Recent voluntary-disclosure programs in Latin America (most notably in Argentina, Brazil, Chile, and Colombia) have cast light on Uruguay as a suitable jurisdiction for Latin America business persons seeking to establish tax residence.
Uruguay’s historical political stability, democratic traditions, low corruption levels, and independent judiciary all contribute to this increased interest. Also contributing to the boom in interest is Uruguay’s attractive tax system.
This note briefly discusses the characteristics 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.
Personal Income Tax (Impuesto a la Renta de las Personas Físicas − IRPF) is only assessed over Uruguayan-sourced income. Foreign-sourced income is excluded, with a few exceptions, such as movable capital income (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 taxed even where it is foreign-sourced. The notion extends to:
(i) Income stemming from deposits with banks abroad
(ii) Interest derived from loans to non-residents
(iii) Dividends stemming from the participation in the stock capital of companies abroad
(iv) Profits emerging from the participation in investment funds abroad
(v) Interest stemming from public debt instruments issued by foreign entities
(vi) Annuities originated in the investment of capital abroad
(vii) Income derived from insurance policies issued by insurance companies abroad.
The personal income tax rate over foreign-sourced movable capital income is 12 percent.
Both income arising from real estate located abroad (rents) and income arising from the sale of assets based abroad remain untaxed.
Because of transparency rules, personal income tax also applies where the foreign-sourced income is indirectly obtained through a low-taxation company.
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?
Uruguay’s law establishes several criteria which trigger Uruguayan tax residence:
(i) The individual completes 183 days of residence in Uruguay during any given calendar year. Sporadic absences, provided that such absences do not exceed 30 days, are computed in order to reach the 183-day term. 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.
(ii) The center or the core of his/her activities is located in Uruguay. The general criterion is that the individual has in Uruguay his/her most significant source of income if he/she obtains in Uruguayan income which exceeds the income obtained in any other jurisdiction (individually considered). This income cannot be purely capital income.
(iii) He/she has established his/her main vital interests in Uruguay (basically, when his/her spouse and minors live in Uruguay, provided that the spouse is not legally separated and that the minors are under parental custody).
(iv) He/she has based his/her main economic interests in Uruguay − that is, the individual owns real estate in Uruguay with a value exceeding US$1.85 million or he/she invests in business activities valued at more than US$5.6 million, provided that such activities are declared to be in the national interest.
Five-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.
This tax holiday enjoys a five-year term, but please note that in many circumstances, this actually may play out as a six-year term: the five-year holiday is counted as starting in the year after the acquisition of the Uruguayan tax residence.
This tax exemption (which only applies to income stemming from capital and financial assets based abroad) has proven to be a most attractive feature for foreigners contemplating a change in their tax residence.
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