Chile: Chilean investors should check their tax residence
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Chile: Chilean investors should check their tax residence

intl-updates-small.jpg

Taxpayers will be subject to an Attributed Income System or a Partially Integrated System from 2017 and onwards, changing the way corporate income tax is paid in Chile.

campos.jpg
vivallo.jpg

Germán
Campos

Martín
Vivallo

Law No. 20.780 introduced the two alternative taxation systems and taxpayers will be subject to one of those systems. The legislation introduced several modifications to the earlier Tax Reform Law (Law No. 20.780) that was published in the Chilean Official Gazette on September 29 2014.

Under the Attributed Income System, as a general rule, the corporate income tax of 25% must be paid in the year in which the income is generated, and the profit is immediately attributed to the shareholders, who must pay their final taxes (up to 35%) in that same year, even if there has been no effective distribution. The corporate income tax paid can be fully credited against the final taxes and, therefore, the maximum combined tax burden would amount to 35%. Also, the shareholders may be subject to personal income tax when certain distribution exceeds the attributed income.

Under the Partially Integrated System, taxpayers will be subject to corporate income tax (Impuesto de Primera Categoría) at a rate of 27% from 2018 (25.5% during 2017). When profits are distributed to shareholders, non-resident shareholders will be subject to additional withholding tax (Impuesto Adicional) at a rate of 35%. Being a (partially) integrated system, the corporate income tax paid may be credited against the additional tax, but only for 65% of the amount paid. Therefore, the total tax burden would amount to 44.45%.

However, the aforementioned 65% credit may be increased to a 100% in cases where the non-resident shareholder is a tax resident in a country with a double taxation treaty (DTA) signed and currently in force with Chile. In this case, the total tax burden would amount to 35%.

The difference between countries with a DTA signed and currently in force with Chile and those without it becomes evident.

The impact on foreign investors

Law 20.780, which introduced the two alternative taxation systems, contains a provisional rule that will allow foreign investors resident in a country that has a DTA signed, but not yet in force, with Chile (such as the US, China, Japan, and Italy, among others) to benefit from the full credit against their final tax until 2019.

For investors who are tax residents of a country with which Chile does not have a DTA, they may have to consider some alternative solutions. One of the possible solutions could be to determine the value of migrating the effective place of management to a country that holds a DTA with Chile.

When possible, this could be a very useful solution. However, the 2014 Tax Reform Law introduced a general anti-avoidance rule (GAAR) to the Chilean legislation, which may prevent foreign investors from migrating. Moreover, the DTAs signed by Chile also contain anti-abuse clauses.

Fortunately, the Chilean tax authority issued a ruling which, broadly speaking, stated that a migration as the one mentioned above should not, in principle, be subject to GAAR.

The taxation system that a taxpayer could choose is not a trivial matter. It depends, among other things, on the situation of their shareholders. Foreign investors should analyse these matters and determine whether they are in the right position to face the future challenges and operations of their investments in Chile.

Germán Campos (german.campos@cl.pwc.com) and Martín Vivallo (martin.vivallo@cl.pwc.com)

PwC

Website: www.pwc.cl

more across site & bottom lb ros

More from across our site

Sharma, managing director for A&M in the United Arab Emirates, tells ITR about intense time pressures, mimicking Jurgen Klopp and what makes tax cool
AI will speed up some of the most laborious TP processes without making human input redundant, argues Hank Moonen, CEO of TaxModel
Firms with a broad geographic reach are more likely to win work, especially from global companies with high turnovers, according to survey data of nearly 29,000 corporate counsel
Australian businessman Gordon Merchant used EY’s advice to offset an A$85 million capital gain, according to the Federal Court
Griggs has been drafted in ahead of schedule as the incumbent Tim Ryan departs for Citigroup; while the Netherlands plans to scrap a 15% share buyback tax
Authorities must ensure that Russian firms do not use transfer pricing schemes to increase profits made from oil sold in different markets, advocacy organisations have argued
Fallet, a partner at law firm Mauger Muniz Advogados in Brazil, tells ITR about his passion for tax law, the leaders who inspired him, and what makes tax cool
The former chief operating officer will assume the role on July 1
Ahead of next week's Indirect Tax Forum in London, ITR spoke with Christian Van Der Valk of Sovos about how different governments and companies are embracing e-invoicing
Konrad Jeczewski has alleged he was threatened with negative reviews before being made redundant by EY Australia
Gift this article