More than a year after introducing tax laws that made certain foreign-source income taxable to all residents of Uruguay, the Uruguayan Government decided to provide a tax exemption for all foreign residents in order to keep the existing foreigners in Uruguay and encourage their continued future immigration into the country.
The new exemption, enacted in May 2012, provides foreign tax residents (non-Uruguayan citizens who spend more than 183 days per year inside Uruguay) a five-year tax-free window during which they will not be liable for income tax on any foreign source income. Foreign tax residents retain their non-resident tax status for five-years. After the five years expire, foreign tax residents must pay a 12% income tax on foreign interest and dividend income like all other Uruguayan residents; however, all other types of foreign income will still be tax-free, including capital gains, pensions, rents, etc.
In order to ensure that foreign tax residents are not taxed twice on their foreign income, Uruguay has also agreed to forgo taxes on foreign interest or dividends if that income is already taxed by another country. Uruguay will thus provide a full tax credit for any foreign taxes paid. This added incentive is significant because many foreign residents moving to Uruguay are already paying significant taxes in their home country. This is particularly true for citizens of the United States, who pay taxes on their world-wide income.
The news certainly calmed many foreigners still living in Uruguay, many of whom were very upset and frighten by the government’s decision to enact a world-wide tax on interest and dividend income. Some of the foreigners had already left Uruguay and opted for friendlier tax jurisdictions like Chile, Paraguay, Panama, Colombia, Mexico, Central America or the Caribbean. More important many more foreigners was considering to exit Uruguay unless this tax exemption was introduced rather quickly.
This new exemption will entice some of those foreign residents to return to Uruguay. The new tax exemption will certainly encourage prospective foreign residents to consider Uruguay again.
Evidence of Uruguay’s great past (Uruguay was a very rich country in the beginning of the twentieth century with higher average pensions and salaries than that of Italy and France as late as in the 1950’s) can be found in the old city / down town Montevideo with its great architecture. The long term decline of the country since then has made it affordable. Average salaries and pensions are now considerably lower than that of Italy and France giving the country a low cost level compared to Europe. The depression in the last decade was the worse recorded in the history of the country and created an historical opportunity for investment in Montevideo with its architectural treasures.
With great nature, good climate, beautiful beaches, colonial architecture, rich in agriculture commodities and fresh water resources, as well as a renaissance of the old city center / down town Montevideo, many foreigners are looking at Uruguay as an interesting country. The government’s latest tax exemption shows prospective foreign residents that Uruguay is serious about attracting them to the country.