Treatment of BONT in the new Uruguayan legislation

One of the changes introduced by the Tax Transparency Law (Law No. 19,484) enacted on January 05, 2017 is in regard to the treatment of the jurisdictions or regimes considered low-tax or no-tax (Baja o Nula Tributación, “BONT”, for its acronym in Spanish). Chapter III of said Law establishes the tax regulations applicable to entities that are resident, domiciled, incorporated or located in BONT jurisdictions and ultimately affects certain transactions made by taxpayers which are subject to the Corporate Income Tax (Impuesto a la Renta de las Actividades Económicas, IRAE), Personal Income Tax (Impuesto a la Renta de las Personas Físicas, IRPF), Income Tax on Non-Residents (Impuesto a la Renta de No Residentes, IRNR), Net Wealth/Net Worth Tax, Impuesto Patrimonial,IP) and Tax on Transfer of Property (Impuesto a las Transmisiones Patrimoniales, ITP), aimed at discouraging the use of entities incorporated in such jurisdictions.

What is a BONT jurisdiction or regime?

According to the Decree of the Executive Power No. 40/2017 of February 13, 2017, a jurisdiction or regime considered BONT is when the effective tax rate on income is lower than 12%; no tax information exchange agreement or agreement to avoid double taxation has been entered into with Uruguay; or if existing, said agreement is inapplicable to all taxes covered by the agreement.

What are the tax modifications set forth in the new legislation?

Any income corresponding to the transfer of assets whether by means of sale, assignment or usufruct of the BONT entity when it has more than 50% of its assets in Uruguay is deemed of Uruguayan source. In this sense, income in the above indicated taxes are levied as follows:

• IRAE at a rate of 25
• IRPF at a rate of 12%
• IRNR at a rate of 12%

In the case of the IRNR, the National Budget Act of fiscal year 2015 (Act No. 19,438) of  October 14, 2016  established that non-resident and resident entities in BONT jurisdictions are taxed at a rate of 25%, except for dividends or profits paid by IRAE taxpayers which remain at the tax rate of 7%.

Additionally, if the transfer of shares of a BONT entity is made by another BONT entity, it is also taxed with IRNR. However, in this case, 30% of the sales price is taken as deemed value in order to calculate the applicable tax rate, which implies that the total tax to be paid is 7.5% of the sales price.

In case the alienation of the BONT is made to a non-BONT entity or individual, 20% of the sales price is taken as deemed value in order to calculate the applicable tax rate, which implies that the total tax to be paid is 2.4% of the sales price.

In the event the BONT has real estate in Uruguayan territory, the entity must pay IRNR at a rate of 25% plus a supplementary rate of 5.25%, which implies that the total rate to be paid is 30.25%.

Regarding the IP levied on the assets held in Uruguay, the rate to be paid increases from 1.5% to 3%.

Exemption from IRNR for transfer of goods prior to 06/30/2017

In order to discourage and eradicate the use of BONT entities, the Law establishes an alternative way to close or transfer said entities.

It stipulates the exemption from the Income Tax on Non-Residents (IRNR) and also the Net Wealth/Net Worth Tax (IP) over real estate transactions by BONT entities when the following conditions occur at the same time:

• The transactions are made before 06/30/2017
• The acquirer is not a BONT entity
• The BONT entities have deregistered from the Tax Administration (DGI) and other state-owned entities within a period of 30 days following the stipulated date, i.e., 07/30/2017

Effective date of these modifications?

The new regulations established by the Tax Transparency Law have a retroactive effect, i.e., they are effective as of January 01, 2017.

Image: Andrew Neel