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Chile: Limit between a reasonable choice to organise a business and the abuse of legal forms


Germán Campos

Gabriela Varas

One of the major changes introduced by Law 20,780, published in the Chilean official gazette on September 29 2014, is the establishment of a general anti-avoidance rule (GAAR) in Article 4-bis of the Chilean tax code, which came into force on September 30 2015.

Until now, the Chilean Internal Revenue Service (IRS) had challenged several operations alleging they had been performed in avoidance of the tax legislation, with different results. In 2001, the Chilean Supreme Court recognised that it is possible to operate borderline-legal businesses due to the lack of an express prohibition rule.

However, through analysis of the criterion underlying certain judicial rulings in recent years, it appears that, in some cases, Chilean courts have accepted the challenges of the IRS against avoidance behaviours and have granted the IRS a legal support over which said tax authority has been able to challenge avoidance behaviours, even before the GAAR came into force. One pertinent example is the Coca Cola Embonor SA v. Chilean IRS decision from the Chilean Supreme Court, dated July 23 2013 [Case No. 5118-2012]. The case concerned a business reorganisation that stated that the avoidance of paying taxes does not correspond to a legitimate business reason.

The new GAAR establishes that the reasonable choice of behaviours and alternatives envisaged in the tax legislation is legitimate – the 'economy of option' doctrine – and that the IRS shall presume and recognise the good faith of taxpayers. This presumption should remain until a taxable event is avoided, at which point the tax authorities may deem there is no good faith within the operations performed. Thus, the sole circumstance that the same economic or legal effect can be obtained through other acts that would lead to different taxation, as foreseen in Chilean legislation, does not embrace avoidance.

Furthermore, the IRS is able to challenge the operations accomplished in abuse of the legal forms or performed with the purpose of covering another operation. The first ones are those performed to avoid the configuration of the taxable event, to reduce the tax basis or the tax obligation or to postpose the generation of the tax obligation; the second ones are those that cover the configuration of the taxable event, its nature, the real amount or date of origin of the tax obligation.

However, within the organisation of their business, taxpayers consider the amount of taxes to be paid as an additional cost when analysing the profitability of a certain operation, act or legal business, or a group of these. Therefore, a justifiable doubt is to inquire where the limit in which "reasonable choice" becomes an "abuse of the legal forms" or "simulation" is.

A useful clue is to analyse the origin of our GAAR, with the underlying principles of tax legality and the equal distribution of the tax burden. Furthermore, Chilean tax legislation recognises the right of taxpayers to organise their activities according to the principles of free will and contractual freedom. This means that if the operations produce relevant legal or economic effects for the taxpayer or for a third party, they would be deemed as an economy of option and would therefore be allowed.

Consequently, not every instance of reduced taxation or other tax advantage should be deemed as avoidance. We expect further clarity on the criteria the IRS embraces and we are looking forward to the upcoming pronouncements of the tax courts, which should recognise the alternative for taxpayers to choose the legal form that seems most accurate and efficient within our tax legislation, even if the same economic or legal effect can be obtained with other acts that would imply a higher taxation or with acts that do not produce tax effects, or produce them in an altered way.

Germán Campos ( and Gabriela Varas (



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