Tax Residence in Uruguay
Under Uruguay Tax Laws Consolidated Text of 1996, updated, in its Chapter 7 referred to Individuals Income Tax (Section 6), and in Section 5 of the Regulating Decree No. 148/007, it is ruled that an individual taxpayer is a Uruguay Tax Resident over a given period of time when it can be proven any of the following circumstances, any of which must occur over the period under consideration:
- That the core of the individual’s business or activity is based within the territory of Uruguay;
- That the center of the individual’s personal life is in Uruguay, such as the individual’s family settled in the country; or
- Even if not fulfilling any of the two circumstances enumerated above, when the individual remains in the territory of Uruguay for 183 days during any calendar year. The law states that the 183 days period includes "sporadic absences" (applicant’s days out of the country) throughout the year; therefore, equating the sporadic absences with days of permanence for the purpose of achieving the 183 days in-country required. The law left to the Executive Power the settling of the conditions that those sporadic absences should satisfy in order to be considered as part of the period of permanence in the country.
Complementing the law, the regulation by the Executive Power states that "sporadic absences" must not exceed 30 calendar days in order to be counted as days of permanence.
The Case of the Administrative Dispute Court
We are going to bring a recent case which involves a change in the application of the law by the Tax Authority, but, more concerningly, by the Administrative Dispute Court (ADC), the superior body with competence over administrative disputes. This ADC holds the power only to annul or confirm all final administrative acts when it is alleged by the people a direct damage caused by a deviation of the authorities in the application of the Law. ADC’s decisions are highly transcendental, since they do not admit further appeal by any of the parties, and, even though Uruguay’s is a Civil Law system (there is no mandatory case-law), the positions and fundamentals held by the ADC are frequently followed by all Public Offices, who reasonably do not want to have them overturned by the superior court.
The case involves a Spanish citizen who, based on the criterion of the legal "183 days period of permanence in-country", requested the General Tax Direction the issuance of the certificate as tax resident of Uruguay during years 2013, 2014 and 2015, in order to file it before the Tax Agency of Spain. With his request, the Spanish citizen was aiming to benefit from the "Agreement for the Avoidance of Double Taxation and Tax Evasion between Uruguay and Spain" in force since April, 2011, seeking to pay Income Tax in Uruguay, and consequently to elude having to pay the corresponding tax in Spain.
The Spanish citizen’s request was only partially granted by the tax authority, which admitted the tax residence for year 2015, but did not grant it for the other two years applied for. Such denial led the applicant to appear in due form and time before the ADC, claiming for the annulment of the denial in-fact of the administration to grant the certificate with relation to years 2013 and 2014.
Admitting he had not strictly accomplished with his physical presence in Uruguay the 183 day period, the Spanish citizen alleged before the ADC that broadly speaking he had met the legal term, for it should be added several sporadic absences throughout the years involved, as permitted by the law. Each of the individual’s absences, individually considered, had lasted less than 30 days, as required by the regulation, and therefore, such absences had to be included as period of permanence. He alleged that the General Tax Direction did not have the power to discretionally interpret the legal concepts contained throughout the text of the law (particularly the notion of "sporadic absences") in a broader and more severe manner than what the very text of the law provides for. Every time the law is clear it should not leave room to free interpretations that may lead to contradict its text.
In its answer to the complaint, the Tax Direction pleaded before the ADC for the upholding of its original decision. In words of the Tax Direction, the Spanish citizen had made a strict and literal interpretation of the law, and of what is called the "criterion of the amount of days in the country". It argued that when it comes to the application of the law by judges and authorities, all possible methods of interpretation admitted by the legal science (such as the application of the principle of material reality) must be used. It added that necessarily the administration must interpret the Tax Law in order to establish what concepts such as "residence" and "permanence" mean, and not to leave space to abuse by the taxpayers, who would claim the declaration as tax residents when they reasonably do not hold that right; not to mention the international legal implications such declaration involves. At the end it was alleged that in the particular case, the facts showed that even though the Spanish citizen had accomplished in excess the minimum of 183 days required by the law (counting the time out of the country as "sporadic absences"), he had not shown stability in his stay within the territory, and that in case of granting the plaintiff’s claim, what the law grants as an exception would turn to be the rule.
After analyzing the case and considering the allegations of both parties, the judges, members of the ADC, unanimously delivered a judgment ruling in favor of the Tax Direction, confirming its initial Resolution denying the tax residence for years 2013 and 2014, and, hence, deciding against the Spanish plaintiff’s claim of annulment.
The judgment stated that after having analyzed the information of the Immigration Department it was proved that the periods of permanence of the plaintiff in Uruguay were significantly shorter than his absences, even though it had to be admitted that each of such absences were less than 30 days, as allowed by the law.
The ADC agreed with the Tax Direction that, notwithstanding the literal text of the law, the purpose of the legislator with the enactment of the rule (the spirit of the law) was to ensure a certain permanence of the foreigners in the country in order to be entitled to the tax residence, and that the absences, in order to be considered sporadic (therefore, counted as days of stay) should be occasional, eventual and happen infrequently. Quite the contrary, it was found that the "sporadic" in the case was the stay of the plaintiff in the country, and not his absences.
The recent decision by the ADC is considered a leading case, which may involve a pitfall for foreign individuals to obtain the Tax Residence of Uruguay, and getting issued the corresponding certificate as theoretically granted by the law, both every day more and more applied for by foreigners who aim to be excluded from their own national taxation systems. It is advisable for foreigners coming to Uruguay with the expectation to get advantage of its beneficial taxation system (at least vis-à-vis their own national system), to remain within the territory of the country for an actual period of 183 days, or otherwise as close as possible.
From now on, and more likely after the sentence of the ADC addressed above, the legal period of permanence required for the tax residence in Uruguay should be completed only with a few sporadic absences, which should meet the features as occasional, eventual, infrequent, and certainly, each shorter than the 30 days legally admitted. And of course, our recommendation must be to seek legal advice prior to any moves, and not after burning the bridges!
For more informations, please contact Estudio Dr. Mezzera:
Ramon Bado, Partner - firstname.lastname@example.org
In Uruguay Capital (such as debt securities, bonds, shares, etc) yield is taxed with a 12% fixed on the earnings, while in Spain the income tax on same investments, from € 9,000, goes from 24% and can reach 43% of the income.