Uruguay Tax Reform Update
by Mark Teuten
Introduction: The Executive has sent a text to the Uruguayan parliament which would incorporate major changes in the current regime of Income tax, Asset tax and also in the regime of bank secrecy. These proposed changes are detailed below, but it must be highlighted that the proposed law is just that, a proposal, and it is likely, or at the very least possible, that changes be made in the law before it is approved. And even if it is approved there will still be lots of areas which are unclear and which will have to be clarified by the Regulating Decree and then by the actual practice of the Tax Office and subject to judicial decisions. So at this stage nobody knows how many areas will be resolved. What is clear is that the draft law was presented to parliament without any prior consultation with anybody in the private sector and that as soon as it was presented it caused alarm bells to ring. It remains to be seen though what if any modifications will be made.
In the introduction to the proposed law, the Executive state that the aim of the law is to make the law more equitable and to encourage investment. In this respect it states that there should be no difference between what a resident pays according to whether they have their money in an account in Uruguay or abroad, rather the amount of tax payable should vary according to the person’s ability to pay. As to encouraging investment and employment it states that they should favour investments within Uruguay in order to channel domestic saving towards domestic productive investments.
Subject to the above the main modifications proposed are:
1. INCOME TAX FOR PHYSICAL PERSONS
At present income is taxed on the basis of source and only income of Uruguayan source is taxed. This criteria for taxation is at the heart of the Uruguayan tax regime, but the proposed law would modify the criteria by including as taxeable income, income which arises from financial instruments abroad e.g. interest on bank deposits, loans or dividends. But, only this source of income would be taxed. Thus pensions would be exempt, as would income from rent of properties abroad and income from employment.
The rate of the proposed tax is 12%. However if the taxpayer can show that he has already paid 12% or more in tax in the country where the income was paid, then no tax will be payable. This is so whether or not Uruguay has a double tax treaty with that country.
The tax is not payable by company’s, however the law foresees mechanisms to avoid evasion by making payments via a company. It MAY though be possible to avoid tax by making payments through a foreign trust, but this is only a possibility. This will depend on the final text of the Law and Regulating Decree and also on the exact terms of the trust – for example, discretionary trusts would appear to be more likely to claim exemption.
The tax is payable by physical persons who are resident in Uruguay. Residence in this context, means resident for tax purposes, and does not mean simply that a person has been granted the status of legal resident in Uruguay. For tax purposes somebody is resident in Uruguay if they spend over 6 months of a year in Uruguay.
2. ASSET TAX (IMPUESTO AL PATRIMONIO)
This tax is at present a tax on individuals who have a particular amount of assets over a threshold. It only covers Uruguayan assets. Under the proposed law, this would be extended to cover all kinds of financial assets abroad.
However it should be noted that the extension is only applicable to Uruguayan citizens, as the law is presently drafted. So residents are at present excluded.
Also in order to calculate the assets on which tax will be paid, the law refers only to taxing a portion of the assets – between 10-20% depending on the total amount of assets – and then payment must be made at the appropriate rate on that volume of assets.
The maximum rate of tax payable under this tax is 2.5%, meaning that the maximum amount of the tax would be 2.5% of 20% of the financial assets abroad i.e. 0.5% per annum.
3. CHANGES TO BANK SECRECY PROVISIONS
Bank secrecy has been at the heart of Uruguay’s financial system for many years. The proposed law makes quite major changes in this system. The argument for these changes is that without such it will be impossible to properly control tax payments.
Under the proposals there are two new situations in which bank secrecy can be lifted:
i) When the Tax Office makes a founded request to the Courts, but not only in cases of supposed fraud, as is the situation at present, but also to control payment. Also the law says that after 60 days if the judge has not made an order then it is to be understood that he has granted the request. The Tax Office can then proceed to request information from the Central Bank, which will in turn ask the banks with which the person has accounts and they will have 15 days to reply, subject to sanctions if they do not.
ii) When a foreign country with whom Uruguay has a Double Tax Treaty or a Treaty to Exchange Tax Information makes a request. At the present time Uruguay has such Treaties with Germany and Hungary. Treaties have been signed and will probably come into force in 2011 with Mexico, Spain and Portugal. Uruguay is in the course of negotiating Treaties with the following: Switzerland, Belgium, South Korea, Malta, Finland, India, Malaysia, Liechtenstein, Ecuador, Chile, Costa Rica, Vietnam and Luxembourg. The intention is to have at least 12 Treaties signed and in force which in theory would be enough to have Uruguay removed from the grey list of OECD countries subject to possible restrictions and sanctions.
The above represents a summary of the draft bill presented to parliament. Since it was presented though, there has been a noticeable silence. There has since been some consultation with the private sector, but it is not known what modifications if any will be made. In any event the law itself will only provide a framework with many details being left to the Regulating Decree and also the practice of the Tax Office itself.
This report was provided to Paradise Uruguay by Mark Teuten, the founder of Teuten Abogados, providing a variety of bilingual legal services in Uruguay.