Castellán

One of the main changes concerns passive income, which would now be subject to IRAE if they do not meet certain conditions established in the regulations, and this is of particular interest to 'holding' type companies (http://bit.ly/3JEVowD).

 

Under the previous regime, passive income from abroad, such as dividends and interests, were considered foreign source - and therefore not subject to IRAE - on the understanding that the source is located at the domicile of the debtor or issuer of the equity interest, as appropriate. The same applied to intangible rights, whose source was located at the place of economic use, and in the case of real estate capital leases, the location of the property was considered.

 

Why are the introduced modifications of special interest to 'holding' type companies?

 

Under the IRAE regulations, income derived from dividends and shareholding were exempt.

 

Now, such income is at risk of being included as taxable income under IRAE if they do not meet certain conditions.

 

Entities affected by the changes

 

1. IRAE taxpayers who are part of a multinational group:

• When the company is included in the consolidated financial statements of the group (if the entity is required to prepare them),
• When the shares of the company are traded on a public securities market.
• Those that have been excluded from the consolidated financial statements solely due to size or relevance will also be considered.

2. Falls within the definition of a 'holding' company described in the Decree: when the assets directly associated with these activities represent at least 75% of the total assets of the company.

 

Conditions of the changes

 

To avoid being affected by the changes (and be exempt from the IRAE regime), the entity must meet the requirement of 'economic substance'.

For 'holdings,' this would imply employing 'adequate human resources in number, qualification, and remuneration to manage investment assets,' and having 'appropriate facilities for carrying out this activity in national territory.'

According to the Decree, a 'holding' will have 'adequate human resources in number' when:

• It has at least one director residing in national territory, with the appropriate qualifications to hold such position.

• The majority of employed human resources are Uruguayan residents and are qualified to carry out the activities that generate the corresponding income.

Compliance with the requirements, in all cases, must be reported in a sworn statement, which has not yet been regulated by DGI, so it has not yet been established what formal or substantial nature it must have.

Furthermore, the Law allows the above condition to be fulfilled by third parties, provided it is done under proper supervision and within national territory.

The Decree complements the above by adding that:

• Adequate human resources in number, qualification, and remuneration must be employed.

• In case of providing services to multiple recipients, there should be no overlap of resources allocated to them.

• They must have appropriate facilities, and incur adequate expenses and costs for the performance of the activity.

It is worth mentioning that the service provider (such as an accounting firm assisting the company) would also be required to detail in the invoice the personnel involved and the hours applied for the provision of said services.

 

Considerations to keep in mind

 

In conclusion, it is of great practical importance for 'holding' companies in Uruguay to be aware of these changes, in order to implement the necessary changes and ensure compliance with the conditions mentioned in the regulations. Otherwise, they would be subject to IRAE, which previously exempted certain types of income and benefited companies of this kind.

It is also of great interest to local or foreign parties interested in eventually establishing a company of this type, as knowing the new regime is essential for proper tax planning.

 

Montevideo, February 6, 2023.