Changes to taxation of foreigners in Free Zones (FZs)
On 25 March 2019, the Ministry of Economy and Finance approved Decree 86/019, which changes some aspects of the special tax regime applicable to foreigners working in an FZ.
Foreigners working in FZs can decide not to be affiliated to the social security system of Uruguay and elect not to make social security contributions in Uruguay. Should they make this written decision, they could also choose to pay non-resident's income tax (IRNR) on their labour income instead of resident’s income tax (IRPF) (applicable as a general rule to resident individuals).
Said legislation established that the special regime was only applicable for those activities that were exclusively undertaken in the FZ and to the extent the aforementioned services were not part of other services provided (directly or indirectly) to residents of the non-FZ territory.
The Decree establishes that the special regime can also be applied to those activities performed outside Uruguayan territory, as long as these are performed in the frame of a labour relationship. In such a case, the Decree establishes that the whole compensation will be subject to IRNR, regardless of whether the activities are performed in the FZ or outside Uruguayan territory.
Individuals tax residence
In order to attract more investments to the country, Decrees 163/020 and 174/020 added additional circumstances in which an individual may become a resident for tax purposes. It brings down the amount of investments required to be considered tax resident in Uruguay. In that sense, the Decree states that, except for taxpayers who are able to prove their tax residency in another country, it will be considered that an individual has one's basis of activities or economic interest in Uruguay when one has the following investments in Uruguay:
- Real estate property for an amount higher than 3.5 million Indexed Units (approximately 375,000 United States dollars [USD]), provided that it is carried out from 1 July 2020, and the individual is present in Uruguay for at least 60 days. If no new acquisitions are made, the updated fiscal cost will be considered for each property.
- A direct or indirect investment in a company which value is higher than 45 million Indexed Units (approximately USD 1.6 million), provided that it is carried out from 1 July 2020 and at least 15 new full-time jobs in dependent relationship are created (during the civil year). New jobs are those generated from 1 July 2020 and are not related to a reduction of jobs in a related party.
In line with these changes, with the aim of attracting more investments to the country, Law 19,904 was approved. This Law extended the current 'window period' (as explained below) and introduced the possibility to reduce the IRPF rate applicable to income from movable capital from non-resident entities.
According to the rules in force, IRPF includes an exception to the source principle. It taxes, at a 12% tax rate, foreign-source income from holding movable capital, the one derived from deposits, loans, and, in general, any other income arisen from movable investments and/or credits, provided they derive from non-resident entities. However, there is a relief or holiday period (known as a 'window period'). In this regard, it is foreseen that individuals becoming resident for tax purposes in Uruguay are entitled to make an option to be subject to IRNR in the tax period in which they turn tax residents in the country and for the next five fiscal years.
To the extent that IRNR is not levied on capital income (passive income) of foreign source, the election of the option results in a relief of the tax burden that would otherwise apply on passive income of foreign source.
Law 19,904 reinforced the current regime with respect to income from movable property derived from investment in foreign assets, expanding the existing option as of the 2020 fiscal year, as follows:
- Extending the so-called 'window period' from five to ten years.
- Enabling the possibility of paying IRPF at a 7% tax rate on the income from movable capital derived from non-resident entities to those who configure tax residence in Uruguay as of fiscal year 2020 and from said configuration.
On 24 December 2020, Law 19,937 was approved and regulated. The new rules establish that those individuals who elected to be subject to IRNR (window period) of the initial regime (from 2011 thru 2019) will have the option to be subject to IRNR in relation to foreign-source income from movable capital accrued from fiscal year 2021, for up to a maximum period of ten fiscal years, as long as they prove:
- To have made an investment in real estate for a value higher than 3.5 million Indexed Units (approximately USD 375,000). The investment must have been made after 22 January 2021.
- Effective presence in the country during the calendar year of at least 60 calendar days in a year.