Proposed new rules regarding foreign tax credits in Chile
International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX
Copyright © Legal Benchmarking Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Proposed new rules regarding foreign tax credits in Chile

Sponsored by

sponsored-firms-pwc.png
chile-693056.jpg

A new bill proposes a reduction in foreign tax credit from 35% to 27%, which will reduce the incentives to use Chile as a platform, as Rodrigo Winter Salgado of PwC Chile explains.

Chile has a unilateral and a bilateral foreign tax mechanism.

The unilateral tax credit mechanism is applicable for countries that have not signed a double tax treaty with Chile. It applies only to certain kinds of foreign-sourced income and is limited to a maximum rate of 35%.

The bilateral tax credit mechanism applies to foreign-sourced income earned from a country with which Chile has a double tax treaty. It applies to all kinds of income included in the treaty and is also limited to a maximum rate of 35%.

Since the corporate income tax rate is 27%, if the foreign tax credit exceeds this amount, the difference up to 35% can be used against final taxes (surtax in the case of Chilean individuals and additional withholding tax in the case of foreigners earning Chilean-sourced income).

Also, if a foreign investment is held through different layers abroad, Chilean tax law allows the use of foreign tax credits, even if the corporate taxes are paid by entities indirectly held abroad, as long as the distributing entity is domiciled in the same country and it holds directly or indirectly an equity interest of more than 10%.

Under a tax change in 2020, if the corporate income tax is paid in a third country, different from the distributing country, corporate income taxes paid can also be used as a credit in Chile, as long as the distributing entity holds directly or indirectly an equity interest of more than 10% and the third country has an enforceable double tax treaty with Chile or an exchange of information agreement.

The bill

In March 2022, Gabriel Boric became the Chilean president. In his presidential programme, he announced a very ambitious tax reform that was presented before the Congress on July 7 2022.

Among the proposed amendments, the bill states that the current maximum foreign tax credit of 35% should be reduced to 27% and should only be applicable to corporate income tax and not to final taxes. Also, the indirect tax credit mechanism is proposed to be fully repealed.

If this is approved, in the author’s opinion, foreign investment and using Chile as a business platform will become less attractive, since the amount of foreign tax credits will be significantly lower, increasing the Chilean tax burden.

more across site & bottom lb ros

More from across our site

As German clients attempt to comply with complex cross-border rules, local advisers argue that aggressive tax authorities are making life even harder
Based on surveys covering more than 25,000 in-house lawyers, the series provides insights into what law firms must score highly on when pitching to in-house counsel
The UK tax authority reportedly lost a case due to missing a deadline; in other news, Canada has approved pillar two legislation
There will always be multinationals trying to minimise tax by pushing the boundaries of their cross-border arrangements, Rob Heferen claimed
HMRC’s attempts to crack down on fraudulent tax relief claims are well-meaning, but the agency risks penalising genuinely innovative businesses, writes Katy Long of ForrestBrown
Argentina, Brazil, Mexico and South Africa are among the countries the OECD believes could benefit from the simplified TP rules
It comes despite an offshore enabler penalty existing in the UK throughout the entire period
It is extraordinary that tax advisers in the UK can offer their services without having to join a professional body. This looks like it is coming to an end, Ralph Cunningham writes
Meet the esteemed judges who are assessing the first-ever Social Impact Awards
The ‘big four’ firm has also vowed to spend more on nurturing junior talent; in other news, Blick Rothenberg has hired a pair of tax partners
Gift this article