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.

CONCLUSION:

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.

Unfortunately, much of what the press articles and blogs have been saying is more alarming than the reality. It has been said that Uruguay will tax:

• its corporate vehicles’ offshore assets
• foreign residents’ assets
• foreign residents’ income

That is incorrect.

The problem was originated because a draft of a proposed change to a tax law was leaked.  A different, adjusted draft, was finally prepared.  And that draft is still a work in progress, and is being adjusted in the Senate´s committee.  And the proposed change only aims to tax the money that Uruguayans have abroad, not foreigners who come to Uruguay.

Here’s the exact situation of where the issue stands on the three supposed taxes:

Taxes on corporate vehicles’ offshore assets: On May 28^th, the Ministry of Finance, where the bill proposal is being discussed, issued an official statement clarifying one issue of the proposed bill: that there will be no new taxes on Uruguayan companies, and that their offshore assets will not be taxed.  Explicitly: that nothing will change for Uruguayan corporate vehicles.  So, Uruguay remains an offshore tax free jurisdiction.

Taxes on foreign residents’ assets: It has been made clear from the start that assets owned abroad by foreign residents in Uruguay will not be taxed at all.  This was never in doubt.  This is only for citizens (at a very small scale; and remember that this asset tax is gradually being phased out since 2007, and will disappear by 2017).

Taxes on foreign residents’ income:

• Some types of income (not all) generated abroad could be taxed.  But the aim of the law is to tax the money that Uruguayans have abroad, not foreigners who come to Uruguay.
• The Ministry of Finance issued a second statement on June 1^st, clarifying that the law will in no way jeopardize the country’s policy of attracting foreigners to relocate in Uruguay.  And that their income will not be taxed or double taxed.
• The likelihood is that on income tax the tax will be circumscribed to Uruguayan citizens, and the government is considering adjusting the text of the bill, possibly to grant tax credits, so no one is taxed twice.
• And remember, it would only be on some types of income: interest on deposits and dividends.  So, any other type: salary, capital gains on sale of shares or property, pensions, lease, income, etc. are all excluded.

Even if he is correct, I still think the proposed law is a bad idea and another step down the slippery slope…

In the last four years I have seen a negative trend that leaves me shaking my head in wonder as Uruguay’s government does everything it can to make this country poorer. Prices have increased, and property prices have become ridiculous. From a business point of view, everything has become harder and more expensive.

But, THE WORST IS YET TO COME. Uruguay’s government has announced that it is giving up its traditional territorial taxation and will start taxing the worldwide income of its residents—including investment income.

In fairness, according to a friend of mine in the governing party, Uruguay was bludgeoned into this change by the OECD countries, especially by the USA and the EU, which threatened to ban Uruguay’s agricultural products if this new taxation was not enacted.

Nevertheless, the impact of this new tax law will be huge, especially on expats and immigrants who moved here based on the principal that their foreign investment income and pensions would be tax free.

The flight has already begun; even people who have gotten their permanent residency have left and more are planning to leave.

Those who can afford two homes in two different countries are debating whether it is worth living here less than 183 days per year, in which case they would not be tax resident (assuming Uruguay uses the OECD model on which the tax is based); and then living someplace else for less than 183 days (except the US which has different rules). With a couple of vacation days in a third country, they would then not be tax-resident in either place.

Those who cannot afford two homes are taking a hard look at Central America and Eastern Europe, depending upon their tastes and needs.

I am personally broken-hearted about this, but will probably still spend about 180 days here, and the balance in one or more of the other places in which I have business.

I wonder if anyone in government here has considered the results of this ill-advised decision?

Frankly, unless Uruguay provides some exceptions, like for pensioners, or at least concludes a series of double taxation treaties, without which some immigrants could find them paying taxes twice, the number of new residents will slow to a trickle, while the number of immigrants leaving, for at least a majority of the year will swell to a tidal wave that will have a huge negative impact on the economy as they spend their dollars or euros elsewhere.

I am taking a wait and see attitude before making any final decisions, but I am sifting through my options. I suggest you do the same.

As a normal part of our  business we open financial accounts with various institutions around the world.  Mostl of them require a notarized account opening document or signature card.  In most places, even including the two islands on which I lived in the Caribbean, this is a piece of cake–here it is an indigestible lump of something I prefer not to describe in a family blog.

One cannot simply get one’s signature notarized here.  The Government won’t allow.  Instead, one must jump through a series of ever more expensive and difficult hoops in order to accomplish this erstwhile simple task.

We have been trying to open an account at a Bank in Poland to more easily load a new Visa card product we are getting ready to offer.  ALL we need to complete it is to have two signatures notarized.  But it CAN’T be done here.  Escibranos, the local name for civil law notaries (although the law isn’t very civil at all) can’t just notarize a signature, they have to notarize the whole document.

And God-forbid that the document is in any language other than Spanish (like Polish and English maybe), the document has to be translated into Spanish.  This means that I have the privilege of paying a public translator to translate an English-Polish bank account opening form into Spanish.  I don’t yet know if they translate BOTH the English and the Polish–(probably they do so they can charge twice for the same translation).

Then the document can be notarized.

End of story; right?  Wrong!  Because Uruguay is one of a handfull of countries that to not subscribe the the International Convention on the Legalisation of Documents, Uruguay does not issue Apostilles, which are basically an internationally recognized super-notarization.  Some other countries that do not have the Apostille include some important business centers as North Korea, Cuba, and Libya.

This means that the document has to be legalized before it can be sent to Poland.

So, after it is translated, and notarized, it must be sent to a court for review.

But we’re still not finished!  Then it goes to the Ministry of Foreign Affairs to finally be legalized.

But we’re not done yet.  Now, it has to be taken to the Polish Embassy in Buenos Aires (because the Polish Embassy here is now closed), after which it can finally be sent to the Polish Bank.

Easy:  US$500 and a month later, we have the document….

EXCEPT that the Court didn’t like two or three words in the notarization, so we had to start the process all over again.

NB:  For those of you who might think that I missed the obvious solution of going to the US Embassy to get the signatures notarized, I didn’t.  The Yankee Embassy will ONLY notarize documents intended for the US.  And espite the grandiose ambitions of King Georeg II, Poland is not yet considered a part of the US (except in some parts of Chicago–or maybe it is the other way around? Chicago is considered a part of Poland…).

For those who want to know more about the Apostille, see:  http://www.hcch.net/index_en.php?act=conventions.status&cid=41#nonmem

In my previous post, I quoted attorney Mark Teuten as saying, in part, that housebhold goods…”can be brought in free of tax within 6 months of the grant of permanent residence.” That seems pretty clear to me, but it obviously is NOT CLEAR to some people.

The duty-free exemption only applies for the 6 month period AFTER you get your permanent residency, NOT while your residency is pending!!!! If you bring in household goods before your permanent residency is granted, you will be required to put up a deposit ranging from hundreds to even thousands of dollars.

If you are not sure about your residency status here are some ways to check:

1. If you don’t have a cedula, you don’t have permanent residency.
2. If your cedula has words on the back like “provisoria” or “in tramite”, you don’t have permanent residency.
3. If your cedula has “Residcencia Legal” on the back, you DO HAVE permanent residency.

You might get your cedula quickly, especially if you are handicapped. But, in my experience, you will not get your permanent residency in less than about 1 year. My friend and coworker Borko received his 365 days after arriving here and his was the quickest of which I am aware.

People are being told things other than this, especially by some less than professional “Immigration Consultants”. It may be that there is a language problem, or it may be that they are simply economical with the truth. That is not for me to judge.

An old Southron saying applies here, “I have no dog in this fight!”

My goal here is simply to help others avoid the mistakes I have made–which are legion–or about which I know–which are legion times 10!

Attorney Mark Teuten graciously volunteered to do the legal research for us and provide us with a definitive answer:

… article 2 of Decree No. 119/004, which regulates Law No. 16.340 states that household goods, in reasonable quantities according to the opinion of the Custom’s authorities, can be brought in free of tax within 6 months of the grant of permanent residence.

Please note, a vehicle is NOT INCLUDED in the definition of “household goods” and cannot be imported duty-free!

If the law changes, or when the application of the law changes, I will write about it here as quickly as possible.

Mark is the first lawyer to be simultaneously qualified in the UK and in Uruguay. This background means he is uniquely placed to advise clients coming from countries with different legal systems.  He is a British-born attorney and moved to Uruguay in 1990.  His law firm is small, but that means you get hands-on personal service (with which I have been perfectly satisfied).  Mark concentrates on residency, real estate, intellectual property and general business matters.  I highly recommend him. Mark is also the secretary of the British Society, and can sometimes be seen at our Thursday night open house meetings.  http://www.teutenabogados.com

Nevertheless, it is my responsibility to report both the good and the bad, so that you don’t make some of the same mistakes that I have or that I have seen others make.

One of those mistakes is being caught in the language bait-and-switch. This happens when you visit a company or professional firm to discuss doing business with them. The person with whom you meet speaks good English and you have no trouble communicating with him. You leave with the impression that this person will be the one with whom you are working.

The next time you contact them you speak to someone or receive an e-mail from someone who speaks English as badly as I speak Spanish. You get frustrated; especially because you are paying more than local rates in order to deal with English speakers. (This is especially common in larger firms or companies that claim to specialize in dealing with foreigners.) Ultimately the situation deteriorates and then collapses, and you are worse off than when you started, and certainly poorer.

While this has happened to me, it has not had the impact it might on others because I have an office full of bilingual people. But this could be disastrous for you.

My suggestion is that when you consider doing business with a company or firm with an English-speaking “front man”, you find out EXACTLY who will be doing the work for you, and that you insist on meeting that person and speaking with that person, BEFORE you agree to hire them or buy from them. Then, make sure that this is confirmed in writing.

I guarantee you, this piece of advice will save you hours of frustration, and, for those of us who do such things, hundreds less curse words to tell our confessor about… (My confessions usually start out, “Bless me Father, for I have sinned. I have taken the Lord’s name in vain, 250 times, this morning…)

On Monday I collected my new permanent Cedula at the DNIC. On Friday, exactly 1 year after arriving in Uruguay, or go will get his permanent Cedula. The Copperhead has been notified that his permanent residency has been granted, but he does not yet have an appointment to get his permanent Cedula.

It took me a bit under two years to get my residency. It took Copperhead a bit over two years to get his residency. But it only took Borko a year to get his. Why?

We made some mistakes when we started and we followed bad advice. After months of getting nowhere we switched to someone who could really do the job. When they reviewed our files they found all kinds of technical problems, and had we not hired them, we might still be mired in the bureaucracy. As it stands, because of the terrible “professional advice” we got, neither myself nor Copperhead were able to take advantage of the ability to bring in household goods duty-free within the first six months–for us, that is gone forever.

Borko was different–we started him out with real professionals. Granted, he wasn’t able to bring in household goods either, but that was simply because we didn’t think they would allow him to bring in the machinery to distill Serbian grappa here in Uruguay…

I hope all of my readers profit from my stupid mistakes, and don’t make the same ones. I would far prefer that they make other stupid mistakes that I can write about.

AMAZINGLY the Government wants us to tell them the things that we think need to be improved here to make it more attractive for immigrants.

SO LET ‘ER RIP!!!! Send me you complaints and irritations and I will compile them and pass them on. If you don’t do this, don’t ever complain to me….

When was the last time George Bush did this?

Please send your complaints to Southron@UruguayLiving.com.

The big question is how do we keep our US$80,000 exclusion on earned income without running afoul of Uruguay’s new personal income tax. I wrote about that previously in Avoiding the US/UY tax trap…

As you may know, my “real business” is international finance. Because of this, I have been asked to put together a small seminar for US taxpayers resident in Uruguay to go through the nuts and bolts of dealing with this potential problem. I also plan to talk about the easiest ways to do business in Uruguay without getting bogged down in the bureaucracy.

If you are interested, please send me a PM on the Forum at SociedadSouthron.net, or email me at southron@UruguayLiving.com and let me know what days and times are best for you.