The Chilean government presented a Tax Modernisation Bill on August 23 2018. From such date until August 22 2019 the Tax Bill evolved, being subject to important amendments in the House of Representatives, until they agreed on a revised version, which is now being discussed by the senators.
In previous articles our firm referred to certain relevant income tax matters considered in the Tax Bill. Below, we continue our analysis of the Bill, addressing further relevant income tax matters that it contains.
Repurchase agreements for financial instruments
The financial market allows parties to obtain financing through the sale of financial instruments agreed jointly and simultaneously with a repurchase subject to a term.
The aim of these agreements is to provide financing using the legal forms of sale and repurchase, and it is expected that there is a difference between the sale and repurchase prices. With a lack of specific regulation over the matter, the tax treatment is determined under the light of the general rules, in other words, capital gains taxation.
Following general tax rules, the first sale could constitute a capital gain for the financed party, and the difference between the sale and repurchase price would normally constitute a higher tax basis for the financed party and a capital gain for the financing party. This differs from the tax treatment of conventional loans, where the gain/loss is represented by the interest which is normally deductible for the financed party.
The Tax Bill introduces changes in this matter, establishing tax effects that recognise the economic reality of the operation (that is, financing). Thus, the transfers are no longer considered as such for tax purposes, no capital gain is derived, and the price difference between operations is to be treated as an expense for the financed party and as taxable income for the financer.
Stock option plans
The existing legislation in force considers that the benefit arising from granting, exercising or transferring a stock option is treated as a higher remuneration for the employee.
The Tax Bill differentiates the tax treatment of labour compensation plans that consist of granting options for acquiring shares, bonds or other securities issued in Chile or abroad, depending on whether they are included in employment agreements or not.
In cases where stock option plans are included in employment agreements, granting and exercising the option would be a non-taxable income for the employee. In turn, when stock option plans are not included in employment agreements, granting the option would be a non-taxable income and exercising the option would be a taxable higher remuneration.
In both cases, the capital gain obtained in the transfer of the option or in the alienation of the shares, bonds or securities would be a taxable event subject to income taxes.
CFC rules – exception for R&D projects
The prevailing Income Tax Law sets forth a list of amounts considered as passive income for controlled foreign company (CFC) purposes as well as cases in which particular income included in that list would not be considered passive.
The list of passive income includes, among other things, the income derived from the transfer of the use, enjoyment or exploitation of trademarks, patents, formulas, software and so on, either consisting of royalties or any other kind of remuneration, with no exception.
The Tax Bill sets forth an exceptional situation in this regard, whereupon the income arising from research and development (R&D) projects previously approved by the Economic Development Agency (Corporación de Fomento a la Producción) would not be considered as passive income.
New tax requirement for market makers
Capital gains derived from the sale of shares or quotas of funds with a stock market presence are considered non-taxable income, provided that several conditions are met. In this regard, stock market presence may be achieved through an effective market presence or by having a 'market maker' contract that guarantees the existence of regular offers to purchase and sell securities.
It is intended that the Tax Bill will introduce a new requisite to benefit from the non-taxable income in case of achieving a stock market presence through a market maker contract, requiring those contracts to have, separately or jointly, a duration exceeding one continuous year before the alienation of the corresponding security.