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.
The tax reform increases the corporate tax burden for Chilean companies from the current 20% to 25% or 27%, depending on the regime companies adopt. For this purpose, the tax reform provides with two new tax regimes.
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.
According to the tax reform, the rules governing the withholding obligations are modified.
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.
According to the new thin-capitalization rules, interest, commissions, services and any other conventional payment by virtue of loans, debt instruments and other operations and contracts which correspond to excessive indebtedness determined at the end of the tax year will be subject to a 35% sole tax.
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.
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 realized by resident individuals or non-resident taxpayers on the disposition of shares in Chilean companies may presently qualify for a sole capital-gains tax of 20%.
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.
Capital gains realized by resident individuals or non-resident taxpayers on the disposition of shares in Chilean companies may presently qualify for a sole capital-gains tax of 20%.
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.
Rather than having a limited list of jurisdictions as the current Income Tax Law has, the tax reform defines the term “tax haven” as a jurisdiction falling within at least two of the following circumstances: (1) taxes foreign source income with less than 17.5% (if the relevant jurisdiction applies a progressive tax rate, an “average tax rate” will be applied”), (2) has not entered into an information exchange agreement with Chile, (3) does not have relevant transfer pricing rules, (4) is identified as a preferential tax regime by the OECD, or (5) only taxes local source income.
Member of the OECD will not be considered as a tax haven, despite the test above.
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.
A Tax Goodwill is generated in vertical corporate mergers when the total tax cost of acquisition of the merged company is greater than its tax-adjusted equity.
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.
