Chile: New thin capitalisation rules

Loreto Pelegrí		Rodrigo Winter

On September 29 2014, Law N° 20.780 was published in the Official Gazette of the Republic of Chile, amending several tax provisions contained in the current Chilean Income Tax Law, as well as several other tax provisions. Among the changes contained in the law are the new thin capitalisation rules applicable to loans granted from January 1 2015 onwards. Thus, loans granted before January 1 2015 will continue to be subject to the old thin capitalisation rules.

Nevertheless, the Law provides that the new thin capitalisation rules are also applicable to loans granted before 2015 whenever such loans have been amended, in the sense that they have been transferred, the debtor has been changed, the principal or interest amount have been modified, or whenever the liability has been directly or indirectly transferred to a related party.

Please bear in mind that under the old thin capitalisation rules, a sole 31% tax was applicable over the interest related to the excess indebtedness at the Chilean debtor level in cases where three joint requirements are met: i) loan has been granted by a related party; ii) loan would be subject to the reduced 4% withholding tax on interest; and iii) debt-to-equity ratio exceeds 3:1.

Also, under the old thin capitalisation provisions, the excess of indebtedness position was calculated only once, that is, in the year when a related loan was granted, such 31% tax being deductible from the debtor's net taxable income. This 31% tax is independent from the 4% withholding tax on interest paid to the foreign creditor.

Pursuant to the new thin capitalisation rules, not only interest is subject to the thin capitalisation rules, but also commissions or fees, financial expenses, and any other disbursement related to the loan. Also, the excess of indebtedness position must be calculated on a yearly basis and consider all loans (local and offshore loans, both related and unrelated).

Under the new thin capitalisation rules, an 'excess of indebtedness tax' of 35% must be paid by the Chilean debtor, the 4% withholding tax being creditable against such aforementioned tax, which continues to be deductible for the Chilean debtor.

When determining the tax base of this 35% excess of indebtedness tax, and provided that the 3:1 debt-to-equity ratio is exceeded, only interest, commissions, financial expenses, and any other disbursements should be subject to this tax, if and when: i) the loan was granted by a related party, and ii) such disbursements were subject to the 4% withholding tax.

Finally, the concept of 'related party' included in the old rule has been broadened by the new law.

This new thin capitalisation regime will imply a significant challenge for Chilean companies, and also for the Chilean Internal Revenue Service.

Loreto Pelegrí (loreto.pelegri@cl.pwc.com) and Rodrigo Winter (rodrigo.winter@cl.pwc.com)

PwC

Tel: +56 229400155

Website: www.pwc.cl