The following is a guest post by Guzman Ramírez from Bergstein Abogados, an independent law firm in Uruguay.
Uruguay offers a number of tax advantages to multinationals. This has become especially so in the wake of the substantial tax reforms which have taken place in Uruguay in the last few years, under which Uruguay has been excluded from OECD blacklists.
In Uruguay, corporations can be used to engage in offshore holding activities. This is what is known as sociedades de inversion or “holding companies”, ie, companies expressly contemplated under Uruguay’s Companies Act whose main purpose is to participate in the capital of other companies.
Such holding companies are able to set up legal structures in Uruguay with taxation that is very low − indeed, practically zero. This is so because, for tax purposes, Uruguay maintains the so-called principle of the source (principio de la fuente): companies only pay corporate income tax (Impuesto a las Rentas de las Actividades Económicas − IRAE) on locally sourced income; foreign-sourced income is excluded from corporate income tax. Furthermore, the net worth tax (Impuesto al Patrimonio − IPAT), which taxes assets at a rate of 1.5 percent, and VAT (22 percent) are only levied on assets and investments located inside Uruguayan territory.
Therefore, insofar as a holding company does not conduct any activities in Uruguay, no local taxation applies, except for a fixed annual payment of approximately US$600, called the Corporations Control Tax (Impuesto de Control de las Sociedades Anónimas − ICOSA).
—As a result, income obtained from the sale of participation in foreign companies or businesses, dividends obtained from foreign entities in whose capital the Uruguayan holding company participates, assets allocated in the liquidation proceedings of a foreign company and interest collected from individuals or companies abroad are all deemed to be foreign income, excluded from taxation in Uruguay.
In addition, where there is no locally sourced income, then remittance of dividends remains tax free. In Uruguay, remittance of dividends is only taxed where the following conditions are cumulatively met: the company based in Uruguay is subject to corporate income tax in Uruguay; and dividends effectively derive from income subject to corporate income tax. In consequence, shareholders of holding companies based in Uruguay are not subject to personal income tax (Impuesto a la Renta de las Personas Físicas − IRPF).