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The separate entity approach within the Chilean IRS pronouncements

The question regarding to what extent a permanent establishment (PE) or a branch should be treated as a separate entity from its head office and the question of which is the tax treatment applicable to transactions performed between them, has been a discussed issue over which the Chilean IRS has not sustained a clear criteria.

On the one hand, the Chilean IRS has been consistent when sustaining that from a legal perspective, a PE and its head office constitutes the same legal entity. However, for tax purposes, the Chilean IRS has established different criteria for both VAT and income tax, depending on the specific transaction under analysis.

From an income tax perspective, the Chilean IRS was consistent in its first rulings (No. 2762 from 1996, 2022 from 1996 and 3064 from 1997) when recognising that even though a PE and its head office constitutes the same legal entity, a foreign branch/PE should be considered as an independent entity for the purpose of determining their income, expenses and tax results.

Moreover, in 2007 (Ruling No. 2997), the Chilean IRS expressly recognised, based on Article 41B and Article 38 of the Chilean Income Tax Law, that income obtained by a PE should be attributed to it as it was an independent and separate entity from its head office. Therefore, for attribution of profits purposes it could be sustained that the Chilean IRS adopted the separate entity principle.

However, when referred to the tax treatment applicable to transactions performed between a PE and its head office, the Chilean IRS has been not that clear. Indeed, the Chilean IRS has recognised, for income tax purposes, the possibility that services are provided between a PE and its head office through Ruling No. 2438 from 2010. However, from a VAT perspective, the Chilean IRS has sustained otherwise in Ruling No. 1794 from 2011 where it stated that the provision of services requires at least two persons, circumstance which is not complied with in the case of a PE and its head office.

With regards to the possibility of having a PE granting loans to its head office and vice versa, the Chilean IRS has also sustained different opinions. In fact, through several rulings, the Chilean IRS implicitly recognised such possibility. However, in 2008, following the Chilean Civil Code, the Chilean IRS established that such kind of transactions were not possible, since a liability requires two different legal parties (Ruling No. 800).

Even though, in the latest pronouncement in this regard, the Chilean IRS recognised again that such kind of transactions were possible when referring to the tax treatment applicable to interest paid by a Chilean head office to its foreign PE (Ruling No. 2047 from 2011). Indeed, the Chilean IRS considered that interest paid were subject to Additional Tax (withholding) under Article 59 of the Chilean Income Tax Law.

The Chilean IRS based its understanding on the fact that such provision does not provide for an exemption which relieves from taxation interest paid by the local head office to its foreign PE. However, attention should be paid to the argument set forth by the Chilean IRS, as Article 59 levies with Additional Tax "amounts paid or credited to an account to neither domiciled resident individuals nor entities", and as consistently recognised by the Chilean IRS, a PE is not a "person" since it is an extension of the head office's legal personality. Regardless of such concern, this recent ruling comes to recognise the separate entity principle, at least for interest paid by a head office to its foreign PE.

Mauricio Valenzuela (mauricio.valenzuela@cl.pwc.com) and Javiera Bullemore (javiera.x.bullemore@cl.pwc.com)
PwC
Tel: +56 2 940 0155 Fax +56 2 940 0588
Website: www.pwc.com/cl

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