Chile: Indirect transfer rules in light of the Chilean tax treaties
On September 27 2012, Chile introduced rules taxing the indirect transfer of Chilean assets (that is, stocks, goods and branches of non-resident entities). Pursuant to the new rules, the transfer of a 10% or greater interest in a foreign entity that directly or indirectly holds Chilean assets would be taxable in Chile at a 35% rate to the extent certain specific thresholds and circumstances set forth in the Chilean tax law are met. Broadly speaking, indirect transfers would be taxed in Chile where the Chilean assets proportionately represent at least 20% of the fair market value of the total interest held by the transferor in the foreign entity being transferred, or where the Chilean assets are valued at or more than $180 million approximately; or where the foreign entity being transferred is domiciled or incorporated in a jurisdiction treated as a tax haven for Chilean tax purposes.
If taxable, taxpayers could make the election to treat such gain under the domestic regimes applicable to direct transfers of Chilean assets (that is, 35% overall rate, or a current 22.5% rate to the extent some requirements are met). There is also a business group reorganisation exception which may apply to the extent some specific requirements are met.
On March 7 2014, the Chilean tax authorities issued Circular letter No. 14 establishing the official interpretation for the indirect transfer rules. The circular letter provided that, from a tax treaty perspective, the gains derived from indirect transfers, where the transferor is resident in a tax treaty jurisdiction, would fall under the scope of the 'Other income' provision of the Chilean tax treaties, which grants to the source state (Chile) the right to apply its domestic law with no limitation. In addition, where the taxpayer makes the election to subject the indirect transfer gain to the capital gains regime applicable to direct transfers of Chilean assets, the applicable provision of the tax treaty was the capital gains provision, to the extent the underlying asset falls within those assets the gain of which is covered under the respective treaty.
At that time, this interpretation was highly debated and arguments were put forward criticising the remission to the 'Other income' provision of the Chilean tax treaties.
On November 14 2014, the Chilean tax authorities issued Circular letter No. 59 where the criteria described above was expressly amended. On the one hand, it was confirmed that indirect transfer gains would fall within the scope of tax treaties where the transferor is resident in a tax treaty jurisdiction. On the other hand, with respect to the applicable tax treaty provision, the Chilean tax authorities stated that the analysis should be performed on a case-by-case basis, given that the 'Capital gains' provision varies from treaty-to-treaty, and it was not possible, in their view, to establish a unique rule or interpretation on the applicable treaty provision.
Circular letter No. 59 referred to the Chile – Spain tax treaty as an example. Under the Chile – Spain treaty, the taxation of gains derived from the transfer of shares falls under article 13 paragraph 4 (taxation at source – Chile – with no limitation where the gain derives more than 50% of their value, directly or indirectly, from immovable property situated in Chile; or where the transferor at any time in the preceding 12-month period owned, directly or indirectly, shares or other rights representing 20% or more in the capital of that company).
In such example, Circular letter No. 59 concluded that the rules set forth in article 13 paragraph 4 were applicable to the indirect transfer gain arising from the transfer of shares of a Spanish entity which in turn holds shares in a Chilean entity, where specific circumstances and thresholds were met.
As a general comment on this new criterion, it could be said that we agree with the approach that a case-by-case analysis is required to determine the proper treatment of the indirect transfer gain in the different tax treaties Chile has in force.
Further, even though the remission to the 'Capital gains' provision should be highlighted, there are still arguments to discuss the accuracy of the application of such specific paragraph referred to in the Chile-Spain tax treaty (article 13 paragraph 4), taking into account that similar wording could be found in other Chilean tax treaties. The analysis becomes even more complex for those tax treaties Chile has in force where no similar rule is in place.
Accordingly, the interpretation of Chilean tax treaties would play a key role in determining the rules applicable to the indirect transfer of Chilean assets.
Mauricio Valenzuela (firstname.lastname@example.org)
Tel: +1 646 471 7323
Sandra Benedetto (email@example.com)
Tel: +562 29400155