Taxpayers should follow the progress of this bill, which proposes some significant tax increases. Taxpayers should review the bill's provisions and determine how they might be affected if the bill is enacted.

On June 16, 2016, Uruguay's Ministry of Economy formally proposed, to its Parliament, a bill that would increase taxes. Once approved, the provisions would apply as of January 1, 2017, unless a specific date is provided in the provision. (For information regarding the previous announcement of these tax increases, see Tax Alert 2016-980.)

Corporate income tax (CIT)

Currently, accumulated net operating losses (NOLs) are fully deductible for five fiscal years from the date they were generated. The bill would allow companies to offset only 50% (rather than 100%) of their taxable income with NOLs.

The bill also would remove the notional employer salary deduction and would only allow a deduction for the real employer's salary (i.e., salaries on which personal income tax is paid). This provision would apply to companies with formal accountancy (i.e., companies that register their transactions in a logbook and calculate their taxes based on what is registered in the logbook).

Additionally, the fiscal inflation adjustment would only apply when the Executive Power establishes that an accounting inflationary adjustment is needed because of a hyperinflationary economy (according to accounting standards).

The bill would require partners or shareholders providing independent personal services to their own organization (where the organization is a CIT payer) to have formal accountancy, when their organization provides personal services of an identical nature.

As of March 1, 2017, the bill would require companies to calculate and withhold taxes on notional dividends, which would be deemed to be paid to shareholders. Upon receipt of actual dividends, shareholders could credit the taxes already paid against their income tax liability, so no tax would be due.

To determine the value of those notional dividends, companies would have to follow specific steps. Generally, the bill would base the calculation on adjusted income (excluding NOLs) that is more than three years old and subject to CIT and would impute the notional dividends in the third month following the three-year period. As part of the calculation, the bill would also allow companies to deduct their equity participation investments in other resident entities and in fixed and intangible assets from the accumulated adjusted income (i.e., all adjusted income from July 2007 onwards), provided the transferor is identified.

Personal income tax (PIT)

Under the bill, PIT would apply to withdrawals that owners take from sole proprietorships that are subject to CIT.

With respect to capital gains for personal income tax purposes, the bill would increase the tax from 3% to 7% in the following cases:

— Interest on long-term deposits (i.e., more than one-year) in Uruguayan pesos and indexed units in local banks and financial institutions

— Interest on corporate bonds or other debt instruments with terms in excess of three years that are conducted by public subscription (i.e., public offer to buy shares or bonds issued by a company) and issued by listed resident entities

— Incomes derived from certificates of participation in listed financial trusts that are conducted by public subscription and have periods that exceed three years

The bill would increase from 5% to 7% the tax applicable to interest on short-term deposits (i.e., one year or less) in local banks and financial institutions in Uruguayan pesos without a readjustment clause.

Under the bill, the profit distribution exemption would include distributions made by sole proprietorships whose incomes do not exceed the limit established by the Executive Power. The bill, however, would repeal the profit distribution exemption claimed by entities that render independent personal services and have chosen to be included in the CIT.

Annual progressive rates applicable to work income would increase as follows:

a) For individuals

b) For households, when work income of each member of the household considered individually exceeds 12 minimum wages (values for 2016 are UYU 133,800 or USD 4,316) in the year

c) For households, when work income of one member of the household does not exceed 12 minimum wages (values for 2016 are UYU 133,800 or USD 4,316) in the year

* BPC is a specific index that varies according to inflation
** Approximate value

Additionally, the bill would limit deductions for social security contributions and certain expenses by replacing the current 10% - 30% progressive rates for deductions with two rates. A 10% rate would apply to annual incomes of up to 180 BPC and an 8% rate would apply to annual income exceeding that amount.

Nonresident income tax

The same notional dividends and profits provision applicable for PIT purposes would apply to nonresidents.

For capital gains for nonresident income tax purposes, the same rates described for PIT purposes would apply. The bill also would increase from 12% to 25% the tax rate applicable to income earned by entities: (1) resident, domiciled, incorporated or located in countries or jurisdictions with low or no taxation; or (2) benefiting from a special regime of low or no taxation. The new tax rate would not apply to dividends or profits paid or credited by CIT taxpayers.

Social security assistance tax

Annual progressive rates applicable to social security assistance income would increase as follows:

* BPC is a specific index that varies according to inflation
** Approximate value

Value added tax (VAT)

Currently, the general VAT rate is 22% and the reduced rate for certain goods and services is 10%. The bill would authorize the Executive Power to reduce the VAT by two percentage points for acquisitions performed through debit card or electronic money instruments. This provision would apply to transactions involving amounts lower than 4,000 Indexed Units (approximately UYU 13,800 or USD 445).

Other provisions

The bill would incorporate the notion of economic unit into the Tax Code. The Tax Code would include a provision that states when an economic unit should be presumed. Additionally, the bill would hold entities jointly liable for their tax debts. Also, the bill would repeal the definition of economic unit included in paragraph 1 of Article 32 of Law No. 13,426.

The bill would change some of the provisions regarding the power of the tax office to estimate taxes owed by taxpayers. For example, when coefficient samplings are performed, the samplings are deemed to be representative of the company reality when they amount to at least 10% of the sampling universe. The bill would allow the coefficient or proven relationship for a fiscal year to be applied to the previous three years. Also, the bill would allow tax authorities to appeal indexes prepared by non-profit private specialized organizations (in addition to the ones prepared by public or parastatal (i.e., an institution that cooperates with the state) organizations according to the current law).

Finally, the bill would eliminate the secrecy provisions, established by Article 47 of the Tax Code, for administrative or judicial proceedings for information related to third parties that is used for the presumptive calculation.

The bill would not allow imported goods that are competitive with the national industry to benefit from the exemptions established in Title 3. The bill also would authorize the Executive Power to include exceptions to this provision in justified cases.

For the purpose of obtaining the exemptions included in Title 3, the bill would require sports clubs and institutions to include, as affiliates, young people for free. The young people should make up at least 10% of their affiliates. These young people would be students from specific educational institutions.

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