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.

But there is a catch:  directors of corporations cannot participate in the BPS connected health insurance plans, even though they pay into BPS.  So much for socialist fairness.  Directors have to pay for private insurance–what a great way to encourage new business in Uruguay.

So, even though the owner/director pays into BPS for himself and his employees, he is barred from benefiting.  I wonder who thought this idea up:  Larry, Curly or Moe (or maybe Shemp or Curly Joe)…

However, there is a way out.  You can set up an Uruguay domestic company and then hire nominee corporate directors from outside the country.  Those directors can then give you a total power of attorney to operate the company, bank accounts etc, as an EMPLOYEE, and thus eligible for health insurance.

Another way is to set up an unipersonal, a sole proprietorship, but that has other issues.

This is one more example of why I say I love living in Uruguay but hate doing business here.  Sometimes I think the government is trying to intentionally keep Uruguay poor…

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.

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Uruguay’s new tax rules: understanding what really changes for foreign nationals

On July 1, 2007, Uruguay overhauled its tax legislation. The main change was the creation of personal income tax – for income generated in Uruguay. The purpose of this article is to point out how it affects foreign nationals who live, own property or simply do business in or with the country.

What the new tax rules don’t change

The key thing to keep in mind is that nothing has changed regarding what kind of income or assets Uruguay taxes, from a territorial or geographical point of view. Uruguay will continue taxing only income generated inside Uruguay and assets located inside the country. Thus, for citizens and foreign nationals alike, any type of income obtained from a foreign source, or assets abroad, will remain untouched by the Uruguayan tax collector. A U.S. pension, dividends or capital gains on stock in a Japanese company, interest from a CD in a European bank or real estate in Australia: they all remain untaxed.

What the new tax rules change

The new legislation basically reintroduces personal income tax in Uruguay, which had been eliminated in 1974. The way the new income tax rules apply (remember: only on income generated by an activity in Uruguay) is split into work-related income and capital-related income.

Work-related income comprises any salary, fees and commissions generated by an activity (a job) inside Uruguay. This type of income is taxed at progressive rates between 10 and 25%.

Capital-related income is taxed at a flat 12% rate (with some exceptions, in which the rate is lower). What is capital-related income?

a. Rental income: Anyone (locals and foreign nationals alike) who owns property in Uruguay and rents it out will have that rental income taxed at 12% (after allowed deductions, such as municipality taxes on real estate, the rate can effectively be lowered by a few percentage points).

b. Interest on bank deposits in a Uruguayan bank in foreign currency is taxed at the 12% rate, and deposits in local currency are taxed at 3% or 5%, depending on the period of time they are deposited for.

c. Yields on Uruguayan government bonds are not taxed. Corporate bond yields issued by Uruguayan companies are –in general terms- taxed at 3%.

d. Capital gains on the sale of an asset located in Uruguay (such as a property in the country): 12% is paid on the spread between the sale price and the original purchase price (which is adjusted for inflation and improvements on the property). For those assets bought before the new tax laws went into effect (July 1, 2007), one can choose to pay a flat 1.8% tax on the sale price, instead of the 12% on the purchase-sale spread.

e. Dividends paid out by a Uruguayan company are taxed at 7% (on top of the company’s own 25% corporate income tax, a topic that exceeds the purpose of this article).

The special case of income generated by a foreign company or individual from doing business with Uruguayan companies from abroad

When providing a service to a Uruguayan company from abroad, such as technical services, the source of the income is deemed Uruguayan for tax purposes, and is taxed at a rate of 12%.

The other taxes

The main change in Uruguay tax law, again, is on income tax. But there are also minor changes in the other two main taxes that the country has: value added tax (Impuesto al Valor Agregado or IVA) and the tax on assets inside Uruguay (Impuesto al Patrimonio or IP).

Value added tax, the sales tax that one pays when paying for a meal at a restaurant or buying an item in a supermarket, is lowered from 23% to 22% (and, for some basic goods and medicines, is lowered from 14% to 10%).

Assets inside Uruguay are taxed, once a year, at progressive rates that start at 0.7% and reach 2.75% of the “fiscal” (official) value of the asset. For all practical purposes, after allowing for the minimum non-taxable portion of assets in Uruguay, and considering that the “fiscal” value of a property is usually substantially lower than its market value, this tax is not as harmful as it sounds (and on assets related to some activities, such as farming, the tax does not even apply). And the good news is that the new law establishes that this tax will be gradually phased out, and virtually eliminated, by 2017.

© Juan Federico Fischer, LVM Abogados & Consultores. jfischer@lvm.com.uy, www.lvm.com.uy & www.uruguayinvest.com

This is a full-sized, 8½ x 11 inch paper back, with color covers and black-and-white inside. Because of its large size is much easier to read than the pocket-sized edition produced locally.  The price for the full-size paperback is the same as the retail price for the e-book, US$30. For payment, lulu.com accepts Visa, MasterCard, Discover, American Express and PayPal.

One other note: there was a Yankee Naval vessel holding station a few kilometers offshore for my house–obviously they were here in connection with that politicians visit.  I didn’t mind the ship that much, until I noticed that as I went from room to room its weapons readjusted accordingly…

It is in that utilitarian spirit that I raise one issue that is completely germane to this forum: If the Democrats take over Congress they have pledged to revoke the US$80,000 annual foreign earned income exclusion (FEIE) which would have disastrous consequences for many people–and would drive many people into renunciation of their passports. Renunciations could happen even in the face of US attempts to tax their income for 10 years after renunciation AND even in the face of the US barring them from reentry.

This is not idle speculation on my part. The incoming Democratic Chairman of the House Ways and Means (tax writing) Committee would be Charles Wrangel of New York–who has pushed the revocation of the FEIE for years.

When I look at the election choices I begin to understand how the German voters must have felt in the early 1930s–God help us all!

• Uruguay will not levy income tax on any foreign “unearned income” such as dividends, pensions, annuities, and other income from investments, however
• the United States only excludes foreign earned income from US taxation of its non resident citizens, and then only the first US$80,000 per year per person–all other earned income and all unearned income is taxable, EVEN IF YOU NEVER LIVE IN THE US AGAIN!

The upshot as “Seasons” noted is:

Of course, if you take income as earnings…the USA will give you an exemption but then UY will require payment. If you take it as a dividend, UY will give you a break but then the USA will want their cut.Fortunately, there is a way around this problem.

If you set up a limited liability company (LLC) and you are the sole owner, you can file IRS form 8832 and elect to have it considered a “disregarded entity” for US tax purposes. Have that company “earn” the money (and take advantage of the US earned income exclusion), and then have that same company pay you a dividend from outside UY so that it is tax-free investment income here.

There are other solutions, depending upon size, but this is the simplest.

Complete IRS rules for Non Resident Citizens can be found at: http://www.irs.gov/publications/p54/index.html