Three new Uruguay tax rules - and how they impact new residents

By Montevideo Attorney, Juan Federico Fischer  

Uruguay’s parliament recently passed a law that grants a tax advantage to those who become new tax residents of Uruguay.

 Following what had been announced at the end of 2011, Act 18,910 was approved in June of 2012, establishing that foreign nationals who become tax residents of Uruguay will not pay any taxes on foreign earned income for at least five years (and after that, minimal or no taxes).

Below, we explain the complete set of rules that apply to taxation of foreign earned income for those who spend more than 183 days a year in Uruguay (thus, becoming tax residents), in three simple concepts.

Rule # 1: Only certain types of income are taxed: interest and dividends
Uruguay does not tax all types of foreign earned income.  It taxes only dividends earned abroad and interest (on a loan, deposit, or debt instrument) earned abroad. The tax rate is 12% (on the amount of interest or dividends earned).

Any other source of income, such as rental income from a property outside Uruguay, a government or private pension, or capital gains on any type of assets –to name common examples- are not taxed.

Rule # 2: If you already pay taxes in another country, you do not pay again in Uruguay
If you are, for example, a U.S. citizen, you will already be paying the IRS taxes on interest and dividends that you earn outside Uruguay.

In that case, Uruguay will not tax you again, as long as you are paying another foreign country 12% or more on interest and dividends. By this mechanism, Uruguay ensures that you are not taxed twice on the same thing. You never pay taxes twice.

This solution does not require that Uruguay have a signed treaty with other countries, in order to recognize the payment of taxes abroad. So, the benefit applies to citizens of any country.

Rule # 3: During the first five years, there are no taxes at all
The June 2012 law added a benefit for those foreign nationals moving to Uruguay: during the first five years of tax residency, one does not pay taxes on any type of foreign income at all.  In other words, you do not even worry about the prior two rules during the first five years.

The five-year window starts counting the year following the year you became a tax resident of the country. In other words, if -for example-, you become a tax resident in January of 2014, you won’t pay income tax of any kind, on any type of foreign income, until 2020 (and after that, you’ll pay only as rules 1 and 2 establish it: only on interest and dividends, but never being taxed twice).

Naturally, if, by the time the five year window expires, you are no longer a tax resident of Uruguay, you will have no tax issues to deal with in Uruguay.

The three rules are applicable to persons and not companies.  Uruguayan companies face no taxation by Uruguay of their foreign-earned income and assets.

Juan Federico Fischer
Managing Partner
Rincón 487, Piso 4
Montevideo 11000, Uruguay
Tel: (+598) 2  915-7468

Fischer & Schickentantz is a full service law firm, based in Montevideo, Uruguay.  The firm´s Residency and Relocation department consists of a multidisciplinary team that advises foreign nationals on residency, property purchases and taxes.

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