Uruguay’s recent tax changes: Why foreign residents should not be alarmed

In May of 2010, Uruguay announced it would make some adjustments to its tax laws.

Unfortunately, unnecessary panic was generated when an early draft of the law that was still under discussion within the cabinet surfaced.

The aim of the tax changes is (and was from the start) to tax interest on deposits and dividends that Uruguayans hold abroad, not to tax foreign residents living in Uruguay. In fact, the law makes specific distinctions to ensure that those who relocate to Uruguay do not face extra taxes as a result.

Shortly after announcing the tax changes, the government issued four successive statements, to clarify matters:

  • On May 28th, the Ministry of Finance issued an official statement ratifying that there will be no new taxes on Uruguayan companies, and that their offshore assets will not be taxed.
  • It also clarified that there will be no taxes on assets owned abroad by foreign residents in Uruguay. The tax on assets is only for citizens (at a very small scale; and this asset tax is gradually being phased out since 2007, and will disappear by 2017).
  • On June 1st, another official announcement was made, stating 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.
  • And finally, on August 3rd, the Minister of Finance announced, when submitting the final draft of the bill to Congress, that it contains an explicit solution to avoid double taxation: a tax credit is granted to those who pay income tax abroad. This ensures that foreign residents in Uruguay are not double taxed.

In sum, then, the tax changes that resulted, and will be effective from 2011 onwards, are:

A) On assets:

  • Citizens (not foreign residents) will face a small tax on overseas deposits, securities and loans. The rate is 0.07% to 0.5%. (Between less than a tenth of a percentage point and half a percentage point). This tax, the asset tax (known as “IP”) is being phased out, annually, and will disappear by 2017, so in essence, will not affect anyone obtaining citizenship after 2017.

B) On income:

  • Only three types of income generated outside of Uruguay will be taxed: interest on deposits, interest from loans to a foreign company and dividends. The rate will be a flat 12%.
  • But, if a person already pays income tax abroad (on any of those three types of income), he or she will not have to pay in Uruguay. Thus, the person avoids paying taxes twice. This is applicable for both residents and citizens.
  • Any other type of income generated abroad (besides the three listed ones) is excluded. Thus, salary, capital gains on sale of shares or property, pensions, lease income, or any other type of income are all untaxed.