Uruguayan government drafts major tax reform bill

A tax reform was approved by the Uruguayan Congress, ratified by the Executive Power on December 27th, 2006, and published on January 18th, 2007. The provisions of the new Tax Law Nber 18,083 entered into force on July 1st, 2007 and significantly modified the previous tax regime.

Even when the Tax Reform Law and it associated decrees modified several aspects of the Uruguayan Tax Regime, the following summary has strictly informative character and its only purpose is to provide a summary which, in our opinion, represent a major interest in terms of international taxation, with no intention of exploring the totality of the matter.


1. Main objectives of the proposed Tax Reform:

The Uruguayan government implemented a tax reform in Uruguay focused in the following high level principles:

a. Increase equity in the distribution of disposable (post-tax) income;
b. Simplify, rationalize and modernize the system of taxes;
c. Increase the efficiency of revenue collection;
d. Stimulus to investments.

2. Tax Reform: Most significant characteristics

The most significant provisions contained in Law Nber 18,083 are:

(i) elimination of 14 taxes;

(ii) maintenance of the source principle for levying taxes - i.e., taxing only income derived from activities developed in, property located in or rights economically used within the Uruguayan territory;

(iii) modification on the Income Tax structure:
  • incorporation of an Individual Income Tax (see (iv)),
  • modification of the previous Corporate Income Tax (see (v)),
  • incorporation of a Non Residents Income Tax (see (vi)).
(iv) introduction of an Income Tax on Individuals: levied on Uruguayan sourced income at rates varying from 10% to 25% for labor based income and from 3% to 12% for capital based income;

(v) reduction of the statutory Corporate Income Tax (CIT) rate from 30% to 25%, extension of the tax loss carryover period from 3 to 5 years and broaden scope of application to almost every legal vehicle and every business activities (previously, corporations were always taxed and other legal vehicles or individuals were taxed only provided they obtained income stemming from the combination of capital and labor - business activities).

(vi) introduction of an Income Tax on Non Residents Income and modifications in the application of Withholding Income Tax (WHT): a) All Uruguayan source income obtained by nonresidents (other than through a Uruguayan PE) would be taxed at a 12% rate on a gross basis, subject to certain exceptions, b) Dividends and profits remittances are subject to WHT only if originated on CIT taxable
income;

(vii) introduction of transfer pricing rules reflecting internationally-accepted methodologies;

(viii) maintenance of the existing preferential tax regimes applicable to: Free Zones, Forestry, Industrial and Commercial qualifying investments;

(ix) improvement of the reinvestment exemption regime pursuant to which taxpayers may obtain a deduction of up to 40% of the CIT taxable basis;

(x) Financial Investment Corporations (SAFI), which are offshore entities subject to a sole tax of 0.3% on their fiscal equity, will be included in the general tax regime after December 31, 2010;

(xi) reduction of the Value-Added Tax (VAT) general rate from 23% to 22%, and reduction of the minimum VAT rate from 14% to 10%;

(xii) inclusion in the VAT taxable base of certain types of goods and services that were VAT-exempt under the previous Tax System;

(xiii) alterations to the Net Wealth Tax (NWT): a) Taxpayers that are legal entities would be able to use the current year's CIT to reduce up to 50% of the current year's NWT, b) Individuals continue to be subject to this tax at progressive rates varying from 0,7% up to 2,75% depending on the taxable basis amount, and a gradual reduction is proposed limited to a 0,1% minimum flat rate;

(xiv) gradual unification in the rate of the social security contributions born by the employers to 7.5% (previously commerce and services – large employers – were taxed at a 12.5% rate, while industry and agriculture were exempt).

In particular, modifications introduced by Law Nber 18,083 maintain or, in certain cases, improve the potential of the Uruguayan tax regime as a channel to develop international operations. Among others, international legal structures with Uruguayan corporations acting as holding companies, trading companies, financing vehicles or developing operations under the Free Zone regime could be implemented to optimize taxes derived from international activities.