the Colombian Supreme Court has conﬁrmed this principle, considering that it protects legal certainty, vested rights, among others. In that regard, although there are certain interpretations stating that the publicity principle is not linked to enforceability against third parties, any restriction affecting vacant land shall be expressly established in the transferal resolution and in the certiﬁcate of conveyance and good standing.

In connection with transferals by Incoder of both vacant land and properties subject to parcel regime, there are certain requirements that shall be fulfiled in order to carry out said transferals. Hence, pursuant to Acuerdo 349 of 2014 issued by Incoder, beneficiaries of transferals of a property subject to a parcel regime shall be persons aged over 16 that are not allowed to be owners or possessors of other farmlands. Gross assets (activos brutos) of said beneficiaries shall be maximum of 100 minimum wages and their monthly family incomes shall not exceed two minimum wages. On the other hand, regarding Incoder authorisation required for the transference of land subject of parcel regime, for the constitution of liens or encumbrances and/or the execution of leases upon these properties, Incoder has three months to reply the authorisation request. If this time has passed without any response of Incoder, it is considered to be affirmative. This authorisation applies for 15 years from the first transferal of parcels if the property was transferred before the enforceability of Law 160 of 1994. If the first transferal was carried out under the enforceability of Law 160 of 1994, the authorisation applies within 12 years from the first transferal. After such periods, owners are required only to notify Incoder of any interest in transferring property rights, in order to provide Incoder the first option in the acquisition of the land. If Incoder rejects the first option, or if it does not respond within the legal period of time, the owner is entitled to transfer the land without restrictions.

Regarding the first transferal of vacant land, Decree 2664 of 1994 regulates the administrative proceeding before Incoder in order to transfer a vacant land. An occupancy of at least five years of a portion equivalent to 2/3 parts of the area of the property that is requested to be transferred is required to obtain said transferal. In addition, petitioners must have a net worth (patrimonio neto) of maximum 1000 minimum wages. After the first transferal, initial vacant lands are subject to be

Doing Business in Latin America MARCH 2016 105 transferred without any authorisation.

Properties ruled by general dispositions of the Colombian Civil Code are not subject to any requirements in order to transfer its ownership.

Finally, foreign companies participating in agriculture production business may carry out activities directly or through a vehicle. In the event such activities are to be considered permanent, foreign companies must incorporate a branch or a Colombian company in order to perform its activities in the country. vi. Treatment of Foreign Investment in the Rendering of Public Services

A. GENERAL LEGAL FRAMEWORK

As from the enactment of the Constitution of 1991, the privatisation of public utilities started in Colombia, allowing private parties to initiate the provision of public utilities under a free market scheme, subject to strict regulation.

Under the Constitution, the Colombian government, although responsible for ensuring the provision of domiciliary public utilities, has been instated with the power to supervise and regulate public utilities rather to operate the provision of such services. Prior to 1991, the Colombian government either provided public utilities directly through specialised providers or granted concessions to private parties to provide such services.

In such regard, the Colombian government has signiﬁcant powers to dictate policy, monitor and regulate public utility companies, in order to ensure the continued availability of public utilities.

In Colombia, unlike several other jurisdictions, the telecommunication sector and the public utility provision sectors differ in several ways. Therefore, for purposes of the present document, it is important to bear in mind that we will address the following public utility services: electricity, gas, water, sewage and solid waste management.

There are two main structural laws which compose the public utilities sector. The ﬁrst one, Law 142 of 1994, establishes the overall general market structure deﬁned by the Congress for the provision of public utilities. In addition, Law 143 of 1994, a special law regulating the electricity and gas sectors, established additional rules and incorporated additional regulations solely applicable for the previously mentioned sectors. In such regard, Law 143 of 1994 is specially applied – compared to Law 142 of 1994 – when analysing matters applicable to the electricity and gas sectors.

Under the aforementioned laws, utilities providers, consumers and other market participants operate under a uniform set of rules guided by principles of efficiency, quality, improved service coverage, financial sustainability and fair and equitable participation regardless of government affiliation.

The current legal and regulatory regime promotes competition for the beneﬁt of consumers in areas such as pricing, quality and coverage. Government entities and government-owned entities that provide public utility services must ensure that they remain competitive in these areas, without solely relying on their dominant position.

106 Doing Business in Latin America MARCH 2016 B. FOREIGN INVESTMENT IN PUBLIC UTILITIES

Colombia’s public utilities sector provides multiple business opportunities for local and foreign investors. Although it is a strongly regulated sector, our strong legal and administrative structure facilitates the incorporation of public utilities companies by any agent – either foreign or national – in the sector. There are no restrictions for foreign investors to participate in the provision of public utilities as shareholders of public utilities companies.

C. GOVERNMENTAL PARTICIPATION AND RESTRICTION IN PUBLIC UTILITIES

As we have mentioned above, the government of Colombia was the primary responsible party to provide public utilities before the enactment of the 1991 constitution. Currently, the Colombian government owns and has equity participation in different utilities companies at the national, regional and local levels.

Nonetheless, under current regulations, the Colombian government participation in new projects is subsidiary to the participation of private individuals in the provision of public utilities. Therefore, as a rule of law established pursuant to Articles 6 (for the local level), 7 (for the department level) and 8 (for the national level) of Law 142 of 1994, the government will enter directly in the market and provide the public utilities itself only in such circumstances where the private agents are not willing to provide the utilities themselves.

D. WATER, SEWAGE AND WASTE MANAGEMENT

The Colombian government has recently pursued a high standard in the provision of water, sewage and waste management public utilities. Because of this, major governmental programmes have been enacted to meet such shortcomings in water, sewage and waste management infrastructure.

Among others, in matters pertaining to water and sewage, the Colombian government has launched the ‘Water for Prosperity’ programmes where several investors, including foreign investors, are entitled to participate in the construction and operation of water and sewage infrastructure. According to the latest information published by the Ministry of Housing, City and Territory, currently, there are in construction an amount of 648 projects of water and sewage infrastructure, reaching an overall value of almost COP$2.7bn (approx. US$1.125m considering a currency of US$1 = COP$2,400). In the following months, the government foresees to initiate the construction of 358 projects, for a value of COP$1.1bn (approx. US$458m considering a currency of US$1 = COP$2,400).

Furthermore, other important programmes have been enacted, for example the ‘Departmental Water Management Plans’, where joining regional efforts, the different municipalities may access funding from the national government for the construction of infrastructure to provide such service, ‘Connect with Water’, ‘Water Culture’ and ‘All for the Paciﬁc’. It is important to mention that there are several reservoir recovery projects and, in such regard, several municipalities and departments are publishing projects related with waste water treatment plants.

In matters related to waste management, there are currently several projects related with the recovery of waste in order to make some waste productive. These projects are being mainly led by the waste management public utility companies already incorporated in our territory; nonetheless, it is a major

Doing Business in Latin America MARCH 2016 107 opportunity for foreign investors to verify the possibilities to be included in this special activity in the waste management sector.

E. ELECTRICITY AND GAS

From the electricity sector perspective, the government recently enacted the Law on Renewable Energies of 2014, establishing certain tax beneﬁts for foreign and local investors interested in advancing in the constructing of renewable energy projects.

In addition, Colombia is endowed with the largest coal reserves in the region, ranking second in the world in hydroelectrical potential and is one of Latin America’s top ﬁve countries in oil reserves. Colombia’s electric and gas energy industries have undergone a constant internal restructuring over the last century, mainly permuted by the innovative encroachment of the private sector and the need to promote competition in the market.

Finally, it is important to mention that the Colombian government has in the last few years initiated a privatisation process of the government owned companies. Recently, it is highly notable the process of privatisation of Isagen S.A ESP, the largest power generator in Colombia.

F. TELECOMMUNICATIONS

The current general framework applicable to information and communication technologies was established in Law 1341 of 2009. According to this law, the provision of telecommunications networks and services, including ﬁxed telephony, is considered a public service under the control of the State, separate from other public utility services covered by Law 142 of 1994. Law 1341 of 2009 also sets forth a general legal habilitation for the provision of telecommunications networks and services, which allows any private party to be part of it. This habilitation is not applicable to television and radio broadcasting services. Regarding all other networks and services, no particular restrictions or limitations are imposed over foreign investors. The general habilitation, nonetheless, does not cover the use of the spectrum. In order to use it, the Ministry of Information and Communication Technologies must authorise interested companies through a bidding process (proceso de selección objetiva).

The only requirement in order to operate telecommunications networks or render telecommunications services different from radio and television is to obtain a registration before the Ministry of Information and Communication Technologies. All companies that provide the mentioned networks or services, or that use the spectrum must have said registration. Additionally, Telecommunications Networks and Services Providers must pay an amount equivalent to 2.2 per cent of their gross income in the form of a consideration. Other fees applicable to the use of the spectrum are established in function of particular criteria such as the quantity of spectrum granted, the number of potential users, the expansion plans of the company and the availability of spectrum (determined based on supply and demand). In some exceptional cases, for reasons related to national defence, attention and prevention of emergencies, and public safety, the government may establish other obligations.

Different regimes govern the provision of television and radio broadcasting services. In order to

108 Doing Business in Latin America MARCH 2016 render these two types of services, a company must obtain a concession by means of a public bidding process. Only Colombian citizens or legal entities duly organised in Colombia can be granted with a concession. Moreover, foreign investment in companies that provide television services cannot be greater than 40 per cent of the share capital of the respective company. These dispositions were included among the approved non-conforming measures in the Free Trade Agreement between Colombia and the US

B. Rendering Domestic Public Services i. Legal Framework

Article 365 of the Colombian Political Constitution, establishes the constitutional framework for public services or utilities in Colombia. Under this article: (1) public services are inherent to the social purposes of the State; (2) the State must ensure that such services, including domestic public services, are made available to all Colombian citizens in an efﬁcient manner; (3) private parties are entitled to provide such services, subject to regulation by the State.

These principles were developed by means of Law 142 of 1994 which sets out the overall legal framework applicable to said services (ie, water and sewage, sanitation, electricity, natural gas distribution and telephone services) as well as to activities complementary to those services such as power generation, natural gas transportation and others.

The law sought to limit the involvement of the State in running businesses in order to focus on policymaking and regulation while leveraging resources by encouraging the private sector to participate in the provision of high quality services.

Under Law 142: (1) government entities of the national, departmental and municipal level have the responsibility to ensure that public services are provided efﬁciently to citizens by public, mixed capital or private entities; (2) citizens have the right to choose their service providers; and (3) any person (Colombian or foreign) has the right to organise and operate companies dedicated to the provision of public services.

Law 142 speciﬁcally indicates that no concession or permit will be required to provide domestic public services per se or to engage in activities complementary to them, without prejudice to other permits that may be required for any economic activity, such as environmental licences and/or permits, municipal zoning and health permits and the like.

In terms of accomplishments, the reform introduced by Law 142 has achieved many of the expectations created at the time of its adoption. Local and domestic private investors have invested signiﬁcantly in the electricity, natural gas, telecommunications (particularly in mobile telephony) and drinking water and both coverage and quality of services has improved.

For example, according to ﬁgures from the Colombian National Planning Department in the period between 2010 and 2014, 3.59 million additional people gained access to potable water and sewage, 911 municipalities (of a total of 1101) had ‘adequate’ disposition of solid wastes, the capacity of the National Electric Grid was increased to 14,696 MW and 43 per cent of the country’s homes were connected to the internet. However, much remains to be accomplished and the potential for private

Doing Business in Latin America MARCH 2016 109 investment is enormous. ii. Public Utility Companies

In order to ensure a level playing ﬁeld between government owned and privately owned providers, utility companies (‘empresas de servicios públicos’) or ESPs are subject to a special legal regime whereby their acts and contracts are subject to private law, regardless of whether they are State or private-owned.

They are also required to ensure that services are provided continuously and efﬁciently, to refrain from practices that restrict competition, when such competition is possible; to facilitate access by lower income users to subsidies provided by the government and to facilitate access and interconnection by other service providers to their networks and assets used for the provision of such services.

ESPs, whether private or government owned are subject to regulations issued by the respective regulatory commission (see below) and are required to meet efﬁciency standards established by such regulatory commissions and enforced by the Superintendence of Domestic Public Services (the ‘Superintendence’), which are updated from time to time. They must also implement systems and procedures to deal with complaints from their clients/users.

The Colombian state at the national, departmental (provincial) and municipal level may participate in public utility companies but may not grant or receive from them subsidies or beneﬁts other than those expressly established in Law 142, which essentially means that government owned ESPs must compete on market terms with private operators.

It should be noted that ESPs are subject to a special insolvency proceeding established by Law 142 and administered by the Superintendence applying the same rules applicable to the administrative receivership and liquidation of ﬁnancial institutions.

Therefore, if an ESP is unwilling or unable to render adequate public services or becomes insolvent, the Superintendence may take over management of the ESP and appoint a ﬁduciary entity or new management under its authority and subject to oversight by an Advisory Board. At least two (2) of the major creditors of the utility must be represented in this Board. As a result of the takeover: (1) all judicial attachments over the public service company’s assets may be terminated; (2) all credit enforcement proceedings initiated prior to the takeover are terminated, and creditors may join the takeover proceedings to seek payment of their credits; and (3) the Superintendence has two months to determine whether it has to liquidate the company or whether it will administer it with a view to rehabilitation for up to two years.

Liquidation will be supervised by a Board of Creditors appointed by the Superintendence consisting of ﬁve members, three of which will represent the largest creditors and the two remaining being appointed by the Superintendence itself. iii. Tariff Rates

110 Doing Business in Latin America MARCH 2016 Tariff rates charged by ESPs are regulated by the relevant regulatory commission, except when they do not have a dominant position in their market, as determined by such commission.

Pursuant to Law 142, the tariff structures for public utilities are based on several principles which include: (1) the principle of ﬁnancial feasibility; (2) the principle of economic efﬁciency; and (3) the principle of solidarity.

Under the ﬁrst principle, tariff rates must allow the service provider to recover operational costs and expenses and a return on investment comparable to the return that would be obtained by an efﬁcient company in a sector of comparable risk.

Under the second principle, the tariff scheme must provide for a mechanism that sets prices for such services in a manner similar to that in which prices are set in a competitive market. In addition, under such principle the service provider should share the beneﬁts of productivity increases with its customers, as it would do in a competitive market, and may not transfer to the consumer the costs of inefﬁciencies in its operations.

Under the principle of solidarity, higher income and commercial users, together with the government must subsidise lower income users. For this purpose municipalities are zoned for purposes of determining lower and higher income areas and surcharges applied to higher income families which are used to subsidise lower income families, along with contributions from the government.

Regulatory commissions typically issue general methodologies to calculate various components of the tariffs and the review calculations of the actual tariffs to be charged by a particular company based on the investments made in their service infrastructure. Tariffs are typically updated every ﬁve years. iv. Competition Regime

One of the stated objectives of Law 142 is to introduce competition in the provision of public utilities. Therefore, there are numerous provisions in the law and in the regulations issued by the Regulatory Commissions aimed at promoting a level playing ﬁeld, including by ensuring adequate access to the infrastructure networks of incumbent service providers (in many cases legacy municipal utility companies).

Pursuant to article 2 of Law 1340 of 2009, all agents of the economy are bound by competition laws and regulations. No person, governmental entity, company or association, whether public or private is above or outside the regulatory scope of competition laws and regulations.

Therefore, despite being subject to a special regime, public utility providers are subject to general competition regulations, as well as speciﬁc rules for their particular sectors. Responsibility for the enforcement of these regulations lies with the Superintendence of Industry and Commerce. v. Institutional Framework

The government entities which play an important role in the domestic public service sectors are: (1) the Ministry of Mines and Energy (MME), (2) the Ministry of Housing (responsible for water and sewage); (3) the Ministry of Information and Communications Technology; (4) the Energy and Gas Regulatory Commission (CREG), (5) the Regulatory Commission for Telecommunications

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(CRT); (6) the Regulatory Commission for Water, Sewage and Sanitation (CRA) and (7) the Superintendence of Domestic Public Services (SSPD).

Each of the energy, water and sewage and Telecommunications-IT sector is under the overall jurisdiction of the relevant Ministry who is responsible for adopting the Colombian Government’s policies for each sector.

The regulatory commissions, CREG, CRA and CRT are administrative bodies comprised of the following members: the Ministers of the relevant sectors (in the case of CRA, they include the Ministry of Housing and the Minster of Environment or their delegates) of Mines and Energy, the Minister of Finance and Public Credit, the Director of the National Planning Department and a number of independent technical experts appointed by the President of Colombia.

The principal purpose of the regulatory commissions is to ensure that ESPs in the sector provide economically efﬁcient and high-quality public services. The commissions fulﬁl this purpose by, among other things, (1) issuing resolutions applicable to the provision of services, (2) promoting competition through open and non-discriminatory access to and use of networks, and (3) establishing the tariff structure for the provision of services subject to its jurisdiction.

ESPs are subject to the oversight of the Superintendence of Public Utilities, which is an administrative body created by Law 142 that is primarily responsible for: (1) inspecting, controlling and monitoring all companies providing public utility services; (2) enforcing regulations, imposing penalties and generally overseeing the ﬁnancial and administrative performance of public utility service companies; (3) developing the accounting norms and rules for public utility service companies; and (4) in general, organising statistical and other information networks and databases pertaining to public utilities.

C. Real estate

Any person – whether an individual or a legal entity, foreign or national – is entitled to acquire real estate property in Colombia, subject to the limitations indicated below: i. Rural Properties – Limitations for Private Parties

A. ENVIRONMENTAL RESTRICTIONS

Under Colombian laws, rural properties may be classiﬁed by the environmental authorities as a so- called ‘Ecological Area’, whenever there are ecosystems or renewable resources located therein. In such cases, the property must be preserved in order to guarantee its sustainable development.

In these protected Ecological Areas the development of industrial, agricultural or farming projects must respect the land use restrictions and in some cases, these projects are entirely prohibited.

The environmental authorities adopt these protection measures by issuing Regional Development Plans as well as the so-called ‘Units of Rural Planning’ (Unidades de Planiﬁcación Rural), through which the environmental protection measures and land use restrictions are implemented.

B. SPECIAL LIMITATIONS TO THE PURCHASE OF RURAL PROPERTIES

112 Doing Business in Latin America MARCH 2016 1 Family Agricultural Units (Unidades Agrícolas Familiares)

Colombian regulations provide for a special rural property limitation regarding Family Agricultural Units. These land units are comprised by the minimum extension of land that a single family is entitled to receive as a governmental economic grant. If a company is willing to purchase some of these land units, the competent authority (INCODER) must authorise such purchase, provided that the company proves that it does not own any other rural property in the country.

2 Land Parcel Licence (Licencias de Parcelación)

In order to divide a rural property into smaller extensions of land the owner must obtain a Land Parcel Licence. The licence-holder is entitled to carry out certain works within these properties.

3 Property Tax (Impuesto Predial)

In Colombia, real estate properties are levied with the Property Tax. The owners must declare and pay this municipal tax, usually once a year but in some municipalities on a quarterly basis. The tax basis is assessed in accordance with the cadastral record and an estimated value of the property made by the same owner. Depending on the economic use of the property, the tax rate generally oscillates between 0.3 per cent and 3.3 per cent.

4 Capital Gains Tax (Impuesto de Plusvalía)

Whenever the owner of a property carries out any improvement, the capital gain resulting thereto will be subject to a capital gains tax which rate ranges between 30 per cent and 50 per cent of the gain.

The capital gains tax is usually levied when the property is transferred, or when the construction licence for improving the property is granted.

5 Betterment Tax (Impuesto de Valorización)

In case the Government decrees a public betterment that would beneﬁt the surrounding properties, the corresponding owners would be charged with this tax, on the basis that these betterments increase the value of their properties.

6 Urban Developing Tax (Impuesto de Delineación Urbana)

Real estate owners in Colombia are levied with the Urban tax when they make new constructions, additions or modiﬁcations of the existing constructions in their properties. This particular tax applies both urban and rural properties, despite its denomination. ii. Urban Properties – Limitations for Private Parties

A. Regional Development Plans (RDPs) and Partial Plans (PPs)

Both RDPs and PPs regulate the development of construction projects, especially regarding urban

Doing Business in Latin America MARCH 2016 113 properties. The RDPs deﬁne the organisation of urban areas indicating their speciﬁc land uses, while the PPs develop and complement the RPDs, by establishing what kind of construction projects can be developed in the areas determined under the RPDs.

B. Building and Planning Permissions

Every construction, addition or modiﬁcation of built structures in urban properties must be authorised by the local governments by means of a Planning Permission. The authorities will verify the land uses compliance, the potential development index (índice de ediﬁcabilidad), accessibility and other technical key features.

C. Taxes

The following taxes: Property Tax, Capital Gains Tax, Betterment Tax, and Urban Developing Tax, will also apply for urban properties, in the same terms as indicated in Section 3.1 above. iii. Expropriation Events

A. Expropriation for Public Purpose

The Colombian Political Constitution provides that any land expropriation must be preceded by a court proceeding, and in any case the owner will be entitled to a proper compensation. This judicial expropriation takes place when a governmental authority declares that a speciﬁc property must be expropriated for the sake of a public purpose or a social interest.

Exceptionally, the governmental authorities are entitled to carry out an administrative expropriation, which in any case will still require an economic compensation to the owner. This expropriation will be subject to a judicial review aimed at protecting the rights of the rural and urban property owners.

B. Extinguishment of Ownership

Regarding rural properties, there is a special expropriation proceeding in case a rural property is not used or exploited by its owner during more than three years.

Other extinguishment proceedings also apply when the property has been acquired in violation of money laundering regulations or other illicit means.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: attempts vs realities

The integration of the stock markets of Chile, Colombia, Peru and most recently, Mexico (hereinafter the ‘Member Countries’) through the Latin American Integrated Market (MILA by its acronym in Spanish) was structured to be implemented in two different stages. The initial stage, which Member

114 Doing Business in Latin America MARCH 2016 Countries of MILA have completed, consists in the entry into operation of an order routing system allowing the sell and purchase of equity-based securities (ie, equity, participation units in funds bound to stock indexes and equity, etc). Orders are placed by local residents through a local stock broker dealer to buy/sell the securities in any of the Member Countries; however, the negotiation and actual sell/purchase of such securities is conducted by the stock broker dealer of the country were the securities are negotiated, and with whom the local stock broker dealer has entered into an agreement. Other important aspects related to transactions conducted through MILA are still disparate in each Member Country, including clearing and settlement of transactions, ﬁscal, foreign exchange regulation and surveillance standards.

In the second stage of the implementation, it is expected that local stock broker dealers are authorised to sell/purchase securities in any of the Member Countries (equity based or fixed income securities) without the intermediation of stock broker dealers of the countries where the securities are negotiated. In order to implement this stage, a standardisation of trading rules and defining a model of cross-border clearing and settlement is required. To achieve the former, an effort has already been conducted to eliminate disparities between the legislations of the Member Countries. For instance, in Colombia important legislation in different fields has been enacted. The most important regulation is reflected in Decree 4087 of 2010 (‘Decree 4087’) Decree 1850 of 2013 (‘Decree 1850’), and Circular 001 of 2011 issued by the Colombian Financial Superintendence (‘Circular 001’). Decree 4087, authorised the listing of equity-based securities in foreign securities quotation systems (sistemas de cotización de valores del extranjero) administered by the Colombian Stock Exchange (BVC by its acronym in Spanish)’ and negotiated in foreign stock exchanges, pursuant to agreements entered into by BVC with foreign stock exchanges (such as the case of MILA). It was the first regulatory amendment, which opened the door towards the integration. Decree 4087, also allowed that orders placed through a local stock broker dealer in Colombia to purchase/sell securities listed in foreign securities quotation systems, are registered in the electronic entry-book registry of the foreign stock broker dealer of the country where the securities are negotiated, rather than in the electronic entry- book of the local stock broker dealer. Decree 4087 also made important progress by allowing foreign clearing houses register transactions of equity-based securities in accounts held in the Colombian securities depositary,43 and also by allowing the later to register equity-based transactions cleared and settled in foreign clearing houses. On the other hand, Decree 1850 authorises foreign issuers and local securities intermediaries (ie, stock broker dealers, financial corporations) to promote foreign equity-based securities that make part of an initial public offering (IPO) in Colombia. In addition, Decree 1850 authorised local securities intermediaries to enter into underwriting agreements for the placement of foreign equity-based securities issued in a different country and negotiated in a other stock exchange (such as those of the Member Countries of MILA). Finally, Circular 001 establishes the minimum requirements that must be included in agreements entered among stock exchanges (such as the stock exchanges of the Member Countries), as well as those entered into among stock broker dealers of different countries. As of 31 January 2014, stock broker dealers authorised to operate in MILA had entered into 50 agreements to place orders with counterparties in any of the Member Countries.44

43 The current equity-based securities depositary in Colombia is Deposito Centralizado de Valores-Deceval S.A. 44 Source: MILA.

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On the other side, in another Member Countries such as Chile, the legal framework has also been evolving during the last years in order to implement an international integrated securities market. In January 1999, Law No. 19601 (‘Law 19601’) created the Offshore Market that allowed the registration of foreign securities by an issuer or its legal representative in order to trade them in Chile. Later, on June 2007, Law 20190 (‘Law 20190’) authorised the registration of foreign securities, now, by third parties called ‘patrocinadores’ (sponsors) simplifying, in that sense, the trade of these securities in the Offshore Market. With the enactment of Law 19601 and Law 20190, in November 2010, the implementation of the ﬁrst stage of MILA in Chile did not require changes in law.

Under the regulatory authority’s point of view, the Chilean Superintendence of Securities and Insurance (SVS by its acronym in Spanish) which supervises – among others – corporations, insurance companies, stock exchanges and stock broker dealers, has also contributed to the implementation of MILA in Chile. SVS through its regulatory framework has issued a signiﬁcant amount of standards. First, Circular No. 1046 dated 17 December 1991 (amended by Circular No. 1371 dated 30 January 1998) authorised as a complementary activity for stock brokers dealers consisting in the advice and speciﬁc commission for the purchase and sale of securities in foreign stock markets. Then, on 12 June 2008, Norma de Carácter General (NCG by its acronym in Spanish) No. 215 (amended on 18 December 2013) established the requirements and conditions to be met by companies in order to sponsor the registration of foreign securities in Chile. Finally, during the last years, and in order to ease the implementation of the second stage of MILA, the SVS has issued NCG No. 352 (21 October 2013) that establishes the standards for the public offering of foreign securities in Chile and was on 14 July 2014 when the SVS issued NCG No. 366 that gave instructions about the negotiation of those securities in Chile.45 As in the legal Chilean framework, some of the rules of the SVS were previously issued to MILA and without seeking said purpose; they have facilitated its implementation in Chile.

The surveillance authorities of the Member countries excluding Mexico46 have also entered into several cooperation agreements (acuerdos de entendimiento or ‘MOUs’) seeking to implement mechanisms for a combined surveillance, an exchange of information, cross-border risk administration and cooperation during investigations and sanctioning processes involving transactions or entities making part of MILA. In this regard, agreements include (1) cooperation agreement entered on 28 October 2009 among the Member Countries, excluding Mexico, by which it set forth the main tasks to be performed by regulators for the implementation of MILA, (2) cooperation agreement entered on 15 January 2009 among the Member Countries, excluding Mexico, establishing mechanisms for the exchange of information and assistance intended to facilitate the compliance of securities regulations of each of the countries parties to this agreement, and (3) the amendment to the cooperation agreement entered on 15 January 2009 among the Member Countries, excluding Mexico and dated 15 January 2010, establishing a combined surveillance committee in charge of the following functions: (1) creating the guidelines for the operation of the committee and the compliance of its functions, (2), determining, in accordance with the aforementioned guidelines, the most suitable channels for the exchange of information and documentation requested by authorities of the Member Countries, and promote their

45 Furthermore, NCG No. 304 dated 10 March 2011, establishes – among others – the registration procedure of debt securities issued by foreign states, international and supranational organisations and foreign entities in the Chilean securities registry. 46 The supervision authorities of the Member Countries excluding Mexico are: (1) Superintendencia de Valores y Seguros de Chile, (2) Superintendencia Financiera de Colombia, and (3) Comisión Nacional Supervisora de Empresas y Valores (Peru).

116 Doing Business in Latin America MARCH 2016 implementation, (3) setting forth mechanisms for the recollection of evidence in any of the Member Countries required for the administrative processes conducted by the surveillance authorities of the Member Countries, (4), enabling mechanisms to coordinate and provide support in connection with any investigation process related to transactions performed in MILA and conducted by any of the surveillance authorities of the Member Countries, excluding Mexico, (5) creating working teams to study, analyse and develop strategies to improve supervision standards related to MILA, and (6), procuring that information is kept conﬁdential by its members.

Despite the advances aforementioned, in regulation to implement MILA, there are still several regulatory challenges for a full implantation of stage 2. Further regulatory amendments are required in each of the Member Countries to achieve a homogenisation in clearing and settling rules, as transactions performed through MILA’s platforms are cleared and settled in each of the Member Countries according to their own risk administration standards (ie, establish the characteristics of intermediated routing, qualify the activity for stock broker dealers, mechanisms for the exercise of political and economic rights of investors, subscriptions of MOUs between local authorities and the supervisory authorities of the other participants of MILA, etc).

Homogenisation is additionally required in tax regulations pertaining to transactions performed through MILA’s platforms. For example, taxes on dividends are different in each of the Member Countries; while in Colombia dividends are not taxed if previously taxed at corporate level (taxable by the company who distributes them), in Chile there is a withholding tax of 35 per cent over dividends for non-residents and in Peru of 4.1 per cent (applying to non-residents), this generates a regulatory arbitrage which can cause a disincentive for investors. As another example, while in Colombia capital gains are not taxed if resulting in a sale of shares of a publicly listed company provided that they do not exceed 10 per cent of the total capital of the company, in Mexico non- residents are taxed different (between 0 per cent to 10 per cent depending on treaties subscribed with different countries, or 10 per cent if there is no treaty). In addition, a standardisation of rules for negotiation of securities in the stock exchanges of each of the Member Countries will allow local stock broker dealers not only to place, but also to negotiate transactions over securities in a foreign stock market, without the intermediation of their fellow counterparties. Moreover, in order to reach the standardisation of regulation, further efforts are required for an implementation of a combined surveillance by the authorities of the Member Countries. For example, a combined surveillance is necessary in connection with risk administration of transactions conducted through MILA, including the assessment of risks derived from the implementation of new ﬁnancial products and instruments (ie, ﬁxed income securities, derivatives), the transfer of risks from one market to another including systemic risk, continuity plans derived from operational failures in the negotiation platforms of MILA and crisis situation management. Furthermore, regulatory changes are essential to permit that a single authorisation by any of the authorities of the Member Countries, allow issuers perform IPOs in the Member Countries, without further authorisations. To achieve the former, a standardisation of information presented to investors and authorities by issuers is required (ie, offering memorandums, public information in web pages of issuers and authorities).

On the other hand, it is important to point out that currently MILA limits negotiations to equity- based securities. It is expected that ﬁxed-income securities are authorised to be negotiated within the MILA platforms, including corporate bonds and public debt (ie, TES (Colombia), CKD (Mexico),

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Títulos Emitidos por la Tesorería General de la República de Chile (Chile). Other ﬁnancial instruments, such as derivatives and structured products, shall be gradually included to attract the interest of more investors.

In respect to the interest of investors and issuers in MILA, it is believed that a more aggressive and educational campaign on MILA has to be conducted among them to show the potential beneﬁts of conducting business through MILA (see next Section for information on the objectives of MILA). As it will be explained in the next Section, numbers show that the current results in the volume of negotiations and liquidity in MILA has not reached the desired levels. This is explained in part because of the regulatory challenges pending to implement stage 2 of MILA described above, but also in the lack of knowledge of investors and issuers of the beneﬁts of negotiating securities through MILA. ii. MILA Market: Current Results and Expectations

Since the commencement of the operations of MILA in 30 May 2011, its Member Countries have pursued seven main objectives: (1) to promote a higher level of integration between the economies of the region; (2) to provide investors with diversiﬁed investment opportunities by granting access to a combined stock exchange market with a market value of US$979.024bn and 742 issuers as of April 2015,47 (3) as a consequence of the latter, to increase the volume of negotiations carried out in the combined stock market using MILA’s order routing systems, which as of 31 December 2014, reached a volume of negotiations of US$354.927.996;48 (4) to provide liquidity to the stock markets of the Member Countries to obtain a growth in the sources of ﬁnancing of issuers on the combined stock markets; (5) to increase for stock broker dealers the range of products to distribute to their customers; (6) the creation of new investment vehicles; and (7) to obtain a technological strengthening and adoption of international standards.

The above objectives have been partially achieved. Even though, investors currently have access to the combined stock markets of the Member Countries, now the second largest after BOVEPSA of Brazil, the volume of negotiations using MILA’s platforms and the liquidity of the combined stock markets have not reached the desired levels. This is explained by two main reasons: (1) the regulatory challenges pending to implement stage 2 of MILA (see Section 4.1 above), and (2) in the lack of knowledge of investors and issuers of the benefits of negotiating securities through MILA. A more aggressive and educational campaign on MILA has to be conducted – mainly by the authorities of each of the Member Countries – among them to show the potential benefits for business conducted through MILA, which are those described at the beginning of this Section. iii. Pacific Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance is a regional and economic integration initiative whose members are the same Member Countries of MILA and it was created in 2011. The objective of this alliance is to build an area of deep economic integration to real a free circulation of goods, services, capital and persons. Furthermore, it was created as a platform for trade integration, among other objectives, to foster

47 Source: Asociación de Fiduciarias de Colombia. 48 Source: MILA.

118 Doing Business in Latin America MARCH 2016 economic development and growth.

Taking into consideration the above, MILA has an important role on this integration process. By allowing the Member Countries have a free trade of their securities with equal regulatory standards, will enhance the economic growth of the Member Countries and development of its corporate sector iv. IPOs of Multilatina Companies in Latin America Capital Markets

During years 2013 and 2014, several companies performed IPOs through the stock exchange markets that integrate MILA.49 Among the issuers were companies such as Carozzi S.A., S.A.C.I. Falabella, Intasa S.A., Latam Airlines Group S.A., Molibdenos y Metales S.A., Grupo Security S.A., Banco Cencosud S.A., Rigel Perú S.A. and Grupo Aval Acciones y Valores. However and as mentioned before, current regulation does not allow performing IPOs without the joint authorisation of each of the authorities of the Member Countries that integrate MILA. We believe that allowing issuers ﬁle a single authorisation request with any of the authorities to make an IPO in any of the Member Countries, would increase substantially the number of IPOs in MILA, as less regulatory obstacles would make the process faster and less costly.

49 Source: MILA.

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120 Doing Business in Latin America MARCH 2016 Costa Rica

Doing Business in Latin America MARCH 2016 121 vi. Costa Rica

A. Foreign investment

Costa Rica is very open to foreign investment; its stable social climate, highly educated workforce, and solid legal framework, among other factors, make the country a favourable environment for many foreign investors. In 2014, foreign direct investment (FDI) represented about 4.4 per cent of the gross domestic product (GDP), which in turn was about US$50.4bn in that same year.

The Ministry of Foreign Trade (COMEX), the Export Promotion Agency (PROCOMER), and the Investment Promotion Agency (CINDE) all provide information and resources for potential foreign investors in Costa Rica. i. Authorisations vs Limitations or Prohibitions

A. ABSENCE OF LIMITATIONS

Generally, there are no limitations or prohibitions on foreign ownership or investment in Costa Rica, and prior approval or special registration is not required. The only exception to this applies to energy projects and terrestrial maritime zone concessions, which limit the equity ownership of foreign investors in a speciﬁc project to 65 per cent and 50 per cent, respectively.

B. FAIR AND EQUITABLE TREATMENT

Following the fair and equitable principles contained in the Constitution, nationals and foreigners are treated equally under the law. All investors, foreign or domestic, must fulﬁl the same basic requirements to organise and operate a business in Costa Rica.

C. FREE CHOICE OF LAW

With the exception of government contracts and certain cases that require the application of Costa Rican law (eg, employment contracts), parties to a commercial agreement can freely choose the governing law of the contract. Furthermore, parties may agree to submit disputes arising under such agreement to arbitration or other alternate means of dispute resolution, or to the Costa Rican courts or the courts of a foreign jurisdiction.

D. OPERATION PERMITS

Any person or business entity wishing to engage in a commercial activity must register as a taxpayer before the General Directorate of Taxation (DGT). The applicant will be granted a Taxpayer Identiﬁcation Number, to be used when paying and ﬁling national taxes.

Furthermore, if the investor seeks to operate facilities in the country, a series of local permits will be required, including a business licence, issued by the respective municipality, and a health permit, issued by the Ministry of Health. Some business activities, such as mining, energy, or high-

122 Doing Business in Latin America MARCH 2016 risk activities in general, require an environmental feasibility permit granted by the National Environmental Technical Secretariat (SETENA), prior to requesting the health permit from the Ministry of Health.

Finally, in order to hire employees, a person or business must register before the Costa Rican Social Security (CCSS). All employees hired must be reported to the Costa Rican Social Security. Additionally, the employer must also obtain workers compensation insurance from the National Insurance Institute (INS), and insure all employees under this policy. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

A. CONCESSIONS IN GENERAL

The General Law on Concessions of Public Works with Public Services (Law No. 7762) provides the framework for public-private cooperation in infrastructure development. Pursuant to Law No. 7762, and its Regulation, the Costa Rican government can grant a private entity a concession to develop a public work or provide a public service; the concession is established through a contract between the public and private entities. A concession may be granted for the construction of any public work or provision of any public service, provided there is a legitimate public interest. Certain activities, such as electricity, telecommunications, and health, have their own special laws and regulations regarding concessions.

Generally, the concession is granted through a public tender or bidding process; this process may be initiated either by the government entity or by the private party. The process is composed of four stages: (1) project development, planning, preliminary ﬁnancial and environmental feasibility studies; (2) preparation of tender and bids; (3) bidding, concession awarding, and contract signing; and (4) construction and/or operation of the project.

The governmental entity responsible for promoting, developing, and implementing public works’ concessions is the National Concessions Council (CNC), an entity associated to the Ministry of Public Works and Transport (MOPT).

With the exception of concessions in energy generation and transmission, and concessions in the terrestrial maritime zone, which have limitations on foreign participation, there are no restrictions regarding foreign investments in concessions.

B. CONCESSIONS IN ENERGY

The generation and transmission of electricity is reserved for the State. However, by virtue of the Law Authorising the Autonomous or Parallel Electric Generation (Law No. 7200), the government can grant a concession to a private party, for the commercial generation of electricity. The National Electricity Service (SNE) may grant concessions for operating power plants of limited capacity of up to 20,000 KW, and for a period of up to 20 years, a term that may be extended. The energy generated by the private concessionaire would then have to be sold to the Costa Rican Electricity Institute (ICE) or to the National Power and Light Company (CNFL), given that only public entities are authorised to distribute energy in the country.

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Given that Law No. 7200 declared the purchase of energy of public interest, a company wishing to obtain a concession and consequently sell energy to the State cannot be wholly-owned by foreign persons; that is, at least 35 per cent of the company’s stock must be owned by Costa Rican citizens.

C. CONCESSIONS IN THE TERRESTRIAL MARITIME ZONE

The Terrestrial Maritime Zone Law (Law No. 6043), enacted by Costa Rica in 1977, created the terrestrial maritime zone, which consists of the first 200 metres of land inward from the main high tide line along the shores of the Pacific Ocean and the Caribbean Sea. The terrestrial maritime zone is divided in two parts: the first 50 metres is called the Public Zone; the inner 150 metres is called the Restricted Zone. Private parties are not allowed to use the Public Zone for any purpose. Investors may use the Restricted Zone through a concession granted by the local governments (ie, municipalities). The concession is a contract between the respective municipality and the private counterparty, whereby the former gives the latter the authority to develop the Restricted Zone for a personal or commercial purpose. Concessions are granted for a minimum of five and a maximum of 20 years. Prior to the expiration of the concession, a renewal may be obtained from the respective municipality.

There are limitations regarding foreign investment in beachfront properties with concession rights. For example, a non-Costa Rican company, or a non-Costa Rican individual that has not lived in Costa Rica for at least ﬁve years, cannot be granted concession rights in the Restricted Zone.

However, a foreign investor does have legal options to indirectly acquire the concession rights in the Restricted Zone. The most common way is through stock ownership of a Costa Rican company that holds the concession rights. It should be noted, however, that pursuant to the Terrestrial Maritime Law, the foreign investor couldn’t own more than 50 per cent of the stock of the company holding such rights. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

There is currently a ban on oil exploration and extraction on Costa Rica’s continental and marine territory. In 2011, the central government signed an executive decree establishing a moratorium for oil exploration and extraction, and in July of 2014, the President signed Executive Decree No. 38537-MINAE, extending the moratorium to 15 September 2021. Analysts have stated that the moratorium appears to exclude exploration and extraction of natural gas.

There is also a moratorium on activities concerning the thermal processing of solid waste to produce biogas. The moratorium was enacted through Executive Decree No. 38500 S-MINAE, on June 2014, and has no definite term. Rather, the Decree states that the moratorium will terminate when the health and environment authorities have determined with technical and scientific certainty that the activity does not significantly impact public health and the environment, and that it complies with the Law for Integrated Waste Management (Law No. 8839).

Mining exploration and extraction is permitted, but is limited in scope. Pursuant to the Mining Code (Law No. 6797), and its Regulation No. 29300-MINAE, individuals or companies wishing to engage in mining exploration must request a permit from the Directorate of Geology and Mining (DGM). The permit is issued for three years, and may be extended for a period of two years. During this term the

124 Doing Business in Latin America MARCH 2016 permit holder may obtain an extraction concession from the DGM. The extraction concession may be issued for a maximum of 25 years, and may be extended for a period of ten years.

Pursuant to the Law No. 6797, mining of most minerals and natural resources is permitted, with certain exceptions, such as oil, water, carbon, among others, which are reserved for the State. With the exception of oil, these may be given in concession to third parties. As of 2010, open pit metal mining is strictly prohibited.

In general, oil, gas, and mining activities are a sensitive subject in Costa Rica, given the country’s great focus on environmental protection and conservation. Therefore, concessions are limited and investors may face a great deal of pressure from activist environmental groups in the country.

It should be noted that these bans and limitations apply to all investors alike, whether foreign or domestic.

IV. TREATMENT OF FOREIGN INVESTMENT IN REAL ESTATE

It is not to wonder that Foreign Investors have shown interest in Costa Rica for a long time: Costa Rica has long been recognised as a regional leader in Latin America of social and economic development. It guarantees economic stability with the highest standard of living in the Caribbean Basin, and political stability with the longest standing democracy in Latin America. As a result, the business environment in Costa Rica is generally stable.

Costa Rica enjoys a highly developed communication, electric and transportation infrastructure and maintains a self-sufﬁcient power supply. The Costa Rican Electricity Institute (ICE) controls several hydroelectric power plants that produce enough electricity to fulﬁl the country’s needs. New electricity production projects that include geothermal generators are currently being developed to meet the country’s needs for the next century.

Costa Rica has over 15,000 miles of roads that run from coast to coast. There are two international airports (Juan Santamaría Airport which is located in Alajuela and offers access to principal markets all over the world and Daniel Oduber Airport located in the western province of Guanacaste, used particularly for tourism) and another airport (Tobías Bolaños in San José) mainly for local ﬂights. Furthermore, thanks to its geographical position, Costa Rica has two international ports covered by important shipping lines on both the Atlantic and Paciﬁc coasts.

The Costa Rican government welcomes foreign investment. All major political parties back this positive attitude. Since 1982, Costa Rica has consistently improved investment conditions. CINDE, an association of private sector leaders, actively promotes investment through ofﬁces located in several countries.

The last successive governments have been moving away from state controls and towards an open economy in anticipation of free trade agreements with nations like the United States, Mexico (already in force), Chile, Panamá, Trinidad and Tobago, Venezuela and Colombia. A number of Bilateral Investment Treaties (BITs) have been signed, such as the ones with Germany, France, Taiwan, Spain, Switzerland, Canada, Chile, United Kingdom, Venezuela, Argentina, Holland, Paraguay, South Korea, Poland and others. Foreign investment in Costa Rica is strongly encouraged as evidenced by the wide

Doing Business in Latin America MARCH 2016 125 range of incentives available for different sectors, such as Export Orientated operations (Free trade zones and Special Drawback), Mining, Agriculture, Tourism and Forest Industry. As tourism and Forest Industry is directly related to Real Estate, we consider it appropriate to explain the incentives thereto related more profoundly:

A. TOURISM INCENTIVES

Costa Rica is a tourist destination with a wide spectrum of tourist opportunities, ranging from adventure tourism, to eco-tourism, to conventional five-star tourism, to medical tourism and environmental legislation has promoted the conservation and protection of an important extension of natural ecosystems located in the Costa Rican territory. The hotel sector may obtain different incentives to operate in Costa Rica. The Costa Rican Tourism Institute (ICT) can issue a Tourism Declaration for companies and activities that meet established requirements, which is a previous step necessary for the award of a Tourism Contract, which grants benefits, and tax incentives to individuals or legal entities. Incompliance with the obligations set forth in the Tourism Declaration implies the immediate termination of the Tourism Contract. Applicants to this contract must comply with legal, financial and technical requirements. Once granted, the agreement will contain the name of beneficiary, description of activity, detailed list of incentives, list of duties and obligations, term of the contract and any other information included in the agreement.

Tourist contracts with hotels, for example, have a maximum legal validity of 25 years. Beneficiaries must submit yearly reports to the ICT, within ninety days after the end of the fiscal year, indicating the use given to all exempted goods. It is not allowed for beneficiaries of the incentives granted by the Tourism Incentives Law to sell, lease, lend or in any other way negotiate the exonerated goods without prior approval by the ICT, or to use the goods for unauthorised purposes.

Speciﬁc incentives and beneﬁts that can be granted to service providers in the hotel business are as follows:

• Exemptions to import taxes or taxes over local purchases of goods for the operation or establishment of new companies, or for those companies already established which offer new services.

• Conferment of municipal licences and permits that are required by the companies for the development of their activities, within 30 days of application, including a liquor licence for local or imported liquors within the authorised establishment. Such licence can be used in the buildings and places that the licence includes and authorises but cannot be used within another establishment.

• Authorisation from the Costa Rica Central Bank for Costa Rican companies engaged in international tourism to function as auxiliary cashiers to provide currency exchange services to foreign tourists on behalf of such institution. The contract between the Central Bank and the company shall establish terms and conditions for reimbursement transfers.

• Other incentives and beneﬁts may apply for other tourism activities. Thus, the Law and its Regulations contemplate in its articles incentives and beneﬁts that the enterprises of the following branches can opt for: tourist air or water transportation companies, tour operators, amongst others.

126 Doing Business in Latin America MARCH 2016 B. FORESTRY INCENTIVES

Under Law 7575, the government grants Certificates for Forest Conservation (CCB) to compensate proprietors or landowners for environmental services rendered to Costa Rica through the preservation of forests which are located on the respective property. However, prior to applying for the certificate, the law requires certification that no lumbering activity has taken place during the two preceding years, and that there will be no lumbering during the duration of the certificate which carries a minimum of 20 years.

These certificates are marketable instruments that may be bought and sold or used for the payment of tax liabilities or other contributions. The value of the certificates has not yet been determined under the new forestry regime. The holders of the certificates are also entitled to the following benefits:

– Full property tax exemption;

– Full Asset Tax exemption;

– Special protection by police authorities against squatters that may invade the property.

The certiﬁcates must be registered with the Public Registry as lien against the property for a speciﬁed period of time that is indicated by the signed contract. Another system of incentives exists for proprietors who manage natural forests and provide environmental services to Costa Rica or those who engage in reforestation activities.

Persons that engage in reforestation activities without the use of resources from prior forestry regimes will enjoy an additional incentive of a full income tax exemption on all income derived from the commercialisation of their products. In cases where the reforestation activities have been ﬁnanced with beneﬁts granted under prior forestry regimes, the income tax exemption would be proportional. v. Treatment of Foreign Investment in Agribusiness Activities

In Costa Rica, the agribusiness activities occupies around 10 per cent of the country’s land use and represents almost 6.5 per cent of the national GDP. The high quality of its products including coffee, bananas, pineapples, tropical fruits and ornamental plants, amongst others, are well known worldwide and those products are frequently exported to Europe, North America, China and Japan. The country is the main exporter of fresh pineapple in the world, and during wintertime in the North Hemisphere, it represents the leading melon provider for Europe.

The main speciﬁc objectives pursued by public policies for the next years in this matter are: the increase of agro productivity using the same land extensions, a more efﬁcient use of natural resources, reduction of the amount of energy required for agro process and the incorporation of clean and renewable energies. Also, the production processes must be executed under social and environmental responsibility policies, looking forward to accomplish the international recognition as a carbon free country.

Costa Rican fresh products are guaranteed with the Global G.A.P. that certiﬁes the good agro proceedings during the entire productivity process and it’s expected to concede economic beneﬁts

Doing Business in Latin America MARCH 2016 127 in the near future. According to environmental policies and in force legislation, the country is promoting the environmental friendly products, with standard agro proceedings that must include organic agriculture, green products, free – fair trade and the incorporation of biotechnology techniques. Also, according to the trend that concedes priority to organic products, many of the exported commodities are produced under 100 per cent natural procedures, which are also certiﬁed under high quality standards, according to Ocia, BSC, OkO, Ecocert and Skal.

PROCOMER and CINDE, work together in order to promote and offer all the facilities that foreign investors require to settle agribusiness in Costa Rica. vi. Treatment of Foreign Investment in the Rendering of Public Services

Costa Rica has an open and non-discriminatory government procurement system and concession regime, under which nationals and foreigners can freely participate and bid for public contracts.

A. PUBLIC CONTRACTING IN COSTA RICA

Public contracting in Costa Rica regulates the form in which the Government plans, selects its partner, executes, controls, supervises and closes its procurement processes on a balance between the principle of legality and Private Law.

This type of contracting has a constitutional basis, speciﬁcally article number 182 of the Constitution, which establishes that the contracts for the execution of public works held by the Government Authorities, Municipalities and autonomous institutions, purchases made with funds of those entities, and sales or leases of assets belonging to them, will be developed by public tender, in accordance with the law governing the amount involved.50

B. CONCESSION REGIME

The award of concession agreements to private companies for the construction, maintenance, conservation, restoration and operation of works, services and other infrastructure projects is governed by a special law, which is the Administrative Contracting Law and its regulations, as well as the General Law on Concession of Public Works with Public Services.

Public concessions generally grant the right to build and operate infrastructure projects, to collect tolls and other fees from users of the project, under the supervision of a regulatory agency. The award of concessions regarding power generation and distribution, telecommunications, ports, airport operations, amongst others, are governed by sector-speciﬁc laws and are subject to different rules.

Foreign companies can participate by setting up a subsidiary, registering a branch in Costa Rica or by entering into a joint-venture arrangement with local or foreign companies already established in our country. As a general rule, the government agency seeking to purchase or concession the goods and services is the entity responsible for conducting the procurement process and awarding the contract. Contracts are awarded to the qualiﬁed participant that submitted the best bid in accordance with the tender documents.

50 Political Constitution of Costa Rica; art. 182.

128 Doing Business in Latin America MARCH 2016 Once the contract is awarded, the provider or supplier and the government agency enter into a ﬁnal agreement in the form prescribed by the tender documents. This contract must then be recorded and counter-signed by the Comptroller General of Costa Rica.

As mentioned above, our country has a generally open and non-discriminatory government procurement system and concession regime, under which nationals and foreigners can freely participate and bid for public contracts under equal conditions. Notwithstanding the foregoing, there are two main exceptions to this general rule in relation to the Law on Maritime Zone and to the Cabotage Service Law. There are foreign limitations established in both laws, for granting the right to operate the service line for coastal and maritime zone concession.

C. LAW ON MARITIME ZONE

This law represents one of the limitations to the treatment of foreign investment in Costa Rica’s public procurement system and concession regime. In what matters, article number 31 of said law states that only Costa Rican natural or legal persons who may have concessions, may intervene in tourism development in the maritime zone, and that foreign entities may intervene as long as they constitute tourism companies, whose development capital belongs in more than 50 per cent to Costa Rican citizens.51

Concessions in tourist areas require approval by the Costa Rican Tourism Institute (ICT); while in other areas of the maritime zone, such approval corresponds to the Rural Development Institute (INDER). If the concession is referred to an island or islet sea, or part thereof, the approval of the Legislature is required.

Furthermore, article number 47 of the Law on Maritime Zone provides that no concessions will be granted to:

• Foreigners who have not resided in the country for at least ﬁve years;

• Corporations with bearer shares;

• Companies or entities domiciled abroad;

• Entities established in the country by foreigners; and

• Entities whose shares or quotas or capital correspond more than 50 per cent to foreigners.

Entities already having concessions may not assign or transfer quotas or shares, nor its partners, to foreigners. In any case, transfers that may be made in violation of the above will have no validity.52

D. CABOTAGE SERVICE LAW

This Law also represents one of the limitations to the treatment of foreign investment in Costa Rica’s public procurement system and concession regime. In order to exploit the coastal shipping service on a regular an ongoing way, it is essential to obtain a licence from the Government, through the Public

51 Law on Maritime Zone; art. 31. 52 Law on Maritime Zone; art. 47.

Doing Business in Latin America MARCH 2016 129

Security Ministry, subject to the provisions of said Law and its regulations.

In what matters, article number 7 of the Cabotage Service Law, notes that the granting of the right line to exploit said service, will only be granted to Costa Rican citizens or to companies constituted under the country’s laws, of whose capital’s 60 per cent of shares, belong to Costa Rican citizens.53

The granting of new lines will be made through public bidding, in people or companies offering grater guarantees of security and service, preferring, in equal conditions, those which are organised and have provided services of this nature. In order to ensure the compliance of their obligations, dealers will constitute a reservoir or guarantee established by the Public Security Ministry.

B. Rendering of public services i. General Framework

Costa Rica does not have general restrictions for rendering public services. However, limitations related to public property and State monopolies do exist. Private entities can offer public services if, in compliance with national regulations, they are previously awarded an authorisation from the corresponding institution, usually a Ministry. By means of a public grant procedure, the State may contract the execution of public works and the rendering of public services with private parties.

Public services regulation is not a matter of a sole national entity, but of several authorities that regulate the diverse public services. ARESEP, the Regulatory Authority of Public Services (Autoridad Reguladora de los Servicios Públicos) regulates public utility services such as water, electricity, sanitation, fuels and terrestrial, maritime and aerial transportation. Meanwhile, SUTEL (Superintendence of Telecommunications), SUGEF (ﬁnancial institutions), SUGESE (insurance industry) and SUPEN (pension funds), regulate the rendering of telecommunications, banking, insurance and pensions services respectively. ii. Governmental Monopoly vs Private Initiative

In Costa Rica, antitrust and competition law are mainly regulated by Law number 7472 for the Promotion of Competition and Effective Consumer Defence and Executive Decree D-25234. Law 7472 sets legal principles and regulations that seek to safeguard and promote competition and free market participation by restricting and forbidding monopolistic practices and concentrations. This Law assigns the responsibility to investigate and correct anticompetitive practices to the Commission for the Promotion of Competition (COPROCOM). This Law is applicable to monopolies, absolute or relative and to mergers and unfair competitions. Acquisitions carried out under the purpose of diminishing, affecting or impeding free market competition for law also prohibits similar, identical or substantially related goods.

Under Costa Rica’s antitrust and competition law, absolute monopolistic practices are those that have direct effects over price ﬁxing, quantitative restrictions of goods or services and arrangements made by competitors to divide the market. Relative monopolistic practices refer to those conducts that

53 Cabotage Service Law; art. 7.

130 Doing Business in Latin America MARCH 2016 have direct effects over competitors, inducing them to leave the market, limiting supply or enacting predatory pricing. According to Law 7472, a concentration implies the merger, acquisition of control, or any other Law whereby two or more companies’ partnerships, shares, equity, trusts or assets in general, are concentrated into one, with the object or purpose of diminishing, affecting or impeding free market competition for similar, identical o substantially related goods.

On 5 April 2013, an important reform to Law 7472 came into force that shifted the approval of concentrations of companies subject to this Law away from industry-related administrative authorities. The new procedure requires previous and mandatory reporting before the COPROCOM. In the case of the telecommunications industry, SUTEL still shares the responsibility of investigating and correcting anticompetitive practices in the sector.

The aforementioned law clearly states that if any of the following situations occur, the merger must be notified to COPROCOM, regardless of the assessment of the effects that the merger or acquisition may or may not have on the market competition: a) the total amount of the productive assets of all the economic agents involved and their headquarters exceed 30,000 minimum wages; b) the sum of the total revenue generated in the country during the last fiscal year of all the agents involved exceeds 30,000 minimum wages; or c) one of the companies involved in the merger has productive assets or income that exceeds the 30,000 minimum wages. Executive Decree number 37,899 has clarified that only mergers or acquisitions that involve at least two companies, which hold operations in Costa Rica and meet at least one of the aforementioned situations, must undergo the previous and mandatory reporting procedure before COPROCOM. iii. Privatisation General Rules

Costa Rica does not have a speciﬁc framework for the privatisation of assets, companies or services and does not have an active privatisation agenda. During the 1980s, Costa Rica initiated limited public sector reforms seeking to increase state decentralisation of public services, thus allowing the government to contract operations with private suppliers and designating the Ministry for National Planning and Economic Policy (MIDEPLAN) as the government’s privatisation administration. Nonetheless, privatisation initiatives have not implied the actual sale of state-owned companies and institutions to the private sector. Instead, Costa Rica allowed for concessions and authorisations in the public service areas, assigning the management or provision of certain public services to private individuals.

As mentioned in subsection 2.1, ARESEP is the entity that regulates water, electricity, sanitation, fuels and terrestrial, maritime and aerial transportation public services, setting norms, regulations, and technical standards on these matters. In order for private companies to be able to become a provider of regulated services, they must: (1) comply with ARESEP’s requirements; (2) obtain the required licence or concession from the Environmental and Energy Ministry (MINAE) and; (3) be registered before the Costa Rican Public Registry. Furthermore, State-owned enterprises have their own independent board of directors, internal operating regulations and procedures and may establish speciﬁc public tenders in order to allow private parties to manage or provide certain services.

The most restricted sectors for privatisation have been electricity, petroleum, telecommunications and insurance. After the Dominican Republic-Central America Free Trade Agreement (CAFTA-DR)

Doing Business in Latin America MARCH 2016 131 entered into force, the privatisation process in Costa Rica accelerated, and the telecommunications and insurance monopolies were ﬁnally opened.

Costa Rica reserves the right to legislatively grant concessions for the transmission, distribution, and trade of electricity, based on service demand. Priority will be given to concessionaires already supplying the service. In the telecommunications sector, important regulatory framework changes took place with the enactment of the General Law of Telecommunications, new regulations for the supply and quality of services, and the creation of new Governmental Agencies such as the SUTEL, the Ministry of Science, Technology and Telecommunications (MICITT) and FONATEL.

As stated above, wireless services cannot be permanently removed from State ownership. Private parties may supply wireless services through the following models: a) authorisations, where they are authorised to provide services through wire line networks or networks owned by other operators; and b) concessions, granted to those providing wireless services.

The insurance sector monopoly was eliminated in 2008, when the Law Regulating the Insurance Market came into force. SUGESE, the Insurance Superintendence was created as the supervisory body in charge of overseeing the legal and technical requirements for the opening of the insurance market. Pursuant to the aforementioned Law and in order to provide the services, private entities must be authorised to offer insurance products and services. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

According to Law 7494, foreign private parties may participate in a public bid to obtain a concession or contract with the Public Administration. However, private parties may never render public services that are considered part of the ‘ordinary activity’ of the public administration, such as granting permits or licences.

Pursuant to article 121, subsection 14 of the Costa Rican Constitution, the State may grant the possibility of using, developing and beneﬁting from goods and services of its property to a private party through a public concession. Concessions are regulated by law, executive decrees and stipulations held in the concession contract between the State and the party. The main applicable laws are the General Framework for Public Administration Law; Law 7494 regulating Administrative Contracting; Law 7762 regulating concessions for public services and public works; and Law 8422 regulating Public Administration. Public institutions may sub-contract with private parties in order to successfully provide certain public services if their Organic Law allows it, as is the case of the Costa Rican Institute of Electricity and the Costa Rican Water Supply and Sewerage Institute.

Finally, the Public Administration may also arrange Interested Management Contracts, with private entities in which the Administration itself renders a certain public service by means of a private manager (eg, Interested Management Contract of the Juan Santamaría International Airport).

C. Real estate i. Real Estate in Costa Rica

There are no restrictions in Costa Rica for foreign citizens to purchase and register properties under

132 Doing Business in Latin America MARCH 2016 their name, except for those established for the Maritime Zone Properties, as detailed further on in this article. The National Public Registry (NPR) provides a safe and well-developed mechanism for title registration and transfer where a full description of recorded real estate is available to the public, including information such as location, property lines, measurement and owner as well as possible easements affecting the real estate.

All property ownership changes must be ﬁled at the NPR and once the new ownership is registered, such change must also be recorded at the corresponding local government (Municipality), accepting the obligation for the owner to update the value of the real estate at the Municipality every ﬁve years. Municipal taxes, which are assessed based on the property value, must be paid on a quarterly basis, in March, June, September and December.

One of the NPR’s underlying principles is the ‘first in time, first in right’ principle, which grants rights to parties in the order in which the documents granting them those rights are filed and made public through the NPR. A second very important and related principle is the ‘chain’ principle, according to which the NPR verifies that the seller is the registered owner of such asset, case contrary it will not allow the document to be registered. Court rulings have consistently upheld that any document not filed or recorded with the NPR does not affect third parties who act in good faith. For example, a purchase of a lot not filed by the buyer at the NPR would not prevent the seller from transferring the same lot to a third party who acquires it in good faith nor will it prevent such third party from validly recording the sale, as long as the seller is still registered as owner of such lot – due to the chain principle. As a consequence, the initial buyer would have a full civil and criminal recourse against seller, but not against the second buyer as long as he acquired the property in good faith. This clearly illustrates the importance of the system as means of protecting parties to real estate transactions and providing trustworthy public information.

Transfer of title always involves a Public Notary since all title transfers and creation of mortgages must be completed before a licensed Costa Rican Notary. Having seller and buyer execute a transfer deed before such Notary transfers title. The transfer deed must include personal data on the seller, the buyer and any other appearing party; a full description of the property to be transferred; the price of sale and form of payment and any other special conditions that apply to the sale. Closing costs and fees are currently established by statute, thus a Notary cannot freely increase nor decrease his statutorily established fees without incurring in professional and/ or tax liabilities. The transfer tax is to be paid in equal parts by both seller and buyer, unless otherwise agreed upon, whereas solely the buyer must cover other stamps related to the registration of the property.

Different forms of ownership that are also used in Costa Rica, other than the fee simple, which gives the owner the absolute right to materially own the property, use it, lease it, sell it, amongst others, are as follow:

A. CONDOMINIUM PROPERTY

Its own special law regulates the condominium, also referred to as gated communities. It allows a developer to restrict and regulate certain aspects of the property by means of the by – laws of the condominium. Thus, the property owner of a condominium property still has full ownership but the construction of a house on such property, for example, must comply with certain criteria as

Doing Business in Latin America MARCH 2016 133 defined in the by-laws. Due to the fact that a Condominium shares common area among all owners, maintenance fees are applicable and must be paid by all homeowners, even if such homeowner does not use the common area, as opposed to a fee simple property not located in a Condominium in which no common maintenance fees are charged. The land on which the Condominium is located will be identified at the Property Section of the Public Registry with its own property registration number together with the letter ‘M’, whereas all resulting properties subordinated to the Condominium law and regulations will be identified with its property number along with the letter ‘F’.

B. MARITIME ZONE PROPERTY

The Maritime Zone is defined as the 200 metre-wide strip along the Atlantic and Pacific coasts of Costa Rica, regardless of its nature, measured horizontally from the ordinary high tide line and the land and rocks exposed at low tide, including islands and islets also. This type of property is also known as the beachfront property. The Maritime Zone is divided in two sections: the first one – known as the Public Area – is the land strip (beach) measuring 50 metres, not subject to any form of ownership, since all beaches are of public access and pertain to Costa Rica; the second one – the Restricted Area – is the remaining 150 metre-wide strip which may be object of concession. As a public domain, the totality of the Maritime Zone is a State asset and, as such, the land may not be encumbered, owned or embargoed, unless, exceptionally, the property was purchased before the enactment of the Law (1977) and registered legally and is therefore recognised as private property. The corresponding Municipality, the Costa Rican Tourism Institute and the rest of the competent entities dictate the necessary measures to preserve and protect the original conditions of the maritime zone. The municipalities have the obligation of taking all the pertinent actions in case of violations of the maritime zone, and enforce the preservation of the original conditions of the ecosystem, including the eviction of occupants and destruction of constructions constructed against the law. A concession request grants neither real administrative rights nor rights to occupy or build in the maritime zone, since the request itself does not consolidate any legal situation due to the fact that the maritime zone is an environment asset. It is important to mention that there are certain legal limitations for foreigners who have not resided (legally) in Costa Rica for at least five years prior to the application for a concession contract. Likewise, concessions cannot be granted to entities in which foreigners hold more than 50 per cent of the capital stock. Once the corresponding municipality authorises the Concession Contract defining conditions such as term (usually 20 years or less), concession fee, and construction regulations, among others, the concession holder shall, with the assistance of a Notary Public, register the contract in the Public Property Registry. The letter ‘Z’ will precede the property number. After signing the Concession Contract, the concession holder has the obligation to pay an annual fee to the corresponding municipality for the right of use over the land.

C. TOURIST GULF OF PAPAGAYO PROPERTIES

The Gulf of Papagayo is a zone regulated by its own law (number 6758) which established the existence of a Master Development Plan approved by the Costa Rican Tourism Institute that allows the granting of concessions for the use of the maritime zone properties located within the limits of Bahía Culebra. Under this type of ownership, the concessionaire is allowed to use, enjoy, transform,

134 Doing Business in Latin America MARCH 2016 build (only if in accordance with such Master Plan), defend, pledge, encumbrance, and lease the concession property. There are no restrictions for foreigners to be registered owners for the concession, by themselves or through a corporation, being the sole requirement that the corporation was constituted and is has a registered domicile in Costa Rica. The concession contract will determine details such as term (usually 50 years), obligations, and building restrictions, among others. Once the contract is in force, the concession holder has the obligation to pay an annual fee to the Costa Rican Tourism Institute for the right of use over the land. Should the concessionaire not comply with his obligations, the law foresees the procedure that must be followed in order to apply penalties or early termination of the concession.

D. TIME SHARE OWNERSHIP

Time-share property grants the contract holder to enjoy certain real estate for a certain period of time and under certain conditions as established in the time-share contract through the payment of certain amount of money. This type of ownership does not imply the transfer of ownership of the Real Estate itself, simply authorising the use of such Real Estate under the conditions set forth in the contract. This type of contract has to be authorised by and registered at the Ministry of Commerce, Industry and Economics.

E. UNTITLED PROPERTY

Even though this is the exception to the rule, some properties still have not been titled and are not duly recorded at the Public Registry. In these cases an Adverse Possession process must be initiated which involves a site inspection by the Judge to verify that the use the land has been given is adequate, that all the neighbours recognise the solicitor as property owner and that no one objects the process. Ownership of untitled land can be transferred by the means of a private purchase deed; however, it is recommended to initiate the Adverse Possession process as fast as possible to obtain secure ownership. ii. Rural Properties – Limitations for Private Parties

Rural properties or agricultural parcels imply that they are destined for agricultural purposes. The Regulation of Urbanism and Fractionalisation issued by the National Housing and Urbanism Institute (INVU) has established the minimum size of such properties of 5000 sq. m. and the survey for such property must indicate that its use is ‘agricultural’. Construction restrictions do also apply as the regulation referenced allows a maximum coverage of ﬁfteen per cent. The density allowed as well as height restriction are established by each local government through its Regulatory Plan and its Zoning Regulations.

It is not allowed to utilise the terrain for any use that is not compatible with the uses allowed and determined by the specific zoning plans of each local government. In order to verify compliance with the use pretended for a specific property, the owner must obtain a zoning certificate issued by the Municipality. This certificate will indicate details about density allowed, coverage (as said, the maximum allowed is fifteen per cent and most of the Municipalities authorise this maximum), setbacks, for example.

Doing Business in Latin America MARCH 2016 135

The National Housing Institute will not allow the development of a terrain in case the property is located outside of the zoning limits and is too far away from public services and facilities, due to the high cost of such services and facilities, due to its distance to inhabited areas, or because of any other health or security reason. If the pretended project is located outside of the zoning limits but utility services are available or the property owner will cover its connection costs, the Housing Institute would have no grounds to deny permission.

For this type of property it is strongly recommended to keep the property lines of the terrain clearly visible by the means of a fence or a 3-metre width lane, in order to be able to initiate a claim due to encroachment, structural encroachment or damages to the property.

According to the Law for Use, Management and Conservation of Soil number 7779, an owner can request for special tax incentives for up to 40 per cent exemption of the property tax payment, for the land which is being used according to its use classiﬁcation and if good practices of management, conservation and soil recuperation are applied.

The possibility to request a change in the classiﬁcation of the land exists through the Ministry of Agriculture, who will review and take into consideration the National Plans, Area Plans as well as regulations provided by the National Environmental Secretary (SETENA), criteria issued by the Committees for the Use, Management and Conservation of Soils by Area and will determine if a change of use is feasible or not. iii. Urban Properties – Limitations for Private Parties

Each local government has the obligation to issue a Regulatory Plan for its territory in order to protect interests related to health, security, comfort and public welfare of its community. This Regulatory Plan must contain regulations related to the minimum size of a lot, the use of land, the distribution of properties dedicated for residential use, commerce, industrial, education or recreational use. Even if all Regulatory Plans share some values as common, they do present different regulations depending on speciﬁc needs of certain community. It is thus recommended to request a zoning certiﬁcate at the corresponding Municipality, which shows the use permitted for the property in order to be able to verify the possibility to carry out the project pretended on the property.

In absence of a Regulatory Plan, general guidelines issued by the National Housing Institute will be applicable. These general guidelines include rules related to the size of the property; the obligation to perform a preliminary study of soil and terracing for terrains with slopes greater than 15 per cent in order to determine the minimum size of a lot; maximum height of a building, being set at four ﬂoors; the allowed coverage being ﬁxed at 60 per cent of the land in case of two story residences; amongst others.

In case the property is located nearby an airport the Directorate of Civil Aviation will indicate speciﬁc requirements related to height allowances, should the property be located next to a railroad, the Rail Institute shall issue the respective alignment and setbacks to the railroads. iv. Expropriation Events

The right to property is a constitutionally protected right in Costa Rica. As in most countries Costa

136 Doing Business in Latin America MARCH 2016 Rican law recognises the eminent domain of the State, however the Costa Rican legal system provides for a ‘prior compensation’ standard in cases of expropriation. Expropriation can only be carried out in cases of legally veriﬁed public interest.

Law number 7495 from 1995 regulates aspects related to expropriation thus including provisions such as:

• Declaration of Public Interest.

• Appraisal of properties value to be rendered in a time frame of one month. Once rendered, the Administration proceeds to inform the owner of such appraisal who will be given a ﬁve business day time to accept or reject the amount established by the appraisal.

• If the appraisal is accepted, the owner will be paid. If the appraisal is rejected, a special procedure at the Costa Rican courts is initiated to determine the fair value of the land.

• In case the property is not used for its intended purpose within a time frame of ten years, the original owner (or his heirs) may request in writing that the property or portion of property not used for public purposes to be returned to the original owner. This request must be stated within three years after expiration of the ten-year period and the owner must cover the current value of the property.

Once the property is expropriated the NPR takes note of such transfer in order to register the property under the government’s name.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchange: Attempts vs Realities

In the 1970s, the country’s ﬁrst stock exchange, Bolsa Nacional de Valores (BNV), was created and is currently regulated by the Securities Market Regulatory Law and its decrees. In 1993, the Electronic Stock Exchange was founded, under the name Bolsa Electrónica de Valores de Costa Rica (BEVCR), and in 1999, a merger occurred between the BNV and the BEVCR. The operations of the stock exchange market in Costa Rica are regulated by the Securities Superintendence (SUGEVAL).

Law 7732, and its regulations, does not contemplate the merger of foreign stock exchanges with the Costa Rican Stock Exchanges. To promote inter alia capital investment as well as development of small and medium-sized enterprises, an Alternative Stock Market, Mercado Alternativo para Acciones (MAPA) was created by the BNV. The BNV also had an interest in a securities market integration in the Central American region. It began in 2011 by signing a cooperation agreement to facilitate securities transactions with the Nicaraguan Stock Exchange. In 2012, the BNV also started working the Panamanian Stock Exchange and the Salvadorian Stock Exchange, under a project called AMERCA (Association of Central American Markets).

An integration process between the securities markets requires complex regulations in matter such as risk management, taxes and foreign investment. One of the main obstacles the integrations have found is the ability for brokerage ﬁrms to cross-access information within the integrated market.

Doing Business in Latin America MARCH 2016 137 ii. MILA: Market: Current Results and Expectations

The Latin American Integrated Market (MILA), or Mercado Integrado Latinoamericano, is an initiative aimed at integrating equities and stock exchange markets, as well as depositories with a view to promoting growth of the trading activity and increasing business among its member countries. While members maintain their regulatory autonomy and process transactions in their local currency, they beneﬁt from joint market growth. Through the integration of capital markets, MILA aims at encouraging and offering increased investment opportunities, driving economic growth and deepening of stock markets.

MILA resulted out of an agreement signed between Colombia, Peru and Chile in 2009, aspiring to set up an equity exchange regional market. MILA began operating in 2011, opening up opportunities for brokers from the three countries to sell and purchase shares from any of their stock markets through local brokers. In December 2014, Mexico joined MILA and while Costa Rica is not yet a part, in the past it has expressed an interest to join. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Pacific Alliance (Alianza del Pacífico) is a regional integration initiative, created on 28 April 2011 by Chile, Colombia, Mexico and Peru. The Pacific Alliance aims to deepen economic integration and free trade, promote growth of its members’ economies, and serve as a forum for political interaction, economic and trade integration. Costa Rica has free trade agreements (FTA) with Chile, Mexico and Peru. The FTA with Colombia was ratified in 2014 by Costa Rica, and is awaiting legislative approval from Colombia.

Costa Rica currently has observer status in the Pacific Alliance. In February and December 2014, Costa Rica undertook initial steps towards starting its accession process in the first half of 2015. In March 2015 however, the process was suspended due to outstanding results from technical cost benefit analyses. Despite the beneficial results presented in late May 2015, Costa Rica is still cautiously expressing interest in the accession process.

Costa Rica has also concluded a FTA with CARICOM countries that has entered into force with Trinidad and Tobago (2005), Guyana (2006), Barbados (2006), Belize (2011) and Jamaica (2015), and the aim of which is to strengthen trade and investment between Costa Rica and the Caribbean countries. In November 2008, a FTA between Costa Rica and Panama entered into force, including a chapter on financial services. Moreover, since 1 January 2009, Costa Rica is part of CAFTA that contains provisions on financial services, investment and, inter alia, capital flows and controls between its Member countries.

Costa Rica is one of 24 Members of the World Trade Organisation (WTO) currently negotiating a plurilateral initiative on trade in services (Trade in Services Agreement – TiSA). Negotiations are based on proposals made by Members and include the improvement of rules and opening up of markets as regards, inter alia, ﬁnancial services.

Finally, Costa Rica has concluded bilateral investment treaties (BITs) with several countries of the Latin-American region that have entered into force for Argentina (2001), Chile (2000), Paraguay (2001) and Venezuela (2001). Costa Rica has also expressed an interest in joining the Trans-Paciﬁc

138 Doing Business in Latin America MARCH 2016 Partnership Agreement (TPP). iv. IPOs of Multilatina Companies in Latin American Capital Markets

Costa Rica does not have any Multilatina companies that have made initial public offers at Latin American capital markets. Nonetheless, some Costa Rican companies that hold operations in other Latin American countries have made IPO’s at the Costa Rican Stock Exchange, such as: Florida Ice & Farm. Co, BCT Bank and ILG Logistics.

E. Offshore vehicle providers in Latin American countries i. General Concept: Legal Framework and Scope of the Activities

Costa Rica is a favourable country for establishing offshore vehicles. The stable social and legal climates, coupled with a territorial tax system, have attracted many individuals and foreign companies to use Costa Rican vehicles for the investments worldwide. Investors have an array of legal options for secure offshore asset protection and tax planning, including the Limited Liability Company (‘Sociedad de Responsabilidad Limitada’), the Stock Corporation (‘Sociedad Anónima’), and the Costa Rican Trust. ii. Applicable Legal Regimes in Costa Rica

A. LIMITED LIABILITY COMPANY

A Costa Rican limited liability company (LLC) possesses many of the same attributes as the corporation. In LLCs, the liability of the partners is also limited to their respective capital contributions. However, for US persons, the Costa Rican LLC offers the beneﬁt that it may be considered a disregarded entity under the applicable US tax regulations.

A limited liability company’s capital is represented by registered quotas (or units) of one hundred Costa Rican Colones each (or exact multiples of this amount). The quotas must be transferred by an assignment agreement and not by simple endorsement. Any assignment must be recorded in the LLC’s legal books, and, in most cases, such assignments require the unanimous approval of the LLC quota holders. Quotas cannot be issued in a foreign currency.

One or more Managers or Assistant Managers must be elected by the quota holders to represent the LLC. These managers must be physical persons (Costa Rican nationals or foreign persons), and may be jointly liable with the LLC for their actions towards third parties. If at least one Manager is not a resident of Costa Rica, the LLC must appoint a Costa Rican attorney as a resident agent. No comptroller is required for the LLC.

For tax purposes, an LLC and a corporation receive the same treatment in Costa Rica.

B. STOCK CORPORATION

A Costa Rican corporation may be established either by private capital (closely held) or by public

Doing Business in Latin America MARCH 2016 139 subscription. Two incorporators (individuals or registered legal entities) are required to setup a corporation, but once incorporated, one single person or entity may own 100 per cent of the stock capital. Generally, there is no limitation regarding the ownership of shares by foreign entities. The stock capital of corporations is represented in shares, which are transferable by simple endorsement and registration in the corporation’s private shareholders registry book. Shares may be issued in Costa Rican Colones or foreign currencies.

Furthermore, there is no minimum capital requirement, but at least 25 per cent of the subscribed capital must be fully paid in at the time of formation.

Common shares have equal rights and one vote each. However, different classes and types of shares may be established, which may in turn offer different preferences, privileges, restrictions, terms and limitations to the shareholders.

A shareholders meeting must be held at least once a year, and may be held in any place authorised by the corporation’s charter. The shareholders’ meeting is the main governance body of the corporation, and has the highest authority.

A board of directors comprised of a minimum of three directors (President, Secretary and Treasurer) manages the affairs of the corporation. Directors are named in the deed of incorporation or are later appointed by a shareholders meeting, which may also remove them at any time. Costa Rican nationals or foreign individuals may be appointed as directors, but corporate entities may not hold positions on the board of a corporation.

The representation of the corporation is usually in charge of the President of the board, but other directors or powers of attorney may be appointed in the corporation’s charter or by public deed.

A comptroller must be appointed in the corporation’s charter. The comptroller cannot be a legal representative or have any powers of attorney on behalf of the corporation. Furthermore, if none of the directors are Costa Rican residents, a Costa Rican attorney must be appointed as resident agent.

C. TRUST

In Costa Rica, the concept of ‘Trust’ is very similar to that of an Anglo-Saxon Trust or Escrow Fund. Trusts are regulated in the Commercial Code and are not a separate legal entity (such as a Stock Corporation or LLC). Rather, a Trust is a binding agreement whereby the Settlor transfers certain assets to the Trustee for a speciﬁc purpose, as outlined in the Trust Agreement.

There are two main types of Trusts in Costa Rica: Guarantee Trust and Administration Trust. The Guarantee Trust is used to secure fulfilment of a financial obligation, usually in a credit transaction, where the debtor is the Settlor, the creditor is the Beneficiary, and the Trustee is a third party that holds the Settlor’s pledged assets until the terms and conditions of the parties’ agreement have been fulfiled. The Administration Trust is a Trust in which the Settlor transfers certain assets to the Trustee, so the latter can administer or invest the assets in accordance with the Trust Agreement, for the benefit of the Settlor or other Beneficiaries.

Pursuant to the Money Laundering Law (Law No. 8204), individuals or companies that manage third- party funds, must register before the Superintendence of Financial Entities (SUGEF). Consequently,

140 Doing Business in Latin America MARCH 2016 Trustees in an Administration Trust must register before the SUGEF; Trustees in a Guarantee Trust are not obliged to register, provided they merely hold the Settlor’s property and do not manage or invest it in any way.

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142 Doing Business in Latin America MARCH 2016 Ecuador

Doing Business in Latin America MARCH 2016 143 vii. Ecuador

A. Foreign investment i. Legal Regime of Foreign Investment in Ecuador

The legal regime of foreign investment in Ecuador comprises the following norms, guarantees and protections:

A. THE CONSTITUTION

The Constitution of the Republic of Ecuador (hereinafter ’Constitution’), which is the supreme law of Ecuador, contains several provisions that deal with different aspects of investment, both domestic and foreign.

• Article 277 of the Constitution provides that investment, and the development of economic activities in general, must be consistent with the concept of ‘sumak kawsay’ (best translated to English as ‘the good life’ or ‘good living’), which is an ancient indigenous concept that integrates living in harmony with the community, the culture, and nature.

• Articles 321 and 322 of the Constitution recognise and guarantee the right to property in all forms, including intellectual property.

• Article 339 of the Constitution provides that the State has the duty to promote private, domestic, foreign and public investment. With respect to foreign investment in particular, the provision indicates that it must strictly comply with the country’s legal framework and regulations, that it is complementary to domestic investment, and that domestic investment will enjoy priority over foreign investment. This priority is mainly evidenced in public procurement laws and regulations.

• Finally, the Constitution allows for disputes with domestic and foreign investors to be decided in arbitration.

B. INTERNATIONAL TREATIES AND CONVENTIONS SIGNED BY ECUADOR

The Constitution states that international treaties and conventions that Ecuador is party to prevail over domestic laws, but enjoy lesser hierarchy than the Constitution, except those treaties and conventions regarding human rights if they provide for more favourable rights to individuals.

Ecuador is a member of the World Trade Organisation, which provides a general trade regulation framework worldwide. The WTO Treaty includes guarantees such as national treatment, most favoured nation, market access and others.

Similar provisions are contained in the Andean Community of Nations Treaty (‘CAN’ for its acronym in Spanish), to which Ecuador is a member along with Peru, Bolivia and Colombia.

144 Doing Business in Latin America MARCH 2016 Ecuador is also party to several international investment agreements or BITs, which provide speciﬁc guarantees to foreign investors doing business in Ecuador, including protection against expropriation and dispute resolution mechanisms. Some of these agreements have been denounced by the Ecuadorian government, but others are still binding given that the denunciation process has either not been initiated or it has not been completed.

BITs are still in force with Cuba, El Salvador, Guatemala, Honduras, Nicaragua, Paraguay, Dominican Republic, Uruguay, Germany, France, United Kingdom of Great Britain and Northern Ireland , Sweden, Canada , Chile, China, the United States, the Netherlands, Switzerland, Venezuela, Argentina, Spain, Italy, Peru, Bolivia, Costa Rica, Romania and Russia.

Finally, Ecuador is also party to several international agreements to avoid double taxation. These treaties include the following foreign jurisdictions: Germany, Belgium, Brazil, Canada, Chile, Spain, France, Italy, Mexico, Romania, Switzerland, Uruguay, Singapore, Korea, China; and the CAN.

C. ORGANIC CODE OF PRODUCTION, COMMERCE AND INVESTMENTS

The Organic Code of Production, Commerce and Investment (hereinafter ‘COPCI’, for its acronym in Spanish) and its implementing regulation are the main pieces of legislation on the subject of investment in Ecuador. There are other laws and regulations that address certain speciﬁc aspects of investment in certain specially regulated areas such as energy, oil & gas, mining, telecommunications, ﬁnance and banking, securities, insurance, among others.

The COPCI sets forth both general and speciﬁc rules, incentives, guarantees and protections for domestic and foreign investment in Ecuador. We will refer to them below.

D. REGULATION OF THE PUBLIC PRIVATE PARTNERSHIP

A relatively new regulation (March 2015) was issued in Ecuador to promote investment in strategic sectors of the economy, to promote competitiveness of the export sector and to change the ‘productive matrix’ of Ecuador, through joint efforts between the public and private sectors. It is called the Public Private Partnership (PPP) initiative.

This regulation sets forth the rules and guarantees for a ‘private developer’ to participate in projects together with a ‘public promoter’. The projects and the participation of the private developer have to be approved by the public promoter.

Both the Constitution (Articles 313 and 316) and the COPCI (Article 100) allow for the participation of the private sector in strategic sectors of the economy ‘on an exceptional basis’. ii. General Guarantees and Protections for Foreign Investments

In general terms, the COPCI sets forth the following guarantees and protections for all investment, regardless of its origin, amount and destination:

Doing Business in Latin America MARCH 2016 145

A. NON-DISCRIMINATION

The COPCI guarantees equal footing (non-discriminatory treatment) to both foreign and domestic investors and their investments with respect to the management, operation, expansion and transfer of their investments.

The investor has the right to control, use, convert to any currency, and to transfer or send abroad any funds derived from or related to his investment. The investor does not have the obligation to keep such funds in Ecuador, or convert them into national currency. Investments are not subject to any restriction other than taxes and deductions applicable under Ecuadorian law.

From a tax perspective, both national and foreign investments are subject to the same applicable regime, except in the case the investor has signed an ‘Investment Agreement’ as provided in the COPCI, which provides for the additional and speciﬁc protection of tax stability.

B. OWNERSHIP RIGHTS

The property of investors is protected in the terms set forth in the Constitution, the COPCI and other relevant laws.

Both the Constitution and the COPCI prohibit all forms of conﬁscation. Additionally, expropriation is subject to adequate and prompt compensation (ie, payment of price). The investor may challenge in courts the price proposed by the State if unreasonable.

C. OTHER RIGHTS OF INVESTORS

In addition to the protections and guarantees outlined above, the COPCI recognises investors the following rights:

• Freedom of production, commercialisation, and pricing of legal goods and services.

• Access to administrative and control actions that the State establishes to avoid any disloyal competition practices;

• Freedom of import and export of goods and services, in accordance with the international agreements to which Ecuador is a party;

• Free transfer abroad of the periodical earnings or proﬁts that come from registered private investment, once tax, proﬁt sharing and other obligations are complied with;

• Freedom to send resources abroad that are obtained through total or partial liquidation of the companies in which the registered foreign investment was made, or through the sale of shares, participations, or acquired rights in investments;

• Freedom to acquire or transfer shares, participations or rights of ownership to third parties, within Ecuador or abroad;

• Freedom of access to the national ﬁnancial system and to the stock market, to obtain ﬁnancial resources; and

146 Doing Business in Latin America MARCH 2016 • Freedom of access to the mechanisms for technical cooperation and technological assistance. iii. Speciﬁc Guarantees and Protections for Investments

The COPCI allows investors to sign ‘Investment Agreements’ with the State in certain special circumstances. Such agreements give the investor the speciﬁc protection of tax stability for the duration of the agreement, generally up to 15 years, and are renewable. These agreements are generally reserved for investments in certain areas deemed as strategic (such as minerals, forest resources and oil). Tax stability may be lost if the investor fails to comply with the requirements, amounts, commitments and deadlines set forth in the Investment Agreement. iv. Incentives for Investors

The COPCI sets forth both general and speciﬁc incentives for investors. General incentives are available to any new investment carried out in any part of the national territory. They include:

• The progressive reduction of three percentage points of the Corporate Income Tax;

• Those established for special growth zones, provided they comply with the criteria for their formation;

• Additional deductions for calculating Corporate Income Tax, as mechanisms to encourage the improvement of productivity, innovation, and eco-efﬁcient production;

• The beneﬁts for companies opening their capital for the beneﬁt of its workers;

• Special payment arrangements for taxes on foreign trade operations;

• Deduction from the Corporate Income Tax of the additional compensation mandated by Ecuadorian law;

• Exemption from the Currency Transfer Tax for operations with external ﬁnancing;

• Exemption, for ﬁve years, of Anticipated Income Tax Payment for all new investments; and

• Reforms on the calculation of the anticipated income Tax Payment.

The speciﬁc incentive of total exemption of Corporate Income Tax for a period of 5 years is available to new investments that fulﬁl the following criteria laid out in the COPCI and applicable tax law:

• The new investment must contribute to the change of the energy matrix, the strategic substitution of imports, the fostering of exports, rural development in all of the country, and urban development in certain designated areas.

• The new investment must be made outside urban jurisdictions of Quito or Guayaquil, and must be made in any of the following economic sectors, considered as a priority for the country: production of fresh, frozen and industrialised foods; forestry and agroforestry and related processed products; metalworking; petrochemicals; pharmaceuticals; tourism; renewable energies including bio-energy or energy from biomass; foreign trade logistics

Doing Business in Latin America MARCH 2016 147

services; biotechnology and applied software; and the strategic sectors of import substitution and export promotion, as determined by the President of the Republic.

If the investment is made in an area defined by the Government as an ‘Economically Depressed Zone’, it will enjoy an additional tax benefit, for a period of five years, of twice (an additional 100 per cent) the deductibility of payroll cost for new employees. v. Specific Economic Development Zones

Special Economic Development Zones (or ZEDEs by their acronym in Spanish) are special areas within the national territory, designated and duly authorised as such by the State, which allows them to enjoy a special customs and legal regime.

ZEDEs are generally located near larger cities. In their selection and authorisation, investors and the State generally consider conditions such as environmental preservation, location, access to road infrastructure, existence of other basic and required infrastructure including access to utilities services, connectivity, among others.

The special legal regime that ZEDEs enjoy consists basically of the exemption from taxes and tariffs on foreign goods entering these areas for speciﬁc authorised purposes, which mainly refer to technological development and innovation, industrial diversiﬁcation and the development of logisitical infrastructures and capabilities. vi. Dispute Resolution

Based on the the principle of party autonomy, all persons and legal entities, public or private, can establish a method agreed between them to resolve their disputes, other than recourse to ordinary courts. Alternative dispute resolution, such as negotiation, mediation and arbitration are procedures recognised by the Constitution.

Thus, if at the time of execution of the arbitration agreement the parties are domiciled in different States, or the issue being litigated relates to an international trade operation susceptible of settlement and not affecting or impairing the national or collective interest (as in the case of foreign investment), the parties may establish in their agreement that the arbitration will be international. These types of arbitrations, according to article 42 of The Arbitration and Mediation Law (AML), shall be regulated by the appropriate treaties, conventions, and instruments signed and ratiﬁed by Ecuador.

Article 11 of the Organic Law for the Ofﬁce of the Attorney General and Article 4 of the AML set forth that public sector entities may submit their disputes to arbitration as long as there is a prior signed arbitration agreement. If a dispute has already arisen when the arbitral agreement is being considered, the authorisation of the Attorney General is required. This authorisation is also necessary to submit disputes to international arbitration.

The Organic Code of Planning and Public Finance also requires the authorisation of the Attorney General for agreements of submission to an outside jurisdiction and to foreign legislation for the settlement of disputes relating to contracts concluded by the State.

148 Doing Business in Latin America MARCH 2016 Additionally, article 27 of the COPCI establishes that conﬂicts that arise from an investment may be resolved through arbitration, but the arbitration clause must be included in an investment contract. The mandatory applicable law will be Ecuadorian law, and there is a mandatory mediation phase that needs to be exhausted before arbitration commences.

Finally, and as mentioned above, many of the BITs signed by Ecuador include dispute resolution mechanisms such as international investor-state arbitration.

B. Public services i. General Framework

The Constitution sets forth the general framework for the provision of public services in Ecuador, which is developed through laws and regulations. This framework has as one of its main principles that enjoying public services of optimum quality is a right of all persons, who shall have the ability to freely select them (Art. 52), and that services should make effective the principles of ‘sumak kawsay’ (‘good living’) and of solidarity (Art. 85).

More speciﬁcally, the Constitution establishes that the State is responsible of the provision of drinking and irrigation water, sanitation, electricity, telecommunications, roadways, ports and airports and all other public services determined by the law (Art. 314). The Constitution contemplates the possibility that the State may delegate the provision of public services to mixed-economy enterprises where it is the majority shareholder, or exceptionally to the private sector (Art. 316).

This principle of exceptionality of participation of the private sector in the provision of public services is reﬂected in Article 100 the Organic Code of Production, Commerce and Investment (COPCI), enacted in the year 2010. The COPCI foresees various modalities for the provision of public services by the private sector, such as concessions, strategic alliances and other contractual modalities that are consistent with the relevant legal and constitutional parametres. Concessions are regulated through sector-speciﬁc norms and by a heavily amended law from the 1990s (the Modernisation Law). Strategic alliances between the Ecuadorian State and private entities are the subject of a recent (March 2015) ‘Regulations of the Public and Private Cooperation Regime’. ii. Rules and Limitations for the Delegation of the Rendering of Public Services to Private Parties

During the 1990s, the need arose in Ecuador to carry out a process of privatisation and concession of public services in order to support to the State in its obligations to carry out a number of functions for which it had limited capacity, and to allow Ecuadorians to have greater and more effective access to a series of public services. For this reason, the so-called ‘Modernisation Law’ was enacted in 1993. This law sought facilitate the intervention of private sectors in the rendering of public services.

The current Constitution, which came into force in 2008, and the COPCI enacted in 2010, brought signiﬁcant changes to this general framework. As mentioned above, they establish the State as the

Doing Business in Latin America MARCH 2016 149 default and main provider of public services and allow the exceptional delegation to the private sector. The privatisation of water and social security services is expressly forbidden in this new framework, although the concessions for water services that pre-existed the Constitution (such as that for Guayaquil, the most populous city in the country) have been allowed to remain.

The changes brought forth by the 2008 Constitution and the COPCI have not fully eliminated the legal framework for the rendering of public services that was established in the Modernisation Law. However, they have modiﬁed it signiﬁcantly and have put limits to its implementation, making its application more relevant when exceptional circumstances are present.

Aiming to deﬁne these ‘exceptional circumstances’ with some more speciﬁcity, the COPCI establishes that in order for the State to delegate the provision of public services to the private sector, the following conditions must be met:

• The delegation of the public service must be of public interest.

• The State should not have the technological and/or economic capacity to provide the service.

• The demand for the public service cannot be met by the participation of public enterprises and/or mixed companies.

If these conditions are met, the State may delegate the rendering of the public services of electricity, provision and management of roads, port and airport infrastructure, railroads, and others. As mentioned above, the COPCI allows for various modalities of delegation, such as concessions and strategic alliances, among others. The delegation must follow the appropriate tender processes, although in the case of foreign governmental entities the delegation can be made directly, ie, without the need to follow these processes.

In practice, delegation is possible and continues to occur in a number of areas, though the possibility for private parties to participate in the rendering of public services can vary notably depending on the sector. Thus, for example, in the area of electricity, power plants may be operated by private companies as long as their generated power does not exceed 50 MW. In the area of telecommunications, the participation of the private sector has been more signiﬁcant, as the majority of users are served by two large foreign-owned private concessionaires.

C. Real estate i. Constitutional Framework for the Real Estate

The Constitution guarantees to all people the right to property in all its forms, including real property. Foreigners who are in Ecuadorian territory have the same rights and duties as Ecuadorians, with the limitations established in the Constitution. One of those limitations is that foreign individuals or legal entities may not acquire any title to land or any concessions in national security areas or protected areas established by law.

Notwithstanding the protection of property rights as a general rule, the Constitution provides that state institutions may declare the expropriation of property for reasons of public utility or social and national interest, subject to fair valuation, compensation and payment.

150 Doing Business in Latin America MARCH 2016 ii. Legal Framework for Real Estate

The basic legal framework for real estate is in the Civil Code, which contains rules that apply to both urban and rustic properties, unless there are express exceptions. The lease of urban real estate is governed speciﬁcally by the Tenancy Act (Ley de Inquilinato). The Organic Code of Territorial Organisation, Autonomy and Decentralisation (COOTAD) establishes the powers of municipal governments with regard to the regulation of urban organisation and development, construction of buildings, cadastre and valuation of properties, and the establishment of taxes on real property. Municipal ordinances regulate the different aspects of competence of municipalities in real estate. Horizontal Property is regulated by the Horizontal Property Act (Ley de Propiedad Horizontal) and its regulations. iii. Registration System

Real estate is subject to a public registration system, made up essentially by the land registries that exist in each municipal district. Each property has a numbered registration ﬁle, which contains information on boundaries and dimensions, ownership history, liens and rights over the property, divisions and mergers to which it has been subject, judicially ordered restrictions, and lease contracts the survival of which is desired in the event of a transfer of ownership of the property (see section vii below). All of these acts and contracts must be registered with the appropriate land registry. iv. Real Estate Development

The establishment of standards for urban development and construction of buildings is responsibility of the municipalities, and is implemented through ordinances. These ordinances determine in detail the requirements and technical speciﬁcations that developments and buildings must meet, as well as the procedures for approval of the plans and technical reports that are necessary for the granting of construction permits. Such requirements include approvals from the ﬁre department and from the entities in charge of the public services of electricity, telephone, water supply and sewerage. These ordinances also regulate the subsequent process for granting authorisations for sale and occupation. v. Horizontal Property Regime

The horizontal property regime is made up generally by the Horizontal Property Act and its regulations. Additionally, there are municipal ordinances applicable in the relevant constituencies, determining requirements for properties subject to the Horizontal Property Regime.

The municipal declaration of submission of a property to the horizontal property regime, as well as the general plans establishing common and exclusive spaces, must be registered with the Land Registry.

The right of every owner over the value of the common spaces is proportional to the value of the ﬂoor, apartment or space that he or she owns, which is his or her share of co-ownership. Each owner must contribute in that proportion to the expenses necessary for management, maintenance and repair of the common property and the payment of the insurance premiums.

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Co-owners should approve, by a vote of at least two-thirds, a set of rules according the General Rules of the Condominium Act, in which their mutual rights and obligations are established. This set of rules must be notarised and registered at the Land Registry.

The regulations must contain rules on the management and conservation of the common spaces, the functions corresponding to the Assembly of Co-Owners, the rights, duties and form of election of the administrator, the distribution of management fees among the co-owners, and all that concerns the interests of the co-owners and the maintenance of the building.

Each co-owner has a right to vote on the General Assembly equivalent to his or her share of ownership. Decisions of the Assembly are taken by a majority of votes representing more than half of the votes held by those attending the Assembly. However the following qualiﬁed majorities are required by law:

• 75 per cent of the votes of co-owners to allow a co-owner to carry out works that involve modiﬁcations of the resistant structure, or vertical or horizontal building additions;

• 60 per cent of the votes of co-owners to allow modiﬁcations to the facade, provided that they do not involve changes or affectation to the structure; and,

• Two thirds of the votes of those attending the respective meeting for the imposition of extraordinary burdens, the building of improvements, or the making of any material alterations affecting enjoyment of the common areas.

The legal, judicial and extrajudicial representation of the condominium is exercised either individually or jointly by the President or the Administrator. vi. Transfer of Title or Encumbrance of Real Property

Contracts for the sale or for the encumbrance of real property must be performed by public deed authorised by a notary, and must be registered at the Land Registry. In the case of a transfer of title, it is only with the registration in the Land Registry that the transfer of title is perfected.

The transfer of property generates a tax known as ‘alcabala’, referred to in the COOTAD, and certain additional taxes established by special laws. The COOTAD also sets a tax on property value gains and on the proﬁt on the transfer of urban properties, which is 10 per cent over the difference between the purchase price and the sale value, minus a deduction of 5 per cent of such difference for each year elapsed since the purchase (which means that this tax cannot be collected after 20 years have passed from the acquisition year). vii. Real Estate Leasing

The lease of rustic properties is regulated by the Civil Code. The lease of urban properties is speciﬁcally regulated by the Tenancy Act (Ley de Inquilinato), the Civil Code rules being supplementary.

The lease can be executed by private instrument; the law does not require the formality of the public deed before a notary. However, the lease must be registered with the corresponding department of

152 Doing Business in Latin America MARCH 2016 the municipality, which has to set the maximum monthly lease payment (which cannot exceed the sum of (a) one twelfth of the 10 per cent of commercial value that the property has recorded in the Municipal Cadastre, and (b) the value of the municipal taxes imposed on urban property).

It is not allowed to establish automatic increases in the monthly rental fees for residential properties during the minimum term of the lease, but this prohibition only applies when the monthly rental fee is less than two minimum wages (US$708 as of June 2015). The term of the lease is binding on both parties, and the lessee has the right to a minimum period of two years. Non-payment of the rental fee for two months is a cause for the termination of the lease.

The transfer of ownership of a leased property terminates a lease, provided the tenant is given notice within one month of the registration of the transfer in the Land Registry. This provision does not apply to the case of leases concluded by public deed and registered at the Land Registry, which must be respected by the new owner of the property.

The tenant needs authorisation from the lessor to sublease the property. Subletting without such authorisation is cause for termination of the lease.

The Tenancy Act applies to leases of rural property only with respect to the competence and procedure for resolving disputes, and to a few discrete aspects relating to the state of the property.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchange: Attempts vs Realities

Ecuador has two stock exchanges: one in Quito and one in Guayaquil. Both were created as corporations in the late 1960’s and changed their corporate form to non-proﬁt entities in the 1990’s, as required by the Securities Market Law.

In May 2014, the Securities Market Law was amended to require stock exchanges to once again adopt the form of corporations. Even though this amendment may be seen as presenting an opportunity for stock exchanges to merge (corporations can merge while non-proﬁt entities cannot), it is not a foreseeable scenario in the near future. In fact, when a proposed amendment to the Securities Market Law included the obligation for stock exchanges to merge, this proposal was opposed by the stock exchanges.

It is worth noting that after the Stock Exchange National Council ordered stock exchanges to adopt a single trading system in 2011, there is one interconnected system. This technological requirement has resulted in common trading processes and rules for both stock exchanges. ii. MILA Market: Current Results and Expectations

There is no current process of adhesion of Ecuador’s stock exchanges to the MILA integrated market. Moreover, it is not legally possible for local stock markets to be interconnected to international stock markets. A reform to the law would be necessary in case Ecuador wants to become part of MILA.

Doing Business in Latin America MARCH 2016 153 iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

Ecuador is an official observer to the Pacific Alliance. However, it is not yet considered a candidate for a future membership; in order to be considered as such, the official observer needs to hold a Free Trade Agreement with at least half of the Pacific Alliance members.

Also, the Ecuadorian President has expressed the country does not yet have the intention to join the Paciﬁc Alliance, among other reasons because Ecuador does not have its own currency (Ecuador’s ofﬁcial currency since the year 2000 is the US dollar). iv. IPOs of Multilatina Companies in Latin American Capital Markets

There have not been any IPOs of multilatina companies in Ecuador. However, in the last few years multilatinas such as Arca Continental and other large companies such as Lafarge have conducted buy- outs of Ecuadorian companies through local exchanges, as required by local laws.

154 Doing Business in Latin America MARCH 2016 El Salvador

Doing Business in Latin America MARCH 2016 155 viii. El Salvador

A. Foreign investment i. Authorisation vs Limitations

A. GENERAL ABSENCE OF RESTRICTIONS

In October 1999, the Legislative Assembly passed the new Investment Law. The regulation for this law was recently enacted in 2014. Foreign investments are deﬁned in the law as being those resources or assets, tangible or intangible, provision of services, or ﬁnance readily convertible currencies destined for the initiation, additional investment, or improvement of economic activities for the creation of goods, provision of services and generation of employment.

Generally, there are no restrictions for foreign investors. However, the aforementioned law does consider some limitations that apply to foreign investment. These limitations are restricted as follows:

Small trade, industry and provision of services speciﬁcally the inshore ﬁshing are exclusive activities for Salvadoran by birth and Central America citizens by naturalisation.

The Underground belongs to the Salvadorian state, however, the State might grant a licence for exploitation.

Ownership of rustic real state cannot be acquired by foreigners whose origin countries do not grant to Salvadorians equal property rights. This limitation will not apply when the land is acquired for the industrial establishments.

An individual or a legal entity cannot not acquire more than 245 hectares. This limitation is not applicable to cooperatives and farmers associations that are subject to a special regime.

The Salvadoran state has the power to regulate and supervise the rendering of public services provided by private enterprise, the approval of their fees, with the exemption of those stablished in international conventions.

For the exploitation of ports, railroads, canals and other constructions of public use, a licence issued by the Salvadoran State is needed. This licence will be granted under the speciﬁc provisions of the relevant law.

All foreign investments must be registered with National Investment Ofﬁce at the Ministry of Economy. The Salvadorian’s legal framework for foreign investments is considered attractive for having tax incentives and providing equal treatment for local and foreign investors. Despite this fact, in 2014 El Salvador has had an exponential decrease in foreign investment and was located in the last place compared to other Central American countries.

156 Doing Business in Latin America MARCH 2016 B. NATIONAL, FAIR AND EQUITABLE TREATMENT

The abovementioned law also recognises the equal treatment of foreign and national investors and investments (ie, non-discrimination of foreign investments) and allows investments freely in all economic activities, except those restricted by law to national or to certain forms of ownership (ie, small business, exploitation of natural resources, and ownership for agricultural purposes, ports, railroads and others.)

C. LEGAL FRAMEWORK FOR FOREIGN

The legal framework to regulate foreign investment is mainly composed by:

Constitution.

Investment Law: This law has as main and fundamental goal to promote investment in general and foreign investments in particular in order to contribute to El Salvador’s economic and social development. This law pursues to guarantee equal treatment for national and foreign investment, freedom to invest in almost all activities, excepting of those restricted by law. No discrimination based on nationality, domicile, race sex or religion will be allowed. There are no repatriation of proﬁt limitations. Registered foreign investors are entitled to repatriate their investment plus any capital gains and are exempted from tax withholdings on dividends; but investors cannot argue this right to repatriate to avoid their labour, tax, social security, bankruptcy, or other legally established obligations.

This law also allows foreign investors to obtain the status of resident investor when their investment is above 4,000 times the then-inforce minimum monthly salary. Residency benefits are extended to their family of the investor if a natural person or to the legal representative and his/her family if a legal entity. Creates a specialised office called Oficina Nacional de Inversiones (ONI for its acronym in Spanish), National Investment Office. This office is responsible for centralising and coordinating governmental procedures related with national and foreign investors, creating statistics of investments in El Salvador amongst other activities.

Legal Stability for Investments Law: The main purpose of this law is to attract and promote national and foreign investment through a legal frame that assures legal stability to the investor. This legal guarantee will be effective thorough the implementation of legal stability contracts. The subjects of this regulation are legal entities or individuals, national or foreign that carry out investment projects in areas such as aeronautics, electronics, energy, logistic, health services, tourism, agribusiness, strategic structure, telecommunications, manufacturing, long distance corporate services, technology and science. The legal entity responsible to apply this law is the Ministry of Economy and the Organismo Promotor de Exportaciones e Inversiones del El Salvador – PROESA for its acronym in Spanish. In order to obtain, the beneﬁts the investment must be an equivalent of 4,220 minimum wage of industrial sector in new projects or expansion of those projects.

International Service Law: The principal purpose of this law is to regulate the establishment and operation of service parks as well as the beneﬁts and responsibilities of owners of companies that develop, manage or use them. The entity responsible to apply this law is the Ministry of Economy, therefore, will authorise the establishment, administration and operation of service parks and service

Doing Business in Latin America MARCH 2016 157 centres as well as granting of beneﬁts and tax incentives. On the other hand, monitoring and effective control of customs and tax regulations of service parks and service centres corresponds to Ministry of Treasure.

The law establishes and defines the only activities which may be benefited with tax incentives as follows: international distribution, international logistics operations, international call centres, information technologies, research and development, repair and maintenance of marine vessels, repair and maintenance of aircrafts, business processes, medical and hospital services and international financial services.

Industrial and Commercial Free Trade Zones Law: This law regulates the operation, beneﬁts and responsibilities of the owners, use and management of the place. The Ministry of Economy is the entity responsible to apply the law. The monitoring and control of the tax regime corresponds to the Ministry of Treasure. Regulated under the provisions of this law are free trade zones known as developer, administrator, users and warehouses for inward processing. This law grants tax exemptions from a 10 per cent up to a 15 per cent of the income tax. These exemptions are orientated to manufacturing and export activity of local companies located in free trade zones.

Tourism Law: This law has as main purpose to promote, regulate industry and touristic services provided by individuals or legal entities, national or foreign. This law grants beneﬁts and incentives to those projects that are classiﬁed as National Touristic Interest. If the investment is over US$ 50,000 an approval of the Ministry of Treasure, the Ministry of Environment and Natural Resources and the Presidential Secretariat of Culture and the Ministry of Tourism will be needed. If the investment is under US$ 50,000.00 an only an approval of the Ministry of Environment and Natural Resources and Presidential Secretariat of Culture will be needed.

Incentive for Renewable Energy Law: The fundamental purpose of this law is to promote investment on renewable energy sources through the exploitation of hydraulic, geothermic, wind and solar resources for generation of electric energy.

Public Private Partnership Law: The main purpose of this law is to establish the legal framework for the development of Public and Private Projects (PPP for its acronym in English). According to this law, the Executive Branch and its dependencies, independent institutions and municipalities may carry out PPP projects. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects.

Since May of 2014, a new law called Ley Especial de Asocios Públicos y Privados was approved by the Congress. This law has as main purpose to establish a legal framework to develop PPP projects for the rendering of public services and infrastructure in an efﬁcient manner. Under this scenario of legal stability, the private sector might provide the essential economic resources, technical skills and for the Salvadoran State to develop PPP projects in order to pursue general beneﬁts. Under the provisions of this law, PPP projects can be carried out by the Executive branch and any of its dependencies, independent institutions and municipalities.

This law is applicable to all contracts where public institutions entrust to a private investor (national or foreign) the design and construction of an infrastructure and related services, repair,

158 Doing Business in Latin America MARCH 2016 improvement, equipment and any other activity involved in the operation and maintenance of the infrastructure. In addition, investment in infrastructure for rendering public services and exploitation an execution of an activity of general interest are considered to be part of the scope of application of this law. Projects in health, social security, public security, justice, rehabilitation and penitentiary work, water, education including National University are excluded.

General Attorney will be the legal representative of the State in Contracts of PPP projects. These contracts might have different modalities. PROESA was created by this law to, amongst other activities, regulate the execution of PPP projects contracts. This institution was created not only to regulate also to promote investment and legal stability. In order to execute PPP projects the Chairman of PROESA will have to approve it. The process for approving a PPP project will start with the request for bids or concessions. As a general rule, the Legislative Assembly will not intervene in this process. However, if tender process implies any tax contingency for future ﬁscal years, it will have to intervene. The supervision for the execution of these contracts will be carry out by an institution called Organismo Fiscalizador de Asocios Público Privados (OFAPP for its acronym in Spanish). This institution will oversee all of the aspects of the execution, especially during the exploitation phase.

Amongst formalities PPP projects contracts will have to be granted in public deed and under the terms of the tender basis. PPP projects contracts will be supervised from the beginning until the end of the PPP project. As a rule, these contracts will have no intervention of the Ministry of Treasure, unless a modiﬁcation to the contract may involve tax aspects.

In case any dispute on the interpretation, application or execution arises as a ﬁrst stage, the parties must try to reach an arrangement directly. If no arrangement is reached a specialist roundtable should be set up. If this roundtable does not achieve to reach any agreement, arbitration will be the ﬁnal stage. So far, the effectiveness of this law remains uncertain since no PPP project has been approved. iii. Treatment of Foreign Investment in Oil, Gas Mining Activities.

In El Salvador, activities regarding oil, gas and mining are subjected to the provisions of the ‘Ley de Mineria’ – Mining Law. This law states that in order to carry out mining activities all legal entities must be authorised to perform commercial acts. This authorisation must be obtained according el Salvador’s commercial laws. The law states that the only requirement to acquire the right to develop mining projects is to be suitable and able to prove sufﬁcient technical and ﬁnancial capacity. In order to carry out mining activities, the investor will have to obtain a concession granted by Salvadoran State. iv. Treatment of Foreign Investment in Real Estate

Financing Real State.

For the ﬁnancing for the purchase of real state, no special rules apply.

Construction.

There are no special restrictions on this matter. Regarding foreign investors in construction sectors,

Doing Business in Latin America MARCH 2016 159 their treatment will be as if they were nationals. No special limitations exist.

V. TREATMENT OF FOREIGN INVESTMENT IN AGRIBUSINESS ACTIVITIES

In agribusiness area, El Salvador is considered as regional leader in the production of juices and snacks. El Salvador offers opportunities for the establishment of production centres, processing and distribution of foods orientated to exportation. For agribusiness investors, that seek to produce and export, El Salvador offers attractive opportunities in the following sectors: fruit farming, aquaculture, ornamentals, nourishment and beverages. El Salvador offers an equal treatment for foreign and national investors. In addition, El Salvador offers tax incentives for importation and exportation of agricultural products.

VI. TREATMENT OF FOREIGN INVESTMENTS IN RENDERING PUBLIC SERVICES

A. CONCESSION REGIME

The award of concessions regarding power generation and distribution, telecommunications, paid and open television, ports, mining exploration and extraction, and airport operations are governed by sector-speciﬁc laws and are subject to different rules. El Salvador has an open and non-discriminatory government procurement system under which nationals and foreigners can freely participate and bid for public contracts. All foreign companies can participate by setting up a subsidiary, or registering a branch in El Salvador, entering into a joint-venture arrangement with local or foreign companies already established El Salvador or just by having a Salvadoran legal representative. The award of concessions regarding power generation and distribution, telecommunications, paid and open television, ports, mining exploration and extraction, are governed by sector-speciﬁc laws and are subject to different rules.

B. CONTRACT LAWS

All foreign investors, when contracting with Salvadoran state will be subjected to the Ley de Adquisiciones y Contrataciones con la Administración Pública. As a general rule, no special restrictions apply. However, usually tender basis establishes that foreign providers will have to have at least a legal representative in El Salvador. Other basis, determine that a physical presence in needed in order to participate in the tendering process. In addition, foreign providers will have to demonstrate they are dully registered and in compliance of all regulations in their country of origin.

B. Rendering of public services i. General Framework

In El Salvador a law that considers the concept of public services does not exists. However, Salvadoran case law establishes that, in order to consider a service as public, three aspects must be taken into account:

a) A necessity or interest shall be satisﬁed: This element is fundamental. The interest or need to

160 Doing Business in Latin America MARCH 2016 be satisﬁed must be collective. A collective interest is understood, in Salvadoran case law, as ‘the sum of all individual necessities or interests’.

b) The ownership of the service provider: For Salvadoran case law, in the term ‘public service’, the word ‘public’ alludes to the addressee not to the provider of the service. Therefore, the service can be provided by the State or a private party.

c) Legal regime. Based on the nature of the service, these kind of services must be regulated under the scope of public law. Public Law is orientated to prevent or avoid any kind of abuse coming from the service providers.

Thus, when a service is orientated to satisfy collective needs, it is regulated under Public Law and is provided either by the State or a private party is considered as public. However, not all private parties can carry out activities that shall be performed by the State. In order to render this kind of services in Salvadoran territory a concession or a privatisation process must exist. The Salvadoran state renders some services such as garbage collection. The rendering of other services are designated to private parties to carry out the service through a concession granted by the Salvadoran state.

The privatisation process began in El Salvador in 1989 with Salvadoran banking. This process was conceived as a demand to liberalise the ﬁnancial system. The belief was that, macroeconomic stability and trade opening wolud be reached. This process entailed the creation of a new legal framework and new institutions. The Superintendence of Financial System (Superintendencia del Sistema Financiero) was created to supervise and regulate all ﬁnancial activities. The Central Reserve Bank of El Salvador’s powers were diminished.

Currently, banking is a service rendered by private and public parties. Foreign ﬁnancial conglomerates are dominating the market of banking services. This is a regulated sector. The fundamental law that regulates the ﬁnancial services is ‘the Banking Law’ (Ley de Bancos), enacted by the Legislative Assembly in September 1999. This law repealed the ‘the Banks and Financial Entities Law’ (Ley de Bancos y Financieras).

In 1996, the privatisation process was orientated to other sectors such as power distribution, telecommunications and pension funds. The process entailed the creation of a new legal framework for telecommunications and electricity sectors. The Legislative Assembly enacted three main laws in 1996 that were conceived as the basis of the legal framework for rendering these services: the Law for the Creation for General Superintendence of Electricity and Telecommunications (Ley de Creación de la Superintendencia General de Electricidad y Telecomunicaciones), General Electricity Law (Ley General de Electricidad) and the Telecommunications Law (Ley de Telecomunicaciones). The Ley de Creación de la Superintendencia General de Electricidad y Telecomunicaciones created the Superintendence of Electricity and Telecommunications (Superintendencia de Electricidad y Telecomunicaciones or SIGET by its acronym in Spanish) to regulate energy and telecommunications market.

In relation with power generation, the Salvadoran state was the largest power generator thorough the national company called Comisión Ejecutiva Hidroelectrica del Río Lempa (CEL for its acronym in Spanish). Nevertheless, because of the process, private parties are also allowed to participate in the power generation market. This participation needed to be regulated. This participation was regulated

Doing Business in Latin America MARCH 2016 161 in the General Electricity Law and the Tariff List approved every year. Regarding power distribution, the privatisation process was carried between April 1997 and January 1998.

The resulting companies from the restructuration of the power distribution system were four. These companies were: Compañía de Alumbrado Eléctrico de San Salvador, S.A. de C.V. (CAESS for its acronym in Spanish), Compañía de Luz Eléctrica de Santa Ana, S.A. de C.V. (CLESA for its acronym in Spanish), Distribuidora del Sur, S.A. de C.V. (DELSUR for its acronym in Spanish) y Empresa Electrica de Oriente (EEO for its acronym in Spanish). Each of these four companies owns a distribution network orienting their service by region. Thus, currently CAEES is distributing power in central-north region, DELSUR in central-south, CLESA in western region and EEO in eastern region.

Until the mid-90’s, telephone services were mainly provided by the State. The Salvadoran State rendered the service through a national company called Administración Nacional de Telecomunicaciones (ANTEL for its acronym in Spanish). Because of the privatisation process, the company was divided into two corporations, CTE and INTEL. A legislative decree, established that majority of the shares would have to be sold to strategic partners with the ﬁnancial and technical capabilities required to render and invest in telecommunications services and the related infrastructure. The remaining shares would have to be sold either to eligible employees or sold through public auction. Therefore, ANTEL was promptly dissolved. The Telecommunication Law was enacted in order to regulate the transition from a public monopoly regime to competition and private investment.

Currently, foreign companies dominate the telecommunications market. The concept of telecommunications does not only consist of telephone, radio and television services. The telecommunications also includes mobile services and internet services. Furthermore, the operators are also internet service providers. Unfortunately, the Salvadoran legal framework is not sufﬁciently advanced. There are no specialised laws that regulate internet services providers, their behavior in relation to the consumers and their liabilities.

Regarding water supply, this service consists providing drinking water and managing of the aqueducts and sewage system. The operation of the water supply market has a particular characteristic. This characteristic is that the provision of drinking water is shared between the national company and private parties. The national company is called Administración Nacional de Acueductos y Alcantarillados (ANDA for its acronym in Spanish). However, only this Company has the power to manage the sewage systems. The rendering of this service is also subjected to special laws and other national entities may participate, depending on the activity that is being carried out. For instance, if the activity is power generation SIGET and Environment and Natural Resources Ministry (Ministerio de Medio Ambiente y Recursos Naturales or MARN by its acronym in Spanish) may take an active part in the regulation of the activity.

Other public services such as management of pension funds or transportation can be either render by the State or a private party. In the case of the management of pension funds, a national entity called Instituto Nacional de Pensiones de los Empleados Públicos still exists. Notwithstanding, public employees are not obligated to pay contributions to this institution. The service may also be render by private parties known as pension fund managers (Administradoras de Fondos de Pensiones, AFP for its acronym in Spanish) can render this service. Regarding public transportation, until recently the

162 Doing Business in Latin America MARCH 2016 service was provided only by third parties. However, since March 2014, the State started rendering this service. The so called SITRAMSS is an articulated transportation system for the area metropolitana de San Salvador, which is capital city and its surroundings. ii. Governmental Monopoly vs Private Initiative

The concept of monopoly is not deﬁned but prohibited in the Competition Law. Article 110 of Salvadoran Constitution regulates the monopoly as a prohibition but also as an authorisation. Thus, two types of monopoly are established in this article. The ﬁrst known as a monopoly its self and prohibited for being considered detrimental to collective interests. The other type of monopoly is known as a social monopoly.

Since there is no concept of monopoly in the Competition Law, the Constitutional Chamber of Supreme Court established in its case law has helped deﬁne Article 110. Case law states that only social monopolies are allowed to exist in El Salvador, giving a deﬁnition of the term. For the Chamber, social monopoly ‘can only be created through a law in its formal and material law and directly in favour of the State or the Municipalities, when social interest makes it essential to the sole purpose to protect social interest of the population acting as consumers’.

Before the privatisation process, a governmental monopoly existed. However, since private parties were allowed to participate in the rendering of public services, governmental monopoly has been diminished. Currently, private parties are rendering most of the public services. Nevertheless, a social monopoly still exists. The monopoly relies in the managing of sewage system. Only ANDA provides this service. Until today, no private party has been interested in rendering this service. In the market of providing water supply, in the service of providing drinking water ANDA holds the majority of the share market, without committing any anti-monopoly practices. Despite ANDA holds the leading position in the market, is the supplier that also holds a 55.05 per cent of the complaints ﬁled before the Defensoría del Consumidor, which is the entity responsible for the safeguard of the consumers.

On the other hand, in services such as power generation, distribution and telecommunications a leading position of private parties exists. The participants in the telecommunication and power markets need a special authorisation granted by the State in order to provide the services. This authorisation is called a concession. The telecommunication sector holds the second place in the top ten list of the sectors which have the most complaints regarding consumer protection until December 2014. In addition, two of the leading operators in this market are also in the top ten of the service providers with the major number of complaints in the same period.

In addition, there are markets such as management of pension funds and the healthcare system are being shared by the State and private parties. However, in the market of management of pension funds, the private parties known as AFP hold the majority of the market share. On the contrary, in the healthcare rendering services the State holds the majority of the market share. This leading position is not based on the quality of the services but in the level of income of the population. The majority of the population cannot afford a health insurance or pay for private healthcare.

Doing Business in Latin America MARCH 2016 163 iii. Privatisation Rules

The Salvadoran government decided that the privatisation process of the telecommunication and power sector must follow some basic rules. However, no general rules for the privatisation processes were enacted. The process of the privatisation of ANTEL was a special case. The rules of privatisation process of ANTEL were included in the Ley de Privatización de la Administración Nacional de Telecomunicaciones. The law stated that: ANTEL, in order to be dissolved had to be divided into two corporations. The ﬁrst corporation was going to be called Compañia de Telecomunicaciones de El Salvador, Sociedad Anónima de Capital Variable (CTE by its acronym in Spanish) and Companía Internacional de Telecomunicaciones, S.A. de C.V. (INTEL by its acronym in Spanish).

To CTE all assets, rights and obligations of ANTEL necessary to keep the company operating had to be transferred. In addition, all rights over the frequency owned by ANTEL in order to operate mobile personal communication system of 1,950 to 1,965 Mhz and 1,870 to 1,885 Mhz had to be transferred. To INTEL the right of use to the frequency to operate wireless telephone system from 880 to 890MHZ and 835 to 845 Mhz.

The privatisation process was going to be supervised by a special commission. The Economy Minister, the Finance Minister and a special appointed by the President, being this last one the president of the commission, integrated the commission. The sale of both corporations’ assets and stock, required that strategic partners, that is, investors with the ﬁnancial and technical capabilities and investing in telecommunications services and the related infrastructure, needed to be the majority shareholders. The remaining shares were going to be sold either to eligible employees or sold through public auction.

Specifically, the distribution of CTE shares must be offered under special rules a 51 per cent to a prequalified strategic partner, a 10 per cent to active and retired employees, a 14 per cent to public auction and a 2 per cent per cent of the shares must be sold by the State in public bid o through an international or national stock exchange. Regarding INTEL shares, a 51 per cent must be sold to a prequalified strategic partner and a 49 per cent to the public.

In the case of power generation, CEL, the government owned electrical energy supplier, two parts of its business were segregated into two corporate entities, one wich operated the electrical transmission system and the other with providing maintenance to it. Corporations derived from the privatisation of CEL’s assets, tasked with the generation and distribution of electrical energy had to be awarded a concession by the SIGET in order to continue operating. CEL’s distribution and thermal energy generating assets were auctioned off. Concessions for the rendering of electrical energy had to be modiﬁed pursuant to the General Law on Electricity, since some of them were awarded before the privatisation of CEL’s assets. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

Generally speaking, the rendering of public services by private parties in El Salvador has no major limitations or prohibitions except some laws require the State to provide that services, as power generation cannot be performed by individuals just by corporations.

164 Doing Business in Latin America MARCH 2016 C. Real estate i. Holding Title to Real Estate

A. WHO CAN HOLD THE TITLE?

The Salvadoran Constitution recognises property right as a fundamental right. Under the Salvadoran Civil Code, any person – legal entity or national or foreign individual – can hold title to real property, with no more restrictions established by law or the will of the owner. Based on that, essential characteristics of property are that is exclusive, absolute and permanent. However, case law of the Constitutional Chamber of Salvadoran Supreme Court determines that property cannot be deemed as absolute because social function may be considered as a limit. In addition, property cannot be considered as exclusive because there are a few restrictions such as easements that may affect the use of the property. In addition, it cannot be considered as permanent because expropriation events may occur.

There are not many restrictions for ownership in El Salvador. The restrictions are covered in the Salvadoran Constitution. The ﬁrst restriction is addressed to foreigners only. Foreign may own property in El Salvador as long as their country of origin law allows Salvadoran citizens to hold title to property in that country. The second restriction arises because of political processes. In the early 1980s, the Salvadoran government enacted the Agrarian Reform Law, with limitations pertaining the transfer and ownership of land that conforms to certain features listed in that law, which are still in force. However, a Constitutional provision prohibits that a single plot of land in excess of a 245 hectares cannot belong to single individual or legal entity. The third restriction is orientated to civil or religious NGO’s. These entities may not hold in property any real state other than the ones destined and related to the main purpose of the entities.

B. RECORDATION OF TITLE

El Salvador has established a nation-wide public recordation system where all matters regarding real property are registered. This recordation system is managed by the Registro de la Propiedad Raiz e Hipoteca of the Centro Nacional de Registros. Once a titled property is filed before the Registro de la Propiedad Raiz e Hipotecas a filing number is assigned. When the registration process is being carried out ,a corresponding file is opened. This file contains all registered records pertaining to the title to property, such as encumbrances and liens or any other instrument that may modify the status of the property.

The Registry’s staff reviews public deeds, which affect the status of a registered property, before any change to the affected property’s record is registered. Records include information regarding: name of the property’s owner, area, liens, and ﬁling of instruments pertaining to the property, percentage of the property encumbered by any lien or belonging to different titleholders. Once the registration process is ﬁnished a registration number is given to the titled property.

Any potential buyer can verify the record for a given property by accessing the corresponding system at the National Registry Centre’s ofﬁces. Actual buyers can record their acquisition of any property by

Doing Business in Latin America MARCH 2016 165 registering the corresponding public deed. This instrument contains the terms of the purchase and the sales contract of the property, triggering the Registry to change the property’s record to reﬂect the change in ownership.

Another way to acquire real estate is through prescription, which attending to the circumstances of the particular possessor of a determined property, can lead to the possessor acquiring the title to the property after requesting the competent courtl to render a sentence ordering the change in ownership, after being in possession of the property for 10 or 30 years. The court’s sentence is then registered at the Centro Nacional de Registros and the change in the title holder is recorded.

C. HORIZONTAL PROPERTY

El Salvador’s Legislative Assembly enacted a law establishing a horizontal property regime to which buildings and projects that wish to be regulated in a condominium-style format can adhere to. The purpose of the regime is to regulate the rights and obligations of owners of property built on land that belongs to all such as parks, sidewalks. Thus, for example, the regime divides these properties into common and private areas and establishes the rights, obligations and limitations that each unit owner has with respect to these areas. The law also requires that property that is meant to adhere to this regime must be registered as such in the Registro de la Propiedad Raiz e Hipotecas.

Unlike other legal systems, in El Salvador, condominiums lack legal personality. The law also requires that for individual condominiums to have each a different owner, they have to comply with certain structural characteristics, such as having direct access to the outside of the building or access to a common area that leads to the outside. Buildings under construction can adhere to the horizontal property regime, as well as ﬁnished buildings.

The Horizontal Property Regime Law requires that owners of buildings or projects intended to adhere to the regime develop regulations, called the Administration Rules that will apply to the property, which have to be registered at the Real Property Registry. The enforcement of these Rules is entrusted to an assembly of owners, constituted of owners or lessors of property within the building. The Rules should include, among other things: the use of common areas and objects; proprietors’ contributions for common and administrative expenses; requirements for the election of the building’s administrator and causes for its destitution; payment of the administrator; powers given to the administrator; establishment of the date when the administrator is required to render account; method for the call to install meetings of the assembly and their periodicity; majority necessary for ordinary and extraordinary sessions, as well for the adoption of decisions where the law requires no majority. ii. Transferring Real Estate

A. RECORDATION OF TRANSFER

All transfers of real property must be registered in the Registro de la Propiedad Raiz e Hipoteca, to be effective against any third parties. Any document, pertaining any change in a property’s registry record, must be executed in a public deed witnessed and sealed by a Public Notary. Thus, contracts for the sale of real property have to adhere to these requirements, as well as other formalities

166 Doing Business in Latin America MARCH 2016 required by the Civil Code. The same applies for documents that deal with real property transfers; encumbrances, for example. When a transfer of property is going to take place, a tax of three per cent has to be paid as long as the property exceeds the US$28, 571.43. In addition, registration fees will have to be paid. The fees are calculated in US$0.63 per US$100.

B. INSTRUMENTS OF CONVEYANCE

The transfer of property is documented in a deﬁnitive purchase and sale agreement, which has to be executed in a public deed before a Notary Public and is registered in the Registro de la Propiedad Raíz e Hipoteca. Registration of the deed of sale in the Registro is essential to effectively execute the transfer of title to the purchaser, otherwise the public deed only contains an agreement to sell with no actual practical effects.

C. Special Limitation

As a result of political processes of 1980s, the Agrarian Reform Law prohibits the sale of rural land, granted to cooperative associations and eligible workers, to other individuals or legal entities not entitled to that land under that Law. iii. Financing Real Estate Acquisitions

Real estate acquisitions in the Republic of El Salvador, can be ﬁnanced by local or foreign lenders. The buyer usually gives security to the lender in the form of a real property mortgage over the property. Mortgages must be granted in the form of a public deed before a Notary Public in El Salvador and registered at the Real Property Registry at the National Registry Ofﬁce to create the encumbrance over the property. iv. Leasing Real Estate

El Salvador’s Civil Code is the main legislation regulating leasing agreements; however, a special Financial Leasing Law exists. This law regulates other leasing agreements when the lessor is a business whose main commercial activity is the purchase and leasing to third parties of real property and the Real State Lease Law applies to residential and commercial leases, as described below.

A. TYPES OF LEASES

Applicable legislation establishes different obligations to both lessor and lessee according to the type of property being leased. As such, leasing agreements in El Salvador can be classiﬁed in the following way:

Leases that exceeds US$ 22.45 per month have to be executed in writing.

Rural or urban property: Basically the lessor is required to give the leased property in the conditions necessary for its intended use under the corresponding leasing agreement to the lessor and protect their peaceful possession of the property. Likewise, the lessor is required to return it, when the leases expires, in the same conditions. Certain variations on these basic rights and obligations are applicable, depending on the nature of the leased property.

Doing Business in Latin America MARCH 2016 167

Leases under the Financial Leasing Law and the Civil Code: as described above, ﬁnancial leasing agreements grant the lessor the right to purchase the leased property. On the other hand, the lessor is a merchant operating in the real estate market, purchasing property and leasing it afterwards.

Leases under the Real State Lease Law: certain residential and commercial leases fall under the scope of this law, which protects the lessor much more robustly than the Civil Code. The protection consists in the safeguard of certain rights that the lessor can exercise against the lessee, because of the lessee’s individual features or their occupation, or the leased property’s intended use. In all cases, the lease agreement is required to be in writing and the lack of a document is imputable to the lessor.

B. LEASE AGREEMENTS

Lease agreements should contain, among others, the following provisions:

The right of the lessee to waive the agreed lease term and terminate the agreement at any time. This termination has to be made through a written notice sent at least within a term equal to the time period that transpires between installments.

Whenever the lessor agrees, the lessee has the right to sublet the property.

Lease agreements can be automatically renewed. The renewal will be understood in the same terms, for three months, when the leased property is of an urban nature and for the time necessary to ﬁnish commenced works and collect the natural produce of rural real property. Whenever a lease expires or is terminated, the lessor has the right to require the return of the property.

The right of the lessee in residential leases to exercise his or her profession within the leased property, unless they exclusively use the leased property for that purpose, instead of housing.

Lease agreements are generally executed by means of a private document that is afterwards authenticated in another document which is sealed and signed by a Public Notary. Leases, both residential and commercial, can be recorded at the National Registry Ofﬁce so third parties can ascertain the existence of the lease. Special mention has to be made that leasing agreements have to be executed, as described previously, when its total value of the lease itself is undetermined or in excess of US$22.85 per month. v. Construction

Investors planning to execute construction projects in El Salvador are required by laws, regulations and municipal ordinances to submit the construction plans to the local municipal Urban Planning Office, in order to have them approved. In addition, the Vice-Ministry of Urban Development, may approve the plans as long as the corresponding municipality does not have an Urban Planning Office. These plans have to be signed and executed into a finished building by a duly accredited and registered civil engineer or architect. After being submitted to the competent authority, the plans are studied, their feasibility and compliance with applicable construction regulations analysed. Once the plans are approved, construction personnel may begin works. An environmental permit also has to be approved. Once the construction permit has been awarded, by the competent public office, the finished building can be occupied. When the construction is finished a permit granted by the Health Ministry must be issued.

168 Doing Business in Latin America MARCH 2016 vi. Expropriation Events

El Salvador’s Political Constitution establishes expropriation as another limitation pertaining to title to property in real estate. The Constitution establishes that whenever urgent social interest or public utility require it. Expropriation may be made effective after payment of a just compensation made to the affected title holder. Compensation for expropriation can be paid in a lump sum or in installments, however when certain circumstances concur, it is possible to be compensated after being expropriated.

D. Development of integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges

On closing of the past century, stock exchanges mergers were uncommon. In the present century, however, these unions have become a global phenomenon. Companies seeking to enlarge their market presence benefit from listing on a domestic exchange and in foreign markets, through arrangements that cross international borders. When stock exchanges merge, the benefits can be significant for the exchanges, the listed companies, and the investors.

Currently – and historically, El Salvador has had one sole stock exchange, the ‘Bolsa de Valores de El Salvador’. Unfortunately, at current, domestic legislation and regulation on stock exchanges and securities do not speciﬁcally contemplate the merger of stock exchanges.

Even though the local stock exchange has not merged – nor is anticipating to merge – with other exchanges, it has established cooperation agreements with the stock exchanges of other Central American countries, including Guatemala, Honduras, Costa Rica and Panama. ii. Latin American Integrated Market (MILA)

MILA is a product of the Pacific Alliance (Alianza del Pacífico). This market is the result of an agreement signed between the Stock Exchanges of Colombia, Santiago de Chile, and Lima, Peru. Since 2009, these Exchanges began a process to integrate the equity markets of the three countries. MILA officially started operations on May 2011. One of MILA’s formation objectives has to do with its ability to compete with other regional stock markets. MILA represents Latin America’s second largest trading venue by market capitalisation after Brazil’s BM&F Bovespa. But by number of listings, MILA is the largest trading venue in Latin America, ahead of BM&F Bovespa.

El Salvador does not form part of MILA; however, jointly with the stock exchanges of Costa Rica (BNV) and Panama (BVP), it has established the Central American Markets Alliance (AMERCA). This initiative aims to standardise the rules of negotiation of the markets in these jurisdictions and offer an efﬁcient mechanism for cross-border trading, where local intermediaries could operate in any of such markets, using a single trading platform. It seeks to broaden the spectrum of issuers registered in all three markets, increasing investment opportunities, portfolio diversiﬁcation, convergence of intermediaries, liquidity, product diversity and competitive pricing. But, AMERCA

Doing Business in Latin America MARCH 2016 169 does not contemplate a merger of the three stock exchanges into one. Further, its actual implementation remains on hold while local regulators negotiate a ﬁnal legal framework. iii. Paciﬁc Alliance

Although El Salvador does not form part of the Paciﬁc Alliance, it is part of the Central American Common Market (Mercado Común Centroamericano). This ‘common market’ exists since 1960 between El Salvador, Guatemala, Honduras and Nicaragua, while Costa Rica joined a few years later. The main objective: to create a common market among member countries, achieving a free trade zone in 2001, excluding certain agricultural products. El Salvador has also entered into Free Trade Agreements with Chile, Dominican Republic, Colombia, Panama, Taiwan, United States and Mexico.

E. Offshore vehicles providers in Latin American countries i. General Concept: Legal Framework and Scope of the General Activities

Offshore companies are foreign entities not engaging in any economic or commercial activity in El Salvador, characterised by establishing themselves in a foreign country, generally a tax haven. Offshore companies are also known as non-resident companies.

From a ﬁscal perspective it is important to note: residents who execute commercial operations with persons domiciled/resident in tax havens shall transact under market prices. Some of these operations also require special disclosures to the Ministry of Treasury. Further, payments made by residents to offshore entities are generally subject to a 20-25 per cent income tax withholding, and a 13 per cent VAT withholding.

In El Salvador, the most commonly used offshore vehicles are: 1) Panamanian entities or foundations, due to their straight-forward and ﬂexible incorporation laws, easy corporate bookkeeping and secrecy laws, among others; 2) Delaware entities (eg, LLC’s), basically for the same reasons above – note that the Panamanian corporation regulation is based upon the same model as that under the State of Delaware; 3) Spanish entities, principally due to the existence of a bilateral ﬁscal treaty between Spain and El Salvador, which establish certain preferential tax rates and seeks to avoid double taxation. ii. Limited Liability Companies

El Salvador legislation recognises and regulates limited liability companies that will engage in economic or commercial activity in El Salvador. In the context of the members’ limited liability, there are two traditional companies available: i. the Sociedad de Responsabilidad Limitada, being a share-participation form of company, where the personal dimension of the partners is an essential component of the entity and their share in the entity’s capital is divided into personal participations (participaciones sociales); and ii. The Sociedad Anónima, being a stock-participation form of company, where the shareholders’ participation in the entity’s capital is divided into stock (acciones). In El Salvador, limited liability companies need to be formed and maintained by at least two members; and the members’ corporate liability is limited to the amount of their respective share participation in the entity’s capital.

170 Doing Business in Latin America MARCH 2016 iii. Foundations and Trusts

Regarding foundations, El Salvador’s regulation lacks a private foundation regime as that available in Panama for the Fundaciones de Interés Privado, but does regulate the form of foundation which seeks the public interest (Fundación).

Regarding local trusts (fideicomisos), these are of limited use in El Salvador, since the administration of a local trust – the fiduciary duty of the trustee – may only be delegated to and exercised by a bank duly authorised and licensed in El Salvador. Salvadoran trusts have in general a 25-year term and shall be remunerated. Local trusts and their amendments are generally subject to registration at the Registry of Commerce, and for the case of real estate trusts, filing with the local Real Estate and Mortgage Registry is also due.

Note that the setting up of a foreign trust on a cross-border basis is not a regulated activity in El Salvador. However, pursuant to Salvadoran tax law, an offshore trust – even if regulated by foreign law – would be deemed a taxable subject in El Salvador if the majority of the beneﬁciaries reside, and are taxable subjects in, El Salvador, and/or when the activities of the trust involving local assets give rise to taxable events imposed on the trust’s beneﬁciaries.

Doing Business in Latin America MARCH 2016 171

172 Doing Business in Latin America MARCH 2016 Mexico

Doing Business in Latin America MARCH 2016 173 ix. Mexico

A. Foreign investment i. Authorisations vs Limitations or Prohibitions

In Mexico there are some activities that shall be carried out by the Mexican Government such as: extraction and exploration of oil and hydrocarbons; electric energy distribution and transmission; generation of nuclear energy; radioactive minerals; telegraphs; radiotelegraphy; mail services; issuance of paper currency; production of coins; control supervision and surveillance of seaports, airports and helipads.

The Mexican legislation also considers certain activities reserved exclusively to Mexicans or Mexican companies with a clause excluding foreign nationals. This clause involves that any foreign individuals that invests in Mexican Corporations will have to act as Mexican in said investment and to renounce to their consular protections over that particular investment. These activities are: domestic land transportation of passengers and cargo, without including parcel and courier; and development bank Institutions.

Mexican Corporations with Foreign Investment will only be able to carry out certain activities if the Foreign Investment does not exceed the following percentage.

Up to 25 per cent

• National Air Transport.

• Aerotaxi transport.

• Specialised Air Transport.

Up to 49 per cent

• Manufacture and sale of explosives, ﬁrearms, cartridges, ammunition and ﬁreworks, excluding the acquisition and use of explosives for industrial and mining activities, and the development of explosive mixtures for use in such activities.

• Printing and publication of newspapers for circulation in national territory.

• Shares series ‘T’ of companies owning agricultural, livestock and forestry land.

• Freshwater, coastal waters and exclusive economic zone ﬁshing, excluding aquaculture.

• Port Integral Administration.

• Port services piloting ships.

• Shipping companies engaged in the commercial exploitation of vessels for inland and coastal navigation, excluding tourism cruises and exploitation of dredges and ﬂoating structures for portual construction, conservation and operation.

174 Doing Business in Latin America MARCH 2016 • Supply of fuels and lubricants for ships, aircraft and railway equipment.

• Radio broadcasting.

Every other licit activity may be carried out by foreign investors with the proper registry in the National Foreign Investment Registry, controlled by the Ministry of Economy. The Foreign Investment Law contemplates the Registry for:

• Mexican Corporations which capital is comprised by Foreign Investment, Neutral Investment and Mexicans living abroad that have acquired another nationality.

• Any Foreigner, Foreign Corporation or Mexican living abroad that have acquired another nationality that carries out commercial activities in the Mexican territory.

• Trusts that result in foreign investment rights.

Such registry must be made within 40 days after the Foreign Investment is carried out. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

The National Infrastructure Programme 2014-2018 is focused on promoting and creating more economic activity and job creation to support infrastructure development with a long-term vision based on three guiding principles of the National Development Plan, which are as follows: (1) balanced regional development; (2) urban development; and (3) logistic connectivity in order to achieve all national targets.

According to the National Democratic Planning System and through the National Infrastructure Programme 2014-2018 the Federal Government seeks to guide the comprehensive functionality of existing and new infrastructure of the country, through the following speciﬁc objectives per sector:

• Have an infrastructure and logistics platform for transport and modern communications to promote greater competitiveness, productivity, economic and social development.

• Optimise the coordination of efforts directed to the energy infrastructure, ensuring the proper development of this speciﬁc sector, in order to have enough energy of good quality and offer competitive prices.

• Increase water infrastructure, both to ensure water for human consumption and agricultural irrigation, as well as ensuring water protection in case of ﬂoods.

• Contribute to strengthen and improve interagency health infrastructure to guarantee effective access to quality health services.

• Promote urban development and the construction of quality housing, equipped with infrastructure and basic services with the orderly land access.

• Develop competitive infrastructure that promotes tourism as a strong guiding principle of regional productivity and as a welfare detonator.

Doing Business in Latin America MARCH 2016 175

PROJECTS

Total Estimated Investment Planned projects 2014-2018 $505,395.39m 743

A. COMMUNICATION AND TRANSPORT

Objective: Have an infrastructure and logistics platform for transport and modern communications to promote greater competitiveness, productivity, economic and social development.

Total Estimated Investment Planned projects 2014–2018 $86,081.27m 223 Total funds per sector (millions of dollars)

Total $86,081.27 Public Resources $36,384.32 Private Resources $49,696.92

B. TERRITORIAL AGRICULTURAL AND URBAN DEVELOPMENT

Objective: Promote urban development and the construction of quality housing, equipped with infrastructure and basic services with the orderly land access.

Total Estimated Investment Planned projects 2014–2018 $124,703.35m 4 Total funds per sector (millions of dollars)

Total $124,703.35 Public Resources $65,758.26 Private Resources $58,945.00

C. ENERGY (RESERVED FOR THE PUBLIC INVESTMENT ONLY)

Objective: Ensuring the proper development of the energy infrastructure, in order to have enough energy of good quality and offer competitive prices.

Total Estimated Investment Planned projects 2014–2018 $35,582.45m 133

D. ENERGY

Objective: Ensuring the proper development of the energy infrastructure, in order to have enough energy of good quality and offer competitive prices.

Total Estimated Investment Planned projects 2014–2018 $225,647.68m 129 Total funds per sector (millions of dollars)

Total $225,647.68 Public Resources $189,925.84 Private Resources $71,304.28

E. HYDRAULICS

Objective: Increase water infrastructure, both to ensure water for human consumption and agricultural irrigation, as well as ensuring water protection in case of ﬂoods.

176 Doing Business in Latin America MARCH 2016 Total Estimated Investment Planned projects 2014–2018 $27,997.22m 84 Total funds per sector (millions of dollars)

Total $27,997.22 Public Resources $24,808.50 Private Resources $3,188.72

F. HEALTH

Objective: Contribute to strengthen and improve interagency health infrastructure to guarantee effective access to quality health services.

Total Estimated Investment Planned projects 2014–2018 $4,878.96m 87 Total funds per sector (millions of dollars)

Total $4,878.96 Public Resources $4,807.74 Private Resources $71.17

G. TOURISM

Objective: Promote the development of tourism infrastructure that consolidates the priority destinations and helps diversify the offer to new destinations.

Total Estimated Investment Planned projects 2014–2018 $12,146.50m 83 Total funds per sector (millions of dollars)

Total $12,146.50 Public Resources $4,626.86 Private Resources $7,519.63

It is a total of $2,866,472m pesos for the private sector investment in which foreign investment can participate through PPP Agreements and Concessions to be granted by the Mexican Government. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

Mexican Federal Constitution was reformed in 2013 allowing the participation of privet investments on the oil and gas industries, although as mentioned above, the extraction and exploration of hydrocarbons is still an activity reserved for the Federal Government that can be made through productive public companies and agreements with the private sector. The corresponding acts and regulations to execute the constitutional amendment were made in 2014.

A. OIL AND GAS

The Federal Constitution expressly provides that the exploration and extraction of oil and any other hydrocarbons will be carried out exclusively by the State through its public companies (Pemex) and agreements with the private sector.

As part of the Round Zero the Ministry of Energy gave PEMEX the 83 per cent of the hydrocarbons reserves and 21 per cent of the prospective resources.

PEMEX announced 10 strategic partnership opportunities in the following four projects (over a

Doing Business in Latin America MARCH 2016 177 period of 13 months beginning in November 2014):

• Mature Fields. Over a probable 1,600,000 barrels of crude petroleum equivalent. As a ‘2P’ reserve.

• Extra heavy raw petroleum ﬁelds. Will focus on the three areas of extra heavy crude oil.

• Development of gas. Associated with the development of two giant gas ﬁelds in deep waters containing 212,000,000 barrels of crude oil equivalent.

• Deep waters. Deep water ﬁelds. As a ‘2P’ reserve.

As part of the Round One the Ministry of Energy has announced that it will offer 169 blocks to bidders in Round One –109 blocks for exploration and 60 blocks for extraction.

The reserves to be offered are estimated at around 3.8 billion barrels of oil equivalent for 2P reserves and about 14.6 billion BOE for prospective reserves.

Mexico expects annual investments in these projects to be in the region of $8bn for 2015-2018.

In these last activities the foreign investment is permitted through a public bid that contemplates the best technical and economic conditions of the bidders.

B. MINING

The Mining Act establishes that the exploration and exploitation of minerals can be granted to the privet sector and even Mexican companies with foreign investment in its capital. These activities can be carried out by the privet sector through a concession in the conditions established in the same Act.

To obtain the concession the Company must comply with the following requirements:

• Its corporate object must contain the exploration and exploitation of minerals.

• Have its corporate domicile in the Mexican Territory.

Every concession granted will be only for a specific Mining lot. The concession will be granted to the first applicant if this applicant satisfies the operative requirements necessary to explore the Mining lot, this concession will have a length of 50 years. iv. Treatment of Foreign Investment in Real Estate

The Mexican Law does not have any restriction to acquisition or lease of real estate in Mexico by foreigners or foreign investment companies. However there is a special procedure for real estate acquisition in the Restricted Zone which is within 100 kilometres of the frontiers and 50 kilometres of the coasts.

The special procedure is the following:

Mexican Corporations with Foreign Investment: a) Outside the Restricted Zone: There is no limitation for the acquisition of Real Estate.

178 Doing Business in Latin America MARCH 2016 b) Within the Restricted Zone:

• For residential purposes: The real estate property can be acquired by a trust in which the ﬁduciary has the property of the real estate but the beneﬁciary has the usage and enjoyment of the property.

• Non-residential purposes: The real estate property can be acquired directly with a registry in the Foreign Relations Ministry.

Foreigners and Foreign Corporations:

a) Outside the Forbidden Zone: The real estate property can be acquired directly with a registry in the Foreign Relations Ministry.

b) Within the Forbidden Zone: For residential and non-residential proposes, the real estate property can only be acquired through a Trust. v. Treatment of Foreign Investment in Agribusiness Activities

Mexico has a very rich land for agriculture production especially for its climate. Mexico’s agribusiness activities are ruled by the Agrarian Act. The Federal Government will promote the development of the rural sector through the promotion of productive activities and social action to improve the welfare of the population and their participation in national life. There are no limitations to the exploitation of private property real estate for agriculture activities.

The Agrarian Act includes a land property regime called ‘Ejido’ for rural communities. The Ejido Communities own massive parcels of land for their own agrarian exploitation. The Ejidos can be turned into private property through a complex procedure and even be owned by foreigners with the Real Estate limitations mentioned above.

Although Agriculture Products can be imported into Mexico without apparent limitations except for illegal drugs, the Foreign Trade Act establishes policies to prevent subvention and dumping practices. The protection to the agribusiness industry can include the imposition of countervailing duties in certain products that may threat the Mexican production.

In accordance with the National Institute of Statistics and Geography (INEG1) the main agriculture products in Mexico are the following: sugar cane; corn; sorghum; orange; wheat; banana; tomato; green chili; lime; mango; potato; cherry coffee; avocado; beans; apple; barley; grapes; rice; strawberry; peach; and soy. vi. Treatment of Foreign Investment in the Rendering of Public Services

The Public Service of Electric Energy Distribution is reserved exclusively for the Mexican Government, however the provision of other services may be performed by private investment, therefore if the limitations established in the Foreign Investment Law mentioned in the ﬁrst section of this chapter, some of these services can only be provided by the private sectors through public bids and the granting of concessions, the rest will be conducted through Public-Private Partnerships.

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PPP Agreements:

The Public-Private Partnership Act establishes the contractual rules for PPP Agreements. The Private Party of these agreements can only be a Company in which corporate object will exclusively be the necessary activities to develop the speciﬁc project of the agreement. To obtain the contractual right to be part of the PPP the authority will publish the rules of the bid that will have speciﬁc regulations of the corporate structure of the company.

The agreement must establish the following:

• Object of the Agreement that will be the provision of the services and the execution of the necessary infrastructure works.

• Rights and obligations of the parties.

• Product features, speciﬁcations, technical standards, performance standards and quality for the execution of the work and service delivery.

• A list of the Real Estate and merchandise needed for the project and its destiny at the termination of the agreement.

• The ﬁnancial regime of the project.

• Distribution of risks.

• The constitution of a surety for any possible breach.

• The term for the work development, the beginning of the service provision and the duration of the agreement.

• The correspondent authorisations (concession, permits, etc) for the service provision.

B. Rendering of public services i. General Framework

The Constitution determines what is considered as Public service; these are categorised by political jurisdictions: the Federation (articles 28, 73 and 124), the States (article 116), and the Municipalities (article 115). However, the Federal and Municipal levels are the ones who concentrate the rendering of these services, leaving to the State a mere coordination role. The Federal level is responsible for issues related to hydrocarbons, electricity supply, postal service, ﬁnancial system, and communications; as well as to health, education, and roads. As for the State and Municipal levels, on the other hand, public services comprise mostly education, water utility services, public lightning, pavement, trash collection, markets, graveyards, public safety and transit systems, among others. These services can be rendered either by means of a State Monopoly, by joint participation with private parties, or by coordination with other political jurisdictions.

The Constitution sets out principles for the participation of the private initiative in rendering public services. These can be found in article 25 whereby it is established that for the beneﬁt of the national economic development public, social and private sectors shall cooperate. Similarly this article

180 Doing Business in Latin America MARCH 2016 mentions that in order to develop and organise the nation’s priority development areas, both public and private sectors will concur.

Besides concessions, another common scheme for rendering public services is through Public-Private Partnerships (PPPs), especially with respect to roads and water utility services. PPPs are regulated by the Federal Public-Private Partnership Law (Ley de Asociaciones Público-Privadas) as well as by the respective State’s PPPs laws, if any. The most common PPPs’ modality used in Mexico is though contracts whereby the private parties are obliged to provide a service, whether it is water supply, a public lighting supply, or to conduct a construction project (ie, road projects).

Concerning water utility services, the municipality is responsible for rendering the service in coordination with the State Congress. Generally the municipal authority grants a concession for this purpose. The title granted under this concession represents an exclusive right for the concessionaire, subject to the terms and conditions set it in the contract entered into with the municipality, in order to ensure the avoidance of abuse practices that could prejudice users. Likewise, as for the energy supply or public lightning, the municipality will generally issue a concession or a PPP through which private parties will participate, upon approval of the State Congress. ii. Governmental Monopoly vs Private Initiative

Governmental or State monopolies in Mexico can be understood as one of the following concepts: (1) Decentralised Public Organisms; (2) State-owned Enterprises; (3) Public Trusts; and (4) State Productive Enterprises.

State monopolies in Mexico are closely linked to the strategic areas concept which encompasses economic sectors such as post, telegraphs, radiotelegraphy, radioactive minerals, nuclear energy, the control and design of the National Electric System; as well as the exploration and production of petroleum and other hydrocarbons. Similarly, it is also related to the concept of priority areas for the national development, such as satellite communications and railways. Nevertheless, as mentioned above, the Constitution allows the participation of the private initiative in public services for both the strategic and priority areas by means of concession, permits or titles, as there may be the case.

In the Federal Level concessions and permits are generally granted by the Executive branch, through its respective ofﬁce, whether it is the Secretariat of Energy (Hydrocarbons, minerals, etc), the Secretariat of Communications and Transports (roads, ports, etc), among others. The only exception is with the broadcasting and telecomm sectors, where the Federal Institute of Telecommunications is the body granting such concessions.

As for the electricity supply, pursuant to the recently issued Electric Industry Law, the sector is now in process of market liberalisation. As part of this process in the energy sector, generation and commercialisation of power are no longer strategic activities of the State, in turn, CFE alongside with other private parties will develop such activities. Nevertheless, the State will hold exclusive control over the National Electric system, as well as over the transmission and distribution of power. The Regulatory Commission of Energy (CRE), under the authority of the Secretariat of Energy, is the body in charge of controlling the sector. It will grant permits for producers and will determine the tariffs for the delivery of the service. No concessions are to be granted in this sector, however the

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State may enter into agreements with private parties under the terms of the respective regulations. iii. Privatisation General Rules

Over the past three decades Mexico’s Governments have pursued a policy aiming for privatisations of public entities. Two mains purposes have driven this path: ﬁrstly, to strengthen public ﬁnances, macroeconomic stabilisation, and expanding the strategic sectors productivity; and secondly, to open up to the public access to non-strategic economic sectors.

In Mexico, privatisation of public enterprises is generally executed by Presidential Decree. The Federal Law of State-owned Enterprises (Ley Federal de Empresas Paraestatales) sets the bases for the privatisation of public companies, it establishes that when a State-owned enterprise ceases to fulﬁl its purposes, or becomes economically unattractive, the Secretary of Finance may suggest to the Executive power (ie, the President) its sell, disposal or dissolution. This process is conducted by the Inter-Secretariat Commission of Public Expenses, Financing and Disincorporation (Comisión Intersecretarial de Gasto Público, Financiamiento y Desincorporación). iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

Antitrust regulations are applicable to private entities rendering public services. The Federal Economic Competition Commission (CFCE) enforces the Economic Competition Law (Ley Federal de Competencia Económica) in all economic areas, including those comprising public services under the Constitution, with exception to the broadcasting and telecomm sectors. The law is applicable to all Economic Agents, which, according to the law deﬁnition comprises any legal person or individual as well as any public entity, with exception to the activities that the State exercises as strategic areas. The CFCE regulates monopolistic practices and economic concentrations concerning all activities related to public sectors, with exception to those executed by the State under the concept of strategic areas. However, It is unclear yet how the State Productive Enterprises will be affected by these regulations as they will participate as equals with other private parties.

As for the Broadcasting and Telecomm sectors, the body responsible for its regulation is the Federal Institute of Telecomm (IFT). Its main tasks are, among others, to regulate, promote and supervise the development of the radio spectrum, telecomm networks and satellite services. It is the authority who regulates economic competition in this sector, in conformity with the Economic Competition Law.

C. Real estate

Article 27 of the Mexican Constitution regulates land ownership in the country by establishing that the Nation originally owns the land and waters within the national territory. However, it has the right to transfer domain of them to private parties, therefore constituting private property. i. Holding Title to Real Estate

A. WHO CAN HOLD TITLE?

While it is clearly stated that only Mexican nationals can have the right to hold title in real estate,

182 Doing Business in Latin America MARCH 2016 foreign nationals are also entitled to do so if and only when they convene with the Ministry of Foreign Affairs that they shall be considered as nationals in matters concerning the real estate they acquire and, therefore, will not invoke protection from their government regarding the real estate they obtain.

B. RECORDATION OF TITLE

Each State in Mexico has its own public recordation system where matters relating to real property are recorded, including titles of property, transfers, encumbrances and limitations on ownership. Each titled property is identiﬁed by a number given by the recordation ofﬁces.

Any person can verify title to a speciﬁc property in the local records, which is advisable when interested in acquiring property. Mexican laws require that transactions involving real property are granted in public deed, including their purchase. Therefore, people who are interested in acquiring property must do so through a notary public who will issue a deed of property including the terms of purchase and sale contract. This deed must be registered in the recordation ofﬁces, a procedure normally carried-out by the notary public who issues the deed. Once the deed is recorded it will have effects before third-parties. ii. Limitations and Modalities to Ownership

A. CONDOMINIUM REGIME

Mexican States have enacted laws that regulate horizontal and vertical (buildings) condominiums. Their purpose is to regulate the rights and obligations of owners whose properties are located in lands divided into common and private areas. Therefore, while the owners may have exclusive rights, albeit subject to certain limitations, with regards to their private units, they will also have obligations towards areas intended for common use (gardens, parking lots, amenities), which may include participation in the expenses required for maintenance, adherence to the condominium rules, etc.

There can be many types of condominiums based on the purpose given to their units, which can be for residential, commercial, industrial or mixed purposes. The law requires that the regime must be incorporated through a public deed and recorded in the property records, including the speciﬁc regulations that will apply to the condominium. These regulations must include the appointment of an administrator, the use that can be given to each unit, terms and conditions of use of common areas as well as matters pertaining to the owners’ assembly which is the highest decision-making authority of the condominium.

B. AGRICULTURAL LANDS

Ejidos are population centres with legal personality and self-patrimony. Those farmers who inhabit ejidos, have use and usufruct over the common-owned land in ejidos. The Agrarian Law and the ejido’s own regulations subject them to different rights and obligations with regards to the land they can exploit. These rights and obligations are, among others:

(1) Use and proﬁt from their plot of land assigned to them and the right to dispose of it;

Doing Business in Latin America MARCH 2016 183

(2) Use and proﬁt from lands intended for common use;

(3) They have testamentary rights with regards to the land assigned to them; and

(4) Participation in the ejido’s governing assembly and in the election and integration of its representation organs.

Farmers may execute different contractual operations with regards to the use and usufruct of their plots of land, however, there are several requirements that must be met in order for them to alienate them.

The Agrarian Law divides land located in ejidos into three categories:

1) land intended for settlement;

(2) land intended for common use; and

(3) plots of land.

In principle, each and all of these lands are inalienable and neither subject to statute of limitations nor to distraint. Despite this, plots of land may however be alienated if they are detached from the ejido regime.

In order to detach a plot of land from the regime, the farmer must receive full domain of his plot of land from the general assembly (farmers only have the use and usufruct). Once this has been done, the plot’s registration in the National Agrarian Registry (the ‘Registry’) must be cancelled. The Registry will then issue the deed of property. Afterwards, the deed must be registered in the Public Registry of Property. It is important to point out that other farmers in the ejido have a right of ﬁrst refusal with regards to the ﬁrst sale once the land is detached from the ejido.

From 1996 onwards, commercial corporations are allowed to own and manage agricultural real estate in Mexico. This means that corporations may own agricultural real estate for industrial, commercial or residential uses. In this case, the corporation must notify the Registry that the real estate has a purpose other than agricultural, provided it receives permission from the local authorities (uso de suelo).

Corporations with interest in acquiring agricultural property intended for agriculture are subject to several terms and conditions:

1) the corporation’s purpose must be limited to the production, transformation and commercialisation of agricultural products;

(2) there are limits to the extension of land they can own;

(3) capital stock must have a series ‘T’ stock which must be equal to the amount of capital invested in agricultural lands;

(4) foreign investors may not hold over 49 per cent of series ‘T’ stock;

(5) the corporation and its shareholders, as well as series ‘T’ shareholders must be registered before the Registry.

184 Doing Business in Latin America MARCH 2016 If a corporation’s agricultural lands exceed the limits set out in the law, the Mexican Government has the authority to order its sale.

C. RESTRICTED ZONE

There are also constitutional limits to foreigners holding title in the areas commonly known as the ‘restricted zone’, a 100-kilometre strip along the borders and 50 kilometres along beaches.

However, due to the importance of foreign investment in Mexico, the government created mechanisms to allow foreigners to acquire property in the restricted zone. One of them is known as the ‘beach trust’: through the use of a trust, in which the owner of the property acts as trustor, a Mexican bank acts as trustee and the foreign buyer acts as beneﬁciary, it is assured that the foreign buyer has all the rights and privileges of ownership. The Foreign Investment Law allows for the trust to be established for a 50-year term renewable any time during its existence.

Foreign corporations can also take part in the trust scheme in order to acquire property in the restricted zone. As to Mexican corporations that allow foreign investment, these can acquire property in the restricted zone as long as it is not intended for residential purposes provided they give notice to the Ministry of Foreign Affairs. iii. Expropriation Events

The Mexican Constitution states that expropriation can only be carried-out when it is deemed necessary due to public utility causes and through compensation, following a procedure described in the federal Expropriation Law. Said law establishes a list of causes that may be considered as public utility, which includes the establishment of a public service, construction of streets and public infrastructure among others. Compensation is given based on a valuation performed by the State and is subject to litigation in case the affected party considers it is not appropriate.

D. Offshore vehicle providers in Latin American countries i. General Concept: Legal Framework and Scope for General Activities

Mexico has been characterised through time as a jurisdiction where residents are taxed on their worldwide income, including that derived indirectly subject to Preferential Tax Regimes or Low-tax jurisdictions rules.

In this regard, Mexico maintains a strictly enforced regime whereby any items of income realised indirectly by Mexican residents from investments made through vehicles which income is considered subject to a preferential tax regime are taxed in Mexican entity considering such income perceived at the moment they were generated in the entity resident in the preferential tax regime country.

Mexico does not follow the criterion of tax havens, but, it has implemented Controlled Foreign Corporation rules (CFC rules). This study focuses on how the Mexican legislation deals with the income taxation of the controlled foreign subsidiaries in the hands of resident shareholders.

Doing Business in Latin America MARCH 2016 185 ii. Applicable Legal Regime in Mexico

In order to fully understand the current regime established in the Mexican Income Tax Law regarding ‘tax havens’, it is mandatory to refer to the report entitled ‘Harmful Tax Competition – an Emerging Global Issue’ published in 1998 by the Organisation for Economic Co-operation and Development (OECD), which claims the need to strengthen effective international cooperation to combat harmful tax competition through the so-called tax havens and preferential tax regimes.

That report has been considered by member countries (including Mexico) as a starting point for corresponding adaptation and implementation in their domestic legislation, in order to combat harmful tax practices.

Hence, the tax treatment applicable to offshore investments maintained by either Mexican individuals or corporations (including a permanent establishment in Mexico) signiﬁcantly has changed since 2005.

Since then, the Mexican Income Tax Law has provided that an income obtained, directly and indirectly, by Mexican residents and non-residents with a permanent establishment in Mexico through controlled foreign entities or vehicles, will be considered income subject to preferential tax regimes when income or gains obtained directly or indirectly through such entities is not taxed or is taxed with an income tax lower than 75 per cent of the income tax that would have been due and paid in Mexico on such income.

The current applicable Mexican tax rate for corporations is 30 per cent, so the rules apply to income taxed at a rate of less than 22.5 per cent.

The Mexican tax legislation provides that income subject to a preferential tax regime are those generated in cash, kind, services, credits or those which are presumptively determined by the tax authorities, even if such income have not been distributed by the entity where they were generated.

It is considered that income is subject to a preferential tax regime if the tax actually incurred and paid abroad is lower than the 75 per cent of the income tax that would have been paid in Mexico, even if the referenced tax incurred and paid abroad is lower because of the utilisation of a legal, administrative or a regulatory provision, an authorisation, a refund, a credit or any other procedure.

The aforementioned law provides that when income is earned indirectly, the tax paid by each intermediate vehicle or entity in which the Mexican taxpayer has an interest, should be taken into account in order to determine the 75 per cent rule within the whole structure.

Furthermore, non-residents whose income is subject to a preferential tax regime are subject to a 40 per cent ﬁxed withholding tax in Mexico.

Under the current administrative rules, said withholding tax rate may be lowered to the extent that the transactions carried out by the vehicle, which income is subject to a preferential tax regime, were undertaken with an unrelated party or with a related party that is a resident of a country with a broad agreement for the exchange of information entered into with Mexico.

In addition, the Mexican Legislation provides that taxpayers who maintain investments through vehicles considered subject to preferential tax regimes, are obliged to ﬁle before the tax authorities

186 Doing Business in Latin America MARCH 2016 on an annual basis, an informative return on the income subject to a preferential tax regime.

In this regard, the Mexican Income Tax Law provides that reporting obligations are applicable when transactions are performed through entities or vehicles deemed as fiscally transparent, which are defined as those that are not considered taxpayers in their country of incorporation, and the income of which is attributed to their members, partners, shareholders or beneficiaries.

Finally, it is important to mention that in July 2013, as a part of the ‘Action Plan on Base Erosion and Proﬁt Shifting’ implemented by the OECD, the latter launched 15 actions designed to ensure the coherence of corporate income taxation at an international level.

One of those actions, (specifically Action 3), pointed out the need to address base erosion and profit shifting by using CFC rules, considering that those rules have existed in the international tax context for over five decades, and dozens of countries have implemented it.

The mentioned draft considers all the constituent elements for effective CFC rules, aimed at having countries without those rules to implement them, and countries with existing CFC rules to modify their rules to align more closely with said recommendations, as in the case of Mexico, whose legislation might be modiﬁed according to the plan of action developed by the OECD.

Doing Business in Latin America MARCH 2016 187

188 Doing Business in Latin America MARCH 2016 Nicaragua

Doing Business in Latin America MARCH 2016 189 x. Nicaragua

A. Foreign investment i. Authorisations vs Limitations or Prohibitions

A. GENERAL ABSENCE OF RESTRICTIONS

Nicaragua is the largest country in Central America, and offers to foreign investment great opportunities for doing business considering that in general there is no need to obtain prior approvals or to fulﬁl special registration requirements for foreign investments. Also, the Nicaraguan economy is growing, capital can be moved freely in and out of the country and the US dollar has been the usual currency for business under a few speciﬁc exchange controls by the Central Bank of Nicaragua.

Nowadays, investments in Nicaragua have great growth opportunities that could be associated with some important indicators such as human development, political rights, civil liberties, country’s credit rating, free competition and several tax incentives in some economic sectors.

The aforementioned results in the current execution of many important projects of foreign direct investment such as energy projects (renewable energy), free zones, telecommunications, mining, banking, agriculture and the tourism industry, among others, including the possibility of carrying out and developing of the interoceanic Gran Canal of Nicaragua and its subprojects.

It is important to consider that Nicaragua has an excellent location in America and is also one of the safest countries in the region. Furthermore, Nicaragua has a productive and competitive workforce and it offers Tax incentives in some areas as well as Export subsidies within an open and free economy and markets.

B. NATIONAL, FAIR AND EQUITABLE TREATMENT

In general, the State of Nicaragua guarantees equal rights and obligations to foreign and national investors. Both Nicaraguans and foreign investors must fulﬁl the same basic requirements to organise and operate business activities in Nicaragua. In addition to these principles, which are contemplated by the Constitution and local laws, the country has signed several bilateral investment treaties and free trade agreements, which include provisions granting national treatment, most-favourable-nation treatment, and fair-and-equitable treatment to foreign investors. Law No. 344, Law for the Promotion of Foreign Investment grants overall protections to all foreign and national investors.

It should be kept into consideration that Nicaragua has not signed any treaties or agreements to avoid double taxation or imposition with any country.

Regarding Arbitration Treaties, Nicaragua is signatory of the New York Arbitration Convention and the Inter-American Convention on Arbitration (Panamá Convention). In addition, with regards to investment protection, Nicaragua recognises various bilateral treaties establishing Arbitration

190 Doing Business in Latin America MARCH 2016 as a means of dispute resolution. Nicaragua has signed bilateral investment treaties (BITs) with the following countries: Germany, Argentina, Belgium and Luxembourg, Chile, Czech Republic, Denmark, Ecuador, El Salvador, Finland, France, Italy, Republic of Korea, Netherlands, Spain, Sweden, Switzerland, Taiwan, United Kingdom, and United States of America.

In this context, Nicaragua is also a party to bilateral trade agreements, including agreements with México and Taiwan, and also the Dominican Republic-Central American Free Trade Agreement (DR-CAFTA) which is a multilateral free trade agreement. International Arbitration is the dispute resolution mechanism provided in the BITs executed by Nicaragua, with arbitration at the International Centre for Settlement of Investment Disputes (ICSID) or under the United Nations Commission on International Trade Law (UNCITRAL).

C. LAW FOR THE PROMOTION OF FOREIGN INVESTMENT

Under this law foreign investors, as well as nationals (if applicable), can beneﬁt from stability with respect to its investments.

The right of foreign investors to enjoy, use and own the property related to their investments is acknowledged in said Law, and the only exception to this is if such property is declared of social interest for the public beneﬁt by the competent authority. This is established in Article 44 of the Nicaraguan Constitution.

Foreign investors enjoy free access to buying and selling foreign currency in accordance with provisions established in Nicaraguan regulations regarding currency exchange. Foreign investors can also transfer capital related to their invested capital to other countries, as long as it does not cause prejudice to the obligations the investors might have in the country. For example, liquidations, voluntary sale of the foreign investment, any utility, dividends or gains generated in the national territory, after payment of the corresponding taxes; rents and technical assistance; payments derived from compensation for expropriation.

Any dispute, controversy or claim arising out of or relating to foreign investments covered by said Law may be submitted to international arbitration in accordance with the agreed upon provisions, without prejudice to the application of national legal standards and conventions to which the Republic of Nicaragua is a party.

Under this Law, capital means all kinds of equity rights, property and assets that have economic value, under the modalities of convertible foreign currency; tangible assets in any form or condition introduced into the country; technology, as long as it qualiﬁed as capital, taking into account their real price in international markets and capitalisations of loans obtained by the investor in freely convertible currency.

Foreign investment is subjected to the general tax regime. For enjoyment of tax exemptions, foreign investors must strictly adhere to the beneﬁts and tax incentives established in other laws, in accordance to the nature of the investment.

Doing Business in Latin America MARCH 2016 191

D. FREE CHOICE OF LAW AND JURISDICTION

Except in the case of government contracts and certain cases where common principles of conﬂict of laws require the application of Nicaraguan law, in general parties can freely choose the governing law of the agreements. Thus, foreign investors, as well as nationals, are free to govern their commercial relations by Nicaraguan law or any foreign law.

In addition, parties are also generally free to submit any dispute arising under such agreement to the courts of Nicaragua or to the courts of a foreign jurisdiction, as well as to arbitration and other alternative methods of dispute resolution.

E. OPERATION PERMITS

Any legal or natural person that intends to engage in a commercial and industrial activity in Nicaragua must obtain a licence from the Municipality where the activity and operation take place. Also, in all cases environmental permits/authorisations are necessary.

Certain types of businesses must be registered an authorised with the pertinent regulatory agency. These businesses include banks, insurance companies, ﬁnancial entities, companies engaged in the sale of arms, security and transportation companies, brokerage houses, construction companies, oil companies, mining companies, telecommunications companies, energy generation and energy distribution companies, forestry companies, aquaculture and commercial ﬁshing companies, tourism companies, among others.

The process for the constitution and registering of a new company or branch in Nicaragua begins with the registration of the Articles of Incorporation before the Public Registry Office. The user must provide information about the company, the operations to be conducted, its address and other general information. Information registered is publicly accessible and available to third parties. The process also include other registrations and processes, such as the processes for obtaining a Taxpayer Identification Number (‘Registro Único de Contribuyente’) from the Ministry of Finance an Public Credit, this Identification Number is used for the payment of national and municipal taxes, as well as for registrations with the Social Security National Institute and other institutions. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

There is no speciﬁc Law in Nicaragua that regulates this matter, which has not avoided the carrying out of some projects of this nature. There are laws with certain provisions that establish similar associations between the State and investors. For example, the Law of Municipalities refers to municipal companies for the rendering of public services; the Special Law for Exploration and Exploitation of Hydrocarbons, which establishes that the State, represented by the Nicaraguan Petroleum Company, will participate in activities described in said Law, and that the investors interested in developing projects of exploration and exploitation of hydrocarbons, may associate, cooperate, make alliances and enter into agreements with the Nicaraguan Petroleum Company.

192 Doing Business in Latin America MARCH 2016 iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

A. OIL AND GAS

In accordance with the Nicaraguan Constitutions the hydrocarbons deposits are national heritages. The activities related to the exploration and exploitation of hydrocarbons in Nicaragua are regulated by the Ministry of Energy and Mining (MEM). Law No. 286, Special Law for Exploration and Exploitation of Hydrocarbons establishes the legal frame for such activities, along with the National and International Technical and Environmental Norms.

Said Law establishes that the State, represented by the Nicaraguan Petroleum Company, will participate in activities described in said Law, and that the investors interested in developing projects of exploration and exploitation of hydrocarbons, may associate, cooperate, make alliances and enter into agreements with the Nicaraguan Petroleum Company.

Foreign investors interested in initiating direct negotiations or in bidding for the entering into an Exploration and Exploitation of Hydrocarbons Contract must be previously qualiﬁed.

Such qualification is granted through ministerial resolutions which shall be valid for two years starting from the issuance date. Subsidiaries, affiliates or branches of companies can be qualified on the basis of their own technical expertise of that of the parent company.

According to information provided by the Ministry of Energy and Mines the available Area for oil exploration offshore of the Caribbean and Paciﬁc of Nicaragua is of 74,478 square kilometres (km2). The maximum surface per area authorised per Contract is of 400,000 hectares. Negotiations with the State for oil exploration may occur by means of concurrence of several offers in areas previously delimited and published or direct negotiations. The type of Contract that will be subscribed with the State for this activities are Concession Contracts, Shared Production Contracts or Any other contractual form internationally recognised by the oil industry. The exploration activity will not exceed six years, and it may be extended for no more than six additional years. Once the commercial discovery of hydrocarbons is declared, the duration of the Exploitation Contract is of 30 years and it may be extended ten additional years. In order to apply for a grant of a Contract it is necessary to prove prior economical, technical expertise and ﬁnancial QUALIFICATION and the owner of the project must be a company incorporated in Nicaragua or a branch of a foreign parent company duly registered in Nicaragua. In both cases, the company must have a natural person who is the legal representative before the Authority and must reside in Nicaragua.

It is permitted to assign the rights of the contract/concession, as long as the Authority is satisfied with the technical and financial standing of the potential assignee. In the case of a project financing, Authority consent would be necessary at the time of the granting of the mortgage on the contract/ concession or any transfer thereof, in order for the same to be valid. In addition, Authority’s prior approval is necessary in case the secured party or a third party is to take over the management of the concession or acquire title to the concession pursuant to mortgage foreclosure proceedings.

Doing Business in Latin America MARCH 2016 193

B. MINING

According to information provided by the Ministry of Energy and Mines, updated at the end of 2014, Nicaragua exported US$385.8m in gold.

In Nicaragua, mining activities of exploration and exploitation are granted under the form of mining concession. The State of Nicaragua is the owner of all mineral assets in Nicaragua. In all aspects of the applicable law (Law 387), mining concession shall be considered as granting mining exploration and exploitation, as established by Law No. 387, Special Law of Exploration and Mining.

The concessionaire can be a company incorporated in Nicaragua or a branch of a foreign parent company duly registered in Nicaragua. In both cases, the company must have a natural person who is the legal representative before the Authority and must reside in Nicaragua.

Mining concession in Nicaragua grants its title holders the exclusive rights for the exploration, exploitation and establishment of the corresponding Beneﬁt Plants over the existing mining deposits in such area. The mining lot will have a maximum area of 50 thousand hectares and is granted for a period of 25 years that may be extended for a similar period.

Law establishes the mining concession to be a real right, different from the property where it is located. These real rights arising from a mining concession are transferrable or susceptible of being mortgaged or given as lien or be effected. The transfer of a concession to a new concession holder requires State approval. It is possible that authorisations from indigenous communities or regional autonomous be required if the project is located in these areas. Mining concession holders are required to pay for all mineral products extracted, a royalty of three per cent and a payment of Rights of validity or surface equivalent in local currency to:

Year 1 US$0.25 per hectare. Year 2 US$0.75 per hectare. Years 3 and 4 US$1.50 per hectare. Years 5 and 6 US$3.00 per hectare. Years 7 and 8 US$4.00 per hectare. Years 9 and 10 US$8.00 per hectare. Years 11+ US$12.00 per hectare.

General ﬁscal regime is applied to mining companies which includes:

• Income Tax (IR):

a) Income Tax from economic activities: Rate of 30 per cent.

b) Capital Income and Capital Gains and Losses (CGT): different rates apply, being 10 per cent the one applied in most cases.

• Value Added Tax (VAT) VAT: tax is levied on acts performed in the Nicaraguan territory such as: sale of goods, exports of goods and services, provision of services and use or enjoyment of goods. The overall rate is 15 per cent, but in the case of exports a 0 per cent rate is applied, allowing the mining company to claim the VAT paid.

• Stamp duty: imposes speciﬁc amounts to documents issued in Nicaragua or abroad, in cases in which they will go into effect in the country.

194 Doing Business in Latin America MARCH 2016 • Municipal Registration, which is paid at the start of commercial operations and subsequently every year.

If the concessionaire (mining company) is not the owner of the property in which the mining concession has been issued, the concessionaire may sign an agreement with the owner of such property whether it be the state, an individual or indigenous communities in order to establish economic compensation beneﬁts iv. Treatment of Foreign Investment in Real Estate (Rural and Urban Properties)

A. FOREIGN INVESTMENT INCENTIVES

Nicaragua offers some of the most generous investment incentives and best treatment of investors in Latin America. Guarantees for investment and business development have the highest rank in Nicaragua, as they are contained in the Country’s Political Constitution.

The right to private property is protected by our Constitution in its Article 5, under ‘Principles of the Nicaraguan Nation.’ Additionally, the Country’s Political Constitution establishes the legal guarantees for foreigners to hold the same rights as Nicaraguans (except political rights), and also to acquire and own private property.

Additionally, as we said before, Law No. 344, Law for the Promotion of Foreign Investment offers investors fundamental guarantees such as:

• No discriminatory treatment for foreign investors.

• Eliminates restrictions on the way in which foreign capital can enter the country.

• Full currency convertibility.

• Freedom to expatriate all capital and proﬁts.

• Recognises the foreign investor’s right to own and use property without limitation, and in the case of a declaration of eminent domain, to receive a proper indemniﬁcation.

On the other hand, Law No. 306, Law for Tourism Incentive, offers various tax incentives for investment in this sector and is considered one of the most generous and competitive in the Central American region. It provides incentives and beneﬁts for investment in accommodation or hotel industry, food and beverage, tour operators, tourist transportation, among others. The incentives are:

• Exemption from 80 to 100 percent of the income tax (IR) for a period of ten years.

• 100 per cent exemption from property tax (IB1) for a period of ten years.

• 100 per cent exemption from value added tax (VAT) applicable to design services, engineering and construction.

• 100 per cent exemption of import tax and duty on the purchase of materials and ﬁxtures of the building for a period of ten years.

In case of reinvestment, if at the end of the incentive regime for ten years, the investor decides to

Doing Business in Latin America MARCH 2016 195 reinvest at least 35 percent of the value of the investment originally approved, they can receive all the beneﬁts for ten additional years.

B. PROPERTY TRANSFER

Property transfer is usually executed by means of a Purchase Agreement. The Purchase Agreement must be executed by Public Deed and signed before a Nicaraguan Public Notary. At the time the contract is signed, the property is immediately transferred to the purchaser, and the contract has full effect between the parties (seller and purchaser). To extend the effects of the Contract against third parties, Nicaraguan law requires registration of the contract at the Property Public Registry of the Department in which the property is located.

C. VALID PROPERTY TITLES IN NICARAGUA

The registered Purchase Agreement Public Deed is in Nicaragua the most frequent title of property. Other kinds of property titles that are valid in our system are:

• Fee Simple: Full ownership rights are recognised;

• Agrarian Reform Titles: Validly issued, these grant full ownership rights, though it is important to confirm whether there was/were previous owner(s) that were confiscated and compensated to avoid claims from them in the future, as well as confirm the validity of the Agrarian Reform title; Regarding the agrarian property titles we must note that there are legal risks involved in these which involve among other things, dual enrollment in the property register of the same land. The above is because one of the major drawbacks of the agrarian reform process was that the properties that were distributed by the State and which were already enrolled in a registry account were subsequently enrolled in a different registrar account, without making any relationship between the two of them.

• Supplementary title: Possession rights are protected, but the title is subject to better rights (ie, fee simple titles). Transforming a Supplementary title in Fee Simple requires a judicial proceeding requesting adverse possession against a third party or the state. The chances of success of proceedings against the State, against Municipalities, especially on coastal areas, under the current administration are limited.

• Concession land in coastal areas: the limitations in this type of concessions are that these may only be obtained by Nicaraguans (natural or legal persons) or by foreigners residing permanently in the country, and within the territorial limits established by law which comprises from where the public use coastal area ends, two hundred metres inward to the mainland.

• Property titles in Border Security Zones: Private Properties located in the Border Security Zone are only transferable in favour of Nicaraguans, according to legitimately acquired titles, as long as they are registered in the corresponding Public Registry. Foreign individuals and foreign legal persons may not, in fact or in law, acquire real estate in the Border Security Zone in any way, except for the lease concessions or authorisations granted by the Executive Branch through Presidential Agreement where there is public or social interest between.

196 Doing Business in Latin America MARCH 2016 • Judicial Ruling: In adverse possession or property claims, ﬁnal ruling will serve as valid title.

Indian Community Property: In the Atlantic regions of Nicaragua, Indian communities were granted by law a special property regime and exclusive ownership rights. Though use and lease agreements can be made with the communities, ownership of these titles cannot be transferred.

D. PROPERTY PURCHASE PROCEDURE

Some of the common steps and documents that must be obtain in every process of purchasing properties in order to ensure the legal security of the operation are:

• Certiﬁcate of Lack of Liens issued less than one month before the Closing date. This Certiﬁcate states weather there are any registered liens on the property at the time it is issued;

• Certiﬁcate of Municipal Tax status. This Certiﬁcate states weather there are any pending Real Estate taxes for that property;

• Certificate of Cadastre information of the property. This Certificates states the Cadastre data and number for that property if available. Not all real estate properties have Cadastre information. The Cadastre Office maintains the official map locating real estate property in Nicaragua. Each property has a single number identifying this property in the official map. This information permits to confirm the exact location of the property and its area;

• Status Letter from the Office of Compensation Quantification (OC1) in case the title is an Agrarian Reform Title or an Agrarian Reform Title appears in the Chain of Title. This letter helps to determine whether a confiscated land or property was compensated by the State. If no compensation was made, there might be a possible pending claim against the State which might affect the property;

• Status Letter from the Property Intendancy Office in case of Agrarian Reform Title. The Property Intendancy Office maintains a record of Agrarian Titles that were issued by the State. This information permits to confirm that the Agrarian Title was issued;

• ’Letter of No Objection’: Issued by the General Attorney’s Ofﬁce to the Cadastre Ofﬁce is recommended in case of titles with agrarian reform background, coastal properties and supplementary titles.

Once the purchase is formalised with the signature of the Public Deed by both parties, in presence of a Notary Public who must also sign the Notary’s protocol (which is the record of all the Deeds and Acts celebrated in the presence of the Notary), the Notary issues a copy of the document for each party called ‘Testimony’. The Testimony becomes the new title and must be recorded at the Public Registry to comply with legal publicity requirements. . If no legal requirements are missing, the Public Registry proceeds to record the Property Title on the Registry Books. The recorded Testimony with the seal and signature from the Public Registry is an enforceable title against third parties. v. Treatment of Foreign Investment in Agribusiness Activities

Nicaragua offers signiﬁcant tax incentives under free zones regime for those companies interested in establishing export-orientated operations of agribusiness industry. Some of these incentives are:

Doing Business in Latin America MARCH 2016 197

• 100 per cent exemption from payment of Income Tax (IR) during the ﬁrst ten years of operation and 60 per cent from the eleventh year onwards.

• Exemption from all taxes and customs duties and consumption associated with the imports, applicable to the introduction to the country of supplies, materials, equipment, machinery, dies, parts or spare parts, samples, molds and accessories to enable the company for its operations within the regime, as well as taxes on equipment needed for installation and operation budget diners, health services, health care, child care, leisure, and any other goods that tend to satisfy workforce needs of the company that works in the company.

• Exemption from customs duties on transport equipment, which are commercial vehicles for passengers or services intended for normal use on a system. In the event of disposal of these vehicles to purchasers outside the area, customs duties will be charged, with discounts applied according to the time of use, similar to dispositions made by diplomatic missions and international organisations.

• Exemption of tax payment on sale of property in any manner, including the tax on capital gains, if any, provided that the company is closing its operations in the Area and the property continues to affect the regime of free zones.

• Full exemption from excise taxes, selective sales or consumption.

• Full exemption from municipal taxes.

• Full exemption from export taxes on products made within the regime.

• Law No. 822, Tax Consultation Law, also establishes some incentives to agricultural producers, which among others are:

• Article 127 presents a list of transfers that are exempt of transferring the Value Added Tax, some of them related to the agricultural sector.

• Exemption of Value Added Tax and Selective Consumption Tax, transfers of raw materials, intermediate goods, capital goods, spares, parts and accessories for machinery and equipment to agricultural producers and micro, small and medium industrial and ﬁshing enterprises.

On the other hand, in the forestry industry Nicaragua has more than 1.7 million hectares suitable for precious wood production as teak and 2.7 million hectares suitable for intensive production of natural rubber, a product that is currently experiencing very high demand worldwide.

The main areas for investment opportunity in forestry are:

• Forest plantations of commercially valuable timber.

• Rubber plantations.

• Cocoa bean production for export.

• Carbon credits.

The beneﬁts granted in Law No. 462, Forestry Incentives Law, were extended to the year 2023 by the Tax Consultation Law:

198 Doing Business in Latin America MARCH 2016 • Plantations registered on the regulatory entity will be exempted of paying 50 per cent of the Municipal Tax on Incomes (IM1) and 50 per cent on proﬁts arising from the exploitation.

• Areas where plantations are established and where forest management is done through a Forest Management Plan are exempted from Property Tax (IB1).

• Companies of any line of business that invest in forest plantations may deduct, as an expense, 50 per cent of the amount invested for Income Tax purposes.

• Exemption from payment of duties and taxes on imports to companies of secondary and tertiary processing that import machinery, equipment and accessories to improve their technological level in the processing of wood, excluding sawmills.

Nicaragua also has a temporary admission regime which is the tax system that allows the entry of goods into national customs territory and local purchases of them without payment of any duties and taxes. vi. Treatment of Foreign Investment in the Rendering of Public Services

As mentioned above, the Country’s Political Constitution establishes legal guarantees for foreigners to hold the same rights as Nicaraguans regarding investments and private property.

Article 105 of Nicaragua’s Political Constitution establishes the obligation of the State to promote, facilitate and regulate the provision of basic public services of energy, communications, water, transport, road infrastructure, ports and airports to the population and their inalienable right to access them. Notwithstanding the above, it is also established that private investment in these areas and its various forms and concessions to private parties may be regulated by law, and one of the legal requirements is that private companies must appoint a legal representative residing in Nicaragua.

B. Rendering of public services i. General Framework

In Nicaragua, the processes of privatisation have had a number of peculiarities and speciﬁc features that make them very different than the ones in other countries in the American continent. This has been the cause for different points of view not only at a national level but at an international level as well.

At the end of the 1970’s, various companies and institutions were nationalised, mainly companies that offered public services, so they were under domination and control of the State, which administered them with limited resources, given the sociopolitical situation at the time.

At the beginning of the 1990’s, the State had virtually collapsed. It had a public and social debt so big that it had to make urgent decisions in the short and medium term. The government, among the things it had to do, adapted its State policy pursuant to the Enhanced Structural Adjustment Facilities (ESAF) promoted by the International Monetary Fund (IMF) and World Bank, among others. These programmes established the necessity to open the State to a market economy, to decentralise, to

Doing Business in Latin America MARCH 2016 199 make the market more ﬂexible, to privatise public companies and function under the logic of the ruling socioeconomic system at the time. ii. Governmental Monopoly vs Private Initiative

Since the amendments to the Nicaraguan Constitution in 1995, the country has gone from a mixed (private/public) economic system, with extensive State intervention and governmental monopoly in the providing public services, to a free-market economy and foreign investments, based on principles which recognise private property, free enterprise and the leading role of the private sector as a dynamic engine of the country’s economy. Thus, Articles 99 and 104 of the Nicaraguan Constitution stipulate that the State has to guarantee free enterprise; it shall promote and protect the culture of free and healthy competition, guaranteeing the full exercise of economic activities.

Furthermore, in relation to public services, Article 105 of the Nicaraguan Constitution stipulates that it is the State’s obligation to promote, facilitate and regulate the providing of basic public services such as energy, communication, water, transportation, roads, ports and airports to the population, and the inalienable right of said population to have access to such public services. Private investment and its different modalities, and concessions awarded to private entities for exploitation in these areas, will be awarded through public and transparent processes according to the laws of the matter, and must observe, for its operation, high efﬁciency and competitiveness criteria.

As shown, Nicaragua has a complete constitutional legal framework in favour of avoiding governmental monopoly in the providing of services and in favour of promoting free enterprise and, especially, market competitiveness.

In relation to this, Law No. 601, Law for Promoting Competition, published in La Gaceta, Ofﬁcial Newspaper, No. 206 of 24 October 2006 (www.asamblea.gob.ni), constitutes the legal basis to prevent restrictive practices of competition, repression of unfair competition and even monopolistic practices. Article 1 of said Law determines that its object is to promote and protect free competition amongst economic agents, in order to ensure the efﬁciency of the market and the welfare of consumers, through the promotion of the culture of competition, the prevention, prohibition and punishment of anti-competitive practices.

For this purpose, Article 5 of said Law created the National Institute for Promoting Competition (Instituto Nacional de Promoción de la Competencia, hereinafter ‘Procompetencia’) (www. procompetencianic.org), which is the entity responsible for proceeding with an administrative procedure which can begin ex ofﬁcio or by means of denunciation, and continues with a evidentiary process and ends with an administrative resolution, which tries to avoid restrictive business practices, the dominant abuse of the market and illegal economic concentrations.

The Nicaraguan legal system prohibits agreements for fixation of prices, the imposition of trade barriers, whether these are economic and/or legal, the allocation of markets, collusive tendering, fixation of production quotas, collective action of agreements, unjustified procurement or agreement for the exclusive distribution of goods or services between economic agents who are not competitors among themselves or others, that could cause the emergence of monopolies, whether private or public.

200 Doing Business in Latin America MARCH 2016 Said Law also prohibits bad practices in the so-called ‘business concentrations’, which could diminish, damage, prevent or restrict competition in the market through mergers, acquisitions and other forms of business combinations.

Speciﬁcally, in reference to the matter of public services, Law No. 868, Law of Amendment to Law 601, Law for Promoting Competition, published 29 May 2014, holds that the regulators (TELCOR, INE, INAA) are the ones that are authorised and have exclusive competence to know, instruct and resolve on anti-competitive practices, unfair competition, concentrations and, in general, any other practice, act, or conduct determined as harmful, that could, or is intended to, limit, prevent or restrict free and healthy competition between economic agents which provide public services. iii. Privatisation General Rules

The 1990s Nicaraguan Government Administration decided to promote the privatisation of state companies with the greatest possible ﬂexibility. The Government decided to create, through Law Decree number 7-90, of 2 May 1990, published in ‘La Gaceta’, ofﬁcial Newspaper No. 94 of 17 May 1990 (legislacion.asamblea.gob.n1), the ‘Junta General de Corporaciones Nacionales del Sector Público’ (General Board of National Corporations in the Public Sector, hereinafter ‘CORNAP’), to manage state companies and make recommendations to the country’s Presidency in relation to the privatisation of such companies. With this, it was intended to achieve the following objectives:

• It was considered a short/medium-term source of income for the State, which would go to the national budget, allowing for the development of new social investment projects.

• Reactivate the economy by attracting investment from the private sector (not only national but international) promoting competitiveness to revive the economy and thus give more dynamism to the business management.

• Diversify the ownership of companies, promoting access to the privatisation process for different sectors.

There were two different perspectives and procedures for privatising State companies:

Through the process of returns or devolutions, in accordance with resolutions issued by the ‘Comisión Nacional de Revisión de Confiscaciones’ corresponding to the CORNAP (Decree 11-90 and 23-11, published in ‘La Gaceta’ Official Newspaper number 98 of 25 May 1990 and number 100 on 3 June 1991, respectively (www.pgr.gob.ni) and the classic process of privatisation, lease of the companies (their management) and liquidation of the companies when they are no longer profitable.

The method through which privatisation of State companies is carried out occurs in the following way:

• Transformation of public entities into private companies (Corporations)

• The establishment of managing of contracts or administrative concessions. With or without option to buy.

• Partial or total lease, with purchase option. The amount was previously established.

• Hiring of companies or persons to perform different functions or speciﬁc activities.

Doing Business in Latin America MARCH 2016 201

• New activities usually performed exclusively by the State, which are not designated by the Constitution.

• Granting of licences and concessions for the services operations.

Not all public services could be privatised, given their social and political interest such potable water services (which is currently under the State’s control) and public transportation (which has a complex organisation, a mixture of private and public, with a logic based on how cooperatives work). However, other sectors were successfully privatised, such as telecommunications and energy/power. For example, between 1992 and 1994, a big debate on the importance of privatising telecommunications (TELCOR) started. The process of investing began by granting the concession to a private company called CLARO, for replacement and technological renovation of the existing capacity. The national coverage was increased by 67 per cent, reaching the highest increase in Nicaraguan history. The satisfaction of the Nicaraguan people in relation to the services provided and the technological development in this sector made its privatisation to be considered very positive. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

The rendering of public services in Nicaragua has ceased to be an activity directed by the State, to mostly pass into the private sector, through procedures of privatisation or granting of concessions, authorisations, licences or specific permissions, for more or less extended periods that allowed to print a more corporate notion in the rendering of services, but without forgetting the consumers rights regulated by Law No. 842, Law of Protection of Consumer Rights, published in ‘La Gaceta’ Official Newspaper, No. 129, of 11 July 2013 (www.mific.gob.ni/es-ni/inicio/proteccionalconsumidor. aspx).

It can be stated that the rendering public services by private entities, has no constitutional limitations or main prohibitions, rather than for social reasons or national interest imposed by the laws.

Almost all of Nicaraguan norms regarding the sector or the service rendered – except for potable water distribution (which is a State monopoly) – allow for the participation of natural or legal, national or foreign persons in the rendering of public services, even though they do not expressly indicate that the company may be owned by a foreigner State.

In this regard, it is noticeable that Law No. 200, Law of Telecommunications, published in La Gaceta, Official Newspaper No. 154 of the 18 August 1995 and its amendment, Law No. 326 of 22 December 2005 (www.telcor.gob.n1) stipulate a limit or specific prohibition for participation of foreign companies in a single type of public service, thus, in Article 29 of the first law mentioned, it is established that licences for social media will only be granted to Nicaraguan natural or legal persons, in the case of corporations, 51 per cent of their capital must be owned by Nicaraguan nationals.

The situation described above also happens in the public transportation sector, given that, according to Article 3 of Law No. 616, General Law of Road Transportation and its reform, published in La Gaceta No. 84 on 7 May 2007, establishes that, to be able to operate in the country, foreign companies must comply with the following requirements: (1) that 51 per cent of the total of their capital should be owned by Nicaraguan persons or be subjected to the principle of reciprocity and

202 Doing Business in Latin America MARCH 2016 the Central American integration agreements; and (2) that effective control and the direction or management of the company should be in the hands of a Nicaraguan nationals.

In conclusion, it can be stated that Nicaragua has had a particular historic process that sets it apart from other countries in the Central American region. The transformations of the State have marked strong changes not only in its own structure, but also in its functioning. From the decade of the 1990s, the privatisation of State companies was an important pillar for restoration, structuring and stabilising the State, which was in a situation of economic crisis. As we have seen, from that time, a constitutional framework was established as well as a series of legal norms that promote, ensure and encourage foreign investment in the country.

C. Real estate i. Who can hold title?

Real property in Nicaragua can be owned by individuals and legal entities, foreign or nationals; however, based on a recently approved law, properties located within 5 km of the border line cannot be owned by foreigners. When registering real property, depending on the type of property there are additional certiﬁcations that may be required, speciﬁcally in the cases of beach front properties and other properties whose title originates in Agrarian Reforms. ii. Transferring and Recordation of Title

All transfers, encumbrances and any other type of limitations over real property must be granted in a public deed before a Notary Public of the Republic of Nicaragua and duly registered in the Public Registry to be effective against third parties. The information registered includes: name of owner, purchased value, location, area of the property, and boundaries, as well as any liens or any type of easements registered over the property.

To determine the legal situation of the real property in Nicaragua it is advisable to obtain: (1) Copy of the title of the property duly registered in the Public Registry; (2) Registrar’s record issued by the respective Public Registry, evidencing the history of the property; (3) Certiﬁcate of good standing of the property issued by the respective Public Registry; (4) Proof of cadastral registration data issued by National Territorial Studies Institute (INETER by its acronym in Spanish); (5) Solvency certiﬁcate issued by the Municipality, from where the property is located; (6) proof of payment of municipal tax.

If the investigation of the property shows the property was subject to Agrarian Reform, it’s advisable to obtain prior to purchasing the real property: (1) Certificate of ownership; (2) Proof of indemnification, duly issued by the Attorney’s General Office; (3) Solvency issued by the Attorney General’s Office.

After obtaining the respective documents that evidence the good and legal standing of the real property mentioned above, the parties must authorise a purchase agreement by means of a public deed before a Notary Public to ﬁle the public deed in the respective Public Registry.

Doing Business in Latin America MARCH 2016 203 iii. Horizontal Property

Nicaragua has a horizontal property regime to which buildings and projects of such kind, can request to adhere. The purpose of the regime is to regulate the rights and obligations of owners of property built on common land. Consequently, the regime divides these properties into common and private areas and establishes rights, obligations and limitations that each unit owner has with respect to each area. The horizontal property regime law requires buildings or projects that wish to adhere to the regime to develop regulations that will apply to the property. The regulations must include, among other issues: appointment of authorities and any other subject related to the building administrator; matters related to the assembly of property owners, including the necessary quorum to hold meetings and votes to approve resolutions, procedures to convene an assembly of property owners; determination of the terms and conditions of each owner and its limitations of use of common land; and the fees the owners are subject to over common areas. Nicaraguan law, states that the regulations of the regime can only be amended by the vote of a supermajority of the property owners, these regulations are subject to be registered in the respective public registry, these are usually registered until a certain percentage of the building or project has been constructed. iv. Leasing Real Estate

Real estate leasing agreements are regulated generally by the provisions of the Civil Code and Special Leasing Law.

The Civil Code determines the obligations for the lessor and lessee for lease agreements of real properties, either rural or urban. It also establishes that lease agreements cannot be longer than a ten year period, unless for rural properties which lease agreements may be extended to up to 20 years. When the term has expired and the lessee continues to occupy the property and pay the applicable rent with the consent of the lessor, there is an implied continuation of the lease agreement.

The Leasing Law grants certain rights, such as: a) owner cannot coerce the lessee to leave the building; b) allowing the lessee to terminate the agreement at any time by giving a 30-day prior notice to the lessor. v. Lease Agreements

Lease agreements should contain, among others, the following provisions:

– The right of the lessee in residential leases to waive the minimum lease term and terminate the agreement at any time with a written notice sent at least 30 days in advance.

– The amount subject in the lease agreement may be updated in regards to an assessment value update of the property.

Lease agreements are normally executed in private documents; however if the lease has a period of four years or more it is usually done in public deed. In order to ﬁle the contract in the public registry the agreement must be formalised in a public deed.

204 Doing Business in Latin America MARCH 2016 vi. Construction

Any investor planning to build in Nicaragua, before beginning the construction project should evaluate if the property is suitable for the type of construction project since, some lands in Nicaragua are considered natural reserves, and have speciﬁc limitations. If optimal for the project, before initiating construction works it will be required to have the necessary construction permits, issued by the Municipality and from the Environmental Ministry (MARENA) (if applicable). vii. Rural Properties – Limitations for Private Parties

In Nicaragua there is no distinction between Urban and Rural properties, with respect to their acquisition ‘limitations’. There are however, additional documents to be obtained to acquire properties affected by Agrarian Reform and beach front properties.

In order to transfer a real property affected by Agrarian Reform or if it is a beach front property, the buyer must obtain a no objection letter issued by the General Attorney Ofﬁce, among other documents. The No Objection Letter helps to validate the purchase; if the No Objection Letter is not issued, the purchase will not be legally effective to third parties and will not be apt for ﬁlling in the public registry.

Certain limitations to acquire real property in Nicaragua may apply, such as foreigner acquisition of border line properties and expropriation events. viii. Urban Properties – Limitations for Private Properties

Please refer to Section vii above. ix. Expropriation Events

The Nicaraguan Constitution includes expropriation as a limitation to holding title in real estate: Nicaraguan law states that by means of public utility or urgent social interest, expropriation may be effective through a special judicial procedure and upon payment of an adequate prior compensation to the effective owner. The amount of compensation will be established upon the assessment value of the property.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: Attempts vs Realities

The Republic of Nicaragua currently has only one stock exchange, named ‘Bolsa de Valores de Nicaragua’. Legislation and regulation on stock exchanges and securities does not speciﬁcally contemplate the merger of stock exchanges.

Doing Business in Latin America MARCH 2016 205 ii. MILA Market: Current Results and Expectations

The MILA Market ‘Mercado Integrado Latino Americano’ integrated transnational stock market exchange platform, to trade in capital markets and securities custody of the three nations Chile, Colombia and Peru. Nicaragua is not part of this Latin American integrated stock exchange market platform. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance (PA) is a four-country trade bloc that promotes economic liberty. The PA is presently composed by Chile, Colombia, Mexico and Peru. Nicaragua is not part of the PA. iv. IPOs of Multilatina Companies in Latin American Capital Markets

Nicaragua does not have any Multilatina Companies that have made any initial public offers in Latin American capital markets.

E. Offshore vehicles providers in Latin American countries

Nicaragua does not have a differentiated tax system for companies that perform offshore operations in its jurisdiction. Although Nicaragua’s tax system is uniform for both domestic and foreign residents and non-residents, there are numerous laws which provide signiﬁcant tax beneﬁts to certain productive sectors of the economy in order to promote their growth and development such as: energy, free zones, operations of Textiles and Clothing Industries, Manufacturing, Agribusiness, Contact Centres & BPO, among others.

206 Doing Business in Latin America MARCH 2016 Panama

Doing Business in Latin America MARCH 2016 207 xi. Panama

A. Foreign investments i. Authorisations vs Limitations or Prohibitions

A. GENERAL ABSENCE OF RESTRICTIONS

Panama offers one of the most open and welcoming economies to foreign investment in Latin America. There is no need to obtain prior approvals or to fulﬁl special registration requirements for foreign investments in Panama. Capital can be moved freely in and out of the country, as the US dollar has been the legal tender and common mean of exchange since 1904. There is no central bank and no currency or exchange controls in Panama. As a result, Panama is now Latin America’s largest recipient of foreign direct investment as a percentage of its GDP.

B. NATIONAL, FAIR AND EQUITABLE TREATMENT

Panama affords equal, fair and equitable treatment to national and foreign investors under its laws. In addition to these principles contemplated by the Constitution and local laws and the country has signed several bilateral investment agreements and free trade agreements, which include provisions granting national treatment, most-favourable-nation treatment, and fair-and-equitable treatment to foreign investors.

According to Panama’s Constitution, nationals and foreigners are treated equally under the law. Both Panamanian and foreign investors must fulﬁl the same basic requirements to organise and operate business activities in Panama. In addition, the Investment Stability Law grants overall protections to all foreign and national investors by stabilising the tax, labour and customs regime under which the relevant investor did his investment for up to ten years.

Also, since 2009, Panama has negotiated treaties to avoid double taxation with Mexico, Italy, Belgium, Barbados, The Netherlands, Qatar, Spain, France, Luxembourg, Portugal, South Korea, Singapore, Ireland, Czech Republic, Austria, Bahrein, United Arab Emirates, Israel, United Kingdom and Vietnam. As of 2014, the tax treaties with Mexico, Barbados, Qatar, Spain, Luxembourg, The Netherlands, Singapore, France, South Korea, Portugal, Ireland, Czech Republic, United Arab Emirates and United Kingdom are currently in force. In addition, the treaties with Israel and Italy have been ratiﬁed but are not yet in force. Panama also has tax information exchange agreements in force with the United States, Iceland, Canada, Finland, Norway, Sweden, Greenland and the Faroes Islands. Panama has also negotiated tax information exchange agreements with Denmark and Germany, but hasn’t entered into force.

On the multilateral front, Panama is also a party to the World Bank Convention on the International Settlement of Investment Disputes (ICSID), and to the World Bank convention that created the Multilateral Investment Guarantee Agency (MIGA).

208 Doing Business in Latin America MARCH 2016 C. INVESTMENT STABILITY LAW

Foreign investors, as well as nationals, can beneﬁt from stability with respect to labour, tax and customs duties under the 1998 Investment Stability Law. Under this law, investors can register investments in excess of US$ 2,000.000.00 in certain qualiﬁed businesses with the National Investment Registry of the Ministry of Commerce and Industry, and obtain a guarantee from the government that these investments will not be affected by adverse changes in labour, tax and customs laws for a period of up to 10 years.

D. FREE CHOICE OF LAW AND JURISDICTION

Except in the case of government contracts and certain cases where common principles of conﬂicts of laws require the application of Panamanian law (eg,, contracts related to land in Panama), parties to any commercial agreement can freely choose the governing law of the agreement. Thus, foreign investors, as well as nationals, are free to govern their commercial relations by Panamanian law or any foreign law.

In addition, parties to a private commercial agreement are also generally free to submit any dispute arising under such agreement to the courts of Panama or to the courts of a foreign jurisdiction, as well as to arbitration and other alternative methods of dispute resolution.

E. OPERATION PERMITS

Any person that intends to engage in a commercial and industrial activity in Panama must obtain an Operation Permit (‘Aviso de Operación’) from the Ministry of Commerce and Industry. In general, this is the only permit required for entities involved in unregulated activities.

Certain types of businesses must ﬁrst register with the pertinent regulatory agency before applying for their Operation Permit. These businesses include banks, insurance companies, ﬁnancial entities, companies engaged in the sale of arms, security and transportation companies, brokerage houses, construction companies, and oil companies, among others.

It should also be noted that retail activities are restricted to Panamanian nationals under the Constitution. Thus, an Operation Permit cannot be granted to foreigners seeking to register this type of business.

Operation Permits are not required for individuals, legal persons engaged in the following:

• Agricultural agro-forestry, and similar activities;

• Non-proﬁt activities;

• Activities that are not commercial or industrial in nature, conducted by natural persons or civil partnerships;

• The practice of liberal professions, by individuals or civil partnership, so far as they are not considered commercial activities;

• Businesses with a Multinational Business Headquarters Licence;

Doing Business in Latin America MARCH 2016 209

• Companies operating in the Panama-Paciﬁco Special Economic Area or

• Individuals or legal persons established within the international duty free zone of the Colon Free Zone or any other free zone.

In addition, limited liability microenterprises are not required to obtain an Operation Permit.

The Operation Permit is obtained by completing a simple process through the online system ‘PanamaEmprende’, which is administered by the Ministry of Commerce and Industry. The user must provide information about the company, the operations to be conducted by the company, its address and other general information. Information registered via this system is publicly accessible and available to third parties.

The Operation Permit automatically conducts other registrations and processes, such as the processes for obtaining a Taxpayer Identiﬁcation Number (‘Registro Único de Contribuyente’) from the Ministry of Economy and Finance and a New Business Registry Number (‘Registro de Nuevos Negocios’) from the relevant municipality. The Taxpayer Identiﬁcation Number is used for the payment of national and municipal taxes, as well as for registrations with the Social Security Administration and other institutions.

The cost for obtaining the Operation Permit is US$15 for individuals and US$55.00 for legal persons. The annual tax incurred by holders of the Operation Permit is 2 per cent of the company’s capital, with a minimum payment of US$100 and a maximum payment of US$60,000. Natural or legal persons whose invested capital is less than US$10,000 are exempt from this tax. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

Over the years, Panama’s legal scenario has been conducive to foreign investment, trade and development through the enactment of several laws containing various types of incentives. The creation of special economic areas such as Panama Paciﬁco and other foreign investment initiatives has helped Panama to attract a signiﬁcant amount of foreign direct investment in our region.

A. SPECIAL ECONOMIC AREA – PANAMA-PACIFICO

Built on the site of the former Howard US air force base, at the Pacific entrance of the Panama Canal, and just 15 minutes from Panama City, the Special Economic Zone – Panama-Pacifico is a 1,400-hectare international business park. Established by special legislation in 2004, the master- planned park includes a business centre, an industrial area, a town centre, residential areas, hotels, medical facilities, schools and an international airport. To qualify for the tax, labour and immigration incentives provided by the law, companies must register with the Panama-Pacifico Agency, the government agency responsible for qualifying companies.

1 Qualifying Activities

Any company that establishes itself in Panama-Pacifico will receive labour and immigration benefits under the law, as well as several tax benefits. However, companies operating in the park that engage in one of the following qualifying activities receive additional tax benefits discussed below:

210 Doing Business in Latin America MARCH 2016 • Offshore services

• Multimodal and logistics services

• High tech product and process manufacturing

• Call centre services

• Data and digital transmission

• Services related to aviation and exports, including transport, handling and storage of cargo as well as maintenance, repair and overhaul of airplanes and their spare parts

• Exports of goods not manufactured within the Panama-Paciﬁco area to the extent such sales are performed by a multinational company or one of its afﬁliates or related entities.

• Transfer of goods and provision of services to other companies established in the Panama- Paciﬁco area or in fuel free zones or port facilities

• Transfer of goods and provision of services to ships in transit or in route to foreign ports and their passengers, except by the good’s manufacturing company

• Transfer of goods and provision of services to aircrafts travelling to foreign countries, except by the good’s manufacturing company

• Transfer of goods and provision of services to visitors and persons in transit to foreign countries, except by the good’s manufacturing company

2 Tax-Beneﬁts

All companies established in Panama-Paciﬁco are exempt from the following taxes:

• Import duties (unless goods are sold within Panama)

• Export duties

• VAT/ITBMS (sales tax) (except for services rendered by regulated professions)

• The Companies are exempt from the obligation to withhold tax on payments made to foreign creditors with respect to interests, commissions, fees or other ﬁnancial charges on ﬁnancing granted to companies in the area

• Notice of Operations (‘Aviso de Operación’) tax

• Capital gains tax on company share transfers on certain situations

• Stamp taxes

In addition to these tax beneﬁts, the companies who participate in qualiﬁed business activities listed previously are also exempt from income tax, dividend and deemed dividend tax and withholding tax on any goods or services sold or rendered within Panama.

Doing Business in Latin America MARCH 2016 211

3 Labour Beneﬁts

Companies established in the Panama-Paciﬁco area beneﬁt from the following labour incentives:

• 25 percent ﬁxed surcharge for overtime

• Negotiable weekly resting day

• Companies may remain open on Sundays and holidays

• Vacation terms are negotiable with employees

• Fluctuation in market conditions or demand are recognised as just-cause for labour contract terminations

• 15 per cent of the workforce may be foreign employees, with exemptions made for additional hires that train Panamanians

4 Immigration Beneﬁts

Companies established in Panama-Paciﬁco beneﬁt from the following immigration incentives:

• ﬁve-year ordinary work visas

• three to ﬁve-year special visas

• ﬁve-year investor visas, for those who invest US$250,000

• Family visas extended to immediate family members

• Tax-free import of up to US$100,000 of personal and household items

All incentives established under Law 41 are permanent for companies within the Panama-Paciﬁco Area.

B. THE CITY OF KNOWLEDGE

The City of Knowledge is an international centre for education, research, and technological innovation intended to promote and facilitate synergy between universities, scientiﬁc research centres, businesses, and international governmental and non-governmental organisations. The City of Knowledge is administered by the non-proﬁt City of Knowledge Foundation, a public-private partnership. Companies established within its premises enjoy a special tax regime.

1 Qualifying Activities

To be established in the City of Knowledge, companies must perform activities related to the City of Knowledge’s priority work areas:

• Communication and information technologies

• Biosciences

• Environmental management

212 Doing Business in Latin America MARCH 2016 • Human development

• Business management and entrepreneurial culture

Activities outside these areas may be considered by the City of Knowledge if they respond to regional or global priorities.

In addition, companies must qualify as ‘innovative’, which requires that there not be (1) a similar programme or activity, or (2) a similar methodology or technology available in the country. An application must be submitted to the City of Knowledge for affiliation. However, there are no specific minimum capital or investment requirements and affiliation is granted on a five-year renewable basis.

2 Tax, Labour and immigration Incentives

Companies operating within the City of Knowledge beneﬁt from the following tax and immigration incentives:

• Exemption from import taxes on all machinery, equipment, furniture, vehicles, devices and other materials.

• Exemption from ITBMS (sales tax) on machinery, equipment, vehicles, devices and other materials.

• Exemption from property taxes.

• Exemption from any taxes, fees, duties, or levies imposed on the transfer of funds abroad, when the transfer of such funds is related to the companies’ operations.

• Operations or activities of companies producing, assembling or processing high-tech goods within the City of Knowledge are exempt from all direct and indirect taxes, including income tax, and such companies are exempt from taxes on capital and operation permits (Aviso de Operación tax);

• Special visas are granted to foreign employees;

• Visas are extended to immediate family members of foreign personnel relocating to Panama.

• Exemption on quotas for hiring highly-skilled foreign personnel. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

Title to all mineral assets in Panamanian soil is vested to the Republic of Panama. The Panamanian Constitution states that concessions granting full possession and rights of use over those minerals may be granted to private persons for the purposes of engaging in prospecting, exploration, processing and transportation activities, regardless of such persons’ nationality or form of corporate organisation. Foreign states and foreign state-owned companies are prevented from holding any interest in mining concessions.

The Minerals Code is the main body of law governing most activities relating to Panama’s sub-surface estate (other than hydrocarbons). The Minerals Code establishes the system of mining concessions

Doing Business in Latin America MARCH 2016 213 and determines the relevant privileges and obligations of concession holders.

In addition, a number of laws have been passed since the 1970s to create a separate regime for the granting of concessions relating to minerals used in the construction industry, such as sand, gravel and clay. The Minerals Code sets forth two principal types of mining concessions, the Exploration Concession and the Extraction Concession, and also allows for the granting of Prospecting Permits (‘Permisos de Reconocimiento Superﬁcial’) and Processing and Transportation Concessions (‘Concesiones de Beneﬁcio y de Transporte’).

A. THE GENERAL DIRECTORATE OF MINERAL RESOURCES

The General Directorate of Mineral Resources (‘Dirección General de Recursos Minerales’ or DGRM) is a governmental bureau within the Ministry of Commerce and Industry. The DGRM is the administrative entity in charge of all matters relating to Panama’s sub-soil, except for hydrocarbons. The DGRM is in charge of receiving and reviewing applications for mineral concessions and recommending the acceptance or rejection of the applications.

In the case of Exploration and Processing and Transportation Concessions, once the concessionaires and their applications have been approved by the DGRM, the concession will be granted by means of a concession contract entered into by the concessionaire and the Minister of Commerce and Industry, representing the State of Panama. In the case of construction materials, Extraction Concessions will not require approval by the Cabinet Council. All mineral concessions contracts will also have to be countersigned by the Comptroller General of the Republic. The concession’s term will start to run on the date the fully signed contract is published in Panama’s Ofﬁcial Gazette.

B. OIL AND GAS ACTIVITIES

Although Panama is now considered an emerging country within the mining industry, with gold as the main product, Panama has modernised the registration framework for oil and gas exploration and extraction activities develops the ground rules for a national petroleum policy and guides the development of the Petroleum Free Zones. Panama’s legal framework in oil and gas activities during the past years have developed beyond the provisions of the National Policy for Hydrocarbons due to the restructuring of this global industry and thus requiring an updated legislation.

C. CONCESSION IN GENERAL

Holders of concessions are required to ﬁle certain information with the DGRM, including annual reports of their operations, information as to each concession (or part thereof) cancelled, abandoned or otherwise terminated, quarterly reports on royalties owed to the Government, detailed reports on all technical aspects of operations (which are normally required to be submitted on an annual basis unless the DGRM requires more frequent documents), annual tax reports and statements as to compliance with the relevant provisions relating to employment found in the Minerals Code, among others.

Holders of concessions are permitted to assign their rights in those concessions, whether outright or by way of a mortgage in a financing, as long as the DGRM is satisfied with the technical and financial

214 Doing Business in Latin America MARCH 2016 standing of the potential assignee. In the case of a project ﬁnancing, the DGRM’s consent would be necessary at the time of the granting of the mortgage on the concession or any transfer thereof, in order for the same to be valid. In addition, the DGRM’s prior approval may also be necessary in case the secured party or a third party is to take over the management of the concession or acquire title to the concession pursuant to mortgage foreclosure proceedings. iv. Treatment of Foreign Investment in Real Estate

A. FINANCING REAL ESTATE

Real estate acquisitions in Panama can be ﬁnanced by local or foreign lenders. The buyer usually gives security to the lender in the form of a real property mortgage over the subject property. Mortgages must be granted in the form of a public deed before a Notary Public in Panama and registered at the Public Registry of Panama to perfect the security interest.

B. CONSTRUCTION

Any investor planning to build in Panama will be required to have the necessary construction plans approved by the Directorate of Municipal Constructions and Works (‘Dirección de Obras y Construcciones Municipales’). The plans must be signed by professionals duly licensed by the Technical Board of Engineers and Architects (‘Junta Técnica de Ingenieros y Arquitectos’). Once the construction is ﬁnished and prior to occupation of the building, an application for an occupancy permit must be submitted to the Directorate of Municipal Constructions and Works. To apply for the occupancy permit, the following permits must have already been obtained in respect of the construction: permit issued by the Security Ofﬁce of the Fire Department, the previously mentioned construction permit, an electricity permit and a permit for installation of air conditioners (when applicable). v. Treatment of Foreign Investment in Agribusiness Activities

In the agribusiness activities, Panama has certain natural advantages such as the high amount of daylight hours, the absence of extreme summers, high soil quality and excellent humidity conditions contribute to the products’ high quality, allowing Panama to position its exportable goods into markets such as the United States, Canada, Central America and Europe.

The constant growth and development of this industry in Panama originated a positive change in the mechanisms usually employed by local producers. In parallel, the government has pursued an aggressive plan of infrastructure development that includes the construction and extension of irrigation systems, maintenance of roads and the implementation of a cold chain to preserve perishable goods. Alongside these improvements, the legal framework regarding agribusiness activities addresses key elements such as credit facilities and tax incentives that not only encourage

Doing Business in Latin America MARCH 2016 215 local producers, but also foreign investors.

One of these instruments within the agribusiness legal framework is the Certificate of Promotion to Agricultural Exports (‘Certificado de Fomento a las AgroExportaciones’ ‘CeFA’). This certificate, in principle, aims to encourage the export of non-traditional products by granting the local or foreign producers and companies a tax incentive, which can be used to pay any of the national taxes. Companies located in special zones (ie, Free Zones), individuals and legal entities that accept other fiscal incentive programmes are not subject to the benefits of this certificate.

The agency for the Attraction of the Investments and Promotion of the Exports (Proinvex) is a state agency, ascribed to the Ministry of Commerce and Industry whose objective is to promote investment in strategic sectors like logistics, tourism and agribusiness activities. This agency manages an integrated information system that allows investors to easily identify the instruments that the Panamanian government has for attracting foreign direct investment, as well as all the commercialisation and the promotion of the exports of national products. vi. Treatment of Foreign Investment in the Rendering of Public Services

Panama has an open and non-discriminatory government procurement system in which both, nationals and foreigners, can freely participate and bid for public contracts. Foreign companies can participate by setting up a subsidiary, or registering a branch in Panama, or entering into a joint- venture arrangement with local or foreign companies already established in Panama.

In certain cases of urgent public interest, government agencies may be allowed to enter into direct negotiations with any provider or supplier of goods and services. In these cases, contracts must be approved as follows: (1) by the Ministry of Economy and Finance (if the contract amount is below US$300,000), (2) by the National Economic Council (if the contract amount exceeds of US$300,000 but is below US$3,000,000) or (3) by the Cabinet Council (if the contract amount is above US$3,000,000).

As a general rule, the government agency seeking to purchase the goods and services is the entity responsible for conducting the procurement process and awarding the contract. Contracts are awarded to the qualiﬁed participant that submitted the best bid in accordance with the tender documents. Tender documents require that bidders post a bid bond of up to 10 per cent of the contract amount, as a condition for submitting a bid. Once the contract is awarded, the provider or supplier and the government agency enter into a ﬁnal agreement in the form prescribed by the tender documents. This contract must then be recorded and counter-signed by the Comptroller General of Panama.

A. CONCESSION REGIME

The award of concession agreements to private companies for the construction, maintenance, conservation, restoration and operation of toll-roads, and other infrastructure projects is governed by a special infrastructure concessions law. Administrative concessions generally grant the right to construct and operate an infrastructure project and to collect tolls and other fees from users of the project, under the supervision of a regulatory agency.

216 Doing Business in Latin America MARCH 2016 The award of concessions regarding power generation and distribution, telecommunications, paid and open television, ports, mining exploration and extraction, and airport operations are governed by sector-speciﬁc laws and are subject to different rules.

Panama has an open and non-discriminatory government procurement system under which nationals and foreigners can freely participate and bid for public contracts. Foreign companies can participate by setting up a subsidiary, or registering a branch in Panama, or entering into a joint-venture arrangement with local or foreign companies already established in Panama.

The award of concession agreements to private companies for the construction, maintenance, conservation, restoration and operation in connection with infrastructure projects is governed by a special infrastructure concession law. Administrative concessions generally grant the right to construct and operate an infrastructure project and to collect tolls and other fees from users of the project, under the supervision of a regulatory agency.

B. CONTRACT LAWS

A contract-law is an agreement negotiated and signed by the Executive branch of the government with a private company and then submitted to the National Assembly for approval and enacted as a special law. Contract-laws afford the maximum degree of security and stability to foreign investors, as they can only be amended with the consent of the affected company and by means of another law. However, it is a very time consuming process and the government tends to reserve this type of contracts for projects of particular national interest which require this type of contract.

B. Rendering of public services i. General Framework

In 1992, the Panamanian government started a privatisation programme of public services, properties and companies owned or performed by the public sector. The programme resulted in the privatisation of the telephone and power companies, a cement factory, sugar mills, ports and railroad services.

The regulatory entity in connection with the rendering of certain public services such as telecommunications open and pad to generation and distribution of energy is the Public Services Regulator or ASEP (the Autoridad Nacional de los Servicios Públicos), which is responsible for the granting of concessions, licences and authorisations, standard-setting, implementation of tariff structure, and the regulation and supervision of the public services of water and sewage systems, telecommunications, radio and television, and electricity. ii. Governmental Monopoly vs Private Initiative

Panama’s antitrust and competition laws and regulations apply to all companies doing business in the Panamanian market. Antitrust and competition laws are relevant to business enterprises at least in two ways. First, these laws identify certain practices, such as price ﬁxing, allocation of markets and bid rigging among competitors, that are absolutely forbidden and illegal, as well as other practices, such

Doing Business in Latin America MARCH 2016 217 as tying, exclusive distribution agreements, and exclusivity clauses, which may, or may not, be illegal, depending on various factors, including whether or not the economic agent has market power in the relevant market. The former practices, known as absolute monopolistic practices, correspond in general terms to ‘per se’ violations under US antitrust laws, and the latter practices, known as relative monopolistic practices, have as their closer equivalents those conducts subject to the ‘rule of reason’ under US antitrust laws.

Panama’s antitrust laws prohibit mergers, acquisitions and other forms of business combinations that hinder or restrict competition in the relevant market. The law does not require the parties to a merger, acquisition or business combination to seek pre-approval from the National Authority of Consumer Protection and Defence of Competition (ACODECO). However, this regulatory agency has the powers to investigate and challenge in court any merger, acquisition or business combination that violates antitrust laws and regulations. Interested parties may voluntarily seek approval from this agency prior to any merger, acquisition or business combination. If this approval is granted, the transaction cannot be subsequently challenged by third parties on the grounds that it violates antitrust laws.

In addition to general rules set out in antitrust laws and regulations, some sector-speciﬁc laws, such as the laws applicable to power generation and distribution, telecommunications, and open and paid television, contain additional antitrust and competition regulations. iii. Privatisation General Rules

The framework for the privatisation of assets, companies and services was established in Law 16 of 1992. The privatisation entails that the Panamanian government transfers to the private sector the ownership of companies, properties and shares, and may also assign to private individuals, the management or furnishing of public services. The methods in which the privatisation of companies and/or services owned and managed by the public sector occur are the following:

• The transformation of companies or state entities into corporations (‘Sociedades Anónimas’);

• The transformation of state entities into corporations of mixed economies in which the Panamanian Government is a minority shareholder;

• The establishment of management contracts or administrative concessions, with or without purchase option;

• Partial or total lease, with purchase option, prior to the settlement of the price amount;

• Hiring of companies or private individuals to perform speciﬁc functions or activities;

• Release of activities usually performed exclusively by the State, that are not designated by a constitutional mandate; and

• Issuance of licences and concessions for the exploitation of services.

The Cabinet Council must approve the terms of tender (which contain speciﬁc details of the privatisation) in order to receive proposals from companies or individuals willing to render public services. The Cabinet Council is also in charge of declaring the privatisation of the properties,

218 Doing Business in Latin America MARCH 2016 companies and state activities, subject to a technical examination. The privatisation in Panama took place mainly during the 90s. iv. Limitations and/or Prohibitions to Private Parties in the Rendering of Public Services

The rendering of public services by private parties in Panama has no major limitations or prohibitions except that some laws provide that such services cannot be performed by a company or entity owned or controlled by a foreign state.

C. Real estate i. Holding Title to Real Estate

A. WHO CAN HOLD TITLE?

Any person, whether an individual or a legal entity, foreign or national, can hold title to real property in Panama, subject to the limitation that foreigners cannot acquire land within ten kilometres of national land borders. It is important to point out that our legal framework in connection with real property doesn’t differ between urban and rural properties. Thus both are subject to the same provisions. Certain rules may apply, however to land used for agricultural purposes.

B. RECORDATION OF TITLE

Panama has a public recordation system where all matters pertaining to real property are registered, including title to property and improvements, encumbrances and restrictions, or limitations on ownership. Each titled property that is registered is given a plot number which identiﬁes it. The information registered includes: name of owner, registered value, area, metres and boundaries, and any liens registered on the property.

A person interested in acquiring titled property in Panama can verify title to the property in the Public Registry of Panama. Then, through registration in the Public Registry of a Public Deed containing the terms of the purchase and sale contract for the property, the buyer registers the title to his or her name. In addition, possessory rights in some areas of the country can also be recognised through a titling process regulated by the National Land Administration Authority (‘Autoridad Nacional de Administración de Tierras’). However the process of titling property held through possessory rights can be a difﬁcult and lengthy.

C. HORIZONTAL PROPERTY

Panama has a horizontal property regime to which buildings and projects that wish to be regulated in a condominium-style format can adhere. The purpose of the regime is to regulate the rights and obligations of owners of property built on common land. Thus, for example, the regime divides these properties into common and private areas and establishes the rights, obligations and limitations that each unit owner has with respect to these areas. The horizontal property regime law requires buildings or projects that wish to adhere to the regime to develop regulations that will apply to the

Doing Business in Latin America MARCH 2016 219 property. These regulations must be approved by the Ministry of Housing (‘Ministerio de Vivienda’) and registered in the Public Registry of Panama. The regulations include, among other things: designation of the building administrator; faculties of the board of directors; determination of use that can be given to each unit; and matters related to the assembly of property owners, including the necessary quorum to hold meetings and votes to adopt resolutions, present an annual budget; maintain a minutes record, and conduct audit of the balance sheet. The horizontal property regime law provides that the regulations can only be amended by the vote of a supermajority of the property owners and grants juridical status to the assembly of property owners once the regulations are registered in the Public Registry. The regulations are usually not registered until a certain percentage of the building or project has been constructed. ii. Transferring Real Estate

A. RECORDATION OF TRANSFER

All transfers of real property must be registered in Panama’s Public Registry to be effective against third parties. Any document that is registered in the Public Registry of Panama must be vested with the requisite formalities, namely that it is granted in a public deed before a Notary Public of the Republic of Panama or, if granted in a private document, (if the law permits) that it is formalised in a public deed before a Notary Public. The law requires certain documents that deal with real property transfers, dispositions and encumbrances to be granted in a public deed. These documents include ﬁnal purchase and sale agreements, mortgages and certain types of leases.

B. INSTRUMENTS OF CONVEYANCE

The transfer of property is documented in a deﬁnitive purchase and sale agreement (usually just a short document that contains the few provisions necessary to transfer title) which is executed in a public deed before a Notary Public and is registered in the Public Registry of Panama. Registration of the deed of sale in the Public Registry Panama is essential to perfect the transfer of title to the purchaser. iii. Financing Real Estate Acquisition

In Panama, real estate leasing agreements are governed generally by the provisions of the Civil Code and special laws on lease agreements.

A. TYPES OF LEASES

220 Doing Business in Latin America MARCH 2016 For the purposes of regulation, leases in Panama are divided into two categories: the ﬁrst covers residential leases with a monthly rental fee of US$150.00 or less, while the second category covers residential leases with a monthly rental fee of US$150.00 or more, as well as leases of premises for commercial, professional, industrial or educational use, regardless of the amount of the rental fee.

Lessees in the ﬁrst category are protected by the Leasing Law which grants them certain rights, such as having the lease agreement respected by a buyer of the leased property in case it is sold; requiring a minimum lease term of three years, with the further right to have it extended for additional three-year terms if the lessee is in good standing regarding payment of rental fees; allowing the lessee to terminate the lease agreement at any time by giving a 30-day prior notice to the lessor; and providing that the rental fee cannot be increased by the lessor without prior approval of the Ministry of Housing.

Leases in the second category, however, are generally governed by the principle of contractual freedom, with only a few mandatory provisions being required by the laws on leasing.

B. LEASE AGREEMENTS

Lease agreements should contain, among others, the following provisions:

• The right of the lessee in residential leases to waive the minimum lease term and terminate the agreement at any time with a written notice sent at least 30 days in advance.

• The right to sublease, although consent of the lessor may be required to sublease if so agreed.

The obligation to deposit with the Ministry of Housing a sum equal to the agreed rental fee (if monthly, then to a month’s rental fee, if yearly, then to a year’s fee, and so forth). It is the lessor’s obligation to deliver this deposit to the Ministry of Housing, but the deposit is paid by the lessee.

The right of the lessee in residential leases to exercise his or her profession within the leased property, unless this interrupts the peaceful enjoyment of the property or violates the law.

All lease agreements must be registered with the Ministry of Housing, using standard forms provided by this agency. In addition, lease agreements with terms of six years or more must be executed in the form of a public deed before a Notary Public, provided that affect third parties. Leases, both residential and commercial, can be recorded at the Public Registry to put third parties on notice of the existence of the lease.

The maximum term for a lease agreement is 20 years. In lease agreements partially excluded from the leasing law, whose term has expired and where the lessee still continues to occupy the property with the consent of the lessor, there is a holdover or implied continuation of the lease after the contractual term expires. In this case, the lease becomes an indeﬁnite term agreement that either party may terminate at any time. v. Construction

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Technical Board of Engineers and Architects (‘Junta Técnica de Ingenieros y Arquitectos’). Once the construction is ﬁnished and prior to occupation of the building, an application for an occupancy permit must be submitted to the Directorate of Municipal Constructions and Works. To apply for the occupancy permit, the following permits must have already been obtained in respect of the construction: permit issued by the Security Ofﬁce of the Fire Department, the previously mentioned construction permit, an electricity permit and a permit for installation of air conditioners (if applicable). vi. Expropriation Events

Any person, whether an individual or a legal entity, foreign or national, can hold title to real property in Panama, subject to the limitation that foreigners cannot acquire land within ten kilometres of national land borders. Nonetheless, Panama’s Political Constitution contemplates another limitation regarding the holding of title in real estate: expropriation. Panama’s Political Constitution states that by means of public utility or urgent social interest as deﬁned in speciﬁc laws, expropriation may be effective through a special judicial procedure and upon payment of an adequate compensation to the effective owner.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: Attempts vs Realities

The Republic of Panama currently has only one stock exchange, named ‘Bolsa de Valores de Panamá’. Legislation and regulation on stock exchanges and securities does not speciﬁcally contemplate the merger of stock exchanges. ii. MILA Market: Current Results and Expectations

The MILA Market, formally known as the ‘Mercado Integrado Latino Americano’, is an integrated stock exchange market. At the present moment it is composed by Chile, Colombia and Peru. Currently, Panama does not form part of this stock exchange market integration. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance (PA) is a highly praised trade bloc that promotes economic liberty. The PA is presently composed by Chile, Colombia, Mexico and Peru. The Republic of Panama is currently paving its way into the PA, as they have now signed a Free Trade Agreement (FTA) with each of the PA member nations. Panama completed this prerequisite on April 2014 with the signature of a FTA with Mexico, the only country of the PA which did not have an FTA with Panama. The efforts of Panama to join the PA are evidence its intention of to become a full member. iv. IPOs of Multilatina Companies in Latin American Capital Markets

222 Doing Business in Latin America MARCH 2016 Panama does not have any Multilatina Companies that have made an initial public offer at Latin American capital markets.

E. Offshore vehicles providers in Latin American countries i. General Concept: Legal Framework and Scope of the General Activities

A. INTRODUCTION

Panama has traditionally served as a recognised and secure jurisdiction to establish offshore vehicles for asset protection and efﬁcient tax planning strategies. Offshore vehicles are originated by foreign capital and generally do not carry out operations in Panamanian territory, beneﬁting from Panama’s territorial tax regime. Jurisdictions that offer offshore services are often mistaken as tax free jurisdictions, yet Panama’s corporate income tax is 25 per cent compared to the United States 25–35 per cent. The difference is that in Panama, operations carried out its territorial jurisdiction are not deemed as ‘Panama source income’. Panama’s geographical position and international background have been a key factor for its development as an offshore jurisdiction that, since 1927, when Panama passed its corporate Law based on Delaware corporate Law Statute. As of 2014, Panama currently offers a variety of secure and trusted offshore vehicles, such as Panamanian Corporations (‘Sociedad Anónima’), Private Interest Foundations, Limited Liability Corporations and Trusts. ii. Panamanian Corporations

The Law on Panamanian Corporations was enacted in 1927 and it does not distinguish between ‘in-shore’ and ‘offshore’ companies, characterised by its simplicity, ﬂexibility and effectiveness; Panamanian Corporations are frequently used inside and outside of Panama as demonstrated by the fact that more than 350,000.00 corporations are currently registered and active, and their owners and beneﬁciaries are, for their great part, non-resident, foreign citizens, that do not conduct any commercial transactions in Panama.

Two or more persons, from any nationality, with or without domicile in the Republic of Panama, may create a Panamanian corporation, for the accomplishment of any lawful objective, having to comply solely with the conditions required by the Law. It is important to mention that the constitution of a corporation is a commercial act, reason for which the persons who constitute it (the subscribers of the Articles of Incorporation) need to have full legal capacity and they shall be able to dispose liberally of their assets.

First and foremost, tax beneﬁts. As mentioned before the Panamanian taxation system is based on the territorial source of income. As such, the income earned from commercial transactions conducted outside of Panama is not subject to taxation in this country. Neither is subject to taxation, income from: (1) distributing earnings or dividends or shares, when such dividends or earnings are produced from income generated or earned by the company outside of Panama; (2) interest paid by banks located in Panama to any depositor (including a Panamanian corporation) for deposits located in Panama and also Panamanian corporations that operate abroad can distribute all or part of their assets among their shareholders without them or the corporation having to pay taxes in Panama.

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In terms of offshore activities that could be carried out by corporations, the regulatory environment is simple. Except for the carrying of specific regulated activities within Panama, such as banking, insurance or the rendering of public utility services are regulated by specific governmental agencies. In Panama, no government entity or agency that has to authorise, approve or supervise the formation of a corporation, the amendment of its articles of incorporation or the beginning of its operations. Nor the issuing or transfer of shares, or the modification of the authorised capital of the corporation, the distribution of dividends, the dissolution, winding up or sale of the assets of the corporation is subject to government notice or approval.

There is no obligation of filing any kind of statements or financial reports before the fiscal authorities of Panama by corporations that do not carry out businesses within Panama. Transactions conducted abroad or the income earned from the same are not subject to report.

Another beneﬁt is that the Law on Panamanian Corporations does not require a minimum corporate capital for the chartering of a corporation, or for its further operation or carrying out of its objectives. Neither it is required that the corporate capital be totally paid up when shares are registered in a shareholder’s name, thus, giving shareholder’s freedom and ﬂexibility to manage their corporate affairs.

The shareholder is not liable for the obligations of the corporation. He only responds to the creditors of the company for the amounts owed to the corporation for the issuing of the shares in case they have not been fully paid. Also, the corporation is not responsible for the personal liabilities of the shareholder. Additionally, the corporation can belong to only one person. There is no prohibition against the company having only one shareholder. One individual or corporation (as a corporation can be shareholder of another corporation) can be the owner of all shares, or have the majority control of the corporation.

Management and completion of shareholder’s and Board of Director’s meetings is fairly easy as the meetings can take place anywhere in the world. It is not necessary that the meetings be held in Panama. The Law also allows that the resolutions of shareholders and directors be adopted by consent, through electronic means, either by telephone or fax, provided that all the shareholders and directors have participated in the meeting or were in contact among themselves and express by majority their consent or approval of the corresponding resolution.

The shareholders, gathered in a shareholders’ meeting, are the supreme authority of the corporation. They do not need to be Panamanians or be domiciled in Panama and may transfer and sell shares without being subject to regulation or approval by, or registration with, any government entity or authority. However, preferred rights, as well as limitations and restrictions, can be established in the articles of incorporation as a condition for the transfer of shares by a shareholder.

Carrying out personal and business transactions in Panama is another beneﬁt that Panamanian corporations offer, as there are no currency restrictions in Panama, or limitations with respect to the transfer, assignment of money, goods or assets abroad. Panamanian corporations can undertake and enter into any kind of ﬁnancial transactions without being subject to government approvals or authorisations. Such operations do not need to be reported. However, in case the corporation had deposits with banks located in Panama any movement of funds for amounts up to US$10,000 has to be reported as a means to avoid and control money laundering.

224 Doing Business in Latin America MARCH 2016 Finally, one of the major beneﬁts of a Panamanian corporation is that it must be registered in the Public Registry for its incorporation, as well as any subsequent amendment to its articles of incorporation. Likewise, the appointment and replacement of directors, ofﬁcers and a resident agent must be recorded with the Public Registry. This is what gives security and certainty about the legal existence of the corporation and the persons in charge of its management and legal representation. This is not a mechanism of governmental control or regulation over the corporation. The Company’s registration in the Public Registry is a form of notice to third parties.

The incorporation of a Panamanian corporation is a swift and simple procedure, as the law requires a set of established requisites, the payment of registry rights and there also exist an annual franchise tax, payable before 1 January or 1 July; depending on the semester in which the corporation has been organised. Furthermore, every corporation should have a Record of Minutes where all the minutes and resolutions adopted by the shareholders and the board of directors must be kept. The corporation must also have a Record Book of Shares where title or ownership of shares and the transfer thereof must be recorded.

Given the exceptional nature of Panamanian Corporations the general scope of activities carried out by this offshore vehicle is extremely vast. For example, Panamanian corporations may own foreign bank accounts, perform commercial operations abroad, buy assets and set up trusts overseas. Panamanian corporations are regularly used as holding companies of regional groups. The dynamic and ﬂexible characteristics of this vehicle allow individuals to tailor the corporation to ﬁt their particular needs. iii. Limited Liability Corporations

This offshore vehicle is not be confused with a Panamanian corporation as it holds several differences. The latest legislation on this matter entered into force on 2009, and the ﬁgure exists in Panama since 1966. Limited liability corporations (LLC) are known as ‘Sociedades de Responsabilidad Limitada (S. de R. L.)’.

Limited Liability Corporation may dedicate to any lawful purpose at any part of the world. In order to constitute a limited liability company, there must be at least two partners (with no maximum of partners), which execute a partnership agreement and ﬁle it at the Public Registry. The authorised capital is also required to be a part of the partnership agreement and it is composed of participation fees or quotas that, as mentioned before, must be nominative. The participation fees cannot be transferred without the consent of other partners and the responsibility of partners is limited to the amount of capital they gave to the limited liability company.

Given the territorial regime of Panamanian tax law, income received by the limited liability company from operations executed, consumed or which produce their effects outside Panama and utilities that in turn pay their partners shall be exempt from income tax in Panama. Limited liability corporations are frequently used by US clients as ‘check the box’ entities. iv. Private Interest Foundations

In 1995, Panama enacted a statute that set forth the legal framework for the constitution of Private

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Interest Foundations. This vehicle is an independent legal personality separate from that of its founder, beneficiaries or administrator. Private interest foundations are created when one or more persons (known as the ‘founders’) subscribe a legal document (known as the ‘Foundation Charter’) that must be registered in the Panama Public Registry. The Founder(s) is/are grants certain assets in favour of the Foundation, which shall be managed by the members of the Foundation Council following the conditions established in the Foundation Charter and in the By-laws, for the benefit of one or more person(s) (known as the ‘beneficiaries’).

Private foundations are constituted to carry out individual and private objectives; of personal nature, being used for religious, educational, heirship, philanthropic or charitable purposes, as well as also for the protection of personal assets and enjoyment and disposition of goods in favour of third parties. They are composed by a founder, a foundational council, a protector, and the beneﬁciaries.

As mentioned above, the founder is the person that constitutes the foundation and thus the person that enacts the foundational council, which is an administrative entity entitle to carry out the objectives and purposes of the foundation. In turn, private interest foundations may have a protector selected by the founder, to supervise the Foundation Council, in order to verify the fulﬁlment of its functions and the adequate performance of the purposes of the foundation. There can be multiple protectors and they can be composed of individuals or legal entities. There are no requirements as to the number of protectors.

The beneficiaries of the foundation are those individuals or legal entities appointed by the founder in the By-Laws of the foundation charter to benefit from the foundation and, particularly, enjoy the proceeds of the assets thereof. The law neither sets out any restrictions, limitations or requirements for the appointment of beneficiaries, nor regarding their capacity. Therefore, the founder has the right to appoint whoever he desires as beneficiary of the foundation, either individuals or legal entities. The beneficiaries, once appointed, can be replaced by the founder at any time with or without cause. The founder can even appoint himself as beneficiary of the foundation.

The beneficiaries are not part of the foundation, nor do they have the right of disposition on the assets thereof, even if said beneficiaries are relatives or presumed heirs of the founder by disposition of the legislation of their nationality or residence. The beneficiaries will have the right to the goods of the foundation or its proceeds according to what has been stated by the founder either in the foundation Deed or the By-Laws.

The By-Laws of the foundation develop and regulate the provisions of the foundation charter. They constitute a document that the founder subscribes concurrently with the foundation charter, to enter into force and to have effect as of the creation of the foundation, so that it may be executed and complied with by the foundation council. As previously indicated, the By-Laws of the foundation charter is a private document, which does not require disclosure, nor has to be recorded in the Public Registry to have efﬁcacy and validity.

The By-Laws is the one document that, due to its private character, guarantees the founder confidentiality regarding the identity of the beneficiaries or their successors or replacements; the identification of the assets owned by the Foundation and the form of management of said assets for the benefit of the beneficiaries of the foundation.

226 Doing Business in Latin America MARCH 2016 A private interest foundation offers a set of concrete benefits for asset management and protection, family asset planning and others. Private foundations cannot carry out commercial activities as its regular purpose or objective since, by nature, they do not have a for profit purpose. They, however can own properties including shares or quotas and perform such other activities to carry out their purposes or to diversify their assets. Consequently, a founder can transfer to his foundation assets of any nature, such as real estate, stocks or securities, moneys, chattel goods and contract rights, among others and thus a foundation is able, for example, to exercise holder stock rights; invest its assets; enter into contracts of any nature, own bank accounts for private profit of the beneficiaries of the Foundation.

Private interest foundations pay an annual fee to the State. There are neither initial capital requirements nor obligations to held foundation council meetings (which can be held abroad). Thus, this offshore vehicle is used: a) as a replacement to the use of wills and of marriage contracts; b) as an instrument for the administration and maintenance of pension funds; c) as a means of protection for beloved ones and/or the grant in their favour of periodical allocations, goods or other beneﬁts; d) as an instrument to assure the good continuation of a business; e) as an instrument for the creation and/or administration of charitable activities; f) as a receiving entity for commissions and/or interest payments; g) a ‘holding company’; h) and as the owner of real estate, valuable goods, inventions, etc.

Under the Law, the foundation charter must comply with certain minimum requirements such as the name of the foundation, name of the founder, names and addresses of the members of the foundation council, name and address of the resident agent, and domicile of the foundation, to mention some of them. Private Interest Foundations are subject to an annual licence fee.

Panamanian private interest foundations can constitute a convenient and useful offshore vehicle and for asset management and protection, estate planning to set up the execution of philanthropic activities of interest for the founder, by reason of the absence of controls and restrictions for the creation of Foundations in Panama; the simplicity to organise a Foundation and to conduct its operations as well as the reasonable protection that is afforded to the identity of the Founder and the beneﬁciaries of the foundation. v. Trusts

A Panamanian trust is not a separate legal entity, but rather a legal arrangement whereby a person known as the settlor transfers assets to a person known as the trustee, to manage and/or dispose of them as set out in the trust deed, in favour of such persons designated as beneﬁciaries. Under the applicable law, the settlor himself may be a beneﬁciary of the trust.

Trust agreements enjoy of contractual liberty as it is established by a private contract that require no governmental approval. The intention to create a trust must be express and in writing; verbal, presumed or implied trusts are not valid. A trust is established by means of a document known as the trust deed, which is typically a private document, with some limited exceptions. For perfection of the trust deed, signatures thereon must be authenticated by a Notary Public, and the deed must contain the following:

• The clear and complete designation of the settlor, the trustee and the beneﬁciary. In the event

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that the beneficiary is to be established in the future or is a class of beneficiaries, the trust deed must contain enough information to be able to identify the beneficiary.

• The designation of a substitute trustee and beneﬁciary, if any.

• The description of the property or estate or portion thereof which constitutes the trust.

• The express declaration of the intent to establish a trust.

• The powers and duties of the trustee.

• The prohibitions and limitation placed on the trustee in the exercise of the trust.

• The rules for accumulation, distribution or disposition of assets, income or products of the trust.

• The place and date on which the trust is established.

• The designation of a resident agent in Panama, who must be a lawyer or law ﬁrm and who must countersign the trust deed.

• The address of the trust in Panama.

• An express statement that the trust was constituted according to the laws of Panama.

The absence of one or more of these clauses does not render the trust as a whole null unless the defect in question makes the fulﬁlment of the trust impossible.

In general, trusts constituted under Panamanian law are subject to the laws of Panama. However, the trust deed may stipulate that the trust is to be governed by the laws of another jurisdiction. Furthermore, the trust and its assets may continue into another jurisdiction or change the laws governing the trust if so stipulated in the trust deed.

Alternatively, a trust constituted under the laws of a foreign jurisdiction may continue into Panama provided that the trust deed allows for its continuation and either the settlor and the trustee, or the trustee alone makes a declaration to that effect.

A trust may hold assets of any nature, present or future, situated in Panama or elsewhere, which may be transferred to the trust at any time by the settlor or any other person. If the trust assets consist of land or other real property located in Panama, then the trust deed must be granted in a public instrument and registered in the Public Registry.

The trust assets are for all purposes deemed to be separate from those of the trustee or settlor, and are therefore protected against claims of preventive attachments (secuestros) or attachments in aid of execution (embargos) by creditors of the settlor or trustee, except for obligations incurred in the execution of the trust, or by reason of a fraudulent transfer of assets to the trust in prejudice to creditors.

Unlike the private interest foundations, trusts are not required to pay an annual franchise tax. However, as in the case of private interest foundations, trusts are also subject to tax territoriality;

228 Doing Business in Latin America MARCH 2016 therefore, if the assets or income produced do not derive from a Panamanian source, neither the income nor the distributions from said income to the beneﬁciary will be subject to tax.

The trustee may be a natural or legal person, with no restriction as to his/her/its nationality or domicile. The powers and duties of the trustee must be included in the trust deed.

The trust deed may establish limitations on the liability of the trustee, except for losses or damages caused by gross negligence or willful misconduct. Unless otherwise provided for, the trustee will be responsible for any loss or damages that can be attributed to a failure to act with an appropriate standard of care. It should be noted that although the trust law does not contemplate the ﬁgure of a protector, it does not prevent the settlor from appointing a supervisory body to oversee the actions of the trustee.

The settler may appoint one or more substitute trustees in the trust deed. In the case of revocable trusts, the trustee may be replaced and new trustees may be appointed at any time. If the trustee is declared dead or unﬁt, or is removed or resigns and no substitute has been appointed, a judge will designate a successor at the request of the trustee, settlor, beneﬁciaries or Attorney General and will transfer the assets of the trust to the substitute trustee.

Doing Business in Latin America MARCH 2016 229

230 Doing Business in Latin America MARCH 2016 Peru

Doing Business in Latin America MARCH 2016 231 xii. Peru

A. Foreign investment in Latin American countries i. General Rules and Restrictions

General Investment Guarantees

Peruvian constitutional and legal framework opens the economy to private investment, which is practiced in the context of a social market economy. It also promotes competition and ensures foreign investment in any type of company and industries.

Prices are governed by market and free competition, safe for public services which are administratively regulated. The Constitution also recognises freedom of trade and industry and of exports and imports.

Since the early 1990s, investment guarantees were introduced such as the right to freedom of ownership and disposition of foreign currency, and repatriation of capital and dividends to all natural and legal persons, both national and foreign.

It is also guaranteed that there shall be no discrimination or differential treatment in foreign exchange, prices, customs tariffs or duties among investors based on sectors or types of activity or geographic location, nor between natural or legal persons, domestic or foreign. ii. Foreign Investment Promotion

A. GENERAL

There are very few restrictions to foreign investment in Peru. Article 71° of Constitution provides that foreigners – individuals or entities – are prohibited to own, directly or indirectly, real state, mineral extraction rights, among others, within 50 kilometres of the Peruvian borders. Nonetheless, this rule may be subject to exception in cases of national interest or public necessity.

The general regulatory framework for foreign investment is provided by Legislative Decrees 662 and 757 and their speciﬁc regulations. Article 63 of the Constitution of 1993 provides that foreign investors shall the same rights as domestic investors.

Investors are guaranteed the right to freely transfer abroad, in freely converted currency and without any authorisation whatsoever, the whole of their capital, dividends, proﬁts, royalties and consideration.

Where appropriate to convert national currency into foreign currency, they shall be entitled to the most favourable exchange rate.

Notwithstanding the restriction set forth in article 71° of the Constitution, previously referred to, the General Law of Hydrocarbons regards the exploration and exploitation of hydrocarbons to be

232 Doing Business in Latin America MARCH 2016 of public necessity and national interest; therefore, these activities are exempted from the above mentioned restriction and foreigners may perform these activities within the full national territory.

B. TAXATION OF FOREIGN DIRECT INVESTMENT

Foreign investments carried out through an incorporated company in Peru are subject to the same tax rates and deductions as those of Peruvian owned companies. In application of the non- discrimination rule and ‘National Treatment’ principle, there shall be no differentiation based on the nationality of the investment.

The Superintendence of Customs and Tax Administration (‘SUNAT’) is the governmental authority in charge of collecting taxes and customs duties.

1 Income tax

Income tax is an annual tax that levies income obtained by taxpayers domiciled in Peru, regardless of the place in which such income is generated. Additionally, this tax levies the Peruvian source income obtained by non-domiciled taxpayers.

Pursuant to Peruvian legislation, Peruvian source income is classiﬁed into the following categories:

– First Category: income produced from the lease, sublease, and assignment of goods.

– Second Category: proﬁt sharing and capital gains income not included in any other category.

– Third Category: income related to business activities.

– Fourth Category: independent services income.

– Fifth Category: labour income and others as established by law.

The following are the main aspects of income tax applicable to resident and non-resident taxpayers:

Individuals

• Dividends and other proﬁt sharing: 6.8 per cent, 8.0 per cent or 9.3 per cent according to the ﬁscal year of distribution.

• Income obtained from the sale of real estate: 30 per cent.

• Interests, when paid or credited by a person domiciled in Peru that generates third category income: 4.99 per cent. This rate shall apply provided that (1) the parties are not related; and (2) the interests are not related to operations carried out from or through countries or territories with low or no taxation, in which case the rate will be 30 per cent.

• Capital gains from the sale of securities carried out outside of the country: 30 per cent.

• Other income derived from capital: 5 per cent.

• Income from third category generating activities: 30 per cent.

• Labour income: 30 per cent.

Doing Business in Latin America MARCH 2016 233

• Income from royalties: 30 per cent.

• Other income not previously indicated: 30 per cent.

Legal Entities

• Interest arising from cross border loans, provided that they meet certain statutory requirements: 4.99 per cent.

• Income derived from the lease of ships and aircraft: 10 per cent.

• Income from royalties: 30 per cent.

• Dividends and other forms of proﬁt sharing received from resident legal entities: 6.8 per cent (tax years 2015–2016), 8.0 per cent (tax years 2017–2018), and 9.3 per cent (tax years 2019 onwards).

• Technical Assistance: 15 per cent.

• Live entertainment performed by non-domiciled artists and performers: 15 per cent.

• Income generated from the sale of securities inside the country: ﬁve per cent.

• Interest from bonds and other debt instruments and deposits as set forth by Peruvian Banking Law: 4.99 per cent.

• Other source of income: 30 per cent.

2 Transfer Pricing

The value assigned to goods, services and other beneﬁts for income tax purposes must be at fair market value. If the value assigned in a transaction differs from fair market value – either by over- valuation or under-valuation – SUNAT may adjust the aforementioned value for the different parties of the transaction.

In case of transactions between related parties or with parties located in tax haven jurisdictions, the transfer pricing standards (ie, arm’s length principle) must be applied in order to avoid that the income tax to be paid in the Peru is less than the income tax that would have been otherwise levied if fair market value principles were applied.

3 VAT

The Value Added Tax (VAT) is a tax levied upon value added in each transaction at various stages of the business cycle. The applicable rate is: 18 per cent (including the 2 per cent Municipal Promotion Tax).

The Value Added Tax is levied upon the following operations in Peru:

• Sale of personal property

• The provision of services

• The use of services

234 Doing Business in Latin America MARCH 2016 • Performance of construction contracts

• The ﬁrst sale of real estate built directly by constructors

• The import of goods

• Taxpayer: the legal entity performing the taxable activity, ie, who sells the goods or provides the services, etc.

Value Added Tax paid when purchasing goods and services may be used as a tax credit. In case of taxpayers exporting goods or services, tax credit not applied against the Value Added Tax of taxable operations may be applied against other taxes.

4 Tax on Net Assets

The Temporary Tax on Net Assets is a tax that levies the value of a company’s the net assets as of 31 December of the prior year.

Net Asset’s Value Rates Up to S/.1’000,000 0 per cent More than S/.1’000,000 0.4 per cent

The obligation becomes due on 1 January of every year and is paid in April of each year, according to a payment calendar established by the Peruvian Tax Authority.

All third category income generators (including branch ofﬁces, agencies, and other permanent establishments of non-domiciled companies) will be levied with the Temporary Net Assets Tax, provided they start operations before 1 January of the current tax year (thus, for example, a company starting operations on 2 January 2015, will be subject to this tax as of 1 January 2016, and will be levied pursuant to the value of its net assets on 31 December 2015).

5 Financial Transactions Tax

The Financial Transaction levies the entry or exit (credit or debit) of money in accounts held in entities that are part of the Peruvian Financial System, and money transfer operations, irrespective of the means used (subject however to certain exceptions).

The tax obligation becomes due when crediting or debiting the bank accounts. The companies within the Peruvian Financial System will act as withholding agents, and will be responsible for the payment of said tax to the Peruvian Tax Authority.

The applicable rate is currently 0.005 per cent on the value of the affected transaction. The Financial Transaction Tax is deductible for Income Tax purposes.

6 Excise Tax

The Excise Tax levies (1) the sales of goods within the country, and (2) the import of certain goods, such as: fuel, soda and mineral water, alcoholic beverages, vehicles, cigarettes, beer, luxury goods and gambling.

Doing Business in Latin America MARCH 2016 235

The tax is either a ﬁxed amount or an amount determined by applying a percentage rate.

7 Tax Incentives

Among others, Peruvian laws and regulations provide the following Tax incentives:

8 Special Regimes

Taxpayers may obtain a refund of VAT levied upon imports and/or local purchases of new capital goods, new intermediate goods, services and construction contracts, carried out during their pre- production stage.

In order to beneﬁt from this regime, it is necessary to execute an Investment Agreement with the Peruvian Government. Individuals or legal entities may make use of this special regime regulation if they invest in any sector of the economy that generates third category income and meets certain statutory requirements.

In addition, there are special regulations for early recovery for certain economic sectors, such as hydrocarbons, mining, public infrastructure, and utilities, among others.

C. LEGAL STABILITY AGREEMENTS

A Legal Stability Agreement (LSA) is a contract with force of law that may be entered into with the Peruvian government both by investors and recipient companies, regardless of the economic activity performed by the latter. By means of LSAs, the government grants stability to an investor (both foreign and/or local) and to the Peruvian company receiving such investment (‘Peruvian Co.’), over certain regulations (legal framework) in force at the time of executing the LSA, for the entire term of the corresponding agreement. As a general rule, LSAs have a validity term of ten years or the length of a particular concession.

PROINVERSION is the national authority in charge of representing the government in the execution of LSAs, as well as supervising their compliance by beneﬁciaries. Agreements with local investors and Peruvian Co., are executed, in addition to PROINVERSION, by the corresponding Ministry of the economic activity to which the investment is destined.

In order to execute a LSA, investors shall commit to carry out investments in the Peruvian Co. of at least US$10m, if the Peruvian Co. operates in the mining and hydrocarbon industries; or US$5m for any other industry.

On the other side, Peruvian Co. may equally enter into a LSA, for which it shall receive investments from at least, one investor that complies with the legal requirements.

Legal aspects stabilised by LSAs

1 For Investors a. Income Tax regime, which implies that the dividends and any other form of proﬁt distribution will be subject to Income Tax at the rate in force at the time of entering into the relevant

236 Doing Business in Latin America MARCH 2016 agreement; The stability regime referred herein, protects the investor from any amendment to the income tax regime. Such modiﬁcations shall not affect the investor, both in the case of a raise or reduction of the income tax rate; b. Free availability of foreign currency; c. Right to freely remit abroad capital, proﬁts, dividends and royalties, with no limitation or restriction whatsoever; d. Right to use the most favourable exchange rate available in the market; and e. Right to non-discrimination.

It is important to note that national investors are granted only the beneﬁts detailed in literals a), b) and e) above.

2 For Peruvian Co. a. Income Tax regime, which implies that (a) any amendment to the stabilised regime regarding rates, deductions or calculation of the Peruvian Co.’s taxable income will not apply thereto, and (b) the Peruvian Co. will be subject to Income Tax at the rate in force at the time of entering into the LSA;

In order to beneﬁt from tax stability, the investment shall represent more than 50 per cent of the Peruvian Co.’s share capital plus reserves on the day prior to the execution of the LSA. Additionally, the investment shall be destined to the enhancement of the Peruvian Co.’s productive capability or to its technological development; b. Employment regime, which implies that the Peruvian Co. may employ its workers under any of the forms permitted by current regulations governing private labour; and, c. Promotion of exports, such as the systems covered by the current customs regulations (eg,, temporary admission for active improvement, drawback and replacement of goods under franchises) and the special regime favouring exporters covered by the Value Added Tax Act.

LSAs entered into as investor provide stability only to the investment committed under such LSA, while, on the contrary, Peruvian Co. acquire stability over its entire equity. This means that it is perfectly feasible for an investor to be the titleholder of both stabilised and ‘non-stabilised’ shares of the Peruvian Co.

D. INTERNATIONAL AGREEMENTS

1 Double taxation

The following double tax treaties executed by the Peruvian government are currently in force: Brazil, Canada, Chile, Korea, Mexico, Portugal, Switzerland, and with the member countries of the Andean Community (ie, Bolivia, Colombia, and Ecuador).

Additionally, Peru has executed a double tax treaty with Spain, which is not expected to be approved by Peruvian Congress--and thus enter into force--in the near future.

Doing Business in Latin America MARCH 2016 237

2 Multilateral Agreements on Trade and Integration

Peru is a founding member of the World Trade Organisation (WTO). Consequently, the WTO rules on antidumping, subsidies and countervailing measures, as well as on liberalisation of markets, technical barriers to trade, among others, are applicable in the country.

Similarly, Peru is currently a member of the Andean Community (CAN), which is formed by Peru, Bolivia, Ecuador and Colombia. It is noteworthy that Venezuela was a member of the CAN, however denounced the agreement in April 2006. The following are State parties to the Andean Community: Chile , Brazil, Argentina, Uruguay and Paraguay.

Following the Relief Programme agreed in the Andean Community, trade of goods between Bolivia, Colombia, Ecuador and Peru enjoy total tariff relief, constituting a Free Trade Area. Peru joined the programme according to a relief schedule established by Decision 414 of the Andean Community.

On the other hand, Peru is a State party to the agreement between countries in South America, called MERCOSUR. That agreement has been entered into by Argentina, Brazil, Paraguay, Uruguay, Venezuela and Bolivia.

Peru has signed agreements with other countries in Latin America, under the rules of the Latin American Integration Association (ALAD1) and has entered into trade agreements with Mercosur together with other members of the Andean Community.

In addition, Peru has executed investment protection agreements which are currently in force, either in the form of Bilateral Investment Agreement or through an investment protection chapter contained in a Free Trade Agreement.54

The main areas covered by trade agreements are: customs affairs and trade facilitation; technical barriers to trade; sanitary and phytosanitary measures; trade protection; services, establishments and capital movement; public procurement; intellectual property; competition; dispute resolution, horizontal and institutional affairs; trade and sustainable development; technical assistance and skill building; among other matters. iii. General Legal Framework

A. VEHICLES TO INVEST

Foreign individuals or entities may conduct businesses in Peru either by directly or through a Peruvian corporation or branch.

The General Law for the Growth of Private Investment, approved by Legislative Decree 757 in November 1991, recognises investors’ freedom to incorporate at their option, in order to conduct economic activities.

Certain activities related to banking and mining may be required by law to be performed through a particular form of company. Some sectors may also require local incorporation or branch.

54 For the full list of Free Trade Agreements entered into by Peru, please refer to http://www.acuerdoscomerciales.gob.pe/

238 Doing Business in Latin America MARCH 2016 The three legal types most commonly used by investors are corporations, limited liability company, and branches. The General Corporations Law governs three special types of corporations: the ordinary corporation (‘Sociedades Anonimas – S.A.’), the closely held corporation (‘Sociedad Anonima Cerrada – S.A.C.’) and the public corporation (‘Sociedad Anonima Abierta – S.A.A.’), which differ from each other regarding the number of shareholders allowed, as well as listing of their stock.

B. HIRING FOREIGN WORKERS

When hiring foreign personnel, it is necessary to execute a written employment contract according to certain formalities and limitations (ie, its term shall not exceed of three years, which could be extended for similar periods).

Foreign employees should not exceed 20 per cent of the total workforce and their combined salaries should not exceed 30 per cent of the total company payroll.

The applicable law provides for exceptions to those restrictions, such as high-level executives of a new company, high-level executives going through corporate restructuring, qualiﬁed professionals or technician, or personnel from companies that have entered into agreements with entities of the public sector. Those restrictions do not apply in case of (1) citizens whose spouse, ancestors, descendants and siblings are Peruvian; (2) citizens whose countries of origin have entered into an international dual nationality or a labour reciprocity treaty.

Foreign employees may only begin their services once the contract has been approved by the Ministry of Labour, and when the adequate migratory status (resident visa) has been obtained. Foreign employees may not be included in the payroll until they fulﬁl both requirements.

Special rules apply in case of Spanish citizens, citizens from countries of the Andean Community and MERCOSUR.

C. CUSTOMS

In Peru WTO rules on import valuation are applied.

The Customs Law sets out a number of procedures and customs operations that are applicable to goods that enter or leave the country. The main customs regimes are: a. Import for Consumption Regime: it is the most common type of customs regime and involves the definitive entry of foreign goods into Peruvian customs territory for the purpose of being consumed in the country. The entry of goods into Peru is made after paying customs duties and applicable taxes, if any, and complying with any formalities and other customs obligations, if applicable. Foreign goods shall be considered nationalised when clearance is granted by the customs authority. b. Definitive Export Regime: a customs regime enabling the exit of national or nationalised goods and certain services from Peruvian customs territory due to definitive consumption or to be used abroad. This regime is not subject to any taxes.

Doing Business in Latin America MARCH 2016 239

The Law also sets forth customs procedures for export promotion, such as: a. Drawback Regime: it allows for the full or partial recovery of customs duties levied on imported inputs that have been incorporated into exported goods or that were consumed during their production. Through this regime, the beneﬁciary may get a refund repayment of 4 per cent of the FOB value of exported goods, provided that some requirements are met. For example, the value of the imported inputs may not surpass 50 per cent of the exported good’s FOB value. The recovery rate will change to three per cent in 2016. b. Temporary Import for Outward Processing Regime: it suspends payment of customs duties and other applicable taxes on imported inputs if they are transformed or manufactured and materially incorporated into export goods that will be exported within 24 months after their entry. In addition, goods used directly in the production process, such as catalysts, accelerators or retarders, which are consumed during the process, may be subject to this customs regime. c. Reposition of Merchandise in Franchise Tariff Regime: it allows the importation – without payment of customs duties and applicable taxes on imports – of goods equivalent to nationalised goods, which have been transformed, processed or physically incorporated into deﬁnitively exported products.

Customs clearance is governed by the General Customs Law and its regulations. In addition, SUNAT is responsible for controlling the entry or exit and transportation of goods inside Peruvian borders.

D. MINING INVESTMENT

In Peru, mineral resources are owned by the Peruvian government; hence the private sector is only allowed to exploit them as provided in the Mining Law.55 A concession is required to carry out all mining activities, except for sampling, prospecting, storage56 and trading of minerals and mining products. Mining concessions are granted for indeﬁnite terms, subject to payment of annual fees to keep them in force and reaching a minimum production after 10 years of the granting of the title.57 Additionally, other applicable administrative authorisations such as environmental, use of water, use of explosives, among others, may be also required before carrying out any activities under mining concessions.

Mining concessions are usually privately owned and State participation is not required. It is a property-related right, independent from the surface land in which it is located. There are no restrictions or special requirements applicable to foreign companies or individuals regarding mining concessions, unless they are located within 50 kilometres of the Peruvian borders, in which case a

55 Uniform Text of Mining Law, approved by Supreme Decree (SD) No. 014-92-EM of 4 June 1992 and its amending and complementary provisions (the ‘Mining Law’). 56 In accordance to Legislative Decree No 1018, the storage of minerals and concentrates in deposits located outside areas of mining activity does not need a concession. 57 Currently, a minimum production of US$100 per hectare per year has to be achieved by the end of the sixth year after obtaining the title or penalties would be applicable (which could be substituted by evidencing an investment in the concession of at least 10 times the amount of the penalty). As from 2018, the minimum production of 1 Tax Unit (currently approximately US$1,230) per hectare per year has to be achieved at the end of the tenth year of having obtained the concession (which by paying a penalty of ten per cent per hectare per year, could allow to keep the concession for a maximum of 20 years. If by that time the required minimum production has not been reached, the concession is cancelled.

240 Doing Business in Latin America MARCH 2016 special authorisation granted by Supreme Decree is required.

The rights granted under mining concessions may be transferred, sold, mortgaged and, in general, are subject to any legal transaction or contract. In order for those agreements or transactions to be enforceable, a public deed shall be granted and subsequently recorded with the Public Registry. Should a concession not be registered, any and all agreements executed with respect thereof shall be binding only between the parties that executed them.

Generally speaking, mining concessions are irrevocable provided their titleholders pay an annual validity fee and reach minimum production levels within the terms set forth by law or otherwise pay the applicable penalties (see fn 3).

In order to carry out exploration or mining activities, the holder of a mining concession shall obtain some title over the surface land through an agreement with the owner of said land, for its temporary use or deﬁnitive transfer. Should any of these not be possible, a legal easement may be requested, so that the State imposes this right (but it is rarely granted).

There are other types of concessions granted under the Mining Law which are required to develop certain speciﬁc mining activities, as detailed below:

– Processing Concession: This type of concession grants holders the right to process, purify, smelt and/or reﬁne minerals.

– General Service Concession: This type of concession grants holders the right to carry out ancillary services (such as ventilation, sewerage, hoisting or underground access) to two or more mining concessions of different holders.

– Mining Transport Concession: This type of concession grants holders the right to mass transportation of minerals using non-conventional systems (such as conveyor belts, pipelines and/or track cables).

Besides this basic title, in order to actually perform mining activities, additional permits are required (such as an environmental impact study, water licences, construction permits, etc).

E. OIL & GAS INVESTMENT

Peruvian Oil and Gas industry is governed by Law 26221 (‘Organic Law’). The Organic Law and its regulations constitute the primary local general regulation in hydrocarbon matters establishing the legal structure that currently governs both upstream and downstream hydrocarbons activities.

Upstream activities

Pursuant to the Organic Law, oil and gas resources are owned by the Peruvian State, and hence the performance of any exploration and exploitation activities in respect thereof shall only be performed based on legal rights granted by the corresponding authority.

Title to such rights may be obtained through any of the following two alternatives: (1) a licence agreement, pursuant to which the oil and gas extracted is owned by the licensee and may be freely sold either in the domestic or international market, while the Peruvian government receives a royalty

Doing Business in Latin America MARCH 2016 241 as compensation for such rights; (2) a Service Agreement, by which the Peruvian government hires a private entity to undertake exploration and exploitation activities, maintaining ownership title over all extracted resources. In this second scenario, the private entity is compensated for its services usually by receiving a portion of the extracted resource. Contracts entered into under the above regimes provide for certain beneﬁts, including tax, during the life thereof, which cannot be modiﬁed unilaterally by the Peruvian government.

The execution of hydrocarbons contracts may be achieved through: (1) a direct negotiation process or (2) a public bid. Nonetheless, both procedures will require the contractor to obtain a prior qualiﬁcation from the corresponding authority (PERUPETRO). Duly qualiﬁed local and foreign oil and gas entities are equally eligible to enter into contracts for the exploration and exploitation of these resources, provided that in the case of foreign entities, they establish a branch or form a subsidiary and appoint a Peruvian mandatory.

The execution the above mentioned contracts as well as any amendment thereto or any assignment thereof, requires the prior approval of the Peruvian Government through the enactment of a supreme decree ratiﬁed by the Ministries of Energy and Mines, and Economy and Finance, respectively.

Downstream activities

Promoting private investment in Peru’s hydrocarbons industry was one of the main goals when conﬁguring the regulation for downstream hydrocarbon activities in 1993. In this regard, private, national or foreign entities are allowed to own and operate oil reﬁneries, fuel oil and gas stations, gas processing plants, and pipeline infrastructures.

In order to undertake the following hydrocarbon activities: reﬁning, storage and fuel station sales, entities are required to: (1) obtain an authorisation (favourable technical report issued by OSINERGMIN) prior to start construction works; (2) register before OSINERGMIN prior to start its commercial operations; and, (3) register before the Peruvian Government’s controlled goods registry managed by SUNAT. Transportation and distribution of hydrocarbons through pipelines infrastructure can only be carried out by entities holding the relevant concession granted by MINEM.

The foregoing could be summarised as follows: (1) Transportation service through pipelines: Concession issued by MINEM; (2) Distribution of natural gas: Concession issued by MINEM; (3) Reﬁning: Authorisation and Registry issued by OSINERGMIN; (4) Storage: Authorisation and Registry issued by OSINERGMIN; (5) Fuel Stations: Authorisation and Registry issued by OSINERGMIN; and, (6) Acquisition and use: Registry issued by SUNAT.

B. Rendering of public services i. General Framework

As per article 58° of the Constitution, the government may act in certain areas of social interest as employment promotion, health, education, security, and the rendering of public services and public infrastructure development.

However, by constitutional mandate, governmental agencies may only engage in economic activities

242 Doing Business in Latin America MARCH 2016 in a subsidiary manner and only if expressly authorised by law for reasons of public interest or national convenience.

As referred above, Legislative Decree 757 establishes the principal guidelines for the exercise of private initiative in all economic activities. Since this Legislative Decree was enacted, all prices and tariffs are set as a result of market free competition, except in the case of public services where prices are administratively set as expressly provided by law.

Once this general rules for private initiative in public services were outlined, each regulated sector (energy, telecommunications, water supply, sanitary, etc) had its own general law approved for the provision of each kind of public service. This way laws such as the Electrical Concessions Law, the General Telecommunications Law (and the General Sanitary Law, among others, were created.

Legislative Decree 757 also provided the ﬁrst legal dispositions for the creation of regulatory agencies that regulate and supervise private investment in the provision of public services. Subsequently, Law 27332 formally created Peru’s ﬁrst four regulatory organisms for the provision of public services and infrastructure development: the Energy Regulator, the Telecommunications Regulator, the Public Transport Infrastructure Regulator and the Sanitation Regulator. All these, among other new regulatory agencies, currently have administrative powers for regulating, supervising and sanctioning public services concessionaires in their respective area. ii. Governmental Monoply vs Private Initiative

Legislative Decree 757 also sets forth the main guidelines in which private initiative would participate in the rendering of public services and the development of public infrastructure. One of these is the concession mechanisms provided in each sector’s general regulations (Electrical Concessions Law, the General Telecommunications Law). Another is the concessions regime approved by Supreme Decrees 059-96-PCM and 060-96-PCM which establish the conditions for granting private investment concessions for the development of public infrastructure and the provision of public services in different sectors of the economy such as transportation, communications, and energy. These regulations have brought up the most important infrastructure projects for the rendering of public services in Peru so we dedicate the following lines to these.

The bidding mechanisms provided in Supreme Decrees 059-96-PCM and 060-96-PCM for private investment in public services and infrastructure, are currently called and conducted by PROINVERSION. Infrastructure and public services concessions under this regulatory framework are formalised in concession contracts that have a maximum term of sixty years. These contracts will establish the corresponding recovery investment mechanism for the development of the infrastructure, as well as all other signiﬁcant conditions set forth in the bidder’s winning offer. The concessions granted under this legal framework may be onerous or gratuitous, depending on whether the investor has to pay a consideration to the State for the granting of the concession.

The investment regime set forth by Supreme Decrees 059-96-PCM and 060-96-PCM was complemented in 2003 by Law 28059, which was enacted for promoting private investment in infrastructure in a decentralised manner in order to provide sustainable development in Peru’s many regions.

Doing Business in Latin America MARCH 2016 243

Later on, Legislative Decree 1012 (which modified Law 28059) and its regulations were enacted, all of which expanded the mechanisms to achieve participation of private investment in different sectors of the economy. This new framework established several principles, processes and regulations for the development of Public Private Partnerships (Asociaciones Publico Privadas) and Private Initiatives (Iniciativas Privadas) for the execution of all type of investment projects in all three government levels (national, regional and local). Public Private Partnerships (PPP) and Private Initiatives (P1) are mainly contractual arrangements between a governmental authority and a private entity for providing a public asset or service, in which the private party will bear significant risks as it generally will be responsible for the design, finance, construction, operation and maintenance of the PPP or IP project.

PPP for infrastructure projects may be executed through any type of contract permitted by law (ie, association in participation, management contract, joint venture, specialisation agreement, etc); however, the most common contractual ﬁgure has been the concession. This may be granted by the Peruvian government for investment not only over any type of infrastructure project and/or public services related to infrastructure, but most recently over any social interest project, related to health and environment, to the treatment and processing of waste, as well as applied to research and technological innovation projects, among others.

In terms of financing, a PPP may be self-sustained (executed entirely with private funds) or co- financed by the State. In the latter case, in order to ensure the availability of the State resources to undertake the required co-financing, the national budget capacity must be certified according to the rules of the National Budget System.

Under this legal framework many important infrastructure concessions have been granted in mostly the transport, communications and energy sectors. Some of the most remarkable concessions are the construction and operation of transmission lines of the national grid, the construction, improvement and operation of airports (among others, the Lima International Airport ‘Jorge Chavez’), the concession for the construction and operation of the Trans-oceanic Highway as well as the concessions of the Callao Seaport.

Regarding administrative competence, the procuring authorities for PPP are (1) PROINVERSION for projects within national competence that involve investments over 15,000 Tax Units or cover multiple sectors; (2) the special investment committee (Comite de Inversion) of each Ministry for national projects that are not in charge of PROINVERSION and (3) government organisms of a region or local government in case of regional or local projects. Also, there are other authorities with a relevant participation in the process of procurement of a PPP such as: (1) the Comptrollers’ General Ofﬁce (Contraloria General de la Republica); (2) the regulatory agencies of each sector involved in the project; and (3) the Ministry of Economy and Finance.

Peruvian regulatory framework also includes the possibility for investors to take the initiative and propose to different governmental authorities the development of public private partnerships through Private Initiatives (P1). These proposals have the nature of a discretionary request, which implies that the rights of the private investor are exhausted upon the submission of the proposal. However, if the State considers that the proposal is of interest, it may award the IP concession directly to the proponent or award it as consequence of a public bid process, in case other investors show interest in the development of the IP.

244 Doing Business in Latin America MARCH 2016 In terms of financing, PI may also be self-sustained or co-financed. Co-financed initiatives must be submitted during the first 45 calendar days of each year and must include contractual terms over ten years and a total cost of no less than 10’000 Tax Units (approximately US$12,450,000).

PI for regional or local-scope projects are submitted to the private investment ofﬁces of each regional or local government, except, as mentioned, for co-ﬁnanced PI that must be submitted in all cases before Proinversion. PI may also be submitted under several contractual forms (operation, management, joint venture, etc), but generally the most common contractual form is the concession.

Important concessions have also materialised as a consequence of PI. Most signiﬁcant examples are the concession for the execution of the Taboada wastewater treatment plant by Proinversion and especially the concession granted to for the construction and operation of an express way for the city of Lima under the name ‘Linea Amarilla’ (Yellow Line) which was granted by the Municipality of Lima.

Finally, once the investor has been awarded the concession and is enabled to develop the project under a PPP (or an IP), it will need to comply with the regulatory requirements for completion of the concession contract, as well as for the construction and operation of the particular project which will be submitted to each sector’s speciﬁc regulations (energy law, transportation law, etc).

A. PRIVATISATION GENERAL RULES

Along with Legislative Decree 757, in 1991, Legislative Decree No. 674 established a legal framework to promote private investment in public state companies. In line with the constitutional deﬁnition by which the State may only perform business activity in a subsidiary manner, several privatisation projects were implemented during the early 1990s in which many public companies were transferred to the private sector.

However, since the enactment Supreme Decrees 059-96-PCM and 060-96-PCM and Legislative Decree No. 1012, privatisation projects have been conducted through private investment concessions, PPP and the concession mechanisms provided in each economic sector’s speciﬁc regulations that were detailed above.

C. Real estate i. Land Use and Real Estate

Peruvian law offers rules that guarantee the acquisition, transfer, and protection of real estate. The speciﬁc measures adopted by the government have a threefold thrust. First, the protection of the right to acquire property is at the constitutional level, ensuring the free exercise of this right and enshrining it as inviolable. Second, the Constitution also establishes that foreigners (whether natural individuals or legal entities) have the same status as Peruvians with respect to the acquisition of property, with a speciﬁc exception set forth for national security reasons regarding lands located within 50 kilometres from the borders. Third, several legal mechanisms have been developed to ensure the safety of transactions related to the acquisition, transfer, and use of property. The limit to the right of foreigners to own land in frontier areas is not an absolute prohibition as it may be waved

Doing Business in Latin America MARCH 2016 245 due to public necessity and subject to a supreme decree.

A. PRIVATE AND PUBLIC REAL ESTATE

The transfer of private property is governed by ordinary rules regulated by the Civil Code. According to these rules, transactions between individuals enjoy wide contractual possibilities, even allowing the creation of new types of contracts, called ‘atypical contracts’ that are not stipulated in the current legislation. Within the regulated legal concepts are the real rights of property: surface rights, easements, ownership, and usufruct, among others. Formal ownership is also acquired through actual possession of an asset for ten years, which is known as acquisitive prescription – ADVERSE POSSESSION.

Peruvian regulations also allow the parties to enter into preliminary agreements intended for the possible acquisition of real estate. This is the case of a commitment to execute an agreement, by means of which the parties agree to enter into a future contract; the party that refuses to execute the preliminary agreement may even have to pay a penalty. There also is the option agreement, by means of which one of the parties agrees to perform the sale within a stipulated term, with the other party having the power to decide whether or not to execute the agreement.

With the exception of donations and mortgages, which are invested with certain formalities, agreements related to real estate may generally be executed by simple mutual consent. The practice and the need to protect property rights, encourages to abide by the formalities that evidence the execution of an agreement, either by written evidence of the agreement, by formalising the agreement in a public deed, or by recording it in the Public Registry.

In relation to private real estate, there is a special type of property that may only be transferred by observing special formalities. These are properties owned by native and peasant communities, in which case the sale of property must be approved by the corresponding community meetings. According to the resolution adopted at this meeting, a person who has been expressly chosen to act on behalf of the community must execute the agreement.

Public property could be private property of the government or could belong to the public domain. In both cases, there is a very specialised regulation in place which stipulates a number of formalities that must be met for the use of such property by any individual. A private entity may purchase state- owned property, execute agreements on exchange, easement, surface rights, or usufruct, or lease the property for a speciﬁc purpose of public relevance. In these cases, it will be necessary to follow administrative procedures relevant to the entity owning the public property; to comply with the requirements legally set forth for each type of operation; and, depending on the case, to take part in auctions or public bids, competing with other bidders for the acquisition of the intended right. State owned properties are not acquired by prescription.

B. URBAN AND RURAL LAND

This distinction applies to both state-owned property and private real state.

Urban lands are located within the cities, including lands on which commercial, industrial, residential, public service activities and, other activities typical of development in urban area take

246 Doing Business in Latin America MARCH 2016 place. When urban land is intended to be acquired for a specific purpose, it is very important to first obtain the necessary certification from the corresponding local authority, either a ‘land development and building parametres’ certificate or a ‘zoning and roads’ certificate. These certificates, which have three years of validity, detail (among other information) the use and building parametres that must be observed. Notably, while the certificates are valid, the person who has requested them may put into effect the information contained in them, despite the fact that within the three year period normative changes may arise, modifying the uses and parametres of the land.

Rural lands are those located outside urban area, intended for agricultural use, livestock, and rural activities in general. In most cases, it is possible to modify the designation of land from rural to urban, following a fairly complex procedure before the competent local authority.

C. REGISTRY SYSTEM

The National Superintendence of the Public Registry (‘SUNARP’) is the entity that governs the real estate registration system. It is through SUNARP that any person may obtain a property registry certiﬁcate (Certiﬁcado Registral Inmobiliario-CR1). This document enables the purchaser to verify the existence and attributes/description of the property (land and construction), the identity of the owner, and to check whether the title is free from attachments, mortgages, or any encumbrances of a judicial or extrajudicial nature.

The effectiveness of the real estate registry is guaranteed by legal order. All the information published and contained in the records is presumed known by all, without admitting evidence to the contrary. Persons that appear as owners in this system are duly empowered to sell the properties of which they are titleholders.

D. EXPROPRIATION

Property rights are well protected and awarded with guarantees for their defence, but are not absolute. The Peruvian Constitution sets forth that a person may be only be deprived of his/her property (expropriated) in case of national security or public necessity declared as such by a law enacted by Congress and prior payment in cash of an indemnity for the value of the property and the proﬁt loss. The owner of the land subject to expropriation may discuss the amount of the indemnity before the Judiciary or in an arbitral proceeding. The expropriation is always in favour of the Republic of Peru.

The experience in recent years reveals that the Republic of Peru resorts in very few occasions to this ﬁgure and it basically does it for territorial security and in order to perform public infrastructure works. This is the last resort when a property is required. ii. Applicable Taxes

At the level of the local authority where the property is located, the following taxes apply (depending on the speciﬁcs of each case and of the transferor, other central government taxes may apply whenever real estate property is transferred to third parties eg, Income Tax, Value Added Tax, etc):

Doing Business in Latin America MARCH 2016 247

A. REAL ESTATE PROPERTY TAX

This tax levies the value of urban and rural properties (real estate). Individuals and legal entities owning real estate are considered taxpayers for such purposes.

The taxable base is calculated considering the value of all the properties owned in a speciﬁc local district, as reﬂected in the internal records of the corresponding local authorities, whereas the tax is calculated applying a following progressive cumulative scale.

B. REAL ESTATE TRANSFER TAX

This tax, so-called ‘alcabala’, levies all transfers of real estate and land. The taxpayer is the property acquirer. The taxable base is the consideration agreed upon by the parties provided that it is not lower than the property value set forth in the local authorities’ records (ie, ‘autoavalúo’). The ﬁrst ten tax units (approx. US$12,000) of the taxable base are exempted from this tax. The tax rate is three per cent and must be borne exclusively by the relevant purchaser.

C. OTHER

Other minor taxes and contributions may apply depending on the location of the property and aimed to cover costs of public services eg, gardening, cleaning, etc.

D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchanges: Attempts vs Realities

The Lima Stock Exchange (‘BVL’) is currently the only stock exchange in Peru. It has mechanisms in place for listing shares as well as other securities of local and foreign issuers. In addition, it has a simpliﬁed listing mechanism applicable to securities of local and foreign issuers that are already listed in other speciﬁc foreign markets (dual listing). The BVL has also implemented a special segment for the listing of junior mining companies.

According to the Peruvian Securities Market Law (SML), stock exchanges may be incorporated as corporations (sociedades anonimas). Hence, besides being regulated by the SML, they are regulated by the Peruvian General Corporate Law. Merger between stock exchanges is legally possible. It should be noted, however, that, as mentioned, the BVL is the only existing stock exchange. ii. MILA Market: Current Results and Expectations

The MILA Market (Mercado Integrado Latino Americano’) is the result of the agreement initially executed between the Stock Exchange of Santiago (Republic of Chile), the Stock Exchange of Colombia and the BVL, including their corresponding securities clearing, settlement and depository institutions, in order to integrate the before mentioned stock exchanges markets. It formally commenced operations in May 2011. In December 2014, the Mexican Stock Exchange as well as its clearing, settlement and depository institution, joined the MILA.

248 Doing Business in Latin America MARCH 2016 MILA allows the local brokerage agents to engage in trading with instruments which are listed in the associated foreign stock exchanges, from their negotiation platforms (the BVL has announced the implementation of a new electronic trading mechanism called Millennium, provided by the London Stock Exchange, which replaces Elex, the previous system), through the trading platforms of brokerage agents that operate in the target exchanges, which grants the former remote access to the centralised negotiation mechanisms.

The integration of the Stock Exchange of Santiago, the Stock Exchange of Colombia, the Mexican Stock Exchange and the BVL through MILA is based on the independence of such stock exchanges as independent companies. In this way, the stock exchanges are administered independently, operating their own platforms and independent negotiation electronic systems, with their own negotiation rules and market administration.

The operations are executed in the original currency of the instrument (for example, if the instruments are Peruvian, then the currency has to be Nuevos Soles). The liquidation of such transaction has to be done in the currency of the country in which the instrument is listed and under which the negotiation was performed.

According to the published information in MILA’s website, the total volume traded in MILA for the year 2014 reached US$57.516m and in May 2105, such amount reach US$20.646m. The Stock Exchange of Mexico represented 80.54 per cent, followed by the Stock Exchange of Santiago with 11.29 per cent, the Stock Exchange of Colombia with 7.43 per cent and the BVL with 0.74 per cent. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance was implemented by Colombia, Chile, Mexico and Peru on 28 April 2011, through a document called the ‘Declaration of Lima’, with the purpose of creating a space for economic, political and commercial integration, offering the economic agents the predictable legal framework for the development of the commerce of assets, services and investments.

The Paciﬁc Alliance arises as a result of the initiative of the Peruvian President at the time (2010), following an invitation made to Colombia, Chile, Ecuador and Panama in order to establish a ‘profound integration area’ which secures the freedom to circulate assets, services, capital and persons, with the purpose of making such space an integration model for the region, consolidating a common economic platform with projection to the world, specially to Asia. Eventually, Mexico joined this group, while Ecuador did not participate and Panama stayed as an observer country.

The Declaration of Lima establishes the commitment of the participating countries to achieve the main objective of the Paciﬁc Alliance: the freedom to circulate assets, services, capital and persons. In that way, several Technical Groups were created for each of the before mentioned areas and a High Level Group was integrated by Vice Ministers of Foreign Affairs, in order to supervise the other Technical Groups.

Since the execution of the Declaration of Lima, there has been: (1) 10 presidential meetings, being the last one held on 3 July 2015, in Paracas (Ica, Peru); (2) 13 ministerial meetings of, being the last one held on 2 July 2015, in Paracas; (3) 30 High Level Group meetings, being the last one held on 2 July 2015, in Paracas, and (4) 16 Technical Groups meetings, being the last meetings held between 20–30 May 2015, in Mexico.

Doing Business in Latin America MARCH 2016 249

At the Paracas Summit, Mexico handed over the pro tempore presidency of the Paciﬁc Alliance to Peru. Likewise, Presidents of the Paciﬁc Alliance signed the Declaration of Paracas, in which they highlighted the upcoming entry into force of the Framework Agreement; the progress achieved in the process of improvement of the Additional Protocol; and, of the Agreement that created the Fund for Cooperation. They also expressed their willingness to continue strengthening cooperation with observer states. During this Summit 10 new countries were admitted as observers: Austria, Denmark, Georgia, Greece, Haiti, Hungary, Indonesia, Poland, Sweden and Thailand.

250 Doing Business in Latin America MARCH 2016 Uruguay

Doing Business in Latin America MARCH 2016 251 xiii. Uruguay

A. Foreign investments i. Authorisations vs Limitations or Prohibitions

A. GENERAL ABSENCE OF RESTRICTIONS

Most investors consider Uruguay a safe place since the country has done much to create a climate of trade openness, passing legislation to promote foreign investments, establishing attractive beneﬁts for investors. The main areas of investment have been tourism resorts and fertile agricultural lands. The latter have been targeted by investors to carry out livestock grazing, forestry, agro-industrial and dairy projects.

Uruguay is a model of political and social stability, recognised for its solid macroeconomics. This is evidenced by the growth rate of close to 6 per cent on average of its GDP a year since 2005 as well as by the investment grade it was awarded by all big three credit rating agencies, Standard & Poor’s, Fitch Ratings and Moody’s Investors Services.

Uruguay has no limitations on the holding or traded of foreign currency or precious metals. Moreover, transactions may be entered into in any currency and no permits or authorisations are required to bring money into the country or to send funds abroad. Any individual or duly incorporated legal entity may own real estate (with certain exceptions in the case of rural real estate), regardless of nationality, residence or place of incorporation. Practically no areas of the economy are reserved to Uruguayan citizens.

B. EQUITABLE AND FAIR TREATMENT, PARITY WITH NATIONAL INVESTMENTS

Uruguay grants fair and equitable treatment to national and foreign investors under its laws and also through the bilateral investment agreements it has entered into. Foreign investors may carry out any type of activity in parity with national investors, receiving equal treatment with respect to taxation.

Under the ‘Protocolo de Colonia para la Promoción y Protección Recíproca de Inversiones en el Mercosur’ (Colonia Investment Protocol), MERCOSUR members are compelled to respect other members’ right to promote investment, which translates into an obligation to admit investments of third states into their territory.

Furthermore, Uruguay has negotiated treaties to avoid double taxation with Argentina, Ecuador, Finland, Germany, Hungary, India, Korean Republic, Liechtenstein, Malta, México, Romania, Portugal, Spain, Switzerland, that are currently in force. Moreover, there are bilateral investment agreements with Armenia, Germany, Saudi Arabia, Australia, Belgium, Canada, Chile, People’s Republic of China, Korea, El Salvador, Spain, USA, Finland, France, United Kingdom, Hungary, India, Israel, Italy, Malaysia, Mexico, Netherlands, Panama, Paraguay, Poland, Portugal, Czech republic, Romania, Sweden, Switzerland, Venezuela, and Vietnam.

252 Doing Business in Latin America MARCH 2016 Although there is no specific regulation governing stability agreements executed between investors and the State, there have been some experiences in the past of agreements executed by the State providing this type of undertakings. Moreover, the Investment Law (as defined below in c), reassures investors due to the wide array of benefits and rights it vests them with.

C. INVESTMENTS LAW

Uruguayan legislation has established a legal framework for promoting investments in various ﬁelds and activities with very successful results. Law No 16.906 of 1988 (hereinafter, the ‘Investments Law’) declares of national interest the promotion and protection of investments made in the country by Uruguayan and foreign investors. It also guarantees freedom to transfer invested capital, as well as proﬁts in any currency and at any time. This law regulates three important aspects. These are: investment principles, tax matters and the treatment given to companies who act within ‘MERCOSUR’.

According to this law, a national interest status may be granted to any activity, specific project or company which meets certain objectives such as the increase and diversification of exports of processed goods, the establishment of new industries or the expansion or the refurbishing of existing ones amongst others. The Investments Law enables the Executive Branch to provide tax advantages to certain activities which are then qualified as ‘promoted activities’.

For the purpose of obtaining said advantages, companies must submit detailed accounting and ﬁnancial information to the Investment Implementation Committee (COMAP). Once a recommendation from the COMAP has been obtained, the Executive Branch shall issue a resolution declaring the project promoted, where the amounts and deadlines of the granted tax beneﬁts are established.

The main benefits of the law are basically tax benefits. These consist in the possibility of deducting between 20 per cent and 100 per cent of the total value of the investment from the applicable income tax in a term that can go from three to fifteen years. Additionally, this law grants other benefits such exonerations of the Net Worth Tax for a particular term and of taxes and duties applied when importing certain equipment and assets destined to be fixed assets of the project when do not compete the national industry.

D. FREE TRADE ZONES AND FREE PORTS REGIME

Law No 15.921 created the free trade zone regime, which has given rise to several exclaves in commercially strategic areas of the country, both public and private. On the other hand, Law No 16.246 created the free ports regime. Both have had important consequences for investments in Uruguay.

Operations which occur within the scope of these regimes receive multiple beneﬁts, such as a complete tax exemption, as well as an exemption from all applicable duties on importation and exportation of goods and services. Companies operating under these regimes receive an exemption from net worth tax and corporate income tax. Furthermore, goods may transit freely within these areas without the need of authorisation or formal procedures of any kind.

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A wide array of activities may be performed under the free trade zone regime. These range from the mere deposit of merchandise, to the rendering of services, including ﬁnancial and insurance services, handling, classiﬁcation and selection of deposited goods, including the establishment of manufacturing industries and professional services.

The free ports regime represents one of the mainstays for Uruguay as a logistic platform in Mercosur and as a hub for the distribution of goods in transit. When operating under this regime, goods circulate freely without the need of permits or formal procedures. During their stay at the port customs area, goods are exempt from all import requirements and import-related taxes.

E. LABOUR BENEFITS

Companies established in Uruguay beneﬁt from the following labour incentives:

– Companies may remain open on Sundays and holidays;

– Vacation dates are negotiable with employees;

– The social security and health system is supported by employees and employers, and covers risks arising from disability, disease, industrial accidents, maternity, unemployment and death;

– Foreign employees can be hired for any activity developed within the national territory, with some few exceptions where certain limitations apply (free trade zones, ﬁshing, transportation and press industries).

– Termination of labour contracts on trial periods (of up to three months) does not generate severance payment or liability.

– Employers do not have to allege a just-cause to dismiss employees, they are only be obliged to pay the corresponding severance compensation, equivalent to one monthly salary (plus beneﬁts) for every full year of service or fraction thereof, up to a maximum of six monthly salaries.

F. IMMIGRATION BENEFITS

Companies established in Uruguay can beneﬁt from the following immigration incentives:

– There are three types of residencies granted by the Uruguayan Migration Ofﬁce: (1) a six month provisional identity card for people who will carry out an activity for a short time; (2) two year temporary legal residency (granted within 4 months approximately); and (3) ordinary permanent legal residency (granted within 2 years approximately).

– Moreover, there is a special permanent legal residency for people born in countries which are members of MERCOSUR or associated to it; which has a simple application process before the Ministry of Foreign Affairs, who shall decide within 30 working days as from the date on which the documents have been ﬁled.

254 Doing Business in Latin America MARCH 2016 G. OPERATION PERMITS

In relation to the relevant permits which are necessary to operate in Uruguay, the same shall depend on the type of industry concerned and its controlling authority. However, general permits which apply to industries or ﬁnancial entities exist, which are:

1 Environmental Authorisation

Prior environmental authorisation is required for several activities, operation of facilities or works listed in the environmental regulation. These include, for example, electricity generating plants of over 10 MW; nuclear power plants; construction of public terminals for loading and unloading of goods and passengers; implementation of complex urban developments of over 10 (ten) hectares.

2 Uruguayan Financial System

The Uruguayan financial system allows entities to operate as full branches of foreign banks or, alternatively, as local subsidiaries of foreign companies or banks. Entities which carry out ‘financial intermediation’, such as banks, financial houses and offshore banks require a licence granted by the Central Bank of Uruguay and an authorisation from the Executive Power.

The Central Bank of Uruguay, in its capacity as supervising entity, overlooks ﬁnancial entities and is vested with the authority to impose minimum capital requirements, liquidity ratios, reserves, maximum exposures, debt ratios, etc, all in line with the Basel Convention principles. ii. Treatment of Foreign Investments in Infrastructure Initiatives and PPP Projects

A. OBJECTIVE OF PPP CONTRACTS

Law 18.786 regulates the PPP regime. PPP contracts may be entered into for the development of infrastructure and provision of services. Those projects may concern: (a) roads (including rural roads), railways, ports and airports; (b) energy projects (without prejudice to the provisions establishing state monopolies); (c) waste treatment and disposal; and (d) social infrastructure, including prisons, health centres, education centres, social housing, sports centres and urban development.

The PPP regime coexists with other regimes applicable between private entities and the State. These other regimes are the default regimes, and PPP contracts may only be concluded when the State determines that this type of contract is economically efﬁcient for the welfare of the inhabitants, which is the aim pursued by the Uruguayan State.

B. PARTIES TO THE PPP CONTRACT

The Uruguayan State may contract through any of the three branches of government (Executive, Legislative and Judicial). The Public Administration may agree directly with the National Corporation for Development (NCD) for this entity to assume the implementation of the project and then transfer it to the private sector later on. The involvement of the NCD implies a shorter procedure, since some

Doing Business in Latin America MARCH 2016 255 stages of the contracting process are avoided. To involve the NCP, prior authorisation of the Executive Branch must be obtained.

C. PPP CONTRACTS

A contractor’s compensation may be paid either directly by the State or by the users of the infrastructure or service or a combination of both. The State in turn will be paid a canon or fee either by the contractor and/or by the users of the service or infrastructure. The Contractor shall provide guarantees for the performance of its obligations.

Even though the State cannot ensure that the project will be proﬁtable, it can guarantee a minimum income. Moreover, the State may promote the development of PPP contracts by granting subsidies, or tax exemptions, etc.

In the area of dispute resolution, it is expressly provided that the parties must resort to arbitration. The arbitrators shall be appointed by agreement between the contracting parties or, failing that, by the procedure laid down in the General Code of Procedure.

Sanctions for non-compliance including withholding of payments may be provided for by the State, which can also request judicial measures to ensure their effectiveness.

D. PROCUREMENT PROCEDURE – PRIVATE INITIATIVE

Before starting the contracting process, the Administration must produce a document evaluating the feasibility and desirability of the project.

The PPP Law created a procedure called ‘Competitive Dialogue’, which is an instance to discuss all the aspects of PPP contract between the State and the applicants that have submitted offers, and which have met the requirements of technical and economic solvency stated therein.

The PPP Law also provides that the initiative for said undertaking can come from private entities.

E. GUARANTEE IN FAVOUR OF CREDITORS AND CONCESSION PLEDGE

Pursuant to the PPP Law the Contractor is authorised to grant pledges on future cash ﬂows of the project, trusts, and all other real or personal guarantees on goods and rights, present and future in beneﬁt of its creditors.

There is also the possibility of pledging the rights arising from the PPP contract (termed ‘pledge of the concession’), but this is restricted to guaranteeing the ﬁnancing of the project, operation or maintenance costs, as well as those resulting from a trust created for that purpose. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

A. MINING

All mineral deposits located within the Uruguayan territory belong to the Uruguayan State and therefore all rights over such deposits can only be granted by the Executive Branch. The Uruguayan

256 Doing Business in Latin America MARCH 2016 Mining Code recognises and regulates the granting of easements, prospecting rights, exploration rights and exploitation permits and expressly states that all persons or entities, whether national or foreign, can be holders of mining rights.

Mining rights are usually granted irrespective of the wish of the owner of the property, who will, nonetheless, have the right to receive compensation for the mining activities carried out and the damages which may be caused and – eventually – to receive a production canon if the mine becomes productive.

Recently, international companies have been interested in large scale mining projects in Uruguay, mainly regarding iron. This caused that in 2013, a law was passed regulating large scale mining (LSM), an activity which has now been declared of public interest.

Projects that qualify as LSM are now regulated by the Mining Code and by this new LSM Law which introduces some relevant changes such as the need to execute an exploitation concession agreement with the Executive Branch (not required for non LSMs, in which the granting of an exploitation permit is enough), and the need for corporations holders of such projects to have their capital stock in registered shares and to identify the ultimate beneﬁcial owner of the same. Special environmental requisites also apply to these projects.

B. OIL AND GAS

Under the Uruguayan Mining Code, all (a) fossil substances, oil, gas and (b) ‘other minerals or elements capable of generating energy industrially’ are classiﬁed as Class I minerals and all mining activities regarding this Class is reserved to ANCAP (the state owned oil company) directly or through concessions to third parties.

Currently, Uruguay has identiﬁed areas for on shore and offshore explorations for oil and gas and bids have been awarded by ANCAP for exploration to internationally renowned companies who have subsequently signed exploration contracts with ANCAP.

Also, Gas Sayago S.A. (a private company owned by the state owned power company – UTE– and ANCAP) appointed GNLS (a joint venture of GDF Suez and Marubeni) for the construction and operation of a regasiﬁcation terminal (FSRU) for a period of 15 years with a capacity of 10,000,000m3 per day and a total investment of US$1bn approximately. iv. Treatment of Foreign Investment in Real Estate (Rural and Urban Properties)

A. OWNERSHIP

Real estate property may be owned by one or more individuals, partnerships and corporations, or some combination of the same, whether national or foreign. The only restrictions refer to ownership of agricultural land (that is, destined for agriculture; rural lands with other destinations – for example industrial – are not subject to limitations) and are set forth in laws 18,092 and 19,283.

Law 18,092 (as amended and implemented) declared of national interest that the owners of agricultural land be individuals (national or foreign) or corporations with registered shares owned

Doing Business in Latin America MARCH 2016 257 by individuals (national or foreign). However, the Executive Branch may authorise companies which do not comply with the above requirements to own agricultural land: (1) when the nature of their undertaking or the number of their shareholders impedes that their capital belong to individuals; (2) when the shareholders are listed in a well reputed stock exchange; (3) when the activity to be carried out qualiﬁes as a productive project.

Law 19,283, states that ‘Sociedades Anonimas’ and ‘Sociedades en comanditas por acciones’ (ie, Uruguayan corporations) with bearer shares, in principle are no longer authorised to own rural real estate if their controlling shareholders are (1) national entities owned by foreign States or (2) sovereign funds of said States. Exceptionally, the Executive Branch may grant an authorisation to a Uruguayan corporation the shareholders of which are foreign States or sovereign funds of said States if said Uruguayan corporation: (1) presents a productive project and (2) has a minor non-controlling participation of foreign States or sovereign funds.

B. REAL ESTATE TRANSACTIONS

As will be explained in C.i below, the legal regime governing real estate property rights in Uruguay offers an extremely secure system under which all real estate transactions must be authorised by a notary public (‘Escribano’) and ﬁled with the Real Estate Public Registry to be valid and enforceable against third parties. The date of registration indicates the preference of each right and, with fully digitalised registries, title insurance is unheard of in Uruguay.

Financing for the purchase of real estate properties in Uruguay is easily available through banks and ﬁnancial institutions. Customarily, the lender will participate in the deal through its own legal advisors and notary public who will be in charge of carrying out the title due diligence and drafting a mortgage. The owner of a real estate property can grant a mortgage over it by executing a deed before a notary public. Mortgages are also registered with the Real Estate Public Registry and therefore, as of the date of registration, they become enforceable against all third parties and prevent any future transactions regarding said property until the cancellation of the mortgage and release of the property is duly registered.

C. APARTMENT BUILDINGS AND COUNTRY CLUBS

The largest real estate investments in apartments buildings are made in Montevideo and Punta del Este. In Punta del Este in particular, such investments are linked to the tourism industry since most buyers are foreigners and the properties are rented in the summer (December, January and February).

In general, each apartment is recognised by law as an independent real estate property upon the registration of the construction plans and the granting of the pertinent authorisation by the Municipal Authorities. During the construction phase, it is possible to execute and register promises of sale, granting the purchaser rights in rem.

Apartment buildings are governed by the provisions of an agreement executed by the original owner of the building (Reglamento de Copropiedad) including rules on the administration of the building and the rights and obligations of the owners of the apartments with respect to the maintenance of

258 Doing Business in Latin America MARCH 2016 the building and their contribution to common expenses as well as their rights to use the common areas and amenities of the building. Such agreements always establish a mortgage over each of the apartments of the building in favour of the owners of all other apartments as security for the payment of common expenses.

Housing in the form of private country clubs has become increasingly common in Uruguay. Upon the purchase of a plot, the owner acquires full title to that speciﬁc plot, being entitled to build a house, dispose of said plot and use the common areas of the country club.

Law 17,292 regulates property rights of plots in country clubs as well as the contribution of each plot to the common expenses, the administration and use of the common areas, the size of the plots and other matters pertaining to the premises to be built by the owner of each plot. Under this law the independent legal existence of each plot will be the result of the granting of the municipal approval of the infrastructure works of the country club, the registration of the country club map and the execution and registration of the Reglamento de Copropiedad. v. Treatment of Foreign Investment in Agribusiness Activities

A. AGRIBUSINESS ACTIVITIES IN GENERAL

Uruguay has a strong agribusiness tradition. As informed by the Ministry of Agriculture, the total agriculture area amounts to 16.4 million hectares and the gross agribusiness product for 2012 amounted to US$5,584m. As for rural land transactions, during 2013, 1,868 purchases were executed causing 371,000 hectares of land to change hands at an average price of US$3,473 per hectare.

Regarding ownership see paragraph a above.

B. FORESTRY INVESTMENTS

Uruguay may well be considered an emerging forestry country. A 1987 Forestry Law introduced various incentives to the industry such as: a) complete tax exemption for the forested areas planted in lands declared to be of ‘Forestry Priority’, not only for net worth tax but also for municipal land taxes; b) the fact that proceeds of the forested areas are not compounded for the payment of income tax and other taxes related to agricultural activities; c) investors may receive partial reimbursement of the expenses incurred; c) eligibility for special soft credit lines provided by the Banco de la República Oriental del Uruguay, or BROU (the Uruguayan state bank); and d) tax and customs duties exemptions for the importation of supplies and capital assets destined for the production and industrialisation of Uruguayan wood. vi. Treatment of Foreign Investments in Public Services

In Uruguay, a public service is governed by Public Law and in principle carried out directly by the State. The only way private parties can carry out these activities is through a concession.

The concession of a Public Service is an act by which the State temporarily allows a private party to perform a public service and grants this private party certain legal powers. A concession shall always

Doing Business in Latin America MARCH 2016 259 be done under Governmental control and supervision and are necessarily granted for a limited period of time.

The concessionaire is granted the right to exploit the public service involved, along with any and all acts needed to those effects, bearing all costs and risks involved. The retribution received for carrying out the public service is not borne by the State but by those who make use of and beneﬁt from the service.

No discrimination is made as to who may be eligible for concessions of public services. However, Uruguayan law does provide that the State is compelled to grant concessions through public bids. The State, taking all offers into account, will choose the most convenient one. This decision shall be made exclusively according to its own judgment – although this judgment must have some sort of justiﬁcation. Aspects such as pricing, timing volume, or ﬁnancing options, as well as reputation and track record carry weight in this decision.

B. Public services i. Concept Under Uruguayan Laws

Public services in Uruguay are deﬁned as activities performed to satisfy imperative collective needs that are provided to individuals under a Public Law regime (eg, power, water, gas). It is up to the national legislation to determine which activities are to be deemed public services.

Public services must be provided:

• on a continuous and uninterrupted basis, given the importance of the needs they satisfy;

• on a regular basis, under reasonable conditions of proper functionality;

• on a non-discriminatory basis; and

• under equal conditions.

The relationship between the provider of the public service and the user is statutory rather than contractual, because the conditions of the service are deﬁned by statute or regulations and not by an agreement between parties. ii. Ways to Render Public Services

A. DIRECTLY

By a government entity, using its own employees, resources and technical means. For such purposes the Uruguayan Constitution establishes Autonomous Entities (Entes Autónomos) and Decentralised Services (Servicios Descentralizados), which have functional and ﬁnancial autonomy, with their own legal personality distinct from that of the State, over which the latter exercises powers of control.

Supervision and control of public service administration is achieved through the following mechanisms:

260 Doing Business in Latin America MARCH 2016 • Application of the Tax and Financial Administration Code (TOCAF) in contracts with private parties.

• Possibility of challenging the administrative acts of the service provider by means of administrative appeals before that same issuing entity (in the case of Decentralised Services, there is a special appeal for reasons of lawfulness that is decided by the Executive Branch).

• Possibility of challenging said administrative acts before the Contentious Administrative Court, which can annul or conﬁrm an administrative act.

• Application of rules of ethics to employees in the public service.

• Application of the specialty principle, whereby the entities in question cannot do business other than that which has been speciﬁcally assigned to them by law or dispose of resources for purposes other than their normal activities.

• Entity directors are appointed by the Executive Branch at the Council of Ministers with approval by the Senate.

• Control of compliance with prohibitions and incompatibilities.

• Control by the Executive Branch, which can challenge acts issued by the entities and suspend acts which have been challenged for reasons of advisability or lawfulness, order rectiﬁcations, corrective measures or removals, communicating them to the Senate, and replace and dismiss their directors, with Senate approval.

• Parliamentary control by means of:

• Requests for written reports

• Summons to appear for questioning

• Creation of investigation commissions to review their activities

• Control by Government Accounting Ofﬁce (Tribunal de Cuentas) concerning:

• Opinion on budget of the entity

• Preventive assessment of expenses and payments to certify their legality

• Report on renderings of account and ﬁnancial management

• Control by the Judiciary, for indemniﬁcation of damages to third parties

• Citizens’ control, by means of the regular publication of financial statements clearly reflecting the entities’ financial situation

• Control by application of Law No. 18,381 granting access to public information

B. INDIRECTLY, THROUGH PUBLIC SERVICE CONCESSIONAIRES

Public service concessions temporarily delegate performance of a public service, under the supervision and control of the State, but on at the risk and peril of the concessionaire.

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Pursuant to the provisions of a 2004 constitutional amendment, public services of sewage and drinking water supply must be provided exclusively and directly by government entities, and hence in no case may they be subject to concession.

When the concessionaire is entrusted with performance of a public service it is vested with certain legal powers under Public Law, such as the power to expropriate or to create administrative easements.

In turn, concession of public services of monopolised activities require authorisation by a national law.

The public entity has broad powers of direction and control with respect to the concessionaire, overseeing technical, commercial and ﬁnancial aspects of the operation. These powers are exercised via diverse instruments such as authorisations, approvals, inspections, investigations, review of books, etc.

Moreover the entity can unilaterally amend clauses related to the organisation and functioning of the service when there is a change in the factual situation existing at the time of granting the concession. If this situation implies greater costs for the service, the concessionaire must be compensated. However, clauses referring to the economic aspects of the operation cannot be changed except to adequate them to administrative acts, unforeseen restrictions or unforeseeable circumstances. If the economic equation is affected by an administrative act the concessionaire must be fully compensated. If, instead, the change derives from facts alien to the parties, which temporarily and abnormally alter compliance with the concession, the concessionaire shall only be entitled to compensation for losses.

Noncompliance by the concessionaire may subject to penalties (ﬁnes, suspension of beneﬁts, lapse, etc). This power to impose penalties is an implied one, ie, it does not require express texts and is regulated by the rules and principles of Public Law. In case noncompliance gravely affects normal provision of the service, the entity in question may retake the operation and render services directly.

The entity granting the concession is empowered to approve rates for public services, while ensuring maintenance of the concessionaire’s economic beneﬁt and must prevent hindrance to the operation by third parties.

Concessions are extinguished due to expiration of the term, lapse declared by the entity in the event of serious noncompliance by the concessionaire, judicial termination at the concessionaire’s request due to serious noncompliance by the granting entity, termination due to force majeure making performance of the service impossible, unilateral decision of the granting entity for reasons of public interest indemnifying the concessionaire in full, and by mutual agreement.

Both the State and the concessionaire must indemnify users for damages caused in performance of the public services for which they are responsible.

C. MIXED PUBLIC PRIVATE COMPANIES

The Uruguayan constitution provides for the organisation of mixed public-private companies(Sociedades de Economía Mixta).

A law, passed by the votes of three-ﬁfths of the members of each of the houses of Parliament, can authorise private capital to incorporate a new public entity or contribute to existing ones

262 Doing Business in Latin America MARCH 2016 (Autonomous Entities and Descentralised Services).

The contribution of private capital and private representation on boards of directors or councils may in no case exceed that of the State.

The State may also participate in industrial, agricultural or commercial activities of private companies, as agreed by the involved parties ensuring State participation in management. Such participation must be authorised by a law passed by the absolute majority of all members of each house of Parliament directors of the company are subject to the same rules as directors of Autonomous Entities and Decentralised Services.

D. NON-GOVERNMENTAL PUBLIC ENTITIES

These entities are public because they are governed by Public Law, but they and their assets are not part of the State.

Their features are as follows:

• They are created by law

• They are governed by Public Law

• They are assigned purposes that are public or of public interest

• The board of directors has State participation or representation of interested sectors

• They are subject to more intensive State control than other entities under Public Law

• Their employees are not government employees

• Their acts, can be challenged appealing to the entity itself, with the possibility of a subsequent challenge at an Appellate Court

• They enjoy certain privileges and exemptions by virtue of the general interest services entrusted to them

C. Real estate i. General Considerations

As explained above in paragraph 1.4 all transactions in real estate involve a notary public. The role of the notary public is not only limited to drawing up and authorising agreements, he or she also carries out a title due diligence analysing the antecedent title deeds for the last 30 years and further acts on behalf of the State as a controlling agent conﬁrming that the seller is up to date with the payment of certain taxes, pension funds contributions related to constructions on the premises, that all necessary permits and authorisations have been obtained, etc.

In general terms, a real estate transaction involves the execution of the following documentation:

• Preliminary Agreement (‘Boleto de Reserva’);

Doing Business in Latin America MARCH 2016 263

• Promise to Purchase Agreement (‘Compromiso de Compraventa’);

• Sale and Purchase Agreement (‘Compraventa’).

The purchase procedure normally starts with the execution of a preliminary agreement, by which the parties agree to the basic terms and conditions of the transaction (object, price, terms, penalties, etc) and the term within which the parties should execute the sale and purchase agreement (or the promise to purchase agreement, depending on how the transaction is structured).

This preliminary agreement is not registered with the Real Estate Public Registry and in case of breach the parties are entitled to claim penalties and damages.

When the transaction cannot be structured as a cash payment transaction (due to need of payment in installments, or delayed delivery of possession, etc) it is usual to execute a promise to purchase agreement. This agreement is registered with the Real Estate Public Registry and in case of breach by seller, the applicable law provides the buyer with the possibility to claim speciﬁc performance. Additionally, any lien (ie, mortgage, attachment, etc) created post registration does not affect the purchaser. The agreement should provide for the execution of a sale and purchase agreement once the conditions precedent are met.

The promise to purchase must be executed either as a public deed by a Notary Public or as a private document with signatures certiﬁed by Notary Public.

Finally, the procedure ends with the execution of a public deed by a Notary Public containing the Sale and Purchase Agreement. Title over the property is transferred once this deed is executed.

This document is registered with the Real Estate Public Registry and is effective against third parties upon registration. ii. Rural Properties – Limitations for Private Parties

For limitations on ownership of agricultural lands please refer to paragraph A.iv.a above. iii. Urban Properties – Limitations for Private Parties

Uruguayan legal framework does not limit the acquisition of urban property. In this sense any person, whether individual or corporate, foreign or national, can hold title to urban real property. iv. Expropriation Events

The Uruguayan Constitution establishes that expropriation of private property can be carried out when there is a need or usefulness to proceed for such taking. Expropriation is done through the prior payment of compensation to the owner.

264 Doing Business in Latin America MARCH 2016 D. Development of ample/integrated capital markets and joint activities between Latin American countries i. Merger of Stock Exchange: Attempts vs Realities

Uruguay currently has only two stock exchanges, the ‘Bolsa de Valores de Montevideo’ (BVM) and the ‘Bolsa Electrónica de Valores’ (BEVSA which only operates as an electronic exchange), which are both under control of the Central Bank. There are several general agreements between them, and they are now coordinating the co-registration of sovereign debt.

Moreover, BVM is member of the Federación Interamericana de Bolsas ‘FIAP’ and America’s Central Securities Depositories Association ‘ACSDA’.

Legislation and regulation on stock exchanges and securities does not speciﬁcally contemplate the merger of stock exchanges and does not limit the number of stock exchanges. ii. MILA Market: Current Results and Expectations

The MILA market, formally known as the ‘Mercado Integrado Latino Americano’, is an integrated stock exchange market. At present it is composed by Chile, Colombia and Peru.

Uruguay will not form part of this stock exchange market integration in the near future as MILA focuses on the equity market, an underdeveloped market in Uruguay. iii. Paciﬁc Alliances: Governmental Action and Proposed Treatment and Agreements

The Paciﬁc Alliance (PA) is a highly praised trade block integrated by Chile, Colombia, Mexico and Peru that promotes economic liberty.

Although Uruguay is currently an ‘Observer’ of the PA it has revealed its intention to become a full member. This has not been implemented yet as Uruguay is a member of the Mercosur and its bylaws bind the country to negotiate with the other Mercosur countries and not individually. This issue has caused several arguments mostly between Uruguay and Argentina.

Notwithstanding the foregoing, Uruguayan relations with the member countries of the PA is optimal, and bilateral treaties are in force with each of them. iv. IPO’s Multilatina Companies in Latin American Capital Markets

Uruguayan private equity market is quite small, although there are almost 31 national Uruguayan companies listed in BVM or BEVSA, generally as issuers of bonds. Notwithstanding the foregoing, there are not Multilatinas based on Uruguay which have entered into an IPO so far.

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E. Offshore vehicle providers in Latin American countries i. General Concept: Legal Framework and Scope of the Activities

Uruguay is an attractive jurisdiction to establish offshore vehicles due to the important benefits awarded to foreign investors, albeit not being considered a tax haven. Among these is the possibility for companies established abroad and operating outside Uruguay to structure their business to obtain tax benefits. Additionally and as we have seen in paragraph A.i.e., Uruguay has a very important Free Trade Zone regime, vesting important benefits on companies operating within its bounds. ii. Applicable Legal Regimes

Uruguay underwent an intensive tax reform in 2007, based on the territorial source principle. This means that only activities carried out, services provided in and goods situated in Uruguay will be levied by Uruguayan taxes, so any income obtained outside Uruguay by a domestic entity is not taxed. To be considered a tax payer in Uruguay the investor must have its residence in the country. The only exception to this rule is the case in which the Uruguayan company established outside Uruguay renders services to a Uruguayan tax payer, in that case the income would be taxed. For all these reasons, Uruguayan corporations have been used as foreign vehicles, enabling investors to perform many activities such as holding bank accounts, investing in real estate or securities, rendering services or having commercial activities outside Uruguay without being taxed.

A. URUGUAYAN COMPANIES

Companies in Uruguay are governed by Law No. 16.060 of 1 November 1989, without prejudice to other regulatory and ancillary provisions.

In general, companies developing activities in Uruguay are organised as corporations or branches of foreign companies incorporated abroad. Other smaller companies are established in the form of limited liability companies. Finally, there are sole proprietorships established for different purposes, both for tax or legal reasons (for instance, agricultural and farming undertakings).

1 Corporations

Incorporation

Corporations may be incorporated in a single act by a group of founders, or through the public offering of stock. There are no restrictions on the nationality of the shareholders. Corporations may be publicly listed or not.

Capital stock

The capital stock may be represented by bearer and registered shares. Shareholders are not liable for company debts beyond the amount of capital contributed by each shareholder.

For bearer shares, law 18.930 determines that all beneﬁcial owners of the shares must register in the Central Bank of Uruguay. This information is not made publicly available.

266 Doing Business in Latin America MARCH 2016 Corporations are required to have a ﬁxed authorised capital. The authorised capital of regular corporations must always be expressed in Uruguayan currency, 25 per cent of the authorised capital should be paid up in cash or in other assets upon incorporation. Only investment stock companies and offshore banks may denominate their capital in foreign currency.

A corporation should start winding-up proceedings if the company’s losses from reduce its capital to less than 25 per cent of its net equity, unless a special meeting of shareholders resolves reduction of the capital stock or to recover loss capital through new contributions.

Restrictions

There are no restrictions on citizenship or domicile of shareholders and directors on Uruguayan corporations.

Meetings of Shareholders

Meetings should be held at the principal place of business and called in advance through a resolution of the Board of Directors. Shareholders representing at least 20 per cent of the paid-in capital are also authorised to call a meeting. Meetings may not be held outside Uruguay. Notice of meetings should be published in the Ofﬁcial Gasette and another newspaper. These formalities may be disregarded provided that all shareholders are present.

Meetings may be regular or special. Regular meetings should be held at least once a year within 180 days of the end of each ﬁscal year, or within 120 days in the case of publicly held corporations, to approve the board of directors’ report, the annual ﬁnancial statements, the proposal for the distribution of dividends, and the appointment of directors and internal auditors.

Special meetings may be held at any time and are free to resolve on any matters included in its order of business by the directors or whomever is summoning the hearing.

Board of Directors

No restrictions exist on nationality or residence of directors. The Board of Directors of publicly held corporations should be comprised of more than one director and should hold a meeting at least once a month. The Board of Directors of closely-held corporations may be comprised of one or more directors.

Directors are jointly and severally liable to the company, the company’s shareholders and creditors for any breach of the law, decrees or the company bylaws they have knowingly incurred in. Directors are personally liable to tax authorities for unpaid taxes under certain circumstances.

The Board of Directors may resolve on any matters included in the corporate purpose subject to the restrictions imposed by the law and the corporate bylaws. In certain cases, the Board of Directors may approve interim dividends when distributable proﬁts are available. The meeting of shareholders should later ratify these dividends.

2 Limited Liability Companies

This type of companies is generally adopted by small or medium-scale companies, for instance, those

Doing Business in Latin America MARCH 2016 267 established among relatives or friends. These companies are ruled by articles of association and an operating agreement executed by two to 50 members, either individuals or legal entities, including corporations. No restrictions exist on nationality or residence of members.

LLCs are managed by managers appointed in the articles, or at the meeting of partners. In this type of companies, liability is also limited to the contributed capital. However, partners are liable for the company’s labour debts. Moreover, the managing partners are liable for the payment of the company’s income tax, if any, and for the company’s tax debts in case they have acted negligently.

Capital must also be in Uruguayan Pesos and is not divided into shares but into quotas which are fully negotiable (notwithstanding any rights of ﬁrst refusal).

The meeting of partners of the LLC is the main authority of the company and is held once a year to approve the ﬁnancial statements and the performance of managers. Limited liability companies with more than 20 members are managed as corporations, and therefore, can have a board of directors. If the number of members is under 20, these companies may be managed by one or more partners, or by a manager.

3 Free Trade Zone Companies

For the specifics on free trade zones we refer to paragraph A.i.d above. The only specific requirement for these corporations is that the corporate purpose must specifically authorise it to be a free trade operating company.

268 Doing Business in Latin America MARCH 2016 Venezuela

Doing Business in Latin America MARCH 2016 269 xiv. Venezuela

A. Foreign investment in Latin American countries

i. Authorisations vs Limitations or Prohibitions

Foreign investments are regulated by the Decree having Rank, Value and Force of Foreign Investment Law, published in Ofﬁcial Gazette of the Bolivarian Republic of Venezuela Extraordinary No.6.152 of 18 November 2014 (hereinafter ‘Foreign Investment Law’). Under said law, foreign investment is deﬁned as productive investment made through contributions from foreign investors, of tangible and intangible resources, intended to form part of the net worth of foreign investment recipients in the national territory. Such contributions may be: a) Financial investment in foreign currency and/or any other medium of exchange or compensation established within the framework of the Latin American and Caribbean integration; b) Physical or tangible capital goods, such as industrial plants and machinery; c) Non-material or intangible goods such as trademarks, product brands, and invention patents; d) Reinvestments.

According to Article 301 of the Constitution of the Bolivarian Republic of Venezuela (hereinafter the ‘Constitution’), foreign investment is subject to the same conditions as domestic investment. Consequently, foreign business corporations, agencies or individuals shall not be granted any conditions which may be more favourable than those established for Venezuelan nationals.

Authorisations

Although in Venezuela, no prior authorisation is required to make an investment as long as said investment conforms to the laws which are in effect in the relevant sector, the Foreign Investment Law provides that foreign investments shall be registered with the National Foreign Trade Centre (CENCOEX by its Spanish acronym), and that said registry must be updated annually. The rights of foreign investors provided under the Foreign Investment Law, such as the guarantee of repatriation of proﬁts, remittance of dividends, reinvestment of dividends, and legal certainty, shall only become effective after CENCOEX registry has been granted.

The formal requirements for foreign investment registration are: a) A minimum amount of US$1,000,000 or the equivalent thereof in other currency, at the ofﬁcial exchange rate. However, CENCOEX may establish a different minimum amount depending on the sector’s interest, for the promotion of small and medium industries, and any other forms of productive organisation, as long as said minimum amount is not less than ten per cent of the abovementioned minimum amount established under the Foreign Investment Law.

270 Doing Business in Latin America MARCH 2016 b) Such investment shall remain in the national territory for a minimum term of ﬁve years, counted from the date on which the foreign investment registry is granted.

Nonetheless, the national bodies or agencies which have competence for hydrocarbons, banking, securities and insurance matters are concurrent with CENCOEX with regard to the analysis, study and issuance of the foreign investment registry. In those cases where the foreign investment shall be destined to the hydrocarbons, petrochemical, carboniferous and mining sectors, the registry shall be granted by the Ministry of People’s Power for Oil and Mining (hereinafter the ‘Ministry of Oil and Mining’).

In view that the Foreign Investment Law has only recently been enacted, the Regulations thereof have not yet been issued and the speciﬁc procedure for foreign investment registration has not yet been established, which leaves this matter in a legal vacuum.

Limitations and Prohibitions

With reference to investment limitations and prohibitions, the Foreign Investment Law provides that foreign investments may be made in any area, sector or activity allowed by national legislation. In this regard, the State reserves for itself the development of certain strategic ﬁelds according to the national interest, and the provisions under the Constitution and the national legal framework. Currently, these restrictions only apply to certain sectors such as: hydrocarbons, open television, radio, and press in Spanish. ii. Treatment of Foreign Investment in Infrastructure Initiatives and PPP Projects

According to article 299 of the Constitution, the State, jointly with private initiative, shall promote the harmonious development of the national economy. In this regard, the Decree having Rank, Value and Force of Organic Law for the Promotion of Private Investment under the Concessions Regime of 25 October 1999 (hereinafter ‘Organic Law for the Promotion of Private Investment under the Concessions Regime’), establishes incentives and guarantees, with the aim of promoting private investment and the development of infrastructure and public services, which are the responsibility of the National Government.

In this sense, the Organic Law for the Promotion of Private Investment under the Concessions Regime constitutes the basis for the grant of concessions, which refer to agreements entered into between the competent public authority and a private company, for the construction and exploitation of new works, systems or infrastructure facilities; or the maintenance, refurbishment, modernisation, expansion and exploitation of said pre-established infrastructure, or public services.

Moreover, the Foreign Investment Law establishes the rights and obligations of foreign investors in those cases where no bilateral agreement has been entered into between Venezuela and the country of origin of the foreign investor. Consequently, as stated in the Constitution, international investors have the right to fair and equal treatment under international law and principles, and shall not be subject to any arbitrary or discriminatory measures. Thus, foreign investors have the same rights and obligations as domestic investors under similar circumstances, the sole exception being any applicable provisions under special laws, and the limitations set forth in the Foreign Investment Law.

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Finally, it must be noted that Venezuela has entered into bilateral agreements for the promotion and protection of investments with the following countries: Argentina, Barbados, Belgium-Luxembourg, Brazil, Canada, Chile, Costa Rica, Czech Republic, Denmark, Ecuador, Germany, Great Britain, Lithuania, Paraguay, Peru, Portugal, Spain, Sweden, Switzerland and the Netherlands. iii. Treatment of Foreign Investment in Oil and Gas and Mining Activities

Pursuant to the provisions under Articles 150 and 151 of the Constitution, the prior approval of the National Assembly is necessary to enter into municipal, national or state public interest agreements with foreign governments as well as with foreign companies not domiciled in Venezuela. At present, hydrocarbon and mining laws provide for said requirement to participate in certain activities relating to such area, even requiring, in some cases, the approval of the National Assembly for the incorporation of companies intending to participate in certain activities.

In this regard, we shall proceed to indicate the possibilities for foreign investment in oil, gas, and mining activities, according to the provisions under each of the applicable laws:

Organic Hydrocarbons Law

The Organic Hydrocarbons Law regulates all matters in connection with the exploration, exploitation, reﬁning, transportation, storage, marketing, and preservation of hydrocarbons, and such reﬁned products and works as may be required for the performance of said activities.

The Organic Hydrocarbons Law regulates 5 activities, to wit:

a) Primary activities: deﬁned under Article 9 as those activities relating to exploration in search of those hydrocarbon deposits referred to in the Organic Hydrocarbons Law, the extraction of hydrocarbons in their natural state, their initial collection, transport and storage.

Primary activities, as well as those relating to such works as their management may require, are reserved to the State upon the terms set forth under said Organic Hydrocarbons Law.

This kind of activities may only be carried out by the State, either directly by the National Executive, through wholly state-owned companies, or through companies in which the State may have control over their decisions, by virtue of holding a stake exceeding 50 per cent of the capital stock, this kind of companies being known as operating companies.

The prior approval of the National Assembly shall be required for the incorporation of mixed companies and the establishment of the terms governing the conduct of primary activities, and the Assembly may modify the terms or establish such terms as it may deem pertinent, any subsequent modiﬁcation to be also approved by the National Assembly.

b) Refining and marketing activities. Pursuant to the provisions under Article 10, refining and marketing activities are those relating to the distillation, purification and transformation of natural hydrocarbons regulated under this Law, carried out for purposes of adding value to said substances and marketing any products obtained. According to the provisions under Chapter VIII of the abovementioned Law, these activities may be carried out by the State and private individuals, either jointly or separately.

272 Doing Business in Latin America MARCH 2016 In order to engage in natural hydrocarbon reﬁning activities, a licence issued by the Ministry of Oil and Mining must be obtained. The Ministry may grant said licence after deﬁnition of the appropriate project and pursuant to the provisions under this Law and its Regulations.

The assignment, transfer or encumbrance of any licences shall require the prior approval of the Ministry of Oil and Mining, without which said licences shall have no effect. In the case of mandatory transfers resulting from execution, the State may substitute the executor after payment of the amount of the execution order.

c) Industrial activities: are those defined under Article 49 as the industrialisation of refined hydrocarbons, comprising activities relating to the separation, distillation, purification, conversion, mixing and transformation of the same, carried out for the purpose of adding value to said substances through the obtainment of oil specialties or other hydrocarbon by- products.

These activities may be carried out directly by the State, by its wholly state-owned companies, by mixed companies having private and state capital participation, in any proportion, and by private companies.

In this case, private companies must obtain a permit to be granted by the Ministry of Oil and Mining.

d) Marketing activities: refer to the domestic and offshore commercialisation of natural hydrocarbons and their by-products.

In this case, any activities in connection with the commercialisation of natural hydrocarbons as well as that of such by-products as may be indicated by the National Executive, by decree, may only be carried out by wholly state-owned companies, created for such purposes. For their part, mixed companies carrying out primary activities may only sell any natural hydrocarbons produced by them to said state-owned companies.

Any by-products commercialisation activities which may be excluded from the reserve decrees issued by the National Executive, may be carried out directly by the State, its wholly state- owned companies or mixed companies without regard for their capital stock interest.

e) Activities of supply, storage, transport, distribution, and sale of hydrocarbon by-products for purposes of domestic commerce: this kind of activities may be carried out by individuals or corporations, with prior permit from the Ministry of Oil and Mining.

Organic Law for the Development of Petrochemical Activities

The purpose of the Organic Law for the Development of Petrochemical Activities is to regulate petrochemical activities carried out in the country, including those industrial activities causing the chemical or physical transformation of raw materials based on gaseous hydrocarbons, liquid hydrocarbons, and mineral substances used as input for said activities, whether by themselves or mixed, or in combination with other substances and input. Said Law also governs any intermediate products deriving therefrom in products of a different physical-chemical nature and of higher added value, as determined by this Law and its Regulations.

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Petrochemical activities are understood as the transformation of initial petrochemical products originated from hydrocarbons, which is conducted through the separation, puriﬁcation, conversion and combination of the same, through chemical or physical methods, as well as the transformation of the products obtained in subsequent, intermediate or ﬁnal industrial processes.

Pursuant to Article 5 of the Law, basic and intermediate petrochemical activities, as well as such works, assets and facilities as may be required for the management thereof, are reserved to the State. Said reserve shall be exercised either directly by the National Executive or through mixed companies where the National Executive shall have a controlling interest and a stake of not less than 50 per cent of its capital stock.

The incorporation of mixed companies is subject to the prior authorisation of the National Assembly.

Organic Law on Gaseous Hydrocarbons

The Organic Law on Gaseous Hydrocarbons regulates all matters in connection with non-associated gaseous hydrocarbon deposits exploration and exploitation activities; as well as the collection, storage and use of both non-associated natural gas, resulting from said exploitation, and gas produced in association with oil or other fossil fuels; the procedure, industrialisation, transport, distribution, domestic and offshore commerce of said gases, and such activities may be exercised either directly by the State or through state-owned entities or national or foreign private persons, with or without the participation of the State, upon the terms set forth under said Law.

Also included within the scope of the Organic Law of Gaseous Hydrocarbons are those matters referring to liquid hydrocarbons and non-hydrocarbonated components contained in gaseous hydrocarbons, as well as gas resulting from the oil reﬁning process.

The Organic Law on Gaseous Hydrocarbons makes a distinction between the kinds of activities in this matter, to wit:

a) Activities in connection with the exploration and exploitation of non-associated gaseous hydrocarbons: The Law provides that any national or foreign private persons who may wish to carry out this kind of activities, with or without the participation of the State, must obtain the appropriate licence from the Ministry of Oil and Mining.

b) Activities other than exploration and exploitation: A permit from the Ministry of Oil and Mining is required to carry out these activities.

Gaseous Hydrocarbons Industrialisation Activity: with reference to this area, the Law provides that any national or foreign private persons who may wish to carry out gaseous hydrocarbon industrialisation activities, with or without the participation of the State, must obtain the appropriate permit from the Ministry of Oil and Mining, after deﬁnition of a project registered with and approved by the Ministry.

Mining Law

The Mining Law regulates those matters in connection with mines and minerals existing in the national territory, whatever the origin or presentation thereof, including the exploration and exploitation, as well as the extraction, processing, storage, holding, circulation, transport, and

274 Doing Business in Latin America MARCH 2016 commercialisation, whether domestic or offshore, of the extracted substances, except as provided under other laws.

The exploration, exploitation and use of mining resources may only be carried out through the following modalities:

– Directly by the National Executive;

– Concessions for exploration and subsequent exploitation;

– Authorisations for exploitation for exercise of Small-Scale Mining;

– Mining Communities; and

– Artisanal Mining.

Under Article 17, the Law provides that any person, whether an individual or corporation, national or foreign, legally competent, and domiciled in the country, may obtain mining rights to carry out the activities provided thereunder, except for certain exceptions.

Any companies or corporations which may be organised for the exploration or exploitation of mines, shall be incorporated in accordance with the provisions under the Commercial Code and shall be civil in nature.

Pursuant to Article 19, foreign companies, in order to engage in mine exploration or exploitation activities, shall meet the requirements provided under the Commercial Code and other applicable provisions and shall have a Venezuelan or foreign legal representative, domiciled in the country.

Pursuant to Article 22, foreign governments may not hold mining rights within the national territory. In the case of entities depending from any such governments or companies where said foreign governments may have an interest, which, by virtue of the capital or by-laws, shall confer control over the company upon them, said entities shall require the approval of the National Assembly to be granted mining rights.

In any case, pursuant to the provisions under the Law being commented on, foreign companies may only be granted a mining concession for exploration and subsequent exploitation, inasmuch as activities for the exercise of Small-Scale Mining, Mining Communities and Artisanal Mining, are reserved, in the ﬁrst case, to Venezuelan individuals or corporations, who, upon gathering in various areas surrounding the same deposit or several thereof, form the so-called Mining Communities, and in the third case, only Venezuelan individuals may engage in Artisanal Mining.

Organic Law Reserving to the State Gold Exploration and Exploitation Activities as well as Related and Ancillary Activities

This Law reserved to the Venezuelan State all primary, related, and ancillary activities in connection with gold mining, primary activities being understood (Article 6) as the exploration and exploitation of gold mines and deposits; and related and ancillary activities, as the storage, holding, extraction, processing, transport, circulation and domestic and foreign commercialisation of gold, to the extent that the latter activities shall contribute to the conduct of primary activities.

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Article 9 of said Law provides that the abovementioned activities may only be carried out by the Republic or through its public agencies, or wholly state-owned companies, or afﬁliates thereof, as well as through mixed companies in which the Republic, its public agencies, wholly state-owned companies or afﬁliates thereof, shall control 55 per cent of the capital stock, and Strategic Alliances entered into between the Republic and any corporations or other forms of association permitted by Law for the conduct of small-scale mining.

For the conduct of activities characterised as primary activities, mixed companies shall be governed by this Law, and in each speciﬁc case, by such terms and conditions as may be approved through an Agreement issued by the National Assembly, as well as such provisions as may be dictated by the National Executive through the Ministry of People’s Power having competence for mining matters. iv. Treatment of Foreign Investment in Real Estate (rural and urban properties)

The real estate sector has been restricted over the past years in Venezuela, therefore, the lease, construction and sale of housing are regulated by the National Government. However, such limitations are not specially designed for foreign investors, but as a matter of government policy. In this regard, foreign investors shall be subject to special laws on this matter. v. Treatment of Foreign Investment in Agribusiness Activities

There are no special regulations with reference to foreign investment in agribusiness activities. Therefore, as it was established in the Constitution, foreign investment is subject to the same conditions as domestic investment in all agribusiness activities. vi. Treatment of Foreign Investment in the Rendering of Public Services

As to the provision of public services, the Public Contracting Law provides that national companies must have priority over foreign companies in contracting processes. In effect, Article 9 of the Public Contracting Law states that for the selection of bids whose prices, in respect of one another, shall not exceed ﬁve per cent of the price of the company obtaining the best evaluation, the company to be preferred shall be the one which shall meet the following conditions as deﬁned under the term sheet: a) For the acquisition of goods, such bid as may have the highest national added value. b) For the contracting of works and services, such bid as shall be submitted by a bidder, whose principal place of business is in Venezuela, incorporates the largest proportion of national parts and input and has the highest participation of national human resources.

Once the foregoing criteria have been applied, if two or more bids showing similar characteristics were to result from the evaluation, the bidder to be preferred shall be the bidder having a capital stock with the largest national share.

Pursuant to Article 29 of the Law being commented on, in order to submit bids, companies must be previously registered with the National Contractors Registry, provided that the estimated amount of the bids shall exceed 4,000 Tax Units in the case of goods and services, and 5,000 Tax Units in the case of execution of works. Said registration shall not be necessary for those interested in

276 Doing Business in Latin America MARCH 2016 participating in internationally announced open tenders; as well as those providing highly specialised services sporadically used, small producers of food products or basic products declared to be of ﬁrst necessity.

B. Real estate i. Rural Properties

A. LIMITATIONS FOR PRIVATE PARTIES

Venezuelan Law regulates a so called ‘Security Zones’ which are areas of the country, which because of its strategic importance, features and elements that comprise them, are subject to special regulation, in terms of people, goods and activities in order to ensure the protection of these areas to hazards internals or externals threats.

The Security Zones could be in Rural Zones, like Borders Security Zones. Foreigners cannot acquire properties in the Security Zones without the previous authorisation of the government (Ministry of Defence) Likewise, foreigners already owners of properties in said zones must inform the authorities.

The Coastal Law regulated also some Protected Areas, which are subjected to concessions and administrative authorisations. ii. Urban Properties

A. LIMITATIONS FOR PRIVATE PARTIES

There are also some Security Zones located within the perimetres of cities. This zones are subjected to the same regulations and limitation with respect to the property of foreigners. iii. Expropriation Events

A. REGULATION IN THE CONSTITUTION

The Venezuelan Constitution regulates all about private property rights and its limitations. Only for reasons of public utility or social interest by ﬁnal decision and prompt payment of just compensation, it may be declared the expropriation of any kind of goods.

B. REGULATION IN THE LAW

The expropriation for public utility or social utility regulates all the relevant procedure regarding expropriations and how to determine the fair price to pay for compensation. So the expropriation that no follow this procedure is illegal and can be appealed by a writ of amparo.

Some laws, like consumer protection laws foresee the occupancy an expropriation in case of infraction to this law.

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