Chile: New regulation on indirect sale of shares
Before Law No. 19.840 entered into force on December 12 2002, the Chilean Income Tax Law (CITL) did not consider gains derived from the sales of shares or rights of a foreign company (a company incorporated abroad) as Chilean source income. The mentioned law introduced new rules to the case of indirect sales of shares. Indeed, according to such provision, gains obtained by a foreign company from the sale of shares or rights from another foreign company was considered as Chilean source income and accordingly subject to income tax when the purchaser was domiciled or resident in Chile and such acquisition allows it to participate with more than 10% in the profits or ownership of a Chilean entity.
On September 27 2012, a tax reform that modified the indirect sales rule, among other changes, was enacted. According to this new rule, the concept of Chilean source income is broadened. As set forth by this new provision, capital gains obtained on such indirect sale will be taxed in Chile, wherever the purchaser is domiciled, if the foreign company whose shares, quotas or rights are being sold has an underlying assets in Chile.
In general, for this rule to apply, at least 10% of the total shares of the foreign company should be alienated and one of the following two circumstances should be met: (a) 20% of the market value of the foreign company's shares owned by the seller corresponds to Chilean underlying assets; or, (b) the market value of the Chilean underlying assets amounts to 210,000 annual taxable units ($200 million).
This new indirect sale provision is also applicable in case the foreign company being sold is domiciled in a tax haven, unless the parties involved can demonstrate before the Chilean Internal Revenue Service that Chilean residents do not own 5% or more than the equity or profits and at least 50% of the equity or profits of the foreign entity is controlled by shareholders resident in a country that is not a tax haven.
Capital gains which arise from these transactions will be subject to a 35% sole tax which will be borne by the non-Chilean resident seller. For this purpose, the new law also set forth some provisions to define how the gain should be calculated.
How this rule will be applied, and for example, how the calculations to determine the relevant percentages should be made, or how indirect/direct participations will be computed, or the relevant cost determined, or how this regime will deal will international reorganisation processes are still some uncertain matters that should be clarified soon by the Chilean Internal Revenue. It is expected that a pronouncement regarding how this rule will be implemented is issued in the short-term.
This new indirect sales regulation regime shall be necessarily taken into account in case any international transaction that involves Chilean underlying assets is carried. Based on the abovementioned, a thorough analysis should be made from a tax perspective on a case-by-case basis because of the capital gain tax that may arise.
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