Adjusting to the BEPS plans, specifically its action number 5, in which it tries to combat harmful tax practices, taking into account transparency and substance, and in which special importance is given to Intellectual Property regimes is that Uruguay decided to approve on July 13, 2018, Law 19,637 (hereinafter the “Law”), its Regulatory Decree No. 244/018 (hereinafter “Decree”) and DGI Resolution No. 10.403 / 018 (hereinafter the “Resolution” and together with the Law and the Decree the “Norms”).

Considering that the aforementioned action 5 does not admit regimes that grant a more beneficial treatment to operations carried out with non-residents than to those carried out with residents, the Standards approved by Uruguay seek to eliminate the exemptions foreseen for the software industry according to the place of use ( Originally, only the income derived from the products and / or services used abroad was exempt).

Exonerated income

By means of the Law, Article 52 Literal S of Title 4 is modified, establishing that the income derived from the following activities will be exempt from the payment of Income Tax for Business Activities:

• Those obtained by the production of software, as long as they are registered according to the procedure established by Law 9,739 (Copyright Law).

The exemption can have limits. The applicable exemption ratio must be calculated as follows:

Exemption = Direct expenses and costs incurred to develop the asset * 1.3

                                                                                                                

                           Total direct expenses and costs incurred to develop the asset

       a) Numerator = Direct expenses and costs incurred to develop each asset, increased by 30% (thirty percent). The denominator cannot exceed this figure in any case.

Direct expenses and costs incurred by the developer and services contracted with unrelated (residents or non-residents) and with related residents will be exclusively considered.

     b) Denominator = Total direct expenses and costs incurred to develop each asset, which include those included in the previous numeral without considering the increase of 30% (thirty percent) + the expenses and costs corresponding to the concession of use or acquisition of intellectual property rights, and the services contracted with non-resident related parties .

It is important to highlight that for the calculation of the aforementioned quotient, the expenses and costs incurred during the production of the software until its registration were considered.

This number exclusively includes the income derived from the lease, use, cession of use or transfer of intangible assets.

• Those obtained by the software services and the services linked to them will be fully exempt, provided that the following requirements are met:

     a) The activity is carried out in national territory;

     b) The requirement mentioned in the previous number is considered fulfilled when;

• The amount of direct expenses and costs incurred in the country for the provision of said services is greater than 50% (fifty percent) of the total direct costs and expenses, incurred in the year;
• Accordingly, human resources are employed full-time.
• In order to contemplate the companies that provide the aforementioned services and considering that it has often been essential for them to incur expenses with unrelated entities abroad, due to the unavailability of technical capabilities in our country, dated April 12, 2019, DGI Resolution No. 1050/019 was approved, which foresees to contemplate said situation, granting a reasonable period for the development of the aforementioned technical capabilities by companies located in national territory.

The following services are included in this section:

• Software development services for third parties, not registered by the developer, including research, innovation, analysis, design, construction, approval, adaptation and personalization (GAPs) and parameterization.
• Services linked to software developed by the provider or by third parties. It includes client implementation, integration, technical support, version update and correction, corrective and evolutionary maintenance, among others.

When the training refers to software developed by third parties, the provider will be required to have performed any of the aforementioned services, and the training must be linked to the result of the application of said services.

Formal requirements to access exemptions

     a) For the income mentioned in number 1, a sworn statement must be presented detailing the elements that determine the ratio. This declaration must be accompanied by the product registration certificate and the percentage of exemption must be recorded in the documentation supporting the operations. The non-relationship with non-resident providers must also be declared.

     b) In the case of the income mentioned in number 2, at the end of each year, a sworn statement must be presented stating the requirements required to obtain this exemption. The exonerated amount must be recorded in the documentation that supports the operations.

     c) Demonstrate reliably the relevance of the expenses and costs incurred for the development of the activities included in the exemption, in order to ensure their traceability and control.

     d) In both cases, going concern companies, to be included in the mentioned IRAE exemptions, must have applied to the electronic tax voucher system before March 1, 2019. While those that start activities must apply to said system within 90 days from the start of activities.

Other relevant aspects

• Subjective aspect of the exemption, are included in this the legal persons detailed in literal A) of article 3 of Title 4, with the exception of de facto and civil companies. One-person companies are not included either.

• Validity – Optional transitional regime

      a) Taxpayers who carry out software production activities may choose to apply the exemption regime in force as of December 31, 2017, provided that by that date they had been covered by it and for the assets that would have benefited from said exoneration.

• Being excluded from applying to said regime, the assets on which the benefits would have been applied for the first time in the period between October 1 and December 31, 2017.
• The regime may not be extended beyond the fiscal years closed to 06/30/2021.
• Must inform the DGI the total amount of the exempt income.

     b) In the case of income obtained from the provision of software support services, it is anticipated that they will be able to opt for the exemption regime in force as of December 31, 2017, provided that by that date they had been covered by it and by the assets that would have benefited from said exemption.

• Being excluded from applying to said regime, the assets on which the benefits would have been applied for the first time in the period between October 1 and December 31, 2017.
• The provisions here will apply to exercises closed until 11/30/2018.

• Modifications to the padlock rule in cases where the provider / developer will be exempt from the Tax on Income from Business Activities (IRAE), the counterparty will not be able to deduct the expense / cost in its liquidation of IRAE.