The CDI plans to eliminate double taxation in terms of taxes on income and wealth using the tax credit method, that is, allowing the refund in the country of residence of the taxpayer (under certain conditions) of the taxes paid in the other country.

Who can benefit from this CDI?

As the treaty mentions in its article 1, this CDI can be used by residents of one or both countries.

By residents, we mean both legal entities (commercial companies) and natural persons who meet the following condition: “any person who, by virtue of the legislation of that State, is subject to taxation therein by reason of his domicile, residence, place of incorporation, seat of management or any other criterion of a similar nature, also including that State and its political subdivisions or local authorities.”

It is important to mention that in the event that a natural person establishes dual residence, the same treaty provides for “tie-breaker” rules to determine which country of residence is and how to correctly use the CDI.

With respect to legal entities, the competent authorities of both countries will reach an agreement taking into account “their seat of effective management, the place of their incorporation or creation, and any other relevant factor.”

What taxes are contemplated in this CDI?

The tax powers regarding income and wealth taxes existing in each country are established, and it is added that it will also be applicable to analogous taxes to be created after the entry into force of the aforementioned Convention.

In the case of Uruguay, the CDI is applied to the following taxes:

• Income Tax on Economic Activities (IRAE)
• Personal Income Tax (IRPF)
• Non-Resident Income Tax (IRNR)
• Social Security Assistance Tax (IASS)
• Wealth Tax (IP)

In the case of Brazil:

• Federal income tax (Imposto Federal sobre a Renda)
• Social contribution on net profit (Contribuição Social sobre o Lucro Líquido)

Consumption taxes such as VAT and special contributions to social security (Social Laws - BPS) are excluded.

Income tax provisions

The CDI divides the different types of income and the treatments applicable to each case.

Next, we will mention those that we understand are of greatest interest to taxpayers.

Business Income

Business income is understood as all business activity obtained by a company, as long as said income is not found in another article of the CDI, such as interest, real estate income, dividends, etc. They will be fully taxed in the country of residence of the subject that generates them, unless there is a Permanent Establishment (PE) in the other State, in which case only the income attributable to that PE can be taxed.

A Permanent Establishment is considered to exist when a company carries out activities in a fixed location such as: Management headquarters, branches, offices, factories and workshops. They are developed for a continuous period of 6 months. In turn, a work, or a construction or installation or assembly project as long as it also lasts a period of 6 months. They also include the provision of services by a company through its employees or other personnel hired by the company for said purpose related supervision activities as long as they exceed 183 days in a 12-month period.

Dividends

Dividends paid may be taxed where the beneficiary of said income resides. It may also be subject to taxation by the State where the distributing company resides, but it may not exceed the following limits:

• Cap of 10% of the gross amount of dividends, if the beneficiary maintained at least 25% of the capital in the 12 months prior to payment.
• 15% cap: in other cases

Interests

Interest paid may be taxed where the beneficiary of said income resides. It may also be subject to taxation by the State where the company that pays such interest resides, provided that it does not exceed 15% of the gross amount thereof.

Royalties

In the case of royalties, the tax power is shared between both countries. However, the tax in the country paying the royalties may not exceed the following limits:

• 15% of the gross amount of royalties from the use or granting of use of trademarks.
• 10% of the gross amount of royalties in other cases.

Fees for Technical Services

They are defined as any payment made for services of a managerial, technical or consulting nature. Although the country of residence of the person receiving the payment has the power, the country that pays for these services can tax a maximum of 10% if the final beneficiary is a resident of the country of residence.

The agreement also establishes the tax power for other income such as capital gains, independent personal services, income from dependent work, maritime and air navigation, among others.

Wealth Tax Provisions

The provisions applied to heritage do not take effect until diplomatic notes are exchanged between both countries. The protocol clarifies that such an exchange will not take place until Brazil introduces a wealth tax.

How is this method implemented to avoid double taxation?

Double taxation is eliminated by applying the tax credit method. When tax residents of one country (Uruguay or Brazil) obtain income that has been subject to tax in the other country, they may prove the withholding against any tax (Uruguayan or Brazilian, as the case may be) to be paid in relation to the same income. 

At this point we must highlight two important things:

• To be able to use this credit in Brazil, the supplier in Uruguay must request a tax residence certificate from the General Tax Directorate (DGI).
• The deduction of the tax credit may not exceed the amount that corresponds to the taxpayer for the income or assets tax of the State of residence that applies the deduction, that is, the credit may be used up to the limit of the tax paid in the origin country.

Limitation of Benefits

The treaty has an anti-abuse clause by which it seeks to avoid instances of Treaty Shopping and thus limit the use of aggressive tax planning. In these cases, it is not allowed to use the benefits of the treaty.

Conclusion

With the entry into force of this CDI, progress is made on the path of developing bilateral economic relations between Uruguay and Brazil and strengthening their cooperation in tax matters in a regulated fiscal framework. This allows Uruguay to have treaties to avoid double taxation with its largest trading partners in MERCOSUR and the region: Argentina and Brazil.