Chile: Final approval for Chilean tax reform package expected next month
Maria del Mar Sanchez
As mentioned in previous updates, a substantial tax reform is in the process of being approved in Chile. Though the legislative procedure started on April 1 2014, it is not until now that it has arrived to what may be its last stage. On September 10 2014, the Chamber of Representatives approved the Bill and sent the relevant text to the President for consideration. Since it is unlikely that further amendments will be introduced by the President, the law approving the Bill is expected to be released in late September or in the beginning of October. The following items cover some of the major amendments potentially affecting either foreign investors or local taxpayers investing abroad:
Two optional income tax regimes are introduced: Regime A and Regime B. In general, Regime A entails shareholders being annually attributed the income generated by the local entity and taxed on such. Hence, the whole taxation arising in Chile for both the shareholder and the relevant entity is triggered each year, even if no effective dividend distribution is performed by the latter. Under this scenario, the 35% tax burden currently borne by foreign investors is maintained, but there is no chance to defer the shareholders' taxation.
On the contrary, Regime B generally maintains the existing integrated mechanism, where the local entity is annually taxed but the shareholder's taxation is deferred until an effective dividend distribution occurs, where it will be granted a credit consisting of the first category tax paid at the corporate level by the Chilean entity. However, Regime B restricts such credit so that the current 35% tax burden increases to 44.45%; save for the case of foreign investors resident in a country which has a double tax convention in force with Chile, where no credit restriction applies and the mentioned 35% total tax burden is still maintained.
The corporate tax rate is gradually increased from 20% to 25% or 27%, depending on whether the taxpayer opts for Regime A or Regime B, respectively, as follows: (i) 21% in 2014, 22.5% in 2015, 24% in 2016, 25% in 2017 onwards, under Regime A, and (ii) 21% in 2014, 22.5% in 2015, 24% in 2016, 25.5% in 2017 and 27% in 2018, under Regime B.
Controlled foreign corporation (CFC) rules are introduced, where, as a general rule, passive income of foreign entities qualifying as CFC shall be taxed in Chile.
A general-anti avoidance rule (GAAR) is incorporated, by which tax obligations shall arise considering the legal nature of the acts actually carried on, whatever form or name is given by the parties; this follows a judicial procedure carried out at the IRS director's request before the Customs and Tax Court. Besides, any person who designs or plans transactions herein covered, or directors or legal representatives of a legal entity infringing this rule, may be sanctioned.
Thin capitalisation rules (3:1 debt-to-equity ratio) are modified, basically in the manner in which the excess of indebtedness is calculated.
A one-time repatriation procedure is envisaged, where taxpayers who have not paid the due Chilean taxes on assets or income located abroad may pay a flat 8% over the value of such assets and income, provided that several requirements are met.
Since the amendments foresee diverse entries into force and some of them will not apply until years 2016 or 2017, taxpayers will now face the challenge of determining the effect these new provisions have in their particular situations and, should the case be, these will likely need to define the proper way for minimizing the actual impact of the above stated.
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