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As we have reported in previous updates, Chile is going through substantial changes in its tax system. In September 2014, the Chilean government enacted Law 20,780 introducing major modifications to the core of the tax system, affecting its foundation in a significant way (the 2014 tax reform). 2015 was the year in which the Chilean IRS focused its efforts on issuing administrative regulations on the different topics covered by the tax reform, to provide taxpayers guidelines on how the tax reform would be implemented.
The tax reform package has generated a lot of discussion among tax specialists, particularly discussion of concerns about the complexity of the amendments introduced by the tax reform.
Within this context, the government has sent to the Chilean Congress a new Bill to amend the original tax reform, with simplification its main aim. However, from a preliminary overview, it seems it goes beyond this remit and it is uncertain whether simplification will be accomplished.
One of the main novelties of the new Bill relates to the two alternative income tax regimes that were introduced by the tax reform package: (a) the attributed income regime (AIR); and (b) the partially integrated regime (PIR).
As per the wording of the tax reform measure now in force, both regimes are available for all companies. The new Bill is proposing to limit this by means of establishing that the AIR would be available only for Chilean companies (excluding stock corporations) exclusively owned by individuals resident or domiciled in Chile or by foreign taxpayers (that is, final taxpayers). Companies that do not comply with that requirement will be obliged to opt for the PIR.
It is also important to note that although the new Bill proposes to change the way in which taxpayers will be required to opt for the regimes (that is, legal formalities and quorums), the term within which the option must be exercised would remain the same. Therefore, throughout this year's second semester, companies will be required to opt for one of the referred regimes. If companies fail to submit their option, then AIR would be the default regime for those companies (excluding stock corporations) exclusively owned by final taxpayers. All other companies would fall under the PIR.
Another important matter to consider refers to the total tax burden increase under the PIR in a non-double tax treaty scenario. From the wording now in force, the total tax burden on profits distributed from a company under the PIR to a foreign shareholder resident in a country with which Chile does not have a double tax treaty (DTT) in place, would be increased to 44.45%. Chilean Government is proposing in the new Bill a transitory regime that would allow maintaining the total tax burden at the current rate of 35%, regarding those jurisdictions that have a signed, but not-yet-in-force DTT with Chile. For this to apply, it would be mandatory that the treaty has been signed before January 1 2017. Note, however, that this transitory provision would only be applicable until December 31 2019. So far this provision would benefit foreign investors from the US, Argentina, China, South Africa and Italy.
At this date, the new Bill is still under discussion in the Chilean Congress and has been recently sent to the second stage of the legislative discussion (Chilean Senate). However, the government expectation is that the legislative procedure is concluded by the end of this month.
The Chilean tax discussion is far from coming to an end. Companies carrying out business in the country should keep a close eye on the progress of the current legislative discussion and on any further developments on this, especially considering that this is a year in which important tax decisions should be made.
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