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Chile: Chile extends corporate income tax credit use

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Lorenzo Gálmez

Paula Silva

While the 2014 Tax Reform Act, N° 20.780, limited the full use of corporate income tax credit (known in Chile as First Category Tax Credit) to foreign taxpayers who were tax residents of countries with which Chile had double tax treaties (DTT) already in force, the "Simplification" Tax Reform Act, N° 20.899 of 2016, extended such benefit to residents of countries with which Chile has signed a DTT even if they are not yet in force, though same conditions.

Former legislation and the Chilean tax reform of 2014

Since the Chilean tax reform first saw light in September 2014, foreign investors have been uneasy about their investments in the country, among other causes, because of the difficulties of using corporate income tax credit as a deduction from the Additional Withholding Tax (AWT) they must pay upon outbound remittance of profits.

This was an all-new concern for foreign investors who, up to that point, have had the possibility to impute 100% of the corporate income tax already paid at the Chilean entity level, against the AWT generated by the distribution of profits to them (as shareholders).

Adding to that new concern, the existence of two new tax systems, the attributed income regime and partially integrated regime, both of them fully applicable to Chilean entities that can distribute profits to foreign investors (both person and entities), means that the corporate income tax credit can vary from 25% to 27% (from 2017 onwards).

As stated above, the Chilean tax reform, contained in Act N° 20.780, limited the right to full credit, from 2017 onwards, to countries with an in-force DTT with Chile, to that date.

As of today, 34 countries have already subscribed a DTT with Chile, but only 26 of them are actually in-force, as the new regulation requires.

Consequentially, by the application of the reform contained in Act Nº 20.780, the only countries that could have used the full benefit are listed in Table 1.

Table 1

Australia

Colombia

Malaysia

Peru

Spain

Austria

Croatia

Mexico

Poland

Sweden

Belgium

Denmark

New Zealand

Portugal

Switzerland

Brazil

Ecuador

Norway

Russia

Thailand

Canada

Ireland

Paraguay

South Korea

UK


On the contrary, countries such as Argentina, China, Czech Republic, Italy, Japan, South Africa, the US and Uruguay, were being kept out of the full benefit even though they had already signed a DTT with Chile that is pending becoming law.

Being able to use the full benefit of the tax credit may be crucial for foreign investment decision making.

In raw numbers, the aforementioned means that, with a corporate income tax rate of 27% (rate applicable from 2017 to entities under the partially integrated income regime), a non-DTT resident will pay a 30% higher tax burden than a DTT resident.

That difference is the result of applying full credit to the final AWT of 35%, in which case the final tax burden paid by the DTT resident would be 35%. Furthermore, in the case of a non-DTT resident, applying 65% of the corporate income tax credit, the final tax burden will amount to about 45,45% under the partially integrated income regime.

The "Simplification" Tax Reform Act, N° 20.899 of 2016

Knowing the relevance of this subject, the "Simplification" Tax Reform Act, N° 20.899 of 2016, introduced some relevant changes regarding this matter, specifically in its Transitory Article 4, by which the possibility to impute 100% of the corporate income tax will also apply to those countries that had a signed DTT with Chile (signed before January 1 2017).

This will benefit residents of countries such as Argentina, China, Czech Republic, Italy, Japan, South Africa, the US and Uruguay, which already have a signed DTT with Chile, and any other that can comply with these rules within the legal time frame.

Notwithstanding this, the aforementioned transitory rule will be applicable until December 31 2019. Thus, on January 1st, 2020, the full benefit will only apply to those countries with an in-force DTT with Chile, as it was established on the 2014 Tax Reform Act, N° 20.780.

Corporate migration or change of effective place of management as a possibility in Chilean Tax Law

Related to the above, the Chilean IRS (SII) has stated that there is no abuse on "corporate migration" or "resettlement", by which a person or enterprise can change their residence to another country, and benefit from DTT rules applicable to that new jurisdiction.

Thus, if a resident of a non-DTT country migrates its residence to a DTT country, the legislation of that new country, including the DTTs in-force would be applicable and protect such a taxpayer, as long as such migration complies with general and specific requisites for the new country to be considered tax resident.

Likewise, the SII has also agreed to recognise the possibility of a taxpayer changing their tax residence by an actual change of effective management, being therefore applicable to the corresponding DTT, if the change occurs towards a DTT country.

Any migration process or change of the place of effective management, must be, nonetheless, very well implemented and studied, on a case by case basis, for there may be other relevant taxation effects surrounding the process that must be taken into account, along with the new provisions of the local general anti-avoidance rules.

Lorenzo Gálmez (lorenzo.galmez@cl.pwc.com); and Paula Silva (paula.silva@cl.pwc.com)

PwC Chile

Tel: +56 2 2940 0000

Website: www.pwc.com/cl

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