|Ignacio Burrull||Germán Campos|
Among other modifications, the Tax Reform introduced article 41 G to the Chilean Income Tax Law (Chilean ITL), which sets forth new regulations regarding the taxation of foreign entities controlled, directly or indirectly, by a Chilean resident, domiciled, or incorporated taxpayer.
As a general rule, foreign source income is subject to taxes in Chile when it is perceived by the Chilean entity or individual. However, under these CFC rules, which will enter into force on January 1 2016, the passive income accrued or perceived by a controlled entity will be deemed as accrued or perceived by the Chilean controlling entity, whichever occurs first, in the same year in which they were generated, with a credit for the taxes paid or due in the country of origin.
There are two main concepts that must be taken into account to be subject to the CFC rules: controlled entity and passive income.
- Controlled entity, meaning an entity holding, directly or indirectly, more than 50% of the:
- capital; or
- right to profits; or
- voting rights;
- or an option in the same terms described above;
Also, if the holding entity can:
- select, change or remove the majority of directors or administrators of the foreign entity; or
- unilaterally modify the bylaws of the entity; or
- unless proven otherwise, has a participation in a foreign entity that is resident, domiciled or incorporated in a country with low or no taxation, as described in article 41 H of the Chilean ITL (that is, having a gross tax rate lower than 17.5%; not having an exchange of tax information treaty in force with Chile; being considered as tax haven by OECD standards, among others).
- Passive income. Article 41 G of the Chilean ITL considers that the following concepts, among others, shall be understood as passive income: dividends (unless it comes from an active income entity), interest (unless earned by a bank), lease income, royalties, capital gains, and so on.
If the foreign entity is deemed as controlled by a Chilean entity and the income deemed as passive, the income accrued or perceived by the controlled foreign entity shall be recognised by the Chilean entity in the proportion of the participation it holds in the controlled foreign entity, and considering the general Chilean tax provisions used to determine the net taxable income of taxpayers. The above will generate a demanding workload for the controlling entity in order to "convert" those incomes into Chilean-like income. However, it is noteworthy to mention that, under CFC rules, only the profits are recognised by the Chilean entity, not being able to consider the tax losses generated by the foreign controlled entity.
Notwithstanding the foregoing, these CFC rules will only apply when the passive income of the foreign controlled entity exceeds the 10% of the total revenues of said entity in the corresponding period. On the other hand, if the passive income represents more than 80% of the controlled foreign entity, the 100% of said entity's revenues shall be deemed as passive income and, therefore, subject to CFC rules. Nevertheless, the Chilean entity shall only consider the application of CFC rules when the aggregate of passive income coming from controlled foreign entities exceeds UF 2,400 ($100,000 approximately) in each year.