Despite the economic fallout brought upon by the coronavirus, not all is bad news for foreign investors, as tax opportunities have surged in Chile.
In February 2020, Law No. 21,210 was published in the Official Gazette, and established a set of rules that might interest foreign taxpayers with investments or those seeking to incorporate companies in Chile. Furthermore, as countries around the world rushed to issue legislation to foster their economies, Chile also introduced a set of updated tax provisions.
New measures for SMEs
A bill in legislative discussion proposes to reduce the general corporate income tax (CIT) rate for small and medium-sized enterprises (SMEs) to 12.5% for the period between 2020 to 2022, as a result of the COVID-19 emergency. Supreme Decree No. 1043 of July 3 allows SMEs with a 30% drop of average revenue declared between April to June, compared to the same period last year, to postpone the VAT to be paid between July to September. The postponed amount will be paid in 12 equal monthly instalments from October 2020. A provisional monthly payments (PPM) relief to be paid between July and September 2020 will apply if some requirements are complied with.
SMEs are companies with a consecutive three-year average of revenue below $2.7 million approximately, when considering relation rules seeking to prevent tax schemes. The initial capital for newly incorporated entities must not be higher than $3.1 million approximately. Furthermore, to opt for this regime, passive income has to be lower than a certain percentage of the year’s total revenue.
In accordance with Law No. 21,210, SMEs in this regime pay a 25% CIT rate (rather than the general 27%), with a 100% CIT credit against final income taxes (generally a 65% credit), and the possibility to opt for keeping simplified accounting records or a CIT exemption (tax transparency regime) as well, among other allowances.
Instant depreciation of fixed assets
A transitory statute allowed instant depreciation for a 50% of the fixed assets value, on condition that they are new or imported between October 1 2019 and December 31 2021. The assets have to be intended for new investment projects.
A new bill seeks to increase the depreciation percentage to 100% for fixed assets acquired from June 1 2020, which is extended to the terms until December 31 2022.
Term reduction regarding the VAT refund due to the acquisition of fixed assets
The Chilean VAT Law establishes a procedure to obtain a cash refund following the acquisition of fixed assets, provided a VAT balance has been carried forward because of that purchase for a certain term.
Law No. 21,210 has modified these provisions by lessening both the minimum term of VAT balance accumulation from six to two months, and the Chilean Internal Revenue Service (IRS) must resolve the refund request from 60 calendar days to 20 working days.
Stamp tax rate reduction
Law No. 21,225, published on April 2 2020, transitorily reduced the rate of stamp tax to 0%, which is levied on documented money credit operations, such as loans, even if granted from abroad, and their extensions or renewals. This measure will apply to the stamp tax accrued from April 1 to September 30 2020. A special form must also be submitted.
Substitute tax for the balance kept in the historical taxable profits ledger
This benefit would allow taxpayers to pay a substitute tax with a rate of 30%, instead of the final income taxes, achieving an effective tax rate reduction to 30% for dividend distributions to foreign shareholders, instead of the general 35% or 44.45% for shareholders domiciled in tax treaty countries or not, respectively. The option can be exercised until the last working day of April 2022.
To estimate the accumulated profits, different formulas are encompassed, depending on the year in which the option is exercised.
Upon payment of this tax, the profits that were subject to this benefit will be deemed fully-taxed, and can be distributed at any time, with preference to any other amount.
Changes definition of necessary expenses
Before Law No. 21,210, the Chilean IRS’s interpretation only allowed the deduction of expenses that were mandatory in order to generate income. The Chilean courts had endorsed this restrictive stance, which punished several commercially driven disbursements.
Law No. 21,210 extended the concept to include those that have the ‘ability’ to generate income, either in the future or not. Expenses must relate to the company’s interest, development or maintenance in order to be deductible. Coronavirus-related expenses are accepted as deductions.
An extensive, complex catalogue of especially deductible expenses was also introduced.
In conclusion, as COVID-19 has ravaged economies all around the globe, countries have enacted legislation to tackle the financial fallout. Chile has followed the trend by introducing several tax rules, which should be taken into consideration by foreign investors when evaluating business decisions. Hence, even faced with complex, uncertain times, tax opportunities in Chile remain available for foreign taxpayers.
Macarena Bevilacqua
T: +56 2 2940 0704
E: macarena.bevilacqua@pwc.com
Mauricio Ramírez
T: +56 2 2940 0704
