Tax incentives are the essence of the Uruguayan tax system. Such a tax system has contributed to attracting foreign companies, including those which provide transport services. A brief description of the main tax benefits offered for such companies follows below.
Income Tax Exemption for Air/Sea Navigation Companies
In Uruguay, regular companies are subject to:
- Corporate Income Tax (CIT) (Impuesto a las Rentas de las Actividades Económicas or IRAE) at the rate of 25% (for companies incorporated or domiciled in Uruguay); or
- Non-Residents Income Tax (NRIT) (Impuesto a las Rentas de los No Residentes or IRNR) at the rate of 12% (for companies domiciled abroad).
However, companies whose main activity is the provision of air and/or sea navigation services are exempted from payment of income tax—whether such companies are local or foreign (Sections 52-A of the Corporate Income Tax Act, and 15-J of the Non-Residents Income Tax Act). Such exemption is “subjective,” which means that all their income is exempted.
The Uruguayan Tax Office (Dirección General Impositiva or DGI) has challenged this approach. In its opinion, the exemption provided in favor of air/sea transport companies only encompasses the income resulting directly from the performance of transport services, and other income would be excluded from such exemption (Tax Office Rulings Nos. 4,407, 4,700, 5,264 and 5,791). That said, the High Administrative Court (Tribunal de lo Contencioso Administrativo), in its Judgment No. 271/2015, disagreed with this opinion.
For foreign companies, the NRIT exemption is subject to a requirement of reciprocity, i.e., such foreign companies shall be exempted in Uruguay as long as their countries of origin offer the same exemption to Uruguayan transport companies (Section 15-J of the Non-Residents Income Tax Act).
Income Tax Exemption on Land Transport Companies
Foreign companies whose main purpose is the performance of land transport activities may also benefit from a subjective exemption (Section 15-J of the Non-Residents Income Tax Act). For instance, Brazilian companies engaged in such activities are expressly exempted from the payment of NRIT (Section 23 of the Non-Residents Income Tax Decree). Local branches of Brazilian companies are also exempted from the payment of CIT (Section 158 of the Corporate Income Tax Decree). Even the Tax Office has been in agreement with this approach, in its Ruling No. 4,638.
The Executive Branch is entitled to grant the same exemption in favor of other foreign companies, subject to a requirement of reciprocity by their countries of origin, as referred to above (Section 15-J of the Non-Residents Income Tax Act).
Income Tax Exemption on Air/Sea Freight
Companies (either local or foreign) which may not be deemed air/sea navigation companies but which as an ancillary activity still render air/sea freight to transport merchandise to foreign markets are exempted from CIT or NRIT, as the case may be (Sections 52-B of the Corporate Income Tax Act, and 15-K of the Non-Residents Income Tax Act). Such exemption is “objective,” which means that the exemption only applies to the income resulting directly from such freight.
Principle of the Source
Those companies which may not benefit from any of the exemptions referred to above would, in principle, be required to pay income tax in Uruguay. However, the Uruguayan tax system still adheres to the so-called principle of the source. This is to say that as a general rule income tax, both for local and foreign companies, is only assessed over Uruguay-sourced income (Sections 7 of the Corporate Income Tax Act, and 3 of the Non-Residents Income Tax Act). Foreign-sourced income is, with minor exceptions, excluded from the scope of Uruguayan taxation. Those companies whose activities are totally or mostly performed outside the Uruguayan territory remain essentially untaxed.
In consequence, companies rendering international transport services not encompassed in any of the exemptions described above would be subject to income tax in Uruguay, but only to the extent that such services are performed within the Uruguayan territory.
In the case of export freight (fletes de exportación), i.e., transportation services by air, sea or land from Uruguay to foreign markets, companies—local or foreign—have the choice to determine the amount of taxable income (to be deemed of Uruguayan source) on a presumed basis. This is to say that:
- for companies with tax residence in Uruguay, CIT at the rate of 25% may be assessed over 10% of the total gross income stemmed from such export freight (Section 48-A of the Corporate Income Tax Act); and
- for companies with tax residence in another country, NRIT at the rate of 12% may be assessed over 20.83% of the same total gross income (Section 13-2 of the Non-Residents Income Tax Act).
Therefore, the effective tax rate in both cases would be 2.5%. This regime is optional. Companies may choose to pay income tax under any other reasonable criterion to determine the Uruguayan-sourced income; however, the criterion proposed should be well-grounded.
In the case of import freight (fletes de importación), i.e., transportation services by air, sea or land from outside Uruguay to the local market, there are no legal rules such as those referred to above to determine the amount of Uruguay-sourced income, i.e., there is no presumed taxable income established by law. That said, and based on several rulings issued by the Tax Office, the ratio of the distance traveled within Uruguayan territory to the total distance covered by the transport companies would determine the percentage of taxable income (Tax Office Rulings Nos 4,723, 5,397 and 5,845).
Such rules on export and import freight also apply respectively to passenger transportation services from and to Uruguay.
Value-Added Tax Benefits
As a result of the same principle of the source, transportation services, by air, sea or land, rendered outside the Uruguayan territory are excluded from value-added tax (VAT) (Impuesto al Valor Agregado or IVA) (Section 5-1 of the Value Added Tax Act).
Transport services rendered within the Uruguayan territory are in principle subject to VAT at the standard rate of 22%. However, certain services, i.e., land transportation services of passengers, are subject to a reduced rate of 10% (Section 18-H of the Value Added Tax Act). In order to determine the taxable amount, i.e., the amount of fees corresponding to transport services rendered in Uruguay, certain companies have the option to do this on a presumed basis of 3% of the total gross fees (Tax Office Resolution No. 230/1980). However, such option is only provided for air freight.
For sea and land freight, companies apply the ratio/proportion between the distance traveled within the Uruguayan territory and the total distance covered by them (Tax Office Ruling No. 5,845) as described above for import freight.
Certain transport services rendered within the Uruguayan territory are not only exempted from VAT, but also subject to a “zero VAT regime,” which means that companies, local or foreign, performing such activities (deemed to be “export services”) are entitled to claim the refund of the VAT billed by their suppliers—so-called inbound VAT (Section 9-5 of the Value Added Tax Act). More specifically, any merchandise transportation services, by air, sea or land, to foreign markets, port facilities and/or free trade zones, fall under such regime, as well as those associated with merchandise declared in customs transit (Section 34-1 of the Value Added Tax Decree).
Passenger transportation services to a foreign country by land (Section 34-17 of the Value Added Tax Decree), and any passenger transportation services (either national or international) by air or sea (Section 34-18 of the Value Added Tax Decree), are also subject to the same regime. In the case of merchandise transportation services to foreign destinations, the right to receive the refund includes the inbound VAT associated with the segment of the services rendered within the Uruguayan territory (which is the standard rule), and also abroad.
Other transport services rendered within the Uruguayan territory, but not included under the zero VAT regime referred to above, may still be exempted from the payment of VAT. For instance, freight by vessels navigating under the Uruguayan national flag is exempted from VAT, subject to the fulfillment of the following requirements:
- such freight requires approval from the Ministry of Transport;
- the company must evidence that: (a) more than half of its shareholders are Uruguayan citizens domiciled in Uruguay, (b) more than half of its issued shares, representing at least 51% of the votes, are nominative shares and are owned by Uruguayan citizens, (c) the individuals controlling and managing the company are Uruguayan citizens, and (d) the company is in compliance with its labor and tax obligations, and also registered with both the National Registry of Commerce (Registro Nacional de Comercio) and the Public Registry of Owners and Operators (Registro Público de Propietarios y Armadores) (Sections 9 and 15 of Law No. 14,650).
Definition of “vessels” includes any floating structure (self-propelled or not) aimed at transporting people or merchandise in the maritime, fluvial or lacustrian space (Section 1 of Law No. 16,387). Barges, for example, are encompassed within such definition.
Transportation services of passengers by vessels operating under the national flag are also exempted from VAT (Section 76-D of the Value Added Tax Decree).
Tax Incentives for National Flag Vessels
In addition to the VAT exemption mentioned above, national flag vessels may benefit (under the same requirements referred to above) from additional tax incentives. For instance, such vessels are excluded from the payment of:
- Net Equity Tax (NET) (Impuesto al Patrimonio or IPAT); and
- any other taxes assessable over their sale and import of spares, equipment and fuels needed for their operation (Sections 9 and 15 of Law No. 14,650).
Tax Exemption for National Aviation Companies
National aviation companies (duly authorized by the Civil Aviation Office) benefit from a broad exemption, comprehensive of any and all taxes (including VAT and NET) on aircraft, fuels and further materials/implements needed for them (Section 1 of Law No. 9,977). The Tax Office accepts a broad concept of “aircraft,” including, for example, hot-air balloons and helicopters (Tax Office Rulings Nos 3,575 and 5,579).
Income Tax Exemption and Zero VAT Regime on Re-selling of Transport Services
For income tax purposes, the broad exemptions referred to above in favor of air/sea navigation companies and land transport companies are not applicable (because of their subjective nature) to companies re-selling such services: 100% of their income is deemed to be local-sourced income, and therefore subject to income tax. That said, the income tax exemption on air/sea freight applies (because of its objective nature) even to re-selling companies. In consequence, that income resulting directly from the re-selling of air/sea freight is tax exempt in Uruguay (Tax Office Rulings Nos 3,722, 4,860, 5,397, 5,778 and 5,878).
For VAT purposes, the re-selling of transport services included under the zero VAT regime (described above), is also subject to the same benefit, even when such services are effectively rendered by subcontractors (Tax Office Rulings Nos 3,722 and 5,778). In the meantime, there is no crystal clear rule as to whether the VAT exemption on freight by national flag vessels applies only for the benefit of companies rendering such freight, or also for the benefit of those re-selling them.
Guzmán Ramírez is a Senior Associate with Bergstein Abogados.
The author may be contacted at: email@example.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.