Core Rules (Original Reform)
The proposed tax overhaul contemplates a gradual implementation of reforms, with complete effectiveness as of January 1, 2017. This description omits reforms to tax regimes of small and mid-size companies, and interim rules effective through January 1, 2017.
Increase of the Corporate Tax and Dual Regime
On one hand, an attribution regime that levies with a 25% tax rate incomes obtained by companies in each tax year, which will be immediately allocated to their shareholders (“Regime A”). On the other hand, a partial integrated regime that levies with 27% tax rate incomes obtained by companies (“Regime B”). Under this regime, shareholders are allowed to defer personal and withholding taxes until such profits are effectively distributed, but it only allow using a 65% credit of the taxes paid by the company, unless the shareholder is resident in a tax-treaty country.
The taxable basis of the Corporate Income Tax is broadened by way of (1) new controlled foreign entities (“CFC”) rules; (2) modified thin capitalization rules; (3) disallowance and limitation of certain deductions; (4) ensuing limitation on the use of tax losses, and (5) limitation of preferential capital gains regimes and tax-free investment fund vehicles, among others.
Dividends Withholding Tax
In this sense, a distinction must be made according to the regime the relevant company is subject to. In the case of Regime A, the withholding will only be made for distributions and remittances which are imputed to “fund D” (meaning, profits which have not paid final taxes); in the case of Regime B, the withholding will be made for distributions and remittances of income subject to withholding tax.
In the case of the Regime B, the tax credit available against the withholding tax is the 65% of the Corporate Tax. This rule does not apply to tax treaty countries, case in which the entire Corporate Tax paid will be granted.
There will be “excessive indebtedness” if the taxpayer’s total indebtedness is larger than 3 times its tax equity at the end of the corresponding year, taking into consideration the following rules:
- The 3:1 debt-to-equity limit would be tested on the aggregated of related-party and third-party debt. Currently, only related-party debt is counted.
- The 3:1 debt-to-equity limit would be tested annually, in lieu of the one-time test that is currently applied upon disbursement of each loan.
- The 35% surtax is levied, in addition to interest, on all charges and fees linked to excessive-indebtedness.
Sourcing Rule for Debt Instruments
Bonds and other debt instruments issued in Chile by Chilean companies will be deemed to be located in Chile. Therefore the capital gain arising from the sale will be subject to taxes, even if the seller is a non-resident. Also, interests arising from debt securities issued through offshore permanent establishment are sourced in Chile.
Capital Gains: No Longer Solo
The tax reform eliminates this reduced taxation and levies the capital gain with personal taxes from 2017. Taxpayers would have the option to levy the capital gain on an accrued or cash basis. In the case of resident individuals opting to be taxed on a cash basis, the personal income-tax rate would be equal to the taxpayer’s average marginal rate over the investment holding-period, and in the case of non-residents, a 35% withholding tax.
Passive income includes dividends, interest (except for banking or financing entities), royalties, certain capital gains, income for lease of real estate (except for entities to which the real estate lease is its main business) and income generated in specific operations with Chilean related parties.
A foreign entity is deemed to be controlled by a taxpayer if it (1) holds 50% or more of the equity, the profits or the voting rights of the foreign entity; (2) has the authority to appoint the majority of its board of directors, or (3) is entitled to amend its bylaws unilaterally. Additionally, entities located in a tax haven jurisdiction would be considered as a CFC, unless proved otherwise.
Tax Haven Definition: Lost Paradise
Member of the OECD will not be considered as a tax haven, despite the test above.
Transfer Pricing Rules
International reorganizations or structures that imply an export of assets or activities would be subject to Transfer Pricing.
The tax reform also doubles the Stamp Tax rates, the maximum rate increasing from 0.4% to 0.8%. However, the current reduced tax rate applicable to mortgages for the acquisitions of certain economic housing will be maintained.
New treatment of Tax Goodwill
The tax reform establishes that this difference must be allocated between the non-monetary assets received from the merged entity up their fair market value. Currently, The remainder could be amortized as tax expense over a period of 10 years; however from 2015 this difference must be registered as an intangible asset and it may only be written-off at the dissolution of the absorbing company.
Mergers performed from January 1, 2015 will be subject to this treatment. Exceptionally, those mergers initiated in 2014 and concluded in 2015 will benefit from the current regime. (See IRS Resolution Nº 111/2014)
References to corporations, shares and shareholders include limited liability companies, equity quotas and members or partners.