Uruguay - Taxation of cross-border M&A | KPMG Global
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Uruguay - Taxation of cross-border mergers and acquisitions

Uruguay - Taxation of cross-border M&A

Competitive forces in the global economic environment are increasingly causing companies to consolidate their operations.


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Palacio Salvo in Uruguay


Competitive forces in the global economic environment are increasingly causing companies to consolidate their operations. As a result, mergers and acquisitions (M&A) have become an important component of business strategies throughout the world. Uruguay is no exception to this rule.

Recent developments

The Uruguay tax system includes a non-resident income tax (IRNR) which applies on Uruguayan-source income obtained by non-residents. This tax requires withholding on
certain payments made abroad by local companies, including dividends, interest, royalties and technical fees. Capital gains resulting from the disposal of local assets (including shares) by a non-resident are also considered taxable, except for bearer shares, which are subject to an exemption.

In 2017, new tax rules came into force and effect for foreign companies located in low- or no-tax jurisdictions (as listed by the local tax office). These changes include an increase to 25 percent (from 12 percent) in the IRNR rate applicable on certain payments made abroad (e.g. interest, technical services and royalties) and some exceptions to the source principle (e.g. capital gains from the sale of shares from foreign holding companies located in low- or no-tax jurisdictions are considered of Uruguay source — and thus taxable — when more than 50 percent of their assets are located in national territory).

Asset purchase or share purchase

Asset purchases and share purchases, the two main options for acquisitions, have different legal and tax consequences in Uruguay, as explained later in the report.

Purchase of assets

In most cases, the purchase of substantial assets of an existing business falls within the category of a transfer of a commercial establishment, requiring a special procedure to be followed under Laws 2.904 and 14.433. According to court precedents, the concept of substantial assets includes those that, on being transferred, would make it impossible for the transferor to continue developing its business as before.

This procedure is quite lengthy and complex, involving a promise to sell the commercial establishment, a request for special certificates from the Tax and Social Security Offices, and the convening of a meeting of the seller’s creditors by means of special publications.

Purchase price

The proceeds from a sale of local assets are subject to corporate income tax.


The difference between the purchase price and the fiscal value of the transferred assets is considered goodwill for tax purposes (the fiscal value of an asset depends on its nature and may or may not be equivalent to market value).


The fiscal goodwill is booked as an asset by the buyer, but it is not depreciated or revalued.
Other assets must be booked at the same fiscal value used by the seller and are subject to the general rules for depreciation and revaluation.

Tax attributes

Tax losses are not transferred to the buyer.

Value added tax

Generally, the transfer of local assets resulting from the transaction is subject to value added tax (VAT).This tax is levied at a basic rate of 22 percent, with a lower rate of 10 percent
for a prescribed list of goods and services (some items are exempt).The fiscal goodwill is also subject to VAT at the basic 22 percent rate.

Transfer taxes

There is no stamp duty or stamp duty land tax in Uruguay. An acquisition that includes a transfer of real estate is subject to real estate transfer tax, levied at the rate of
4 percent (2 percent each for the buyer and seller) on the cadastral value of the real estate (a notional value established by the National Direction of Cadaster).

Purchase of shares

The transfer of shares takes place through a simple procedure (basically by their simple delivery in the case of bearer shares or through their endorsement in the case of nominative titles).

Tax indemnities and warranties

When the buyer purchases a company, it takes over all its tax liabilities, existing or contingent. Therefore, the buyer usually protects itself from eventual contingencies by commissioning a due diligence investigation of the target’s affairs, including its tax affairs, and by requiring contractual tax indemnities and warranties from the seller.

Tax losses

The tax losses of the purchased company are not affected by the sale of its shares.

Choice of acquisition vehicle

Several potential acquisition vehicles are available to the foreign buyer.

Local holding company

A local holding company is not normally suitable for a purchase of shares because it does not produce any tax advantages in Uruguay. Moreover, apart from investment companies (entities whose main business consists of investment activities), local companies cannot participate in the capital of other entities for a value that exceeds their net worth.

Foreign parent company

Foreign parent companies are used most frequently as acquisition vehicles by foreign investors. Dividends received from Uruguay are subject to IRNR withholding (discussed later in this report), and gains on a subsequent disposal of the shares of the local company, notionally established at 20 percent of the selling price, are taxable under IRNR.

Non-resident intermediate holding company

From the Uruguayan viewpoint, non-resident intermediate holding companies do not generate any tax advantage.

However, they can be a useful alternative from an exit strategy perspective, because the sale of shares from a foreign company that holds shares from a local entity is not taxable in Uruguay unless the foreign company is located in a low/no tax jurisdiction and more than 50 percent of its assets are located in the national territory.

Local branch

A local branch of a foreign company is considered a permanent establishment (PE) of the foreign entity. Uruguay applies the force of attraction principle, under which all income obtained in Uruguay by the foreign entity must
be imputed to the PE (whether or not it has participated in obtaining it). The effects of this rule should be carefully evaluated before choosing a branch structure for investment purposes.

Joint venture

A joint venture is not a separate entity in itself but rather a contractual arrangement. Its use should be analyzed case- by-case.

Choice of acquisition funding

The buyer needs to decide whether to fund its acquisition with debt or equity. Some factors to be considered when making this decision are discussed below.


The principal attraction of debt is the potential tax deductibility of interest. Uruguay has no thin capitalization rules, but other aspects of the Uruguayan tax regime may limit such deductibility.

Deductibility of interest

As indicated in previous sections, under Uruguayan corporate income tax rules, deductibility of expenses is conditional on their taxability as income to the counterparty.

This general rule also applies to interest. Assuming all income of the local company is of Uruguay source, the deductibility is determined by the difference between:

  • the IRNR withholding rate (12 percent1) plus the foreign tax rate applied to the interest in the foreign lender’s country, and
  • the corporate income tax rate of 25 percent.

Thus, 100 percent deductibility is only allowed where the IRNR withholding rate plus the foreign tax rate exceeds 25 percent.

Financing through debt generates additional tax effects for foreign currency gains or losses (where the loan is
denominated in foreign currency), and inflation adjustment must also be taken into account. The combined tax effects of these external factors may be material but are difficult to predict in a particular case.

Withholding tax on debt and methods to reduce or eliminate it

Interest paid by a local company on foreign loans is subject to IRNR withholding at 12 percent2. However, interest is exempt for loans granted to local entities that employ more than 90 percent of their assets in obtaining non-taxable income.

Checklist for debt funding

  • No thin capitalization rules.
  • No restrictions on interest payments or currency exchange limitations.
  • 12 percent IRNR withholding3.
  • Full deductibility by local company is conditional on foreign tax treatment.
  • Additional effects from inflation adjustment and currency exchange are difficult to forecast and may result in taxable gains.


A buyer may also fund its acquisition through equity. The disadvantage of this approach is that there would be no interest to deduct and dividends are not deductible. But equity may be preferable for non-tax reasons, and the limitations on interest relief and the negative effects that might result from external factors such as inflation and currency exchange rates must also be taken into account.

For these reasons, no general rules can be established for the choice of debt or equity as alternatives for financing. Each case must be evaluated on its own merits.


There are no specific rules in Uruguay relating to hybrid instruments. Their potential use should be analyzed case- by-case.

Discounted securities

There are no specific rules in Uruguay relating to discounted securities.Their potential use should be analyzed case-by-case.

Deferred settlement

Uruguay has no specific provisions regarding deferred settlement, which is computed for tax purposes on its accrual.

Other considerations

In addition to the options considered earlier in this report, a legal merger may be used to acquire a local target.

Under article 26 of Law 16.906, the Executive Power can exempt merger transactions from applicable taxes (corporate income tax, VAT, real estate transfer tax) where the operation is likely to strengthen the activities of the companies involved. To obtain this exemption, a special request must be submitted demonstrating the economic purposes of the transaction.

Concerns of the seller

The tax position of the seller may be relevant when deciding how to structure the transaction, but there are no general rules.

Company law and accounting

Company Law 16.060 contains the main legal provisions applicable to commercial companies in Uruguay, including formation, operation, reorganization and dissolution.

Mergers are specifically regulated in article 115 and following articles 114 to 135, which stipulate that a merger by creation takes place when two or more companies dissolve without liquidation and transfer their whole net worth to a newly created company. A merger by absorption occurs when one or more companies dissolve without liquidation and transfer their whole net worth to a pre-existing company.

In both alternatives, the shareholders or partners of the merged companies receive as compensation shares, quotas or participations in the newly created or absorbing company.

A merger is decided by majority votes following the formal requirements of corporate by-laws, as amended.

A special balance sheet must be prepared by each of the merging companies before the competent corporate bodies can adopt the merging resolution. In preparing the special balance sheets, the merging companies should apply uniform criteria for the valuation of the assets and liabilities, the valuation date and the treatment of subsequent changes.

The decision to merge should be preceded by a promissory contract setting out the bases of the merger. Special publications of the promissory contract must be made for 10 days, summoning the shareholder and creditors.

Company creditors need to justify their credits within 20 days of the final publication. Creditors who oppose the merger must be paid or provided guarantees of payment.

Shareholders who oppose the merger may opt to leave the company within 30 days of the final publication and have their holdings paid for out of the special balance.

Once these notification periods have ended, the final merger contract will be executed and filed in the Register of Commerce.

Group relief/consolidation

Group relief or consolidation does not apply for tax purposes in Uruguay.

Transfer pricing

Uruguay introduced transfer pricing provisions in 2007 based on Organisation for Economic Co-operation and Development (OECD) guidelines. Uruguay’s transfer pricing rules are regulated by a decree issued in 2009.

Foreign investments of a local target company

Uruguay generally applies the source principle for income taxation purposes, so foreign investments made by local companies are not subject to tax.

Comparison of asset and share purchases

Advantages of asset purchases

  • Possible to isolate the purchasing entity from previous tax liabilities by following a special procedure (transfer of commercial establishment).
  • Possible to acquire only part of a business.

Disadvantages of asset purchases

  • The purchase procedure is fairly complex and lengthy (involving publications and obtaining special certificates from the tax authorities).
  • The transaction is subject to local taxes, including corporate income tax, VAT and real estate transfer tax (if real estate is involved). Where the transaction is structured as a merger, the Executive Power may grant an exemption.
  • Tax losses remain with the seller.

Advantages of share purchases

  • The legal procedure for share transfers is simple and quick.
  • Consent of third parties (e.g. creditors) generally is not required.
  • No special certificates are needed from the tax authorities.
  • From the legal viewpoint, the operation of the target company remains unchanged since the transaction is between the buyer and the shareholders of the target company.
  • The fiscal costs are usually lower (e.g. sale of shares is VAT-exempt, real estate transfer tax does not apply, etc.).

Disadvantages of share purchases

Buyer acquires the target company with all its liabilities and contingencies (declared or not), so due diligence procedures have special importance and are normally more intense.


1 Where the seller is located in a low- or no- taxjurisdiction, this notional percentage is increased to 30 percent (from 20 percent), and the applicable IRNR tax rate is increased to 25 percent (from 12 percent).

2 Increased to 25 percent for payments to low- or no-tax jurisdictions.

3 See note 2.

4 See note 2.

KPMG in Uruguay

Gustavo Melgendler
KPMG Sociedad Civil Plaza de Cagancha 1335 Piso 7 Montevideo

T: +598 2902 4546
E: gmelgendler@kpmg.com

Luis Aisenberg
KPMG Sociedad Civil Plaza de Cagancha 1335 Piso 7 Montevideo

T: +598 2902 4546
E: luisaisenberg@kpmg.com

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