URUGUAY: An Introduction to Private Wealth Law

URUGUAY: STRATEGIES TO ATTRACT FOREIGN INVESTMENT

In our last article we referred to the measures adopted by the Uruguayan Government in recent years aiming to promote the establishment of foreigners in the country. Now, we highlight the impact that these measures had both in the legal and tax residency applications received since then. During 2021 more than 14,000 applications for legal residence were received, meaning an increase of 44% compared to the previous year; an impressive record.

The new immigration wave is an opportunity for the economic growth of the country not only because it represents an improvement in the GDP, but also represents an increase at the level of human capital and a growth in productivity and innovation in the market.

In the pursuit of this goal, Uruguay’s window of opportunity is not limited to the ones related to tax residency, but it also provides special regimes that seek to channel the performance of business from our country abroad such as the Free Zone regime, the international trading special regime, and/or the software regime.

Free Zones Regime 

The implementation of the Free Zone regime in Uruguay has as main objective to develop the traditional role of the country as a service centre for the region. It is a regime that has lasted over a century, and for the last decades, considering several amendments, has seen an exponential growth.

Within the free zone area companies can conduct all kinds of industrial, commercial, and service activities, and the development of them will be exempt from all Income Tax, Wealth Tax and Value Added Tax as well as any other national tax created or to be created. The only exception refers to Social Security Contributions (CESS), which applies in all cases except for the following scenario.

Foreign dependent personnel rendering service to a user in a Free Zone have the option to resign this Uruguayan CESS and choose to pay the Non-Resident Income Tax (IRNR) at a fix rate of 12%, instead of paying Personal Income Tax (IRPF) with a progressive rate between 10% and 36%.

Furthermore, both the entry of goods and services to the Free Zone as well as their exit abroad are exempt from all taxes. Additionally, all dividends paid by users of the Free Zone to its shareholders will not be reached by the Income Tax. This applies in all cases as long as the dividends come from income obtained by the development of an activity included in the exemption granted by this regime.

The implementation of this regime represents significant benefits for Uruguay. According to recent studies, for every dollar exempted from taxes, the Free Zones generated a return almost six times higher for the country. In 2019 Free Zones represented 5% of the national GDP.

The establishment of foreigners in Uruguay led to the installation of companies from various sectors inside the free zones, causing a clear development in this area that provides the country with a substantial injection of capital and employment generation.

The international trading special regime 

Uruguay has a special regime that benefits companies that conduct sales of goods and service if they do not enter the Uruguayan territory and their origin and destination is not Uruguay. The key aspect of this regime is that it considers a presumptive income of a Uruguayan source of 3% over the difference between the purchase price and the sales price. Therefore, the Income Tax with a 25% rate will only be applied to this income.

In addition, dividend distributions will be subject to 7% withholding tax over the amount considered as Uruguayan income.

Finally, it should be noted that VAT is not applicable to this activity since services are rendered exclusively abroad.

Both activities covered by the international trading regime and the software regime - which will be described below - should be carried out in Uruguayan territory. Therefore, companies must have full time employees in a number consistent with the services provided, qualified, and adequately remunerated.

The software regime 

Following the wide range of regulatory tools aimed at promoting investments in the country, Uruguay has also granted different fiscal benefits for those investors performing software activities.

In this regard, the decree 244/018 of 2018 provides for exemptions, in whole or in part, to specific companies whose income derives from:

a) software production activity under the regulation on protection and registration of intellectual property rights, carried out in Uruguayan territory, when the resulting assets are registered; and
b) software development services and software related services, such as, services for third parties, not registered by the software developer, and services related to software developed by the service provider or by third parties.

Moreover, the Corporate Income Tax exemption for income deriving from these activities shall be applicable to fiscal years commencing as of January 1st, 2018. Therefore, 100% of the income obtained from software development services, and the totality of the income obtained from software related services are exempted from the payment of this tax.

Investment Funds 

Lastly, it is of interest to comment on the recent modification of the Investment Funds Law in Uruguay, with the aim of promoting the structuring and operation of this investment vehicle in Uruguay. The country has a series of attributes that position it as an attractive place for the operation of Investment Funds (political, legal and social stability; connectivity with the main regional financial capitals; free convertibility of foreign currency and the entry or exit of foreign currency).

To this favourable institutional and regulatory framework, the new norm adds an update of the legislation establishing two basic modifications:

a) Creates the figure of “qualified investor”, which would be those persons or entities that, due to having sufficient knowledge and expertise on the financial market, are able to assess the risks they assume when investing. Thus, the investment limits established for the generality of the Funds (in terms of concentration, class of securities, location, etc.) would not apply to Investment Funds aimed at qualified investors.

b) Provides that Investment Fund Management Companies may delegate to third parties - local or foreign - the management of the portfolio and the composition of assets.

It now remains for the Central Bank of Uruguay, in its capacity as stock market regulator, to regulate the new law to allow its practical application.

Conclusion 

In the past few years Uruguay has positioned itself as one of the most attractive countries in the region at the time of attracting foreigners and foreign investments. The political stability, the country's characteristic tranquillity and its low country risk have led HNWI and multinational companies to put their eyes on the country when planning their relocation or expanding their business.