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 his/her basis of activities or economic interest, when he/she has in Uruguay the following investments:
- Real estate property for an amount higher than 3,500,000 Indexed Units (approximately USD 460,000), provided that it is carried out from July 1st, 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 15.000.000 UI (approximately USD 2,000,000), provided that it is carried out from July 1st, 2020 and at least 15 new (full time jobs) in dependent relationship are created (during the civil year). New jobs are those generated from 1st 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 our country, Law 19,904 was approved. This Law extended the so called “window period” (as explained below) and introduced the possibility to reduce the Individuals Income Tax (IRPF) rate applicable to income from moveable 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 derived from movable investments and/or credits, provided they derive from non-resident entities. However, there is a relief or holiday period (known as “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 our country, and for the next 5 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.
Hence, as anticipated above, Law 19,904 reinforced the current regime with respect to income from movable property derived from the investment in foreign assets, expanding the existing option as from the 2020 fiscal year:
- Extending the so-called "window period“, from 5 to 10 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 December 24th, 2020 Law 19,937 was approved and regulated. These 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 10 fiscal years, as long as they prove:
1. To have made an investment in real estate for a value higher than UI 3.500.000 (approximately USD 460,000). The investment must have been made after January 22nd, 2021
2. Effective presence in the country during the calendar year of at least 60 calendar days in a year.