Chile: Chilean investors should check their tax residence
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.
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.