Proposed new rules regarding foreign tax credits in Chile

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 Also, the indirect tax credit mechanism is proposed to be fully repealed.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.