Botnia is a joint co-operative owned and operated by UPM, which has a holding of 47%, Metsäliitto, with a hold of 23%, and M-real, with 30%.
In the proposed transaction, all shares in the Fray Bentos mill will be transferred to UPM and in return, UPM will sell some of its shares in Botnia to Metsäliitto.
This will cut UPM's stake in the company from 47% to 17%, while Botnia would continue to act as the sales channel of UPM's market pulp.
Following the asset-swap arrangement, Botnia would become a subsidiary of the Metsäliitto Group.
The Fray Bentos pulp mill's biomass-based surplus electricity generation is 32 MW, which means its reduction in carbon dioxide emissions will be some 45,000 tonnes per year.
UPM said the proposed transaction is in line with its strategy to grow in cost competitive pulp and emission free energy.
Elsewhere, the deal will see the transfer of Botnia's ownership of the Uruguayan eucalyptus plantation company Forestal Oriental to UPM, which would also acquire an additional 1.2% of the energy company Pohjolan Voima Oy (PVO) from Botnia.
Once the transaction is completed, UPM's share of the pulp capacity within Botnia's
Finnish mills will more than half from 1.1m tonnes down to 400,000 tonnes.
However the paper manufacturer's eucalyptus pulp capacity will increase by around 500,000 tonnes.
Speaking about the agreement, Jussi Pesonen, president and chief executive of UPM, said: "Clarification of Botnia's ownership structure provides a good basis for developing UPM's pulp operations further.
"The Uruguay mill would increase UPM's own pulp capacity to 3.18m tonnes and strengthen its position as a reliable partner in market pulp. The mill would also reinforce the company's presence in the emerging markets."