Juan Trocolli manages the corporate tax and accounting department at Anderson, which is one of the largest tax and legal firms in Uruguay. He has a degree from Georgetown on international taxation. So he’s really the person for Karen A Higgs, founder of Guru’Guay to be bringing international readers’ questions about taxes in Uruguay.
In this interview they jump right in to discuss the point at which a foreigner needs to start paying tax, tax obligations when you live in Uruguay but work for a company abroad, taxes on royalties and tax breaks for business owners. And Karen asks whether filing taxes in Uruguay is going to get less frustrating in the future.
This article is based on the interview and has been edited for brevity and clarity.
I’ve got a bunch of questions from the Guru’Guay readers on taxes. Can we jump in?
Yes, of course. Shoot.
So this reader asks, “What are my tax obligations if I live full time in Uruguay and earn income working for a foreign company?”
So they want to know what taxes they need to pay in Uruguay. Our tax system in Uruguay is based on local source income, which establishes that if you are developing an activity from within Uruguay, you have to pay individual income tax on earnings.
A question we hear a lot is: “But I’m serving a client located abroad, and doesn’t Uruguay not tax income sourced from abroad?” The answer is no. What ‘s important is that while your client is from abroad, you’re living and working in Uruguay. You still have to pay individual income tax.
What you are exempt from is VAT. Here in Uruguay, service providers must charge 22% VAT. However when you provide a service to a foreign client and the benefit of that service is utilised exclusively abroad—which is typically the case—you don’t have to charge VAT. But you still have to pay individual income tax.
If you earn income generated abroad, obtained from sources abroad, just two types of income are taxed: interest and dividends. No other income from abroad is taxable here in Uruguay.
How much is individual income tax?
It’s between zero and 36%. As an independent contractor, you can apply to pay a flat tax of 12% on your income.
Who doesn’t want to pay 12% instead of 36%. How do you do this?
The difference is between registering to pay tax as an entity i.e. paying corporate income tax (known as IRAE, income tax on commercial activity, with a flat 12% rate) or paying personal income tax as an individual (known as IRPF, with rates of 0-36%). You could start out registering yourself as an individual and then analyse if it’s beneficial to switch. There is a tipping point that I would say is more or less between 3,000 and 4,000 dollars per month. If you earn over that, it’ll probably be more beneficial to switch to paying corporate income tax.
Second question. “What taxes must I pay on royalty income coming from abroad?”
Royalties obtained from abroad are not taxable here in Uruguay.
Next question. “My wife and I are planning to sell our home in Canada and move to Uruguay. When we purchase the house with some land, what taxes do we need to pay? And then what are our tax obligations into the future as house owners?”
At the time of buying your property, the only tax that the buyer pays is an asset transfer tax (known as ITP), which is two-percent of the fiscal value of the property. The fiscal value of the property is typically between 30 and 40% of the market value of the property. So, in terms of a percentage, the ITP is likely to be 0.7% of the purchase price of the property. The buyer has no income tax to pay on the transaction (the seller pays).
Annual property taxes are quite low. The first is a municipal property tax set by the local government (called ‘contribución inmobiliaria’). The other is a national tax which supports public primary schools in Uruguay (called ‘impuesto de primaria’). Both are calculated on the fiscal value of the property. In general terms, both taxes will likely add up to some 0.5% of the market value of a property.
Our next question. “Do US citizens still have to pay US taxes, federal and state, on US-made income?”
Yes, they do. The USA has a unique system which establishes that by the fact of being born in the US, you are obliged to pay taxes in the US your entire lifetime—unless you rescind your citizenship.
Even if they are tax residents in Uruguay, they will still need to pay taxes in the US. (However Uruguay will not tax them twice.)
“At what point,” asks another reader, “does a temporary resident need to start declaring and paying taxes?”
Uruguay’s tax system is a little different to most others abroad.
It’s basically based on the principle that, if you’re generating or receiving an income inside Uruguay—for instance you’re working or you have a property in Uruguay and you lease it—, you have to file a tax return and pay taxes, whether you are a resident or not.
If you are not generating income in Uruguay, whether you are a resident or not, you don’t need to file tax returns. Our tax authority does not require you to have tons of tax returns that say at the end of the day, you don’t need to pay any taxes. Their only requirement is that if you are generating a tax, you file a tax return. If not, there’s nothing to do.
Oh, interesting. So in the case that the person is generating income, how do they start?
They need to register at the DGI, the tax authority. You’ll get a tax ID and then you need to invoice and file tax returns monthly and annually.
Another reader asks, “I’ve heard there are generous tax breaks when investing in business. Can you tell me more about that? How much do I need to invest, in what, and what are the breaks?”
Investment in Uruguay was declared of national interest in a 1998 law to promote and protect investment. The first article of the law stated that there should be no difference in terms of regulation between a local and foreign investor.
At the beginning or indeed at any stage of the business, as an owner you’re making investments—you are improving and constructing something, you are buying machinery, or you are developing technology. Whatever you invest in, the regimen provides for benefits, mainly in the form of tax breaks.
Benefits include tax breaks on corporate income tax (25% at the time of writing). Depending on the amount of the investment, you may be able to get a personal tax exemption on the investment.
The second benefit is companies have a net worth tax (IP), which taxes the assets less liabilities that a company has inside Uruguay (foreign assets are not taxable—again, Uruguay only taxes what happens inside Uruguay). Any purchases—equipment, machinery—or improvements or construction that you carry out are exempted from this net worth tax.
Thirdly, you are also exempted from VAT on goods and improvements including the cost of construction.
And the fourth benefit is related to importing goods and supplies for your business. Import duties tend to be between 20 and 35%—plus you have to pay VAT. Under this regime, you can import equipment, machinery, and indeed most company-relevant items from abroad, without paying VAT and without paying custom duties.
I would say that 80% of investments in Uruguay are done under this regime.
The last question is my own. After moving to Uruguay, I found it was impossible to do my taxes myself. I felt much better after a Uruguayan business MBA I knew who’d recently returned from the UK also threw up her hands and hired an accountant. It has definitely gotten easier since electronic invoicing became compulsory last year. But why is the tax system so convoluted and do you think it’s going to get any easier?
The truth is that it’s not easy to complete and file tax returns. As you mentioned it’s already possible for the taxpayer to automatically generate invoices and payment receipts. I think probably… not next year, but by 2023, at least individual taxpayers will start to receive an automatic personal tax return and tax payment receipt that can be approved and submitted at the click of a button. If you don’t agree with the return, you will be able to file a corrected return. So, yes, things are improving. But I’m afraid you’ll still need your tax advisor until 2023.
Is a big company like Anderson affordable for a freelancer?
You never know when a freelancer is a freelancer at the beginning and becomes a major company. So for us, freelancers are very important clients and we have a unit which specifically helps foreigners starting business here in Uruguay with registration and taxes.
It depends on the amount of hours that it takes us to serve the client. But I would say that that an average fee—to take care of all taxes and filings if they are invoicing two to four times a month, including our fees—would be around 150 dollars monthly, more or less.