Castellán

Therefore, it is vital that when signing a contract with a foreign company, the situation of these liabilities is considered, so that, if we are facing a scenario where withholding is required, the local company can carry it out and deduct it from the price balance, without harming the commercial relationship and without that deduction becoming a cost.

When this is not possible or was not done, it is important to analyze the company's accounting in a timely manner, well in advance of the end of the calendar year, in order to make certain decisions that allow for better tax efficiency.

With the aim of contributing to this analysis, we will briefly explain the regulations applicable to the Wealth Tax (IP) withholdings that Uruguayan companies are required to make for liabilities with foreign companies.

What type of debtor balances may be subject to withholding?

Companies subject to the Business Income Tax (IRAE) that have balances payable to individuals or legal entities abroad who do not operate in Uruguay through a permanent establishment as of December 31 of each year are required to act as withholding agents for the Wealth Tax, unless they are financial debts or import price balances.

Thus, debts incurred for services, royalties, unpaid dividends, customer advances, and commissions for sales intermediation, among others, will be subject to Wealth Tax withholding.

The withholding is carried out exclusively for the passive balances that companies maintain with foreign individuals at the end of the calendar year, that is, on December 31 of each fiscal year, regardless of the closing date of each company's fiscal year.

What are the applicable rates?

It will depend on the type of foreign company with which the passive balance is held. The general tax rate is 1.5%, applicable to companies domiciled abroad. But in the case of companies domiciled or established in low or no tax countries that do not operate in the country through a Permanent Establishment (PE), the rate rises to 3%.

On the other hand, if the foreign creditor is a non-resident individual, the minimum non-taxable amount and the progressive rates applicable to each case must be taken into account.

Can the existence of Double Taxation Agreements (DTAs) impact?

Yes. A very important aspect to consider when determining this withholding is the analysis of the existence and terms of the Double Taxation Agreements in force in Uruguay. The particular case and corresponding agreement must be considered in order to determine if the Wealth Tax is covered by it, as in certain cases the withholding may not apply. It should be noted that, in any case, to apply the Agreement, the tax residence certificate issued by the corresponding tax authority must be obtained.

What are the consequences for the Uruguayan company if the withholding is not done?

If withholding is required and not carried out, the regulations provide for fines and surcharges for the local company that was the withholding agent.

What impact does this withholding have on the IRAE of the Uruguayan company?

As we mentioned, ignorance of this regulation, as well as analyzing it out of date, can have economic consequences, implying a cost in the IRAE for the local company.

Indeed, when planning is adequate and this issue is anticipated in advance, it will be the foreign supplier who ultimately bears the withholding amount, allowing the local company to withhold and then deduct the withheld amount from the price balance to be paid.

On the other hand, if this withholding was not foreseen at the time of contracting, it is possible that the foreign supplier does not want to bear the cost of such withholding and the Uruguayan company may end up choosing not to pass it on, becoming in such cases a non-deductible expense for the local company in its Business Income Tax (IRAE).

In such cases, the local company should consider the possibility of settling this liability with the foreign party prior to December 31, in order to avoid the aforementioned tax cost.

Final reflection

Considering the above, it is of vital importance that local companies, before contracting with foreign companies or in view of the end of the calendar year, analyze the liabilities they will hold at the closing, considering their nature and with whom they were or will be contracted, in order to negotiate, settle, or reduce them, and thus avoid the payment of the tax that often ends up being a non-deductible cost for the local company.

 

Montevideo, December 10, 2021.