23.1.11

Uruguay Income Tax Law and Uruguay Banking Secrecy Law Updates

Mark Teuten
January 2011: Update on changes in Income Tax Law and Bank Secrecy provisions in Uruguay, by Montevideo Attorney, Mark Teuten

Introduction:
After more than 6 months of debate, on 29 December 2010, the Uruguayan parliament approved Law No 18.718, which makes changes in the Income Tax law. In a previous report this year we set out the details of the changes that the government was proposing. At that stage the bill had caused widespread controversy due to a lack of prior consultation and it was uncertain how many of the changes would actually be implemented. In the end and as a result of agreement with some of the other political parties in Uruguay, most of the bill has been passed unchanged with only minor changes in the provisions regarding bank secrecy. The new law was published in the Official Gazette of 3 Jan 2011 and the law is already in effect.

Income Tax:
The principal change is that income arising from foreign monetary instruments is now taxable income. This is a very major change for Uruguayan law as it is the first time that the territorial basis for liability to tax has been varied. The idea of the government is that residents who have an income from, for example, bank accounts in Uruguay should not be penalised vis-a-vis others who have their savings in a non-Uruguayan account. In fact as the law is now it will be the other way around - those with a Uruguayan bank account will actually pay a lower rate of interest than those with a foreign account. The rate of interest on foreign generated income is 12%, whilst for local income the rate of interest is 3-7%.

Residence for the purposes of this law means 180 days or more of physical presence in the country in any given tax year – which corresponds with the calendar year in Uruguay. It does not have any relationship with the concept of legal residence for immigration purposes. It is possible to be a legal resident, but not be resident for tax purposes and vice-versa, not be a legal resident, but still be resident for tax purposes.

It is important to note that credit will be given for any tax already paid in the foreign jurisdiction, whether or not there is a double tax treaty in force with that country. It remains to be seen in the Regulating Decree however, how the tax office will administer this and what documentation it will require. But the principle is that if 12% or more tax  has already been paid there will be no additional liability and if for example 5% tax has been paid abroad, then the taxpayer will only have to pay the difference i.e. 7%. Also it should be noted that the law ONLY covers foreign income arising from monetary instruments – bank deposits, loans, share income for example. It does not affect any other kind of income, particularly pension or rental income.

If payment is received via a Uruguayan subsidiary of the foreign institution where the funds are based, then the Uruguayan subsidiary is obliged to act as a retention agent for the 12% tax due.

Bank Secrecy:
Uruguay is renowned for having a very strict bank secrecy law – it is a criminal offence to reveal information about any particular bank account or anybody’s personal dealings. It is largely as a result of these secrecy provisions, plus Uruguay’s history of stability, that Uruguay has such a large financial sector - bank deposits of non-residents far exceed those of residents. As a result of this Uruguay, like many other tax havens, has come under increasing pressure from the OECD countries to make its system more open. Uruguay is in the process of signing the 15 tax information sharing treaties with other countries in order to be removed from the OECD “grey list”. It is in this context that the secrecy provisions have been modified to make it easier for the criminal and tax authorities to get access to bank information.

The new law states that in the case of an alleged criminal offence, the tax authorities must make a request to a Judge for access. The Judge or the public prosecutor must object to this request within 30 days, otherwise the request will be considered as granted and forwarded to the Uruguayan Central Bank, for it to forward on to the appropriate financial institution.

In cases where the tax authorities simply want to check that a person has paid the correct amount of tax, then again the tax authority must make a written request to the court and the Judge will only permit access if there are objective indications that make it reasonably clear that tax evasion has taken place and also that the information requested is necessary for the authority to make a correct determination of the tax due and what offence/s have taken place.

Secrecy can also be lifted in accordance with the terms of any treaties signed, on application by the authorities of the relevant country.

Notice:
This report is not intended to be legal advice and should not be taken as such. You should consult with a lawyer or accountant about your particular circumstances.

Mark Teuten
Teuten Abogados
Juncal 1408, Oficina 702
CP 11000 Montevideo - Uruguay
Tel: + (598 2) 9088638
Fax: + (598 2) 9088640
mteuten@teutenabogados.com
www.teutenabogados.com

17 comments:

albertoelnora1 said...

Oh well, I guess that is the end of our plans to permanently move to Uruguay. I was born there, my wife was born in Hong Kong. But all our retirement income comes from Canada and the USA. We would not like to be tax again and again.

Paradise Uruguay said...

Thank you for your comment.

It is my understanding from Mr Teuten's article that foreign retirement income is not taxed in Uruguay.

It is also my understanding there are no duplicate taxes. Full credit is given for any taxes you pay in Canada and the US.

I suspect the tax on investment and interest income in the US and Canada is more than 12%, in which case would pay no tax in Uruguay.

If it is your desire to move to Uruguay, I strongly recommend you discuss your personal situation with Mr Teuten or other knowledgeable counsel.

Best to you-

Anonymous said...

I am seldom taxed on gains because I try to keep my gains low enough that the standard exemption leaves me paying no taxes. Of course the time will come when I will cash out and will have to deal with it then.

I do intend to see Mr. Teuten soon. I also have a blog and two of my people with plans to move to Uruguay notified me that they had changed course while actually in preparation to leave England for Uruguay--on the basis of the proposed law. It had not even passed. They are now investing in a more tax-friendly country, they tell me. One that does not reach outside the country to tax assets elsewhere. I think that we will not hear from all the potential investors who will change course.

I think that Uruguay is doing this under outside duress, just as they changed their bank secrecy policies under threat of an embargo. But at present it seems to me that with this law, Uruguay limits their immigrants largely to those with retirement income but without that important surplus wealth that would make it possible to invest in Uruguay. That investment money is likely to go elsewhere, which does not seem a good idea for Uruguay!

I have lots of investigation to do yet on this development. Mr. Teuten will be one stop in the process.

Paradise Uruguay said...

Thank you for your comment. You make some good points.

Dwight said...

The government of UY is not going to change it back. They'll be much like governments all over who pass a dumb bill and won't repeal it. Unfortunately what they likely don't understand is that the overwhelming majority of people immigrating to UY are doing so to get AWAY from government intrusion into their lives. They've worked hard for their money all their lives and now want to enjoy it, invest it, spend it like drunken sailors, or simply spend it in a nice environment that leaves them alone and lets them have a good life. Panama now seems like the lead country for that. UY was high on everyone's list. It just dropped off of mine despite moving money there and spending a massive amount of time there hunting for a home to buy etc.
Love it as we do, I'm just not going to deal with a government....any government....taxing beyond their borders. Life's too short and the world's too big not to find other places that fit that bill. It's a shame too. If I were running UY I'd tell the other 'pressure' countries to shut up and then make things even more stringent, more secret, and even less cooperative. The amount of money that'd flood into UY would be staggering and make life easier for all citizens of UY. All they'd have to do is tax the receiving banks more on their super growing profits. Think about it. What does UY have for export? Food. That's pretty much it. What does the world need the most and have actual riots forming now in various parts of the world for? Food. So some 'pressure' country is going to not take UY food and starve their people because they're told politely to stay out of UY affairs? I don't think so. Food, water, & oil. If you have those in abundant supply, no one pushes you too much if you show them a backbone. The middle east figured that out. Venezuela and Brazil are getting the idea and I suspect Argentina and Chile will be right behind. UY needs to jump into that thinking too.

And you know what the worst case scenario for UY exports etc. is? It all gets sold to China who's going to end up being the world's biggest power down the road anyway. And China's the country that all the 'pressure' countries are falling all over themselves to do deals with. And what's China need most that it can't provide for itself? Food. But...what do I know?

Anonymous said...

After months of articles indicating that foreign residents of Uruguay would not be taxed on global income, we now know that indeed they will be taxed on global income.

This is an insidious and destructive piece of legislation. Uruguay is becoming much like the US in its tax policy.

Love the country, but will not be moving there.

mark teuten said...

I note the comments made above. I agree that the new tax law is at first sight a step backwards for Uruguay and could be viewed as a reason not to use Uruguay as a tax haven. However the vast mayority of people will not be affected in any way and there will be numerous ways to structure any payments received in Uruguay so as to legitimnately avoid the tax. Likewise the tax is not aimed at foreign residents - it is aimed at Uruguayan citizens who have bank deposits or financial investments abroad and pay nothing on these. It is these people who will be the focus of all attempts by the tax authorities to extract more tax. This is already a serious problem for the tax authority because they do not have the resources to cover even these people, let alone investigate what foreigners may or may not have. Obviously I can't guarantee that in a few years time things may not change, but in the short term I don't see it as being a major issue and seriously Uruguay has got to be a lot nicer place to live than most of the other countries people are considering.

Anonymous said...

A silly person reads all the above & giggles. We are relocating in less than 90 days to UY, a village of less than 600 people... ;p

We plan to build a small chacra & let our livestock & meat business develop bit by bit...

Panama? Get REAL, people. Anyone remember what happened to US bank accounts in the Noriega years? How much of that did you get back?

We're going for the down-to-earth lifestyle. For us, plenty of food means fewer worries. Who knows? Maybe we'll be exporting our goat meat someday...

Paradise Uruguay said...

I believe that Mark Teuten and the last comment both allude to a realistic point. Compared to where? The people who read this blog have a variety of interests. Some are travelers, some are international investors, and others are considering relocating to Uruguay.

Of the people relocating to Uruguay to live, each one has his or her own reasons and priorities. For some it is to live a healthier more natural lifestyle. Others find security living in a country that is basically a food factory sitting over the second largest fresh water aquifer in the world. Some have fallen in love with a local. Others appreciate the warmth of Uruguay's unique Latin/slightly European culture. It is a culture in which many people from other countries feel at home and can assimilate to. Also, many investors have made great returns in Uruguay over the last five years.

However, if you have decided not to consider Uruguay because of the tax on foreign held monetary instruments, I hope that you are doing so because the ruling has really tipped the balance of your own presonal basket of reasons you considered Uruguay in the first place.

Thanks to all who are contributing to this thread.

Anonymous said...

Mark: Can you please comment on the new "tax break" for foreigners that has been announced in April 2011. More information here:
http://www.olauruguay.com/2011/05/07/uruguay-good-news-on-foreign-income-tax

Is this tax break now in effect?

Paradise Uruguay said...

Mr Teuten reports that there is no specific exemption at this time, and points out that in the article you referred to it states it is a “regulation that is expected to exclude”. It is something hypothetical and not something that has already been signed in to law.

Al said...

Oh well, I guess that is the end of our plans to permanently move to Uruguay. I was born there, my wife was born in Hong Kong. But all our retirement income comes from Canada and the USA. We would not like to be tax again and again.

Paradise Uruguay said...

Al, Thank you for your comment.

I don't think the changes will double tax your retirement income.

If you like the idea of retiring in Uruguay, you may want to contact Mark Teuten or other residency attorney and get the specifics in regard to your situation before writing it off.

Best regards...

Anonymous said...

Suppose you have a business that earns money by selling abroad--that is, income earned entirely offshore, but not as a "financial instrument," but as a business. As a foreign resident or even citizen, would that income be taxed?

Or, for example, suppose you run an offline business while living in Uruguay but earn the money by selling online to customers outside Uruguay. Would that income be taxable?

Would that income have to come in through a foreign bank and accessed by a debit card, or could it come it directly to an account in an Uruguayan bank?

Paradise Uruguay said...

Thanks for your comment.

It is my understanding that many international businesses set up in Uruguay just as you describe and do not owe income taxes in Uruguay. I believe the income could come directly to a Uruguayan bank - HOWEVER: I am not an attorney or accountant and am not qualified to give professional advice. If you are interested in setting up such a business, I recommend you speak with a reputable Uruguayan attorney to verify this information and to go over your individual situation.
Mr Teuton, the author of this article might be a good place to start.

n1kd0 said...

Excellent blog, thank you all for contributing.

I would like to add one more area of taxation to discuss. UY does not tax (most) of foreign sourced income, which is excellent. But consider the following:

One has income based on trading profits from the frequent purchase and sale of XYZ instrument (e.g. stocks). The exchange will not be located in UY. Broker will be outside of UY and the trades will be executed in the name of an non-UY company. Director of the co is non-UY entity however the beneficial owner of the company resides in UY.
While most aspects of business are demonstrably conducted outside of UY, the duty of engaging in the transactions is a daily one and requires continuous decision making input. One would be using local resources; home office, electricity and Internet connection when engaged in business. In these circumstances would the trading profits be considered foreign sourced income or local (UY) income? This would be the same if one was IT programmer working for non-UY company with no UY business whatsoever, or imagine someone managing eBay business while residing in UY, but not selling in UY and not sourcing products from UY. Local or foreign sourced income? That is the question.

Paradise Uruguay said...

Mr Teuten reports: "Bottom line is that in the case of the person who does share dealing from Uruguay or programming from Uruguay, then that is technically Uruguay sourced income and taxable as such."