Uruguay: Proposed corporate income tax changes would capture certain passive income generated abroad

Proposed changes to Uruguay’s income tax on economic activities

Proposed changes to Uruguay’s income tax on economic activities

A bill that includes proposed changes to Uruguay’s income tax on economic activities (impuesto a las rentas de las actividades económicas—IRAE) has been released for public consideration.

In general, the measures propose to impose corporate income tax on certain income generated abroad, and with regard to taxpayers subject to IRAE if they are members of multinational groups.

The corporate income tax amendments are proposed pursuant to commitments made in July 2021 by Uruguay with the European Union. Specifically, the proposed legislative changes would aim to address EU concerns about certain aspects of Uruguay’s tax regime that the EU considers to be harmful from the perspective of international tax competition and erosion of tax bases. Although the proposals would maintain the principle of territoriality for business income (that is, the proposed measures would not amend the general rule that IRAE is imposed on and taxes income generated in the territory of Uruguay), certain passive income from foreign sources obtained by companies that are members of “multinational groups” (as defined) would be taxable, unless certain requirements of substance or value added are met. 

Income considered to be from Uruguayan sources

The proposals would amend current law by including new types of income that would be considered to be of Uruguayan source—and, therefore, subject to the IRAE—when obtained by entities that are members of multinational groups.

Specifically, income derived from intellectual property rights related to patents and software, when alienated or used economically abroad, would be subject to tax if not “qualified income” For these purposes, "qualified income" would be defined by reference to a formula that ultimately seeks to determine if the subject patent or software basically had been generated in Uruguay. The formula consists of applying to the income derived from the exploitation of the patent or software, a quotient based on the ratio of direct expenses and costs measured against the total expenses and costs incurred to develop the asset. The proposals also include rules for determining when patents and software would be exempt from application of the new rule (that is, when they are considered to be entirely from Uruguayan sources).

The proposals include an anti-abuse rule that would allow the tax administration to disregard the application of certain beneficial regimes concerning the non-taxability of passive income abroad, when the main purpose of one of the main purposes would be to obtain that benefit.

Under the proposals, the measures would be effective for tax years beginning on or after 1 January 2023.

KPMG observation

Tax professionals expect that the proposals could be subject to changes as the measures continue through the legislative process.

Read an August 2022 report (Spanish) [PDF 987 KB] prepared by the KPMG member firm in Uruguay


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