This content is from: Chile

Chile: Law with changes in Chilean foreign tax credit system published

Sandra Benedetto
Adriana Zaidan
On January 31 2014, Law No. 20.727 (the law) was published, amending several tax rules on different subjects. Among such amendments, the law brought some improvements to the system of unilateral and bilateral foreign tax credits (FTC), with retroactive application to January 1 2014.

Traditionally, Chilean the FTC system has been subject to several limitations. In brief, (i) unilateral FTC has only been available in case of certain types of income, that is dividends (direct and indirect FTC), royalties, technical assistance services and PE income; (ii) broadly speaking, for dividends, the amount of FTC was limited to the lower amount between 30% of the taxpayer's foreign income and 30% of its foreign source net income (FSNI). In the other cases, unilateral FCT was limited to the lower between the amount of first category tax paid on taxpayers' foreign income and 30% of its FSNI; (iii) only a two tier indirect FTC was available; and (iv) credits were extinguished in case the taxpayer registered tax losses in the year where FTC were paid or in the following years (in case a carry-back of losses applied).

As illustrated below, the law reduces some of the limitations mentioned above, although it does not extend unilateral FTC to other concepts (such as capital gains and interest).

Accordingly, the law increases the unilateral FTC limits from 30% to 32% of the FSNI. Only in case of dividends, there is an increase in the FTC limitation that considers the foreign income received by the taxpayers (from 30% to 32%). In what concerns bilateral FTC, the limits of 30% of the total taxpayer income and 30% of the taxpayer's FSNI were increased to 35% in case the beneficial owner of the relevant income is a Chilean resident. As a result of such differences between unilateral and bilateral FTC limits, Chilean taxpayers will now have to calculate two types of FSNI: one considering foreign income derived from treaty countries and the other taking into account foreign income sourced in non-treaty countries.

Additionally, the new rules grant to Chilean taxpayers unilateral indirect FTC reaching as many tiers as may exist, to the extent that all the subsidiaries are resident of the same country of the first tier subsidiary and that the first tier subsidiary owns, directly or indirectly, more than 10% of the shares of the other subsidiaries.

In what concerns the use of FTC when the Chilean taxpayer receiving the foreign income is in a loss situation, the law introduces a rule that allows unlimited carry-forward of FTC received in connection with dividends. However, in a contradictory manner, a previous rule stating that FTC were totally extinguished if obtained in a period where the Chilean beneficiary presented a tax loss was not revoked by the new legislation.

No reference is made to the treatment of unilateral FTC received by companies in a tax loss position in connection with other concepts of income or to the credits received as a result of double tax treaties.

Sandra Benedetto ( and Adriana Zaidan (
Tel: +56 2 940 0155

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