Tax Reform in Chile: Major Changes

Law 20,780 of tax reform (the "tax reform") provides for gradual implementation, with full effect to January 1, 2017. To simplify the understanding of the tax reform, the following description omits the reforms proposed for small and medium enterprises and the transitional rules until January 1, 2017.

Increased Business Tax System and Dual Regimen

The tax reform considered a progressive increase in the first category tax, from 20% today to 25% or 27% depending on the tax regime adopted by the company. In this respect, tax reform contains two new alternative taxation regimes.

On one hand, a system of allocation will affect a 25% rate of income earned by the companies each tax year, which will be immediately allocated to the shareholders ("Schedule A"). On the other hand, a system of partial integration will affect a rate of 27% income derived by companies ("Regime B"). Under the Scheme B, it is allowed to defer payment of final taxes affecting shareholders until the effective withdrawal or distribution of company profits, but only allows use as a credit to 65% of the taxes paid by the company, except the shareholder is domiciled in a country with an agreement.

In addition, the tax base is expanded businesses by, among others,

(1) The new rules for controlled foreign companies ("CFC");

(2) The amendment of the rules of over indebtedness;

(3) Rejection and limitation of certain deductions;

(4) The limitation on the use of tax losses resulting from the reforms, and

(5) Limiting gain preferential use of capital and investment funds that granted tax benefits schemes.

Additional tax on dividends

According to the tax reform, the rules on withholding obligations are modified. In this regard, it should be distinguished according affect the rate at which the respective company is located.

In the case of Scheme A, the additional tax withholding shall be made except for withdrawals or distributions and remittances that are charged to the "bottom D" (i.e. the case of utilities that have not paid taxes late); in the case of Regime B, retention or distributions shall be made to correspond to affected remittances to additional tax revenues.

In the case of Regime B, available credit against the Additional Tax is 65% tax of First Category. This rule does not apply to countries with double taxation agreements with Chile, in which case 100% is granted.

Rules on over indebtedness

They accordance with the new rules on excessive debt, interest payments, fees, services and any other conventional charge, under loans, debt instruments and other transactions and contracts corresponding to over indebtedness determined at year-end will be taxed with a flat tax of 35%.

There will be "over-indebtedness" when taxpayer's total annual debt exceeds 3 times its equity at the end of the respective financial year, taking into consideration the following rules:

(1) The limit of 3: 1 for the ratio between debt and equity is determined by considering both related debt as obtained from third parties. Currently, only it considered the debt with related parties.

(2) This limit of 3: 1 is evaluated annually, instead of only in the year of granting credit.

(3) The penalty tax on interest deemed excessive (i.e. 35%) applies not only on interest, but on all charges and fees associated with excessive debt.

Source Rules for Debt Instruments

Bonds and other debt securities issued in Chile by Chilean companies understand located in Chile and, therefore, the capital gain on disposal made by non-residents will be subject to taxes in the country. In addition, interest earned on debt securities issued by permanent establishments of Chilean companies abroad has their source in Chile.

Capital Gain: Elimination of Single Tax

Currently, the capital gain made on the sale of shares in Chilean companies can benefit from a flat tax of 20%.

The tax reform was to eliminate this reduced tax rate and the capital gains tax from end 2017. To this end, the option to tax based on perceived or accrued income is granted. In the case of natural persons resident in Chile who opt to be taxed based on income received, the rate at which the highest value is taxed, it would be equivalent to the average marginal rate of Complementary Tax during the period in which the taxpayer had ownership the actions. In the case of non-residents, the additional tax of 35% would apply.

CFC rules

Passive income of foreign entities would be recognized on an accrual basis by entities or drivers resident in Chile assets. This is because an attempt to adapt to the OECD taxation standards.

Passive income includes dividends, interest (except to banks or financial institutions), royalties, certain capital gains, rental income property (except for entities to which that is their main business), and income from operations in specific parts Related Chilean.

It is understood that a foreign entity is controlled by a shareholder when the latter

(1) Holds 50% or more interest on capital, profits or votes of the respective foreign company, or;

(2) Can choose either to elect a majority of its directors, or

(3) Have unilateral authority to amend its statutes. Additionally, it is presumed controlled entities resident in tax havens, unless proven otherwise.

Definition of Tax Paradise

Instead of an exhaustive list of tax havens, tax reform would define " tax haven " as a jurisdiction that meets at least two of the following criteria:

(1) Levied on foreign income with a rate lower than 17.5 % (in the event that the country implement a progressive tax rate, you must determine an " average rate " for these purposes)

(2) Has no information exchange agreement with Chile,

(3) Has no relevant transfer pricing rules,

(4) It is identified as having a preferential tax regime by the OECD, or

(5) Only local source income taxes.

Yet not considered tax havens any OECD member country.

Transfer Pricing Rules

International reorganizations and restructurings involving assets or export activities would be subject to scrutiny under the rules of transfer pricing.

Tax Amnesty Program

The tax reform provides for a program to regularize those Chileans income taxpayers who have not been duly declared and taxed in Chile. This requires the payment of a single tax of 8% on the value of the assets and income to declare, which aims to presume the good faith of the taxpayer and extinguish the civil, criminal and administrative responsibility for breach of tax obligations, Corporations and applicable securities market.

The tax reform contains a number of requirements and conditions for the application of this mechanism. Among others, the assets and income must be

(1) Intangible nature of nominative furniture

(2) Financial instruments (bonds, fund shares, deposits and the like) or

(3) Securities payable in foreign currency or currencies. They should also be located abroad 

(excluding those ranked by the Financial Action Task Force (FATF) as high risk or uncooperative in matters of prevention and combat money laundering and terrorist financing jurisdictions), unless Chile maintained through third foreigners. In addition, this mechanism would only apply in respect of property acquired prior to January 1, 2014.

The tax reform also establishes certain exclusions. For example, applicants may not have been brought to trial, executed or convicted of certain offenses or being summoned, liquidated, reliquidados or rotated relative to the corresponding assets and income.

The procedure begins with a statement of interest to the Internal Revenue Service, which must be detailed in the respective assets and income, your recovery, and credited his direct ownership or through third parties. Filed such a declaration, the SII issued a twist of taxes must be paid within 10 business days.

IBS has a term of one year to oversee this declaration can determine tax differences and resolve the breach of the requirements of the standard. This resolution is claimable under the general rules of the Tax Code. Failure confirmed by a court decision, the only tax already paid will not be returned to the taxpayer and the person does not enjoy the exemption from liability under this mechanism.

This system does not relieve taxpayers of their obligations regarding the prevention of money laundering and terrorist financing.

It should be noted that, given its highly exceptional, taxpayers might only invoke this mechanism during the calendar year 2015. The failure to opt for the same constitutes an aggravating factor for the application of the penalty provided in Article 97 No. 4 of the Code Tax.

Seal and Stamp Tax

The tax reform also increases the rates of the Stamp Tax twice the current and maximum rate being 0.8%. However, the reduced rate currently affecting mortgage loans for the purchase of properties DFL2 remains.

New tax treatment of goodwill tax

The tax goodwill occurs in improper merger of companies when the value of the total investment in the acquisition of the acquired company exceeds its tax equity.

The tax reform establishes that the goodwill generated in this process should be distributed among non-monetary assets received by the acquiring company to its market value. Currently, this excess can be amortized as tax expenditure over a period of 10 years, but since 2015 this difference should be recorded as an intangible asset, punishable only to the dissolution or termination of business in society.

Mergers carried out since January 1, 2015 has this new treatment. Exceptionally those initiated in 2014 and completed in 2015 enjoy the current treatment. (See Resolution No. 111/2014 of the Internal Revenue Service).

References to shares or social rights include dividends and profit sharing. References partners include partner’s partnerships and shareholders of corporations.

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Translated by: Mónica Landaluce.