Castellán

Law 19,637 of 07/13/18 made an abrupt modification regarding the exemption from the Income Tax on Economic Activities (IRAE) in Uruguay for the production of logical supports and related services.

Previously, the exemption was conditioned on the services being fully utilized abroad. Instead, with the modification established by the mentioned Law and its regulatory Decree 244/018, the exemption applies when it comes to services that are utilized within Uruguay, provided that certain conditions are met: mainly, that a large part or all of the activity is carried out in Uruguay, regardless of where the goods and services originated in said activity are utilized.

The exemption is applied differently according to two types of activities:
- production of logical supports (software); and
- development of logical supports (software) and related services.

Who does this exemption apply to?

The IRAE exemption applies to certain types of companies, such as Limited Liability Companies (LLC), Anonymous Companies (SAU), and Simplified Stock Companies (SAS), excluding De Facto and Civil Companies and Sole Proprietorships.

Production of logical supports (software)

The incomes included in the exemption exclusively cover the activities of leasing, use, assignment of use, or alienation of intangible assets (own software).

The exemption will be applied at a percentage calculated as the quotient between:

1) direct expenses and costs incurred to develop each asset, including contracted services (excluding those with non-resident related parties), increased by 30%; and

2) total direct expenses and costs incurred to develop each asset, which include those included in the numerator without considering the 30% increase, as well as the expenses and costs related to the granting of use or acquisition of intellectual property rights, and services contracted with non-resident related parties.

Other aspects to consider:

a) this quotient is calculated for each intangible asset, so, in case of having more than one, different exemption percentages will be applied to the company;
b) the asset must be registered in accordance with Intellectual Property Law No. 9,739;

c) expenses and costs incurred from production to the registration of the resulting asset are considered;

d) activities of logical supports production must be carried out in national territory;

e) the exemption is a percentage, meaning it can be total or partial exemption.

Development of logical supports (software) and related services

The incomes included in this section are:

a) development services of logical supports (software) for third parties, not registered by the developer, including research, innovation, analysis, design, construction, homologation, adaptation, and personalization (GAPs), and parameterization;

b) the following services, related to logical supports developed by the provider or by third parties: implementation at the client, integration, technical support, update and version correction, corrective and evolutionary maintenance, data conversion and migration, testing and quality certification, computer risk, security, and training.

Other aspects to consider:

a) the exemption percentage is 100% or 0%, not allowing partial exemption;
b) the exemption applies to the entire company, that is, it applies to all services provided by it, and is calculated annually;

c) activities must be carried out in national territory, that is, when:

c.1) full-time human resources are employed in a number appropriate to the services provided, qualified and adequately remunerated;

c.2) the amount of direct expenses and costs incurred in the country for the provision of such services is adequate and exceeds 50% of the total direct expenses and costs incurred in the fiscal year for the provision of these services.

What are the conditions to apply for the exemption?

- submit an annual Sworn Declaration to the DGI showing the exemption for each activity.

- in the case of logical supports production, the registration of the Asset under Law No. 9,739 and the authorization for the exclusive use and exploitation of the asset in favor of the company must be obtained.

- record the exemption percentage on the sales receipts issued, and the asset registration number if applicable.

- the company must be included in the electronic billing system.

Lock rule: effects on expense deduction

Due to the so-called \"lock rule\" in expense deductibility, the IRAE exemption applied to companies engaged in software activities has a direct impact on those who contract these services and are taxpayers of the same tax. In this sense, for the case of contracting services for the production of logical supports that have a partial exemption, the deductible expense will be limited to the percentage of income not exempted by the provider. On the other hand, for expenses incurred in contracting development services of logical supports and related services, which enjoy total exemption, it was established that they will be deductible at 60%.

Final Considerations

All these aspects must be taken into account when analyzing the tax situation of professionals and companies dedicated to software activities. At Castellan, we offer the appropriate advice through the implementation of a tax strategy, seeking the most convenient option that adapts to the needs of each particular situation.

 

Montevideo, June 20, 2022