Significant changes proposed to source rules for passive income
Uruguay’s Ministry of Economy released a draft bill at the end of July that would introduce an exception to the source principle for corporate income tax purposes for entities that are part of a multinational (MNE) group (as defined) operating in Uruguay.
Uruguay currently taxes companies—both resident and nonresident—only on income that is sourced in the country; income derived from assets located or rights used outside Uruguay is exempt. The proposals only would affect the sourcing of passive income; the sourcing rules for normal business income would not be affected.
A public consultation is currently underway, and if the proposals are enacted, the measures would apply as from 1 January 2023.
Overview of proposed changes
The draft bill would revise the source rule so that specific passive income derived from outside Uruguay by an entity that is a member of an MNE group would be considered Uruguay-source income. As a result, the following income would be subject to corporate income tax if the entity is not considered a "qualified” entity:
- Income from real property;
- Other income from movable capital;
- Equity increases from transfers of assets that generate any of the above income.
Further, the following types of income from intellectual property would be added to the types of income deemed to have a Uruguay source:
- Income from the sale or economic use of trademarks outside Uruguay, which would always be deemed to be Uruguayan-source income (i.e., there would not be an exception for a qualified entity); and
- Income from patents or software registered, alienated or used economically outside Uruguay in certain instances.
Definition of “MNE group”
An entity would be considered to be part of an MNE group if either of the following conditions is fulfilled:
- The entity’s results are included in the group's consolidated financial statements for presentation purposes in accordance with generally accepted accounting principles in the jurisdiction where the group's ultimate controlling entity is resident or would be so included if the equity interests in the entity were traded on a public stock exchange; or
- The entity’s results would be included in the group’s consolidated financial statements as set out above but are excluded solely because of the entity’s small size or lack of significance.
A permanent establishment of such an entity would be considered a member of an MNE group in all cases.
Definition of “qualified entity”
According to the draft bill, an entity would be a qualified entity only if it has adequate economic substance during the fiscal year. An entity would have to meet the following requirements with respect to each asset that generates income:
- Employ a sufficient number of individuals who are appropriately qualified and remunerated to manage the investment assets and have adequate facilities in Uruguay for addressing these activities;
- Make the necessary strategic decisions and bear the relevant risks in Uruguay; and
- Incur adequate costs and expenses with respect to the acquisition, holding or disposal of the assets.
For purposes of bullets 1. and 2., an entity would have adequate economic substance even if the activities are carried out by third parties contracted for such purposes in Uruguay and are under the adequate supervision of the entity. The requirements in bullets 2. and 3. would not apply to entities whose main purpose is the ownership of equity interests in other entities (i.e., holding companies) or to entities whose main function is the ownership of immovable property. In other words, holding companies and immovable property companies would only need to meet the first requirement to have adequate economic substance.