Member Article

 The interaction between the Treaty and Uruguayan tax rules Permanent establishment (Pe)1 and Fixed base for business (Fbb)2 The concept of permanent establishment3 for corporate activity, and the concept of a fixed base for business4 for independent individual workers establish the mechanism for apportionment of tax-raising powers between both countries for income of a nature defined in those countries. Income earned from these sectors and activities can only be taxed in the country of residence, except when the said activities or services are carried out in the source country through a PE or a FBB. In our case, Uruguay is the country of residence and Portugal, in your case5 , it is the source country.

Services provided by Uruguayan residents in Portugal

 

Any individual resident in Uruguay and any undertaking established under Uruguayan law, therefore resident in Uruguay for the purposes of the Treaty, may only be taxed in Portugal (the source country) if they operate in the said country through a PE or a FBB. If this is not the case, Uruguay has exclusive tax-raising powers.

 

As the Uruguayan rules follow the territorial principle for income, the tax situation in Uruguay for the income generated in Portugal, the territorial source, is that the income is from a foreign source and for this reason is not covered by the taxable event for Uruguayan income tax because it does not meet the territorial requirement.

 

Conclusion: as long as such income cannot be imputed to a PE or to a FBB in Portugal, of a company or an independent worker with tax residence in Uruguay, they do not pay income tax either in Portugal or in Uruguay. Thus, there is no tax on income from business or on dividends or earnings transferred abroad but that are generated outside the country as the condition to tax such income is that it should be generated by income subject to Uruguayan income6 tax and this is not the case here.

 

In truth, the dividends distributed by a company with its tax residence in Uruguay with their origin in profits or income earned in Portugal, may not be subject to taxation in Portugal, except when such dividends are distributed in favour of a person who is resident in Portugal for tax purposes, or when the holding that generates the dividends can be imputed to a PE or a FBB in Portugal.

 

In the case of profits or income from independent work earned in Portugal by a company or independent worker that is a tax resident in Uruguay, for the Treaty to operate and the Portuguese entity that pays the income not to make a retention at source of the tax due in Portugal, under the terms of Portuguese domestic law, it is necessary for the companies or independent workers with their tax residence in Uruguay to request full dispensation from the Portuguese withholding tax (IRC –corporate income tax7 or IRS – personal income tax8, respectively), by completing the form Model 21-RFI9 . This form must be certified by the Uruguayan tax authorities. The form is valid for the maximum period of 1 year and must be completed in triplicate by the company or by the independent worker that is the actual beneficiary of the income for the provision of services, or by their legal representative in Portugal. One copy of the form must be given to the entity that is under the obligation to withholdthe tax in Portugal before the deadline established for the payment of the tax. The second copy of the form must be given to the Portuguese tax authorities and the third copy remains with the beneficiary of the income. Thus, such financial flows of money transferred in and out of Uruguay will not pay income tax.

 

Services provided by uruguayan residents, from Uruguay to Portugal

 

In this scenario the key is that the services are provided from Uruguay and enjoyed in Portugal. This means they will be taxed in Uruguay, because they occur in this country and the source is Uruguayan.

 

Once again, in not falling under the definition of PE or FBB in Portugal, and being income from activities covered by articles 7 or 14 of the Treaty, they cannot be taxed by Portugal, only Uruguay.

 

There is a legal framework established by the Free Zones Law (FZ)10 , that defines certain areas of Uruguay that are dedicated to carrying out, free of taxes, all types of industrial, commercial or services activity that are allowed in those zones11. These activities can be carried out by companies that acquire the right to operate within these FZs, which the Law calls FZ Users12.

Thus, if the provision of services is done through a FZ User, acting within the zone defined by the law, no taxes are paid also in Uruguay13.

 

As to the distribution of dividends or earnings, the same considerations apply in this case. Being generated by income that is exempt in Uruguay, they are not taxed.

 

Accordingly, the income generated by services provided by these entities is not subject to income tax either in Uruguay or in Portugal since, as the entity that owes the income is Portuguese, the Treaty comes into operation through the completion and filing of the form Model 21-RFI under the terms set out above. This step avoids the withholding at source of IRC and IRS on such income, applicable under the domestic laws of Portugal. Again, such financial flows of money transferred in and out of Uruguay will not pay income tax.

 

International investment platform – uruguayan holding companies

 

Even though this is a topic that is not directly related to the Treaty, it is of interest to analyse these legal entities.

 

A tool that could be particularly useful in analysing the impact of internacional taxation or level of protection of a family or business asset, may be to concentrate the investments through entities established in Uruguay.

 

The principle of the territorial source means that income generated by the said entity outside Uruguay is not taxed because it does not meet the territorial requirement for an income tax event. In turn dividends or earnings, or any other income, transferred abroad are not taxed because they are generated by income that is not subject to Uruguayan income tax. Thus again, such flows of money transferred in and out of Uruguay will not pay income tax.

 

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