URUGUAY: An Introduction to Private Wealth Law

URUGUAY: Recent Changes in the Corporate Income Tax Regime

In our past articles we referred to the measures adopted by the Uruguayan Government in recent years with an aim to promote the establishment of foreigners in the country, and discussed the special regimes set by Uruguay that seek to channel the performance of business from abroad, such as the Free Zone regime, the international trading regime, and the special treatment for the software industry.

However, a lot of water has run since then. Applications for legal and tax residency in Uruguay continue to increase exponentially; the creation of a new free zone in the country has been approved; and Uruguay has once again been considered as a co-operating jurisdiction before the European Union, to name but a few. However, most remarkable are the changes passed by the Uruguayan Parliament in the treatment of certain passive, foreign-source income generated by Uruguayan entities, a consequence of the strong commitment assumed by the country to align with best practices in the field of international taxation.

The EU decision to include Uruguay in Annex II 

During 2021, the European Union added Uruguay to the EU Code of Conduct Group (Business Taxation) Annex II (famously known as the “Grey List”), thus changing its status from a co-operative jurisdiction to a co-operative jurisdiction with commitments for tax purposes. As a result of this, and to be removed once again from said Annex, Uruguay approved changes in the treatment of foreign income by Uruguayan entities.

As an overview, to understand the reason for these changes, it should be mentioned that Uruguay’s tax regime is based on the Principle of the Source. This means that, generally, Uruguay would only tax income generated in within Uruguayan borders, with some exceptions – it must be mentioned that the applicable tax rate for Corporate Income Tax is 25%.

As a result of the above, Uruguay committed to make certain changes in its regulations, for the purpose of leaving the Annex II and once again becoming a co-operative jurisdiction for tax purposes in the eyes of the EU.

Uruguay’s commitment and legal modifications 

On 16 November 2022, the Uruguayan Parliament approved a law, qualified as of “public interest”, which introduced some relevant changes to the Corporate Income Tax’s regime (in Spanish, IRAE).

This amendment numerated certain exceptions to the territoriality criteria adopted by Uruguay for foreign passive income obtained by IRAE taxpayers who are part of a multinational group and d onot comply with certain requirements of economic substance (“non-qualified” entities).

A multinational group, as defined by internal regulations, comprises a set of two or more related entities resident in different jurisdictions, as well as the parent company and its subsidiaries. Thus, the IRAE taxpayer is part of a multinational group when it is included in the consolidated financial statements in accordance with the accounting principles applied in the jurisdiction of the parent entity.

In general terms, these amendments require that IRAE taxpayers comply with suitable requirement of substance in Uruguay, for the purposes of continuing to consider such income as foreign income, thus exempt from the payment of Corporate Income Tax.

Furthermore, the new law includes a specific anti-abuse clause.

Specific activities that shall require substance in Uruguay

The amendments specifically refer to three type of activities that generate income abroad. These are i) exploitation of intellectual property rights corresponding to patents and registered software, ii) holding companies or real estate investments companies, and iii) other activities generating passive income abroad such as capital gains, interests, royalties not included in i) and other income from movable capital.

i) Exploitation of intellectual property rights corresponding to patents and registered software.

The income arising out of these activities are to be considered as foreign source income, in the proportion arising from a certain coefficient related to the costs incurred by the entity itself to develop each asset (excluding expenses incurred with foreign related entities).

ii) Holding companies or real estate investments companies.

It is stated that the income arising from these activities shall be of foreign source if the IRAE taxpayer that procures it, employs human resources according to the number, qualification and remuneration to manage the investment assets. Added to this, it must have adequate facilities to develop this activity in Uruguay.

However, an adequate substance may be obtained even when the activity is developed by third parties hired in Uruguay and under adequate supervision by the company.

Moreover, for these kind of companies and through the reglementary decree of the Law published on 14 December 2022, a simple presumption of compliance with the human resources requirements is established to the extent that it has at least one director resident in the national territory (with the appropriate qualifications to perform such position), or the majority of the human resources employed are Uruguayan residents (with the appropriate qualifications to carry out the activities in question)

iii) Other activities generating passive income abroad such as capital gains, interests, royalties not included in i) and other income from movable capital.

For these cases, besides the human resources and facilities substance requirement mentioned in activities ii), the IRAE taxpayer must comply with certain conditions with respect to the assets generating the income.

Firstly, it must take the necessary strategic decisions, and bear the risks in national territory. For these cases, the solution stated for holding companies apply, and the taxpayer can subcontract.

Secondly, the IRAE taxpayer incurs in the appropriate expenses and costs in connection with the acquisition, holding or disposal.

Finally, all income obtained from economic use or sale of trade marks, in all cases will be considered of Uruguayan source and thus subject to the payment of Corporate Income Tax.

Conclusion  

Uruguay has moved towards applying a global income criterion for passive, foreign-source income generated by Uruguayan entities that are part of a Multinational Group and not have an adequate economic substance.

Notwithstanding the above, the new legislation itself eases the requirements for adopting sufficient substance in the country to avoid paying Corporate Income Tax on such foreign source income, as can be highlighted in the case of holding companies or real estate investment companies.

The changes that have been implemented, along with the treaties signed by Uruguay, clearly strengthen the consideration of the country as a certainly attractive jurisdiction to foster foreign investments.