In times of increasing taxation and uncertainty, individuals tend to look for alternative locations for their tax residence. Because of its democratic tradition, historical political stability and peace, independent judicial system and legal certainty, absence of exchange controls, and free inflow and outflow of foreign currency (among other reasons), Uruguay serves as an attractive jurisdiction for foreign (most notably Latin American) business persons seeking to move their tax residence. Recently, many individuals (especially from Argentina and Brazil) have expressed renewed interest in having Uruguay as their tax residence.
Also contributing to the rise in interest is Uruguay’s attractive tax system. This article briefly discusses the opportunities Uruguay offers for personal income tax planning purposes, with a special emphasis on the standards which trigger tax residence in Uruguay.
General Characteristics of Individual Taxation in Uruguay
The Uruguayan tax system still adheres to the principle of the source. This is to say that, as a general rule, Uruguay only taxes Uruguayan-sourced income, assets located in Uruguay, and services rendered in Uruguay. Foreign-sourced income is—in principle—excluded from the scope of Uruguayan taxation.
Since the approval of the so-called Tax Reform by Law No 18,083 (December 27, 2006), the notion of tax residence has become relevant in determining the income tax regime to which individuals are subject. Those individuals residing in Uruguay are subject to Personal Income Tax (Impuesto a la Renta de las Personas Físicas—IRPF), while individuals residing abroad are subject to Nonresidents Income Tax (Impuesto a las Rentas de los No Residentes—IRNR).
In accordance with the general rule, both IRPF and IRNR are only assessed over Uruguayan-sourced income. Foreign-sourced income is excluded, with a few exceptions, especially for resident individuals in the framework of IRPF. These exceptions include movable capital income (rendimientos de capital mobiliario) (i.e., income which stems from deposits, loans, and in general from any placement of capital or credit of any nature whatsoever). Such income is subject to IRPF even where it is foreign-sourced. The concept extends to:
- income stemming from deposits with banks abroad;
- interest derived from loans to nonresidents;
- dividends stemming from participation in the stock capital of companies abroad;
- profits deriving from participation in investment funds abroad;
- interest stemming from public debt instruments issued by foreign entities;
- annuities or temporary benefits (rentas vitalicias o temporales) originating in the investment of capital abroad; and
- income derived from insurance policies issued by insurance companies abroad.
The IRPF rate over foreign-sourced movable capital income is 12%.
The same IRPF applies whether the placement abroad (of capital or credit) is effected directly by the individual residing in Uruguay, or through a legal vehicle (organized under the laws of Uruguay or under any foreign legislation). Regulations contain several anti-avoidance rules aimed at preventing that through the utilization of intermediary vehicles a taxpayer omits or diminishes his/her tax burden. To that end, local regulations also establish a “transparency” or “looked through” regime. Because of such transparency rules, IRPF applies immediately where the foreign-sourced income is obtained by and through a company located in a low-taxation jurisdiction.
Both income arising from real estate located abroad (rents) and income arising from the sale of assets based abroad remain untaxed (as long as such income is not obtained through a company located in a low-taxation jurisdiction).
Withholdings which might have been made abroad grant the Uruguayan individual tax resident a credit for Uruguayan tax purposes.
Who is a Uruguayan Tax Resident?
Under Uruguayan law, individuals become tax resident in Uruguay when any one of the following conditions is met:
- the individual spends 184 days or more in Uruguay during a given calendar year;
- the individual maintains his/her “center or core of activities” in Uruguay;
- the individual’s main “vital interests” are located in Uruguay; or
- the individual has based his/her main “economic interests” in Uruguay.
Hence, Uruguay’s legislation establishes several criteria which may trigger Uruguayan tax residence. Brief comments on each of these criteria follow.
Physical Stay in Uruguay
An individual is deemed to be resident whenever he/she completes 184 days of residence in Uruguay during any given calendar year. The stays to be counted can be consecutive or not. Every day for which there is a record of effective physical presence in Uruguay—regardless of the time of arrival or departure—is computed as a day of residence in Uruguayan territory. That said, sporadic absences, provided that such absences do not exceed 30 days, are also counted in order to reach the 184-day term.
The High Administrative Court (Tribunal de lo Contencioso Administrativo—TCA) has recently issued a judgment on sporadic absences, in a case where the individual had totalled only 76 days of effective physical presence in Uruguay. The Uruguayan Tax Office (Dirección General Impositiva—DGI) had refused the taxpayer`s request for the issuance of a tax residence certificate, and the TCA agreed. In the words of the Court, “deeming as ‘sporadic absences’ those which occur with so high frequency, is not in compliance with the spirit of the law, to the point that—as in this case—the taxpayer remained more days abroad than in Uruguay. In this case, the absences of the taxpayer became the rule, and staying in Uruguay the exception.”
By this judgment the Court put a stop to certain practices which involved the abuse of sporadic absences as an instrument in calculating the days stayed in Uruguay.
Center or Core of Activities in Uruguay
The criterion is that the individual has his/her center or core of activities in Uruguay, in that the most significant source of income is located in Uruguayan territory (i.e., he/she obtains Uruguayan income exceeding the income obtained in any other jurisdiction).
This income to be obtained in Uruguay cannot exclusively stem from pure capital investments (rentas puras de capital). The individual must receive some income from employment or business activities conducted in Uruguay (for instance, the salary received for being director of a Uruguayan company). In the event the individual receives only purely capital income in Uruguay (e.g., dividends from a Uruguayan company, or leases from a real estate property located in Uruguay), he/she will not be considered as Uruguayan tax resident.
The comparison must consider income obtained in Uruguay, with the income received in any other country individually considered. In the event the individual receives purely capital income in Uruguay, along with business activity and/or employment income, all such items of income must be considered.
Main Vital Interests in Uruguay
An individual has his/her main “vital interests” in Uruguay basically when his/her spouse and children live in Uruguay, provided that the spouse is not legally separated and that the children are minors and therefore remain under parental custody.
In the event the individual has no children, the presence of the spouse in Uruguay is sufficient to become tax resident.
Main Economic Interests in Uruguay
An individual is considered to have based his/her “main economic interests” in Uruguay where he/she owns the following investments in Uruguay:
- real estate properties with a value exceeding approximately $1.8 million (the tax value is determined as follows: acquisition price adjusted in accordance with the inflation rate);
- business activities valued at more than approximately $5.6 million, provided that such activities have been declared to be in the national interest under Uruguay’s investment promotion regime.
Six-year Tax Holiday over Foreign-Sourced Movable Capital Income
Foreign individuals (or even Uruguayans returning to Uruguay) who become Uruguayan tax residents benefit from a tax holiday over their foreign-sourced movable capital income. For instance, this is the case for interest paid by foreign banks or borrowers, and dividends received from non-Uruguayan companies.
This tax holiday lasts six years counted as from the year in which the Uruguayan tax residence is acquired.
This tax exemption (which only applies to income stemming from capital and financial assets based abroad) has proven to be a highly attractive feature for foreigners contemplating a change in their tax residence.
Planning Points
Uruguay is far from being a “tax haven,” and in fact, over the last few years has fully aligned with Organization for Economic Co-operation and Development (OECD) standards. For example, Uruguay has entered into more than 15 tax information exchange agreements and more than 20 double taxation agreements. Uruguay became a member of the OECD Committee on Fiscal Affairs, signed the Convention on Mutual Administrative Assistance in Tax Matters, and has also agreed to conduct automatic exchange of financial information.
That said, the Uruguayan taxation system offers some beneficial provisions to those individuals seeking more efficient personal income tax planning. Such provisions are aimed to:
(i) extend the notion of tax residence, making it possible to trigger such residence by prior acquisition of real estate properties located in Uruguay with a value exceeding approximately $1.8 million (the current government has now publicly announced that such threshold may be reduced);
(ii) make the change of tax residence more attractive, providing a six-year term exemption over foreign-sourced income stemming from financial investments; and
(iii) maintain other foreign-source income untaxed (including that arising from real estate located abroad—rents—and from the sale of assets based abroad).
However, triggering Uruguayan tax residence still relies on factual elements. The reader must be aware that in order to obtain such residence, the Uruguayan Tax Office will require all necessary documents for evidencing compliance with any of the conditions listed above.
Guzmán Ramírez is a Senior Associate with Bergstein Abogados.
The author may be contacted at: gramirez@bergsteinlaw.com
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.