Chile: Introducing rules to benefit from 4% WHT and structured agreements
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Chile: Introducing rules to benefit from 4% WHT and structured agreements

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Germán Campos Kennett and Mónica Aguilar Valderrama of PwC Chile explain the implications of Chile’s withholding tax rate limitations following the modernisation tax bill.

As a general rule, the income paid or credited to entities without domicile or residence in Chile would be subject to a 35% withholding tax (WHT) rate.

In addition, interest paid to non-residents would also be subject to a general 35% WHT rate. However, interest on loans granted by foreign financial institutions or banks (FFI) would be subject to a reduced 4% WHT rate.

With Law No. 21,210 of 2020, the so-called ‘modernisation tax bill’, there is a ‘before’ and ‘after’ to consider regarding rules and requirements to qualify as an FFI and apply the 4% WHT rate.

Before Law No. 21,210, the Chilean Corporate Income Tax Law (CITL) did not provide a definition of FFI. However, the Chilean Internal Revenue Service (IRS) has pointed out that FFIs should have a financing purpose; and comply with capital and reserves of $8 million approximately. 

However, after the introduction of Law No. 21,210, a definition of FFI has been incorporated into the CITL, which states that a FFI will be understood as an entity domiciled, resident or incorporated abroad, whose main business purpose is granting credits, financing or other similar operations. 

Additionally, legal requirements to qualify as an FFI were modified, according to the following:

  • Its main business purposes must be to grant loans, provide financing or other similar operations;

  • Their income should derive mainly from its financing activities;

  • Financing activity should be performed on a regular basis; and

  • FFIs should have a capital and reserves of approximately $14,4 million.

Regarding these requirements, the IRS through Circular Letter 56 of 2020, has pointed out that in order to qualify as an FFI:

  • The entity should have capacity to develop its main purpose;

  • Their financing activity should be considered in a period of 24 months; and

  • The FFI should assume financial risk on its operations.

If those requirements are not met, interest paid, credited to an account or made available to a non-resident will be subject to a general rate of 35% WHT; or a lower rate, if a double taxation avoidance agreement can be applied.

Structured agreements

In order to apply the 4% WHT rate mentioned above, the following requirements should be met:

  • The credits should not be granted through any type of structured agreement; and

  • The FFI should issue an affidavit of not having concluded a structured agreement.

Therefore, it becomes relevant to understand what is meant by a structured agreement.

The legal definition of a ‘structured agreement’ states that this type of agreement will exist in the case of a FFI that receives interest, then transfers it to a different entity, domiciled abroad, which would have had no right to the 4% WHT rate, if paid directly from Chile.

Through its instructions, the IRS has indicated that these types of agreements are characterised mainly by two elements:

  • The FFI that receives the interests does not assume the risks inherent in a financing operation; and

  • The FFI would transfer the received interests to another person or entity domiciled or resident abroad, and that would not be entitled to the reduced WHT if it had directly received the interests of the debtor.

In addition, this type of agreement may fall on all or part of the financing operations carried out by a FFI with taxpayers domiciled or resident in Chile. This implies that those arrangements contemplate any type of liability, whether legal or in fact, to transfer, directly or indirectly, all the income or a significant part of it, which ultimately leads to the FFI that receives the interest to lose the power to dispose of that income.

Therefore, Law No. 21,210 incorporates this concept with the purpose of limiting the ‘structured agreements’ that allowed other persons or entities with domicile or residence abroad to be benefit from the 4% WHT, a reduced rate at which they would not be entitled to if they had directly received the interests of the debtor.

Finally, the main purpose of this rule is to restrict the use of the preferential 4% WHT rate to those cases in which the FFI is the beneficial owner of the income.

Grandfathering rule

The legal requirements to qualify as a FFI and the structured agreement rules in order to apply the 4% reduced WHT rate, will be applied to interest paid, credited to an account or made available to non-resident FFIs in the following cases:

  • Interests derived from loans entered into from March 1 2020; or,

  • Loans granted before the same date, if the one of the following circumstances are met:

    • The loan agreement is novated or assigned after such date; or

    • There is an amendment to the amount of the principal or to the interest rate of the loan after such date.


Germán Campos Kennett

T: +56 2 2940 0000


Mónica Aguilar Valderrama

T: +56 2 2940 0000


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