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Chile: Chile’s new (not-so-)thin capitalisation rules


Sandra Benedetto

Ignacio Burrull

On September 29 2014, Law No. 20.780 was published in the Chilean Official Gazette (2014 Tax Reform), which introduced several modifications to the Chilean taxation system. However, on February 8 2016, Law No. 20.899 was published in the Official Gazette (2016 Tax Reform), which introduced modifications to the 2014 Tax Reform.

Among other modifications, the 2016 Tax Reform introduced relevant changes to the excess of indebtness rules (Thin Cap Rules). For clarity purposes, a bit of history could be useful to understand how these rules are not-so-thin now.

Before the 2014 Tax Reform was enacted, a 35% withholding tax (WHT) applied, as a general rule, over interest payments made abroad (unless a reduced tax rate applied through a double taxation treaty provision). However, a reduced 4% WHT applied under certain circumstances (for example, interest paid on loans granted from abroad by foreign banks or foreign financial institutions). Notwithstanding the above, if the operation was deemed to be made in a related party scenario and the debtor was in a debt-to-equity ratio exceeding the maximum of 3:1, an additional 31% taxation would be levied on the excessive interest, payable by the local debtor.

The 2014 Tax Reform changed the way in which the 3:1 debt-to-equity ratio was calculated. Broadly speaking, before the 2014 Tax Reform was enacted, the excessive indebtedness position had to be calculated only considering the liabilities with related parties and subject to the 4% WHT (that is, without considering liabilities with unrelated parties and with related parties but subject to the general 35% WHT). The 2014 Tax Reform established that the excessive indebtedness position of the Chilean debtor had to be calculated considering loans with both related parties and unrelated parties (using a monthly average of the sums of all these loans). The 31% tax imposed over the excessive interest payments applied not only to such excessive interest payments but also to all charges and commissions related to the excessive indebtedness position. Additionally, the 2014 Tax Reform established that this 'fattened' position needs to be reviewed annually.

The Thin Cap Rules gained some weight, but nothing to be too worried about.

The 2016 Tax Reform changed the taxable base of the Thin Cap Rules. The excessive indebtness position of the Chilean debtor now needs to be calculated considering not only loans with both related and unrelated parties (the latter with a minor exception), but also considering any interest payment that is subject to a reduced WHT rate (before, it was only loans subject to the 4% WHT); that is, for example, payments subject to a reduced rate as per the provisions of a double taxation treaty, or even those which are not subject to WHT.

The Thin Cap Rules are now clearly overweight.

As per the above, it is advisable that those entities now subject to a reduced rate due to a double taxation treaty carefully review this situation in order to monitor their waistline, assess their weight and stay healthily compliant.

Sandra Benedetto ( and Ignacio Burrull (



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