Taxes and Uruguay
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Doing business in Uruguay
Uruguay is an independent republic since 1825, situated in South America between Brazil and Argentina. In the course of the past twenty years, Uruguay has been making its mark as a growing and authentic international financial centre. Uruguay is characterised by solid banking provisions, political stability, excellent communications, a pleasant climate and a favourable tax system. Uruguay is an excellent location to minimise taxes while doing business in the area.
Uruguay is a member of most international organizations and is a founding member of the Southern Common Market (Mercado Común del Sur or MERCOSUR).
Political and Legal System
In common with many Western democracies, the State is organized in three independent powers: Executive, Legislative and Judiciary; whilst the legal system of Uruguay follows the Western European Civil Law tradition. The members of the government are elected every five years through universal suffrage. The Executive Power is in the hands of a President and a cabinet of 12 ministers. The Legislative Power is represented by the General Assembly, or Parliament, composed of the Upper Chamber of Senators and the Lower Chamber (House of Representatives). The Judicial Power is exercise through the Supreme Court of Justice, courts and judges on a nationwide basis.
Social and Economic Aspects
Uruguay has a total population of 3.2 million; approximately 50% of these people live in the capital Montevideo. Most Uruguayans are of European descent, mainly Spanish and Italian. The language in Uruguay is Spanish but most professionals also speak English.
Compared to other Latin American countries, income and wealth in Uruguay is rather evenly distributed. The per capita GNP is one of the highest in the region and there is little unemployment.
The prosperity of Uruguay essentially depends on its agricultural sector and exports but tourism is a steady contributor as well.
Uruguayan people enjoy a high cultural and literacy level. The educational system, which reaches 94% of the children over the age of 10, provides secular, free and obligatory schooling. Well trained staff are thus readily available.
Montevideo is served by many European, American and South American airlines. Montevideo is also easily accessible by air through good connections with Buenos Aires (Argentina), Sao Paulo (Brazil) and Santiago (Chile). Digital systems permit rapid and direct international connections for telephone, internet, email and facsimile.
Under the supervision of the Central Bank of Uruguay, many banking institutions operate in the financial sector. Most private banks are branches or subsidiaries of leading international banks. All major international audit firms have offices in Montevideo.
There are no exchange controls and full freedom is enjoyed regarding the purchase and sale of foreign currency and remittance of funds to and from abroad.
Types of companies
The most common business entities in Uruguay are: company limited by shares, limited liability partnership, a branch of a foreign company, free trade zone corporation, and joint ventures.
Company limited by shares
The incorporation of sociedad anónima (SA), also known as a company limited by shares, requires a minimum of two founding members. They can be local or foreign individuals or legal persons. The company limited by shares is free to hold assets and undertake business anywhere in the world, including Uruguay itself. Shares can be issued either in registered or bearer form. There are no minimum capital requirements and restrictions on the number of shareholders. However, one quarter of the capital must be paid up.
Limited liability partnership
The limited liability partnership (SRL) is most often used by small and medium-sized business entities. The partners can have from two to fifty partners who are liable up to the amount of their capital contributions. There is no minimum or maximum authorized capital.
Branch of a foreign company
Branches of foreign companies are entitled to perform the same kind of activities as the head office. The head office is fully liable for the obligations of the Uruguayan branch. Because the branch is a foreign company, it is unable to transform itself adopting a different type of legal structure. The branch is obliged to keep separate accounting records for Uruguayan operations in Uruguayan peso and in Spanish.
Free trade zone corporations
Free trade zone corporations are created with the objective of carrying out business activities within free trade zones. Free trade zone corporations may conduct a wide variety of industrial, trade, and service activities.
Joint ventures are common in Uruguay. They do not constitute companies or legal entities. Joint ventures are considered contracts of an associative nature.
The corporate tax rate is 25% in Uruguay.
Corporate income tax (IRAE) is levied on resident legal entities and permanent establishments of non-resident entities. A non-resident income tax (IRNR) is levied on income of non-residents with no permanent establishment in Uruguay.
Taxable entities include commercial companies, agricultural entities, state entities with an industrial or commercial purpose, closed credit investment funds, trusts, de facto companies, certain civil companies, and other enterprises carrying out industrial, commercial, agricultural and service activities for profit.
Corporate income tax (IRAE) is only due on Uruguayan-source income. Uruguayan-source income includes income derived from activities performed, property situated or rights exploited for economic purposes in Uruguay. This offers opportunities for international businesspeople who are doing business internationally and who want to minimise taxes.
The taxable income is calculated by deducting income generating expenses from the gross income. Other permitted deductions include advertising costs, bad debts, commissions, gifts, goodwill, guaranties, interest expense, rents, representation expenses, research and development, remuneration (to owners, partners, directors), royalties and technical assistance, salaries and wages, service fees, social welfare, taxes on income-generating assets and activities, training costs, travel expenses, and depreciation expenses. A fiscal adjustment for inflation is compulsory.
No withholding tax applies to payments to domestic companies.
Dividends distributed to non-resident shareholders are subject to withholding tax (IRNR) at the rate of 7%. The amount of the IRNR is determined by applying the 7% rate over the dividends to be distributed, with the ceiling of revenue determined by tax criteria.
Interest paid to non-residents are taxed with IRNR at the following rates: 3% on interest paid by financial institutions out of deposits in domestic currency or indexed units with more than a 1-year term; 3% on interest on bonds with a term of more than 3 years issued through a public offer and quoted on the stock exchange; 5% on interest from 1-year term deposits or deposits of less than a year; 12% on other interest.
The profits of branches and other qualifying establishments of foreign companies are taxed with IRAE at the standard rate of 25% on net taxable income. After-tax profit remittances paid or credited to the head office are taxed with IRNR at the rate of 7%.
Withholding tax at rate of 12% applies to royalties.
Withholding tax at rate of 12% applies to service fees derived by a non-resident company (or individual).
Uruguay offers tax exemptions on investments in infrastructure aiming to benefit the tourism industry. The tax exemptions apply to qualifying hotels, resorts and other types of establishments. The exemptions include: (1) exemption from VAT on the purchase of equipment and materials imported to build or equip the establishment and a credit of VAT on equipment and materials bought locally for that same purpose; (2) special depreciation treatment for IRAE purposes; (3) exemption from net worth tax for 10 years.
Uruguay provides tax incentives aiming to stimulate planting and commercial exploitation of forests. The incentives include exemption from IRAE and net worth tax in respect of planting of forests.
There are certain incentives for export-oriented businesses, such as fishing, agricultural companies, dairy producers and mining companies. These businesses may benefit from (1) exemption from import tariffs and other import taxes and duties, (2) exemption from net worth tax, (3) partial exemption from IRAE, and (4) generous credit schemes under special funds.
It should be also noted that certain projects that are considered of vital interest can benefit from an exemption of IRAE amounting to 51% to 100% of the capital invested.
Goods shipped from abroad to the Uruguayan free zones (FZs) are not subject to import duties. Companies operating in FZs are exempt from domestic taxes, with the exception of social security contributions.
Summary fiscal system
Uruguay has adopted the territorial principle for taxation purposes. For companies, only profits derived from Uruguayan sources are taxable in Uruguay and this at a rate of 25%. Foreign sourced income or assets are not taxed in Uruguay. Value Added Tax, excise taxes and import duties are Uruguay’s main source of revenue. There is no gift tax, nor inheritance tax.
In April 2009, Uruguay agreed to comply with some requirements of the OECD about exchange of information and made the commitment of signing double taxation treaties with sufficient other countries to enable it to be “white listed”. In December 2011, Uruguay left the grey list and was included into the list of countries that comply with the requirements of the OECD, by signing agreements with the following countries: Denmark, Ecuador, Faroe Islands, Finland, France, Germany, Greenland, Hungary, Iceland, Liechtenstein, Malta, Mexico, Norway, Portugal, Republic of Korea, Spain, Sweden, and Switzerland.
Taken from Tax Advisors De Hoon and Partners
Please note that tax law is constantly evolving so check with a legal advisor before relying on this information.
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