Chile: First consultation on the applicability of the Chilean GAAR
The Chilean Internal Revenue Service (IRS) has been working on the new General Anti-Avoidance Rules (GAAR).
Last year, the tax authority released a catalogue of 12 possible scenarios under which the GAAR could be applicable.
Within this context, on February 3 2017, the IRS issued the first response to a consultation presented by a national taxpayer regarding the application of the GAAR to an intended transaction.
The consulted scheme referred to the situation of a Chilean company that would be demerged. The demerged company owned investments and assets, among which, immovable property was included. The demerged entity would keep all immovable property, while the new company arising from the demerger would be assigned with all other investments. Subsequently, the demerged entity would be dissolved and liquidated.
In this particular case, the taxpayer indicated that the envisaged operation had a business reason. The demerger is justified on the necessity of separating the different lines of business, while the dissolution is justified on the fact that the immovable property business would not be developed anymore.
The taxpayer continues to argue that the demerger and subsequent dissolution should not be seen as an elusive practice. This is because Chilean tax legislation expressly provides for a specific taxation over the dissolution of entities, thus configuring a legitimate and reasonable option given by Chilean tax legislation.
The IRS indicated that even though the taxpayer will perform the demerger in order to separate the lines of business, if we consider both the demerger and subsequent dissolution, the operations considered jointly could not have a relevant economic nor legal purpose different than paying less taxes under the specific taxation applicable upon the dissolution of entities. For such purposes, it would be necessary to consider the accumulated profits in the demerger entity and the personal taxation of its partners, to determine if indeed this operation could be motivated by tax savings rather than economic or legal purposes.
The IRS concluded that in principle the demerger and the subsequent dissolution, either individually or jointly considered, should be seen as a legitimate option under Chilean tax legislation. However, this conclusion could vary depending on the actual circumstances of the case, particularly accumulated profits in the demerger entity and the personal taxation of its partners should be taken into account.
Chilean GAAR is a matter under development and should be closely monitored. Until this date, the IRS has not applied the GAAR to any transaction being executed in the country. Nonetheless, as publicly announced by the tax authority, another nine consultations presented by taxpayers are under review.
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