Foreign tax credit
Non-qualified entities obtaining non-qualified passive income of foreign source will be liable to CIT, having the right to credit the analogous income tax paid in the foreign jurisdiction against the CIT generated by the same items of income. This credit cannot exceed the portion of the tax calculated prior to the deduction.
CIT reduction for income reinvested in fixed assets
40% of income reinvested in the purchase of (i) industrial and agricultural machinery, (ii) vehicles and installations, (iii) computers, (iv) telecommunications equipment, and (v) some assets for the tourism industry is exempt from CIT.
20% of income reinvested in the construction and expansion of industrial, agricultural, and tourism buildings is exempt from CIT (limited to 40% of net taxable income in the year of expenditure).
The joint amount of said investments can be deducted from the taxable basis, with a limit of 40% of the annual net profit, once the amount of other exemptions has been deducted. The excess can be deducted (with the same limitations) in the following two tax periods. It is important to mention that income exempt by these provisions cannot be distributed and must be retained as a reserve account, which ultimately can only be capitalised.
Note that the above-mentioned CIT benefit will be exclusively applicable to taxpayers whose income, in the immediately preceding fiscal year to which the investment is executed, does not exceed the amount of 10 million 'Indexed Units' (approximately USD 1,510,000). This limitation is not applicable to professional cargo transport companies.
Movable fixed assets directly connected to the industrial cycle and equipment for data processing are exempt from NWT.
All assets directly associated to the development of agricultural and/or farming activities will be exempt from NWT as long as the owners are individuals or companies with nominative shares also owned by individuals. As a consequence of the elimination of the Rural Real Estate Concentration Tax (ICIR), this NWT exemption has been modified. According to Law Nbr. 19,088, this exemption will apply only in cases where the referred assets do not exceed 12 million ‘Indexed Units’ (approximately USD 1,815,000).
Investment Law 16,906
Uruguay has modified Investment Law 16,906, achieving a better framework for local and foreign investments carried out in the country. To obtain tax benefits, the Investment Law requires that enterprises obtain a government statement in this regard. The Bureau of Investor Assistance is in charge of monitoring the correct compliance of these projects.
The Investment Law grants two types of benefits:
This kind of benefit is only for manufacturing, extractive, or farming/ranching activities, and includes:
- Exemption from NWT for chattel property directly engaged in the production cycle and data-processing equipment.
- Exemption from VAT and CIT paid on the importation of such goods, and reimbursement of VAT in the case of locally purchased items.
Benefits that may be obtained at the discretion of the Executive Power for any type of business activity (not cumulative with automatic benefits) include:
- VAT and CIT exemptions (among other taxes) on importation of fixed assets items.
- NWT exemptions: Permanent for chattel property items, for a period of eight years for construction work in Montevideo (capital city), and for a period of ten years in the rest of the country.
- VAT reimbursement on local purchase of goods and services for civil construction work.
- Exemption from CIT, depending on the nature and size of the project to be carried out. The Executive Power takes into account the following criteria to grant this benefit:
- Implementation of 'clean' technologies.
- Contribution to export growth and diversification.
- Contribution to geographic decentralisation.
- Improvement of technological investigation, innovation, and development.
- Generation of employment.
Regulatory framework for the Investment Promotion Law - Decree 268/020
It is worth mentioning that the Executive Power updated the regulatory framework for the Investment Promotion Law in 2020. In this regard, it establishes a transition period for the presentation of projects for which it is possible to opt to apply the previous regime (Decree Nbr. 143/018).
Regarding tax benefits, CIT exempted in each fiscal year may not exceed 90% of the tax. If convenient for the taxpayer, the computation term of the exoneration might be suspended for up to two years.
The indicators established by the previous regime through which the tax benefit is determined remain in force, but the new provisions modify their burden in the matrix and the calculation method.
Nevertheless, all investment projects could be assessed through a simplified matrix with only one indicator: job creation.
- Exemption of CIT: From 42% to 69%.
- Period: 5 to 7 years.
The calculation of the amount of CIT exemption and the effective period for this benefit is established on the basis of a score determined by the amount of investment committed (tranches) and the number of people to be employed.
On 30 November 2022, the Commission for the Application of the Investment Law issued a document that adjusts the basic general criteria for the operation of Decree 268/020, which modifies the methodology for the calculation of certain indicators and the limits applicable to investments in utility vehicles, electric vehicles, and renewable energies.
Amendments to Investment Promotion Regime: Law 19,637
Law 19,637 introduced measures in order to promote investments in small companies, generate new incentives for investment and productive development, and adjust the applicable exemption for the software industry.
The main provisions approved are the following:
- CIT exemption for research and development (R&D) activities in areas of biotechnology, bioinformatics, and software production, provided the assets are developed, at least in part, in Uruguay, or the services related to the referred activities are provided in the country.
- Increase in CIT exemption related to foreseen automatic benefits, going from 40% to 60% in the case of certain investments in movable assets and from 20% to 30% in certain investments in real estate construction. It is applicable to CIT payers whose income from the previous year does not exceed 5 million 'Indexed Units' (approximately USD 755,000).
CIT exemption for R&D activities in biotechnology, bioinformatics, and software production
The regulations establish a legal framework for the CIT exemption condition for R&D activities in biotechnology and bioinformatics and software production, referring to the fact that to be exempted the assets resulting from the aforementioned activities shall be registered according to the IP protection and registration regulations.
The exemption will apply if the assets are executed, at least partly, in Uruguay, and the amount exempted will be calculated considering the relative weight of the direct development costs incurred in Uruguay in relation to the costs incurred in the rest of the world. The assets that result from such activities can be used abroad as well as locally.
Within the services related to the activity, services of technical advice in the areas of biotechnology and bioinformatics provided by the entities that carry out R&D activities, in relation to certain products, are included.
In addition, a full exemption is available, provided that the referred services are developed in Uruguay. Said fact will be verified when the company employs full-time human resources in accordance with the services provided, and the amount of expenses and direct costs incurred in the country for the provision of said services is adequate and exceeds 50% of the amount of expenses and total direct costs incurred in the year for the provision of the same.
Finally, the exemption is limited to those entities that are CIT payers by their legal status (it excludes some taxpayers that are not corporate entities).
In this context, Resolution 183/020 establishes the frequency in which the tax returns must be filed and the information they must contain for the application of the exemption.
Auto-saving ‘direction’ benefit
The auto-saving ‘direction’ benefit allows a company to deduct from the CIT basis the amount of the capital increase that occurred as a consequence of the reserves capitalisation or of the in-kind distribution of shares, for an amount equivalent to the investment carried out with the investor’s own funds. The amount of the CIT deduction and the period(s) to which said exemption will apply is granted by the government through a statement issued by the Executive Power.
Following the approval of the Free Zone Law in 1987, this system became an important tool for attracting investments to Uruguay.
It has been utilised for carrying out traditional activities in the free zones (warehousing, logistics, and distribution), for the provision of services (software, finance, call centres, etc.), and for manufacturing activities.
This regime, established by Law Nbr. 15,921 in 1987, was modified in 2017 by Law 19,566 (hereinafter the 'New Law', in force since 8 March 2018), which introduced changes (in line with OECD recommendations) without affecting the rights acquired by free zone users (as guaranteed by the Uruguayan government).
The Law declares 'of national interest in the promotion and development of the free zones, with the objectives of promoting investments, diversifying the productive matrix, generating employment, increasing the capacities of the national labour force, increasing the national added value, promoting the activities of high technological content and innovation, promoting the decentralisation of economic activities and regional development, and in general terms, promoting the insertion of the country in the dynamics of international trade in goods and services and international investment flows'.
Free zones are privately or publicly owned isolated and fenced off areas of Uruguayan territory determined by the Executive Branch with the purpose of carrying out all types of manufacturing, commercial, and service activities within the zone, while enjoying tax exemptions and other benefits envisaged in the law.
Companies in these areas cannot carry out industrial, trading, or service activities in the non-free zone Uruguayan territory (the New Law introduces modifications in this regard; see below), except for services expressly authorised by the government (listed below) but are allowed to render all types of services within the free zones or to third countries. Also, Resolution 231/019 specifies that free zone users can provide services to non-free zone territory if the beneficiary of said services is a taxpayer taxed by CIT.
Free zone users are allowed to render the following services to the non-free zone Uruguayan territory:
- International call centres, except for those whose main destination is the non-free zone Uruguayan territory.
- Remote learning.
- Electronic signature certificate issuance.
In addition, as an exceptional manner, free zone users may perform the following activities outside free zones, within the limits that the Executive Power establishes:
- Collection of debt portfolio, provided they are made through third parties.
- Exhibition by free zone users that are settled in free zones with eventual disadvantages of location.
It is also foreseen that users that are settled in free zones located outside the metropolitan area are allowed to perform complementary activities outside the free zone, such as public relations, handling of auxiliary documentation, billing, and collection of goods and services. To do so, they will have administrative offices provided by the free zone operators. It is important to mention that it will not be allowed to carry out operations of sale of goods and services in these administrative offices.
In order to operate in/from the free zone, certain requirements must be fulfilled from an ‘economic substance’ perspective (i.e. there must be an actual economic activity developed in the free zone). In this sense, some modifications were introduced to determine which substantial activities can be developed outside the free zone.
The New Law introduced maximum terms (limits) for free zone contracts, generally up to five, ten, or 15 years (depending on the activity and type), and filing will be required to free zone users with existing agreements not complying with such limits.
In order to preserve and maintain the condition of free zone status and the corresponding exemptions and benefits, free zone users must employ, as a minimum, 75% of natural or legal Uruguayan citizens within its staff. However, the New Law stated that those free zone users that develop service activities may employ a minimum of 50% of natural or legal Uruguayan citizens during the whole agreement period, as long as the nature of the developed activities requires it and the free zone user makes an effort to employ as many Uruguayan citizens as possible. In this case, an authorisation of the Executive Power will be needed.
Free zone users are exempt from all current and future national taxes, including those taxes for which a specific legal exemption is required, in connection with the activities performed within the free zones. The Uruguayan government guarantees all the exemptions and benefits granted by the law for the term of their contracts. Free zones can be located outside or inside the cities; it depends on the kind of free zone.
The New Law introduced a provision that establishes that income derived from the exploitation of IP rights and other intangible assets will be exempt, provided they derive from R&D activities carried out within the free zone.
Social security taxes, as well as certain WHTs, are excluded from the exemption. WHT on payments of dividends made by these companies to their non-resident shareholders are exempt.
Additionally, the New Law established exemptions for thematic zones for the provision of audio-visual, leisure, and entertainment services outside the metropolitan area.
One of the most relevant changes to the free zone regime is the authorisation for the provision of services from free zone to non-free zone territory, provided the beneficiary of said services is a taxpayer taxed by CIT. In this regard, the regulations establish that the services contracted by CIT payers with free zone user suppliers must be linked to taxable income of the beneficiary. In addition, CIT payers must inform the supplier that they meet the mentioned conditions before the service is rendered.
The rules establish certain provisions related to activities of R&D, such as the information to be included in a tax return that must be filed annually to the Tax Office and its due date, as well as the attribution of the property of the registered assets.
CIT exemption for trading activities with transit of goods through Uruguay
The CIT Act establishes a tax exemption for non-residents on income derived from activities performed in Uruguayan customs areas, port customs areas, customs deposits, and free zones, with goods of foreign origin declared in transit or stored in the referred areas. This exemption applies to the extent that such goods are in transit (not having as origin or as destination the Uruguayan customs territory). This exemption also applies on a percentage of the sales that have as final destination the Uruguayan internal market. This tax benefit has been widened and, while originally applicable only to non-residents, is now available for tax residents in Uruguay. In addition, these activities with goods deposited in the country can be performed from outside Uruguay.
Industrial park incentives
Individuals or legal entities that establish industrial parks within Uruguayan territory, as well as companies located within such industrial parks, are entitled to CIT exemption for their industrial equipment, excise tax and VAT exemption on the acquisitions of such goods, and other benefits.
Decree 170/019 modifies certain provisions regarding incentives granted to industrial park users by Investment Law 16,906. In addition, in May 2018, Decree 143/018 introduced a new regulatory framework to said law.
In this regard, Decree 143/018 established that the exemption of CIT granted to industrial park users and the period in which the benefit applied, as well as the tax credit given in relation to employer retirement contributions, would be increased by 15%.
Notwithstanding this, Decree 70/019 establishes that for those projects that include investments within and outside of the industrial park, the benefits must be calculated over the investment carried out within it. Also, the amount of the tax credit should be determined, taking into consideration the retirement contributions made on behalf of employees that work within the industrial park.
In February 2020, the Executive Power issued the Decree 79/020, which regulates this regime, updated by Decree 408/022 (22 December 2022). The latter introduced more flexible conditions for accessing the benefits and extended certain terms, aiming to make the regime more attractive.
Uruguayan legal entities holding shares in non-resident entities or investing in assets not located in Uruguay are not subject to tax (due to the application of the source principle) on qualified income, provided they meet the substance requirements to be considered qualified entities (see Foreign-source income in the Income determination section for more information).
Tax benefits for Shared Service Centre (SSC) activities
Activities carried out by SSCs are granted relevant tax benefits under certain conditions.
For these purposes, an SSC is defined as an entity that belongs to a group of enterprises, which has as its sole activity the effective provision of any of the following services: advisory and data processing services, management or administration (strategic planning, business development, advertising, management, and staff training), logistics and storage, financial management, and R&D, regardless of the place of use; to at least 12 related parties that belong to the same group of enterprises.
In addition, it is clarified that the exploitation of IP rights is not included in this beneficial regime.
Tax benefits granted include the exemption of CIT of 90% of the income derived from the promoted activities and exemption of NWT on the assets involved for five or ten fiscal year-ends, depending on specific compulsory requirements that must be fulfilled. To have access to the five year-end tax benefits, an SSC must comply simultaneously with the following conditions:
- Generate at least 150 new direct qualified jobs at the end of the first three year-ends, jobs that must be preserved until the end of the fifth year-end.
- Implement a training plan with a minimum budget of 10 million 'index units' (approximately USD 1,510,000) for the Uruguayan citizen employees during the whole first three year-ends, which must be for new projects.
The tax exemption period will be extended to ten years when (i) the minimum number of jobs exceeds 300 at the end of the first five year-ends and remains until the end of the exemption period and (ii) the referred training expense exceeds twice the aforementioned amount in the course of the first six year-ends.
Tax benefits under the SSC regime have been extended through Decree Nbr. 330/016. Making benefits more accessible, a CIT exemption of 70% of the income derived from the promoted activities by complying with the following conditions is available:
- Generate at least 100 new direct qualified jobs at the end of the first three year-ends (fulfilling the same conditions that are required for the original benefits).
- Implement a training plan with a minimum budget of five million 'index units' (approximately USD 755,000) for the Uruguayan citizen employees during the whole first three year-ends (fulfilling the same conditions that are required for the original benefits).
It is important to note that for the determination of new direct qualified jobs, those that are related to a decrease in jobs of local related entities will not be considered.
Regarding NWT, the exoneration of the assets affected by the activity promoted by the CIT exemption period remains unchanged.
Printing industry incentives
Companies that print books and educational material are exempt from the NWT and VAT.
Long distance services and call centres
Companies developing long distance services and call centre activities have special benefits regarding CIT (from 70% to 100% exemption).
Companies running a condo hotel have special benefits regarding CIT (from 70% to 100% exemption), among other taxes. There are also exemptions and other tax benefits granted on behalf of the promoting company.
Electric power industry incentives
Companies that generate electric power from non-traditional energy sources have special benefits regarding CIT (from 40% to 90% exemption).
Machinery industry incentives
Companies that build and/or assemble (under certain conditions) machinery with agricultural purposes have special benefits regarding CIT (from 50% to 90% exemption).
Shipping industry incentives
Imports of material, supplies, and equipment required for the construction, maintenance, and repair of shipyards or vessels are exempt from VAT. The shipbuilding industry has special benefits regarding CIT (from 50% to 100% exemption).
Water and air transportation incentives
The income of water and air transportation companies is tax exempt. In the case of foreign companies, the exemption is subject to reciprocal treatment. The government may exempt from CIT companies engaged in transportation by land, subject also to the conditions of reciprocal treatment.
Forestry plantation incentives
Income derived from forestry plantations made before July 2007 is tax exempted. For income derived from forestry plantations made since July 2007, stricter conditions, such as ‘quality wood’, are required to be exempted from CIT.
Software, bioinformatics, and biotechnology industry incentives
See the description of the CIT exemption for R&D activities in biotechnology and bioinformatics and software production above.
Electronic industry incentives
The production of electronic devices has special benefits regarding CIT (from 50% to 100% exemption).
Tourism industry incentives
Investments in the tourism industry have tax benefits related to CIT, VAT, and NWT, as follows:
- Deduction of up to 40% of CIT in investments made in the fiscal year in hotel equipment and equipment for improving entertainment and information services to tourists and deduction of up to 20% of CIT in investments made in construction and expansion of hotel buildings, with the limits mentioned in previous sections (40% of the annual net profit, once the amount of other exemptions has been deducted).
- VAT refund included in local acquisitions of goods and services for construction, improvement, or expansion of tourist complexes.
- VAT exemption on import of goods for construction, improvement, or expansion of tourist complexes.
- The list of operations included in the concept of exports of services for VAT purposes (thus zero-rated and with the possibility to recover input VAT) was broadened to include, among others, services related to accommodation that hotels, apartments, and rural tourism establishments provide to tourists, as well as for international event organisation services. In the context of COVID-19, the zero-rated treatment available to non-residents was extended to accommodation services for Uruguayan residents in high season (November thru April).
- NWT exemption for ten years on investments in infrastructure and civil work for construction, improvement, or expansion of tourist complexes.
- NWT exemption for four years on fixed assets investment for tourist complexes.
- 50% exemption of import duties on materials and goods for construction, improvement, or expansion, as well as fixed assets, of tourist complexes.
- VAT reduction of 9% to the following services rendered from 16 November 2020 thru 30 September 2023: restaurant services not included in the fair for accommodation, catering services for parties and events, parties and events services, vehicles rental without chauffeur, and mediation services in the rental of immovable properties to tourists.