Guest post by Guzmán Ramirez and Jonás Bergstein, from Bergstein Abogados, an independent law firm in Uruguay.
Uruguay is positioning itself as a jurisdiction for multinationals considering an alternative legal platform to conduct operations abroad.
The tradition of stability and democracy which characterizes the country, and Uruguay’s achievement of all relevant OECD standards − Uruguay is a member of the OECD Fiscal Affairs Committee − are the foundation for this development.
Among its business-centric policies is a special tax platform allowing companies to conduct international trading operations outside of Uruguay: specifically, the purchase and sale of merchandise and services abroad, without any physical transit of the goods or services through Uruguay.
In 1997, Uruguay’s Tax Office put into effect a special regime for international trading activities − defined as acquisition of goods from a foreign supplier for resale and delivery to another foreign acquirer, with no transit of such goods through Uruguayan territory (Tax Office Resolution No. 51/1997 dated 19 March 1997)-.
Uruguayan companies which conduct such international trading benefit from the option of assessing corporate income tax (Impuesto a las Rentas de las Actividades Económicas — IRAE) at a reduced tax base of 3 percent of the balance between the acquisition price minus the sale price.
This reduced taxable base is subject to IRAE at the rate of 25 percent, which makes an effective tax rate of 0.75 percent over the above balance.
Such tax base (the 3 percent of the balance between the acquisition price and the sale price) is deemed to be “net income,” which means that the company cannot deduct expenses.
An example may illustrate the structure. If the Uruguayan company acquires any goods from a foreign supplier at US$100, and sells the same to a foreign acquirer at US$1,000, then the taxable amount would be calculated at 3 percent of US$900 − i.e., US$27. Because the corporate income tax rate is 25 percent, the amount payable as corporate income tax would be US$6.75.
This regime is optional. The Uruguayan company may choose to pay corporate income tax under any other reasonable criterion to determine the Uruguayan-sourced income (for companies, Uruguay still adheres to the source principle: only Uruguayan-sourced income is taxed). The criterion to be proposed must be duly grounded and sustained, and it can be eventually challenged by the Tax Office. This is the reason that most taxpayers prefer to opt for the regime established under the aforementioned resolution.
Only companies organized under Uruguayan laws may benefit from this preferential tax scheme. Notably, the Uruguayan corporate system itself allows flexibility: (a) a single shareholder is allowed (whether resident or non-resident); (b) one director is sufficient (whether resident or non-resident); (c) transfer of the stock is effected by means of the physical delivery of the stock certificate; (d) re-domiciliation is admitted (inbound and outbound); (e) shelf companies are available; and (f) shareholders may be represented at meetings by proxy.
Dividends remitted abroad − which in Uruguay are subject to a 7 percent withholding − would be taxed only on 3 percent of the total dividends distributed. This is so because remittance of dividends abroad is only taxed where the dividends are distributed by a company whose income is subject to corporate income tax. Where most of the income remains untaxed, the distribution of dividends would be taxed only on a pro-rated basis: only 3 percent of the dividends distributed would be subject to the 7 percent withholding.