As You Mourn The End of Portugal’s NHR, Consider Uruguay’s Special Tax Regimes

Philippe May
Singapore

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Contrary to popular belief, Portugal has not ended its Golden Visa program. It has only scrapped the real estate option. While job creation, cultural heritage, and scientific research investment options remain open, the fund investment option will be the preferred qualification route for applicants going forward.

But while the higher capital requirement for funds (EUR 500,000 as opposed to the previous EUR 350,000 for real estate) may not deter wealthy individuals, another change, on the fiscal rather than the immigration front, is going to ruffle feathers: 

Portugal is set to terminate the Non-Habitual Residency (NHR) preferential tax regime on New Year’s Eve. This regime exempts many types of foreign-sourced income from Portuguese tax for a period of 10 years, and its absence will deal a harsh blow to Portugal’s attractiveness as a tax jurisdiction. As a consequence, it is worthwhile for high-net-worth individuals to consider some options. 

Besides the usual tax havens like The Bahamas, Monaco, and Vanuatu, which impose no tax on income at all, one country shares striking similarities to Portugal: Uruguay.

A similar proposition

This three-million-strong South American country shares with Portugal not only the subtropical climate, Latin culture, and Atlantic coastline; Uruguay also offers wealthy investor migrants a tax holiday that is about the same as NHR.

Before I explain that, here’s a piece of advice: It is important to know how a fiscal residency in a previous country of (tax) residence is canceled. If you cannot de-register as a resident taxpayer in the previous country, you will face a case of double tax residency, which can have negative effects. In some countries, the process of tax residence cancellation only starts when permanent residency (PR) is acquired in another foreign state. Unlike the much-hyped visa programs of countries like Malaysia, Indonesia, or Thailand, where long-term tourist visas are widely touted but where PR is virtually never issued, Uruguay does grant PR to qualified foreigners after a period of temporary residence of a few months. 

Legal residence is not fiscal residence: Know the difference

In Uruguay, as in most jurisdictions, the terms Legal Residency and Tax Residency are different and independent concepts.

• Legal Residency (first temporary, then permanent) is granted by the immigration authority.
• Tax Residency is a status granted by the fiscal authority.

If you are – from a fiscal perspective – a tax resident in Uruguay, the Personal Income Tax (IRPF) applies. If you are a tax non-resident, the Non-Resident Income Tax (IRNR) applies.

Note: An individual can be a legal resident without being a tax resident, and vice versa. 

According to government regulations, a natural person traditionally has tax residency in Uruguay when one or both of the following circumstances occur: 

• The individual spends more than 183 days a year in Uruguay.
• The core or base of the individual’s activities, finances, and/or vital interests are located in the country. 

The establishment of “vital interests” is presumed when the spouse and the minor children reside in the country. The regulations make clear that to be included in the aforementioned presumption, the spouse must not be legally separated from assets, and the children must be subject to parental authority. The presence of a spouse is sufficient if there are no children. 

New options to gain tax residency

The current center-right government coalition recently adopted additional categories for tax residency. A natural person who has the following investments in Uruguay is also considered a tax resident: 

• US$2.15 million or more in real estate;
• US$510,000 in real estate if the individual is physically present in Uruguay for at least 60 of the year
• US$6.45 million or more, directly or indirectly, in a Uruguayan company, including those engaged in activities listed as in the national interest;
• US$2.15m million or more, directly or indirectly, in a Uruguayan company that directly leads to the creation of 15 new, full-time jobs.

Previously, those who owned the above types of assets in Uruguay were subject to tax on any income derived from them in any case but didn’t get the corresponding benefit of tax residency. Now they do.

Taxes applicable in Uruguay for a natural person are the following: 

1. Personal Income Tax (IRPF) 

2. Wealth Tax (IP)

The IP is an annual tax levied on assets located in Uruguay. The first US$150,000 (double that for families) are exempt from this tax. The IP rates that apply to different asset classes range from 0.1% to 0.3% in the case of resident individuals.

Progressive income tax for residents, but…

The Personal Income Tax (IRPF) is a personal and direct tax levied on income obtained by natural persons residing in Uruguay. This tax applies a dual system that  distinguishes income derived from capital (taxed at rates ranging from 0.5% to 12%) and from labor (taxed at progressive rates up to 36%). 

Uruguay’s territorial tax system means these rates apply only to income from Uruguayan sources. Foreign income from movable capital – also known as “holding income”, such as interest on deposits, interest on loans, and dividends – is taxed at the rate of 12%. 

…there’s an 11-year tax holiday 

However, there is a remarkable exemption on said foreign holding income for new immigrants who choose to become tax residents in Uruguay. They may opt to pay the special “Non-Resident Income Tax” (IRNR) instead of IRPF. The IRNR does not include such holding income, which means they will not be taxed in Uruguay on foreign holding income at all.

Foreigners can take advantage of this attractive option starting from the fiscal year in which they take up residency in Uruguay and for the ten following fiscal years.

This means 0% Income Tax for 11 years.

After that period, the regular 12% tax will apply on foreign holding income. However, newly arrived migrants have another option: To pay personal income tax on foreign holding income at the rate of 7% – without a time limit. 

Three-year path to MERCOSUR citizenship

On top of the tax benefits, Uruguay offers - like Portugal - a road to citizenship open to foreign residents: Singles can apply five years after arrival in the country, and those with a spouse or family after three years. While basic knowledge of Spanish is expected, applicants need not sit a written language exam like in Portugal. Uruguay is a member of MERCOSUR and therefore Uruguayan citizenship comes with residency rights in Brazil, Argentina, and – fiscally even more attractive - Paraguay.

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