As a rule, employment income received by an individual resident in Brazil will only be taxable in Brazil as long as the work is performed in Brazil. However, when this work is performed in Uruguay, both countries can tax the employment income. Nevertheless, if the following conditions are met, Uruguay should not tax the employment income of the individual:
- The Brazilian resident stays in Uruguay for a period greater than 183 days in any 12-month period, begging or ending in the fiscal year analyzed.
- The compensation is paid by, or on behalf of, an employer non-resident in Uruguay.
- The Brazilian employer must not have a permanent establishment in Uruguay.
In this sense, by meeting the above conditions, the work performed by the Brazilian resident in Uruguay, would not be subject to taxation in Uruguay. This is a clear example how the Double Tax Treaty between the two countries would help.
Who can apply the provisions of the Double Tax Treaty?
Resident individuals or companies can apply the Double Tax Treaty; however, a principal purpose test and a limitation of benefits clause are included and will be performed to avoid certain circumstances of “treaty shopping”. In other words, if an individual is not a resident of either State, he/she would not have the benefits of the Double Tax Treaty.
We should also mention that an individual might be tax resident of both countries, based on the domestic legislation of each country. If this is the case, following the model of OECD, the Double Tax Treaty includes article number 4, with the “tie breaker” rule, establishing different ways to determine which country’s tax residence will prevail. Indeed, to apply the Treaty provisions, we first need to review where will the individual be considered resident of.
Are there any formal requirements needed for applying the Double Tax Treaty?
Each country may establish the formal procedures needed to apply the provisions of the Treaty, and this may also be different for individuals and for companies.
For example, for individuals, generally, a tax residence certificate might be required. In Uruguay, the documentation to be filed to the Tax Office for obtaining this certificate varies depending on the alternative chosen by the individual to demonstrate tax residence in Uruguay. If an individual stayed in Uruguay more than 183 days in the calendar year, he/she would only need to attach the Immigration Certificate showing the days of presence in our country along with a signed electric form. This is a document issued by the Immigration Uruguayan authority and would prove the days of presence in our country. Other documentation might be requested on a case-by-case basis.