Tax incentives for international transport companies in Uruguay

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Guzmán Ramírez

Bergstein Abogados, Montevideo

gramirez@bergsteinlaw.com

Tax incentives are the essence of the Uruguayan tax system. Such tax system has contributed to its attraction to foreign companies, including those which render transport services. A brief description of the main tax benefits offered in favour of such companies follows below.

Income tax exemption on air/sea navigation companies

In Uruguay, regular companies are subject to: 1. Impuesto a las Rentas de las Actividades Económicas (IRAE; Corporate Tax) at the rate of 25 per cent (for companies incorporated or domiciled in Uruguay); or 2. Impuesto a las Rentas de los No Residentes (IRNR; Non-Residents Income Tax) at the rate of 12 per cent (for companies domiciled abroad). However, those whose main activity is the provision of air and/or sea navigation services are exempted from the payment of Income Tax (whether such companies are local or foreign).[1]

Such exemption is ‘subjective’, which means that all their income is exempted. The Dirección General Impositiva (DGI), the Uruguayan Tax Office, has challenged this approach. In its opinion, the exemption provided in favour of air/sea transport companies, would only encompass the income resulting directly from the performance of transport services (other income would be excluded from such exemption).[2] That said, the Tribunal de lo Contencioso Administrativo (TCA; the High Administrative Court) has not agreed with such opinion.[3]

For foreign companies, the Non-Residents Income Tax exemption is subject to a requirement of reciprocity (ie, such foreign companies shall be exempted in Uruguay as long as their countries of origin offer the same exemption to Uruguayan transport companies).[4]

Income tax exemption on land transport companies

Foreign companies whose main purpose is the performance of land transport activities, may also benefit from a subjective exemption.[5] For instance, Brazilian companies engaged in such activities are expressly exempted from the payment of Non-Residents Income Tax.[6] Local branches of Brazilian companies are also exempted from the payment of Corporate Income Tax.[7] Even the Tax Office has been in agreement with this approach.[8]

The Executive Branch is entitled to grant the same exemption in favour of other foreign companies, subject to a requirement of reciprocity by their countries of origin (as referred to above).[9]

Income tax exemption on air/sea freights

Even those companies (either local or foreign) that may not be deemed air/sea navigation companies, but which still render (as an ancillary activity) air/sea freights to transport merchandises to foreign markets, are exempted from Corporate Income Tax or Non-Residents Income Tax, as the case may be.[10] Such exemption is ‘objective’, which means that the exemption only applies to the income resulting directly from such freights.

Principle of the source

Those companies which may not benefit from any of the exemptions referred to above, would, in principle, be required to pay Income Tax in Uruguay. However, the Uruguayan tax system still adheres to the so-called ‘principle of the source’. This is to say, that, as a general rule, Income Tax (both for local and foreign companies) is only assessed over Uruguayan-sourced income.[11] Foreign-sourced income is, with minor exceptions, excluded from the scope of Uruguayan taxation. Those companies whose activities are entirely or mostly performed outside the Uruguayan territory, remain, essentially, untaxed.

In consequence, companies rendering international transport services without being encompassed in any of the aforementioned exemptions, would be subject to Income Tax in Uruguay, but only to the extent that such services are performed within the Uruguayan territory.

In the case of fletes de exportación (export freights) (ie, transportation services, either by air, sea or land, from Uruguay to foreign markets), companies, either local or foreign, have the choice to determine the amount of taxable income (to be deemed of Uruguayan source) on a presumed basis. This is to say that; (1) for companies with tax residence in Uruguay, Corporate Income Tax (at the rate of 25 per cent) may be assessed over 10 per cent of the total gross income stemmed from such export freights;[12] and (2) for companies with tax residence in another country, Non-Residents Income Tax (at the rate of 12 per cent) may be assessed over 20.83 per cent of the same total gross income.[13] Therefore, the effective tax rate, in both cases, would be 2.5 per cent. This regime is optional. Companies may choose to pay Income Tax under any other reasonable criterion to determine the Uruguayan-sourced income. However, the criterion to be proposed should be duly grounded.

In the case of fletes de importación (import freights) (ie, transportation services, either by air, sea or land, from outside Uruguay to the local market), there are no legal rules in order to determine the amount of Uruguayan-sourced income (ie, there is no presumed taxable income established by law). That said, and, based on several rulings issued by the Tax Office, the ratio of the distance travelled within the Uruguayan territory to the total distance covered by the transport companies, would determine the percentage of taxable income.[14]

Such rules on export and import freights also apply respectively to passengers’ transportation services from and to Uruguay.

VAT benefits

As a result of the same principle of the source, transportation services (either by air, sea, or land) rendered outside the Uruguayan territory, are excluded from Impuesto al Valor Agregado (IVA; or VAT).[15]

Transport services rendered within the Uruguayan territory, are in principle subject to VAT, at the standard rate of 22 per cent. However, certain services, that is, land transportation services of passengers, are subject to a reduced rate of 10 per cent.[16] In order to determine the taxable amount (ie, the amount of fees corresponding to transport services rendered in Uruguay), certain companies have the option to do this on a presumed basis of three per cent of the total gross fees.[17] However, such option is only provided for air freights. For sea and land freights, companies apply the ratio/proportion between the distance travelled within the Uruguayan territory and the total distance covered by them,[18] as mentioned above for import freights.[19]

Certain transport services rendered within the Uruguayan territory are not only exempted from VAT, but also subject to a ‘zero VAT regime’, which means that companies (either local or foreign) performing such activities (deemed to be ‘export services’) are entitled to claim the refund of the VAT billed by their suppliers (so-called ‘inbound VAT’).[20] More specifically, any merchandise transportation services (either by air, sea or land) towards foreign markets, port facilities and/or free trade zones, fall under such regime (as well as those associated with merchandise declared in customs transit).[21] Passengers' transportation services to a foreign country by land,[22] and any passengers' transportation services (either national or international) by air or sea,[23] are also subject to the same regime. In the case of merchandise transportation services to foreign destinations, the right to receive the refund includes the inbound VAT associated with the segment of the services rendered within the Uruguayan territory (which is the standard rule), and also abroad.

Other transport services rendered within the Uruguayan territory, but not included under the zero-VAT regime referred to above, may still be exempted from the payment of VAT. For instance, freights by vessels navigating under the Uruguayan national flag, are exempted from VAT, subject to fulfilment of the following requirements:

• such freights require approval from the Ministry of Transport; and

• the company must evidence that:

• more than a half of its shareholders are Uruguayan citizens domiciled in Uruguay;
• more than a half of its issued shares, representing at least 51 per cent of the votes, are nominative shares and are owned by Uruguayan citizens;
• individuals controlling and managing the company are Uruguayan citizens; and
• the company is compliant with its labour and tax obligations, and also registered with both the Registro Nacional de Comercio (National Registry of Commerce) and the Registro Público de Propietarios y Armadores (Public Registry of Owners and Operators).[24]

The definition of ‘vessels’ includes any floating structure (self-propelled or not) aimed at transporting people or merchandise in the maritime, fluvial or lacustrian space.[25] Therefore, barges, for example, are encompassed within such definition.

Transportation services of passengers by national-flag vessels, are also exempted from VAT.[26]

Tax incentives on national-flag vessels

In addition to the aforementioned VAT exemption, national-flag vessels may benefit (under the same requirements referred to above) from additional tax incentives. For instance, such vessels are excluded from the payment of: 1. Impuesto al Patrimonio (IPAT; Net Equity Tax); and 2. any other taxes assessable over their sale and import of spares, equipment and fuels needed for their operation.[27]

Tax exemption on national aviation companies

National aviation companies (duly authorised by the Civil Aviation Office) benefit from a broad exemption, comprehensive of any and all taxes (including VAT and Net Equity Tax) on aircrafts, fuels and any additional materials/implements needed for them.[28] The Tax Office accepts a broad definition of ‘aircrafts’, including, for example, hot-air balloons and helicopters.[29]

Income tax exemption and zero-VAT regime on re-selling of transport services

For Income Tax purposes, the broad exemptions referred to above in favour of air/sea navigation companies and land transport companies, are not applicable (because of their subjective nature) to companies re-selling such services.100 per cent of their income is deemed to be as local-sourced income, and therefore subject to Income Tax. That said, the Income Tax exemption on air/sea freights applies (because of its objective nature) even to re-selling companies. In consequence, that income resulting directly from the re-selling of air/sea freights is tax exempted in Uruguay.[30]

For VAT purposes, the re-selling of transport services included under the zero-VAT regime (described above), is also subject to the same benefit even when such services are effectively rendered by subcontractors.[31] In the meantime, there is no crystal-clear rule as to whether the VAT exemption on freights by national-flag vessels applies only for the benefit of companies rendering such freights, or also for the benefit of those re-selling them.

Notes

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