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Income Tax in Uruguay


Personal Income Tax:

Individual income tax is levied on income obtained by resident and non-resident individuals. The source principle for levying taxes includes income derived from activities developed in, property located in, or rights economically used within the Uruguayan territory. However, there are specific cases where (under certain conditions) income generated outside Uruguay is subject to tax.

Income tax on resident individuals (IRPF):

IRPF was broadened by the National Budget Bill of 2010, such that remunerations that employees derive from personal services rendered outside Uruguay to local taxpayers are subject to IRPF at progressive rates ranging from 10% to 36%. Additionally, the source principle of IRPF was widened and includes income derived from technical services. Now advertising services rendered outside Uruguay by self-employed individuals (not included in the company’s payroll) will be taxed, provided those services are incurred to generate taxable income for local corporate income tax (CIT) purposes.

The income derived from mediation, leasing, use, transfer of use, or transfer of federative rights, image rights, and similar of athletes registered in resident sports entities, regardless of the registration period or permanence in Uruguay, is also considered Uruguayan sourced.

From 2017, income derived from derivative financial instruments (DFIs) obtained by resident individuals is considered Uruguayan sourced.

IRPF's source principle on capital investments was also widened and, since 2011, includes income originated on holding movable assets located outside Uruguay, income that is referred to, in general, as ‘passive income’.

IRPF is levied on capital investments (e.g. interest, rents, royalties, capital gains) at a flat rate of 12%, with some exceptions. This tax is basically levied on gross income.

Earned income stemming from work (i.e. wages, salaries, etc.) is subject to progressive rates ranging from 10% to 36%. As only a few expenses are allowed as deductions (such as social security contributions and a notional amount corresponding to education, feeding, health, and housing of dependent underage children), almost the whole gross income is subject to this tax.

The income tax rates applicable to resident employees are the following:

Annual taxable gross income (UYU*)
Tax Rate (%)
From
To
0
303,324
0
303,325
433,320
10
433,321
649,980
15
649,981
1,299,960
24
1,299,961
2,166,600
25
2,166,601
3,249,900
27
3,249,901
4,983,180
31
Above 4,983,180
36

* Uruguayan pesos

This tax can also be paid as a family unit. The scale of rates to be applied depends on the income of each of the family group's members. If each of the members earns more than 12 minimal salaries (one minimal salary is approximately UYU 12,265), taxable income before deductions must be added together and then the following scale of rates is applied according to the different income brackets:

Annual taxable gross income (UYU)
Tax rate (%)
Over
Up to
0
606648
0
606,649
649980
15
649,981
1299960
24
1299961
2166600
25
2166601
3249900
27
3249901
4983180
31
4983181

36

If one of the members earns less than 12 minimal salaries, taxable income before deductions must be added together and then the following scale of rates is applied according to the different income brackets:

Annual taxable gross income (UYU)
Tax rate (%)
Over
Up to
0
346656
0
346657
519984
10
519985
649980
15
649981
1299960
24
1299961
2166600
25
2166601
3249900
27
3249901
4983180
31
4983181

36

Income tax on non-residents individuals (IRNR):

IRNR is levied on Uruguayan gross income at rates that vary from 7% to 12%. This tax is mainly collected by way of withholding.

If the non-resident individual obtains income from a Uruguayan source of any kind, then the local CIT payer must withhold IRNR on the corresponding payment.

Although IRNR follows the source principle, technical services (defined as services rendered in the fields of management, technical, administration, or advice of any kind) rendered by non-residents (not under a dependency relationship) outside Uruguay, but associated to taxable income for CIT purposes, are deemed to be Uruguayan sourced and subject to IRNR at a rate of 12%. However, it is also stated that when the taxable income for CIT obtained by the local user of said service does not exceed 10% of its total income, then only 5% of the service fee paid or credited abroad will be subject to IRNR. In these cases, the effective tax rate is 0.6% (5% x 12%) on the amount paid or credited abroad. In those cases where the company receiving the service does not obtain income subject to CIT, the service received will be entirely associated with foreign-source income and thus not subject to IRNR.

The following will be also considered Uruguayan-source income:

· Advertising services rendered from outside Uruguay by independent service suppliers to CIT payers.

· Mediation, leasing, use, transfer of use, or transfer of federative rights, image rights, and similar of athletes registered in resident sports entities, regardless of the registration period or permanence in Uruguay.

Income determination

Capital gains:

Capital gains obtained by individuals (residents or non-residents) upon disposal of shares/quotas in Uruguayan CIT payers are subject to individual taxation at a 12% rate (IRPF or IRNR, respectively). From 1 January 2014, the elimination of the exemption of capital gains derived from the disposal of bearer shares has been eliminated. Thus, since 2014, bearer title transfers are subject to an effective capital gains tax rate of 2.4% on the transfer price (12% applied to a notional 20% of the transfer price or 20% of market value of the titles transferred if there is no price). The same tax treatment already applies to capital gains derived from the disposal of nominative shares.

Income derived from the transfer of shares or participations in entities from low or no-tax jurisdictions (LNTJs) whose assets located in Uruguay exceed 50% of their total investments is deemed to be Uruguayan sourced (thus taxable) for individual income tax purposes.

Dividend income:

Dividends or profits paid or credited by CIT payers to non-resident shareholders are not subject to withholding IRNR when they derive from non-taxable income for CIT purposes (i.e. foreign-source income). In other cases, 7% withholding IRNR will be applicable. Under certain circumstances, non-distributed earnings will also be subject to 7% dividend withholding tax (WHT) after three years of being generated.

The same tax treatment is applicable to IRPF, except for dividends or profits paid out of foreign-source income derived from holding movable capital. In this last case, a 12% withholding IRPF rate is applicable.

Interest income:

Loan interests are exempt from IRNR if at least 90% of the CIT payer (debtor) assets generate non-taxable income for CIT purposes. Therefore, interests paid or credited by local entities whose assets are located abroad and exceed 90% of their total assets are free of WHT.

Individual – Residence:

Residence rules for income tax purposes are set out in the Law. An individual is considered resident when at least one of the following conditions is met:

· Presence in the country for more than 183 days (formal criteria). For determining such period, sporadic absences will be counted.

· The base of its activities, or economic or vital interests, is settled in Uruguayan territory (substantial criteria). The legislation presumes that this condition is met when one’s spouse and dependent under-age children habitually reside in Uruguay. Furthermore, it will be considered that the individual has one’s base of activities in the country when one derives from Uruguay more income than in any other country (this does not apply when one derives exclusively passive income from the country).

· Regulations published in October 2016 established that if the individual has an investment in Uruguay that complies with one of the following conditions, the individual will be considered resident for tax purposes (presence of economic interests in the country), unless one proves one's fiscal residence in another country:

o   More than 15 million 'index units' (approximately UYU 52,500,000) in properties located in Uruguayan territory.

o     More than 45 million 'index units' (approximately UYU 157,400,000) in a company with projects or activities promoted by the Inversions Law, directly or indirectly.



Tax administration

Tax returns

Monthly tax returns are required to be filed by employers with the tax authorities, exposing the employee income withheld from one’s monthly payroll compensation. Otherwise, one is required to file an annual tax return for individuals.

Payment of tax

Advance and withholding payments are assessable on individuals on a calendar-monthly basis stated by the tax authority.

Self-employed workers must register with the tax authorities and are required to make advance payments on account of their income tax liability for the current year. In cases where self-employed income derived from rendering of services will be higher than approximately UYU 36,000, certain previously defined taxpayers must withhold at a rate of 7% on gross income.

There is also income tax withholding from salaries. Employers are required to withhold at the appropriate personal rate applied to net taxable remuneration of each employee.

Corporate - Taxes on corporate income

Net income derived from business activities conducted in Uruguay, obtained by legal entities resident in Uruguay and non-residents operating through a permanent establishment (PE) in Uruguay, is taxed at a CIT rate of 25% under the source principle (i.e. the territorial system of taxation). Accordingly, Uruguay taxes only income that is derived from activities conducted within its borders, income generated from property located in Uruguayan territory, or income derived from the economic use of rights within its territory.

In order to determine the net taxable income, all accrued expenses that are necessary for the generation of Uruguayan-source income and that are duly documented are allowed as deductions. Additionally, taxpayers are able to deduct expenses from their gross income if such expenses are subject to taxation (either foreign or local taxation) in the hands of their counterpart. A compulsory proportional deduction must be calculated when the taxation in the hands of their counterpart is lower than 25% (CIT rate).

A 12% withholding tax (WHT) is imposed on Uruguayan-sourced income obtained by non-residents, except in cases where the income is obtained through the operations of a PE in Uruguay.

Trading companies:

Uruguayan corporations that sell and buy foreign goods and/or services from Uruguay (which are not physically introduced to the country, in the case of goods; or which are not economically used in Uruguay, in the case of services) may determine the net Uruguayan-source income on a notional basis of 3% of the gross margin (difference between the selling price and the purchase price). This gross margin has to be compliant with transfer pricing rules (in line with Organisation for Economic Co-operation and Development [OECD] guidelines). The applicable effective CIT rate is 0.75% (25% x 3%).

Income determination:

Inventory valuation

Replacement cost is permitted for tax purposes, as well as the first in first out (FIFO), last in first out (LIFO), or average cost methods, irrespective of the inventory valuation method used for accounting purposes.

Capital gains

Capital gains are treated as ordinary income for CIT purposes.

As a general rule, capital gains are calculated as the selling price minus the fiscal cost (usually acquisition cost updated by certain inflationary indexes) of goods being sold. In certain cases, not all the fiscal cost may be deductible, depending on the application or not of the compulsory proportional deduction mentioned previously in the Taxes on corporate income section.

Furthermore, for certain capital gains, there are special ways of determining the taxable income (e.g. based on notional income).

Bearer title transfer capital gains are subject to a 12% tax rate, applicable to a notional 20% of the transfer price (or 20% of market value of the titles transferred if there is no price). The same tax treatment applies to capital gains derived from the transfer of nominative titles.

Dividend income

Dividends received from local subsidiaries are exempt. Dividends received from foreign subsidiaries are out of the scope of this tax since they are considered foreign-sourced, thus non-taxable, income.

Interest income

Uruguayan-sourced interest income, derived by companies resident in the country, is subject to CIT under the general regime (i.e. taxed at 25%).

Royalty income

Uruguayan-sourced royalty income, obtained by companies resident in the country, is subject to CIT under the general regime (i.e. taxed at 25%).

Foreign income

Uruguayan legal entities (CIT payers) and non-residents operating through a PE in Uruguay are only subject to tax on income from Uruguayan sources under the territorial system of taxation. Hence, foreign-source income is not subject to tax.

However, there is an exception to this principle, as follows. When a CIT payer obtains income as a consequence of rendering technical services outside the limits of Uruguayan territory to another CIT payer and such technical services are used by the recipient to obtain its income subject to CIT, the income obtained by the company rendering the services will be subject to CIT, even when foreign sourced. Technical services are those rendered in the fields of management, technical administration, or advice of any kind.

The following will also be considered Uruguayan-source income:

·  Advertising services rendered from outside Uruguay to CIT payers.

· Mediation, leasing, use, transfer of use, or transfer of federate rights, image rights, and similar of athletes registered in resident sports entities, regardless of the registration period or permanence in Uruguay.

Income derived from activities performed, assets located, or rights utilised outside Uruguay, regardless of the nationality, domicile, or residence of the parties participating in the transactions and the place where the transaction agreements are subscribed, is not subject to CIT.

Income adjustment for inflation

An income adjustment for inflation has been in force since 1 January 1981 and is calculated by multiplying the variation in the consumer price index (CPI) for the financial year by the difference between:

· total assets at the beginning of the year (excluding fixed assets) and

· total liabilities at the beginning of the year.

Under an inflation scenario, if (1) is higher than (2), then an inflation loss adjustment is deducted from gross income. However, if (2) is higher than (1), then an inflation gain adjustment is added.

Tax regulations disallow Uruguayan taxpayers to calculate tax inflation adjustment in their CIT return if inflation is below 100% (variation of the CPI accumulated in the 36 months prior to the close of the fiscal year end).

Corporate residence

Legal entities are deemed to be resident in Uruguay when they are incorporated according to the local legislation.

Permanent establishment (PE)

The concept of PE in the Uruguayan tax legislation follows, in general terms, the definition provided in the OECD Model Tax Convention, although it has some special clauses that may be found in the United Nations (UN) Model Tax Convention. From a Uruguayan law perspective, the term PE means a fixed place of business through which the business of an enterprise is wholly or partly carried on in Uruguay. The term PE especially includes: (i) places of management; (ii) branches; (iii) offices; (iv) factories; (v) workshops; (vi) mines, oil or gas wells, quarries, or any other place of extraction of natural resources; (vii) buildings, constructions, installation projects, or the management activities associated to them, when they last more than three months; and (viii) services, including consultancy services, rendered by a non-resident through employees or other hired personnel by the company for that purpose, to the extent that such activities are developed (in relation with the same or a connected project) during a period or periods exceeding, in total, six months within any 12-month period. Please note that item (viii) constitutes an exception to the OECD model and is based on the provisions of the UN model.


Tax administration

Taxable period

The taxable period may be chosen by the company. However, certain sectors or industries have mandatory fiscal year closing dates.

Tax returns

CIT and NWT are self-assessed and their tax returns are filed by the end of the fourth month following the date of the year-end.

Payment of tax

Income and capital taxes are paid monthly by way of advanced payments, which are calculated on the basis of the previous year’s tax. The difference between the advanced tax payments and the total annual tax calculated at fiscal year-end is paid by the end of the fourth month after the fiscal year-end.



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Note: Information placed here in above is only for general perception. This may not reflect the latest status on law and may have changed in recent time. Please seek our professional opinion before applying the provision. Thanks.

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This blog is Created by CA Anil Kumar Jain.