1. Introduction.

Law No. 19,484 on International Tax Transparency, Prevention of Money Laundering and Terrorism Financing (enacted January 5, 2017; hereinafter the “ITT Law”) covers essentially four main areas of regulation: a) automatic reporting of financial account balances and income to the DGI (Uruguay’s tax authority); b) identification of ultimate beneficial owners and holders of registered shares; c) tax rules designed to discourage the use of entities resident in low- or no-tax jurisdictions; and d) adjustments to the transfer pricing regime under corporate income tax (IRAE).

The ITT Law changes several existing rules in our corporate and banking markets, which we believe are of interest to those doing business in Uruguay. Below we summarize the main changes. Should you require a more detailed analysis or wish to discuss a specific case, please do not hesitate to contact us.

2. Automatic Reporting of Financial Account Balances and Income to the DGI.

Article 1 of the ITT Law requires financial institutions resident in Uruguay, as well as branches of non-resident entities located in the country, to annually report to the DGI information regarding balances and income of accounts held by individuals, legal entities, or other entities with tax residency in Uruguay or in another country or jurisdiction. If, based on criteria established by the Executive Branch, the account holders are considered high-risk for tax evasion purposes, the ultimate beneficial owner must also be reported.

The information provided by financial institutions may be used by the DGI to carry out its functions and to exchange information with competent authorities of foreign states under international agreements or treaties.

Bank secrecy will no longer be enforceable against the DGI in the exercise of the powers established under the ITT Law, effectively eliminating bank secrecy vis-à-vis the DGI — a long-standing institution in our country. The above provisions were set to take effect on January 1, 2017.

3. Identification of Ultimate Beneficial Owners and Holders of Registered Shares.

Chapter II of the ITT Law sets out a series of rules to identify Ultimate Beneficial Owners (UBOs) and holders of registered shares or equity interests. Note that since 2012 there has already been an obligation to identify holders of bearer shares to the Central Bank of Uruguay (BCU). This regime is now extended, applying the rules previously applicable to bearer shares to registered shares as well, and incorporating the identification of ultimate beneficial owners.

3.1 Ultimate Beneficial Owners.

A UBO is defined as an individual who, directly or indirectly, holds at least 15% of the capital or voting rights of an entity, or who otherwise exercises ultimate control over it. Ultimate control is considered to include control exercised directly or indirectly through a chain of ownership or through any other means of control.

As of January 1, 2017, resident entities are required to unambiguously identify their UBOs, with documentation substantiating this identification. The same obligation applies to non-resident entities that operate in Uruguay through a permanent establishment, or that have their effective place of management in Uruguay for purposes of conducting business activities domestically or abroad. This includes the ultimate beneficial owners of foreign investment funds and trusts whose administrators or trustees are resident in Uruguay.

3.2 Holders of Registered Shares.

Corporations with registered or book-entry shares, limited partnerships by shares, agricultural associations, or any other legal entity authorized to issue registered securities or interests must report information identifying their holders, as well as their percentage of ownership in the corresponding capital. This extends the requirements of Law No. 18,930 (previously applicable only to holders of bearer shares) to holders of registered shares as well. This means that both companies with bearer shares and those with registered shares must report their shareholders to the Central Bank of Uruguay.

3.3 Bearer Shares.

Law No. 18,930, published in the Official Gazette on July 27, 2012, established the obligation for holders of bearer securities to report their ownership to the BCU (“Law 18,930”).

3.4 Registry Operation and Procedure.

The Registry will be maintained by the Central Bank of Uruguay pursuant to Law 18,930. Entities must report, by sworn statement, who their UBOs are and their respective ownership interests, who exercises ultimate control (if applicable), and who holds registered shares. Access to information in the BCU Registry is restricted to: a) the DGI, provided there is an ongoing inspection or in response to formal, substantiated requests from the competent authority of a foreign state under an international agreement; b) the National Secretariat for the Fight Against Money Laundering and Terrorism Financing; c) a substantiated ruling of the criminal courts or competent court where a child-support obligation is at issue; and d) the Board of Transparency and Public Ethics.

3.5 Penalties.

Entities that fail to comply with reporting obligations may be subject to fines; may be prohibited from paying dividends, redemptions, withdrawals, or liquidation proceeds; may have their unique DGI tax compliance certificate suspended; and may be barred from registering legal acts and transactions in public registries.

3.6 Deadlines.

3.6.1 Registered Shares. The ITT Law sets June 30, 2018 as the deadline for reporting holders of registered shares, although this aspect is still pending regulation by the Executive Branch.

3.6.2 Bearer Shares. Under Law No. 19,288 of October 2014 (on winding up inactive companies and identifying holders of bearer equity interests), companies with bearer shares that had not reported at least 50% of their capital by January 29, 2015 are dissolved by operation of law. A fine of 50% of assets applies if the company was not liquidated before May 29, 2015. Shareholders holding bearer shares in companies that reported more than 50% of their capital before the above deadline, but who fail to comply with the sworn-statement obligation, automatically lose their status as shareholders. They are paid the value of their interest based on net equity value, less the applicable fine.

3.6.3 Ultimate Beneficial Owners. a) Entities required to report under Law 18,930 (bearer shares): September 30, 2017 to report their UBOs, given that shareholders should already have been reported. b) Entities issuing registered shares: June 30, 2018, covering both shareholders and UBOs.

4. Tax Rules to Discourage the Use of Entities Resident in Low- or No-Tax Jurisdictions.

The ITT Law seeks to discourage the use of Panamanian, BVI, and other low- or no-tax jurisdiction entities (“BONT entities”) by increasing the existing tax burden. The DGI published a list of jurisdictions considered BONT. The following changes result: a) the Net Worth Tax (Impuesto al Patrimonio) rate increases from 1.5% to 3%. b) Transfers of shares in such entities, previously untaxed, become taxable at 12% (non-resident income tax or personal income tax) or 25% (corporate income tax), provided the entity holds assets in Uruguay representing more than 50% of its total assets. c) The Non-Resident Income Tax (IRNR) rate increases from 12% to 25%, with an additional 5.25% applicable to income derived from real estate (rental income or income from the sale of real property).

These rules took effect for fiscal years beginning on or after January 1, 2017. To avoid falling under this new, more burdensome regime, the law provides two alternatives: i) transferring real estate owned by the BONT entity before June 30, 2017, in which case the transfer is exempt from the Non-Resident Income Tax and from the Real Estate Transfer Tax (2% payable by the seller and 2% by the buyer), provided the buyer is not an entity in a low- or no-tax jurisdiction and provided the dissolution of the transferring entity is requested before the DGI. The notary handling the property transfer must withhold the corresponding IRNR and ITP amounts until proof of the entity’s dissolution is provided; otherwise, the notary will be liable for paying the taxes to the DGI. ii) redomiciling the foreign entity in Uruguay through a summary procedure, with a deadline of June 30, 2017, adopting the standard bylaws provided by the relevant state regulatory body.

We remain at your disposal for any clarification or further detail you may require, as well as to assist with compliance regarding the registration of registered shares and/or ultimate beneficial owners, and to help evaluate the best course of action for BONT entities.