This is a guest post from our friends at Bergstein Abogados in Uruguay
Uruguay is becoming an increasingly popular jurisdiction for tax residence. This article briefly discusses the new opportunities Uruguay offers for personal income tax planning purposes. Such opportunities are aimed at (a) extending 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 US$390,000; and (b) making the change of tax residence more attractive, providing an 11-year term exemption over foreign-sourced income stemming from financial investments.
In times of increasing taxation and uncertainty, individuals tend to look for alternative locations for their tax residence. Recently, many individuals (especially from Argentina and Brazil) have expressed fresh interest in having Uruguay as their tax residence. That trend is ascribed to the quality of Uruguay’s public health system and to the swift actions of the new business-friendly administration, which took office on March 1, 2020. While the coronavirus disease 2019 pandemic and its attendant economic crisis have profoundly overtaken Uruguay’s neighboring countries, Uruguay itself, thanks to its nimble, science-based response, has kept a tight lid on the pandemic. The US Embassy in Montevideo noted on November 3, 2020 that while mask wearing in public is still encouraged, “Essential services are open. Public transportation and hospitals are operating at normal capacity. Schools and universities are open for in-person classes on at least a part-time basis.”
There are numerous other reasons Uruguay is becoming attractive as a tax residence. It has a long democratic tradition, a history of political stability and peace, an independent judicial system, sound legal system, absence of exchange controls, and free inflow and outflow of foreign currency (among other reasons). In sum, Uruguay serves as an attractive jurisdiction for foreign (most notably Latin American) business persons seeking to move their tax residence.
General characteristics of individual taxation in Uruguay
Also contributing to the rise in interest in Uruguay is its attractive tax system. 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. Foreign-sourced income is – in principle and with a few exceptions – excluded from the scope of Uruguayan taxation.
Such exceptions include movable capital income (rendimientos de capital mobiliario) (ie, income which stems from deposits, loans, and in general from any placement of capital or credit of any nature whatsoever). Foreign-sourced movable capital income is subject to personal income tax (impuesto a la renta de las personas físicas or IRPF) at the rate of 12 percent.
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).
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 (a) income stemming from deposits with banks abroad; (b) interest derived from loans to nonresidents; (c) dividends stemming from participation in the stock capital of companies abroad; (d) profits deriving from participation in investment funds abroad; (e) interest stemming from public debt instruments issued by foreign entities; (f) annuities or temporary benefits (rentas vitalicias o temporales) originating in the investment of capital abroad; and (g) income derived from insurance policies issued by insurance companies abroad.
Until recently, this tax holiday lasted six years counted from the year in which the Uruguayan tax residence was acquired. The tax holiday has proven to be highly attractive for foreigners contemplating a change in their tax residence. For that reason, the Uruguayan Parliament recently passed a new piece of legislation under which, for those individuals acquiring Uruguayan tax residence starting this year (2020), the tax holiday will last 11 years. After the 11-year period, if the Uruguayan tax residence is maintained, that individual will start paying IRPF at the standard rate of 12 percent.
In addition, the same individuals – those who become Uruguayan tax residents as from this year – will have the alternative option to benefit from another tax incentive, namely paying IRPF (over the same income – movable capital income generated outside Uruguay) indefinitely at a reduced tax rate of 7 percent(as opposed to the standard 12 percent).
Standards triggering tax residence in Uruguay
Individuals become tax resident in Uruguay when any one of the following conditions is met: (a) the individual spends 184 days or more in Uruguay during a given calendar year; (b) the individual maintains his/her “center or core of activities” in Uruguay; (c) the individual’s main “vital interests” are located in Uruguay; or (d) the individual has based his/her main “economic interests” in Uruguay.
An individual is considered to have based his/her “main economic interests” in Uruguay when he/she owns certain investments in Uruguay. Until recently, in order to trigger Uruguayan tax residence under such criterion, local regulations required to(a) own real estate properties with a value exceeding approximately US$1.7 million; or (b) have business activities valued at more than approximately US$5.1 million, provided that such activities had been declared to be in the national interest under Uruguay’s investment promotion regime.
However, with the explicit aim of encouraging foreign investment, the Uruguayan government recently issued a new decree to extend the notion of “main economic interests.” In accordance with this decree, nonresident individuals may be able to become tax residents in Uruguay when, starting July 1, 2020, they make any one of the following investments in Uruguay:
(i) Investment in real estate properties in an amount exceeding US$390,000. Individuals making such investment will be deemed to be Uruguayan tax residents provided that they stay in Uruguay (which means effective physical presence) only for a minimum period of 60 days during any calendar year, whether consecutive or not.
(ii) Investment in any enterprise whatsoever in an amount exceeding US$ 1.7 million. Individuals making such an investment will be deemed to be tax residents in Uruguay provided that the target company (where the individual invests) creates not less than 15 full-time jobs during the calendar year.
The above figures are approximate, varying with the prevailing exchange rate.
All other pre-existing criteria which trigger Uruguayan tax residence remain in force (and unchanged).