The effects and opportunities of ending a business in Chile

A topic which businesses sometimes forget to analyse when investing in a country are the tax effects associated with closing a business. In Chile, this is a relevant matter given that: (i) taxes are due, (ii) there are advantages to be had, and, (iii) businesses may no longer be left dormant postponing the end of business tax.

In light of this, Chilean tax legislation has been subject to important changes during the last tax reforms, which has generated different tax effects to those which had previously been produced.

When a business is closed, a 35% rate end of business tax is due. This tax is a replacement of final taxes (additional tax or global complementary tax) which would levy any profit distribution.

The end of business tax is determined through a formula that considers the tax equity less profits not subject to taxes less capital contributions. This means that it will not only levy taxable profits, but it may also levy financial profits.

There is a credit to be had for the corporate income tax paid by the entity, which may amount up to 27%. The amounts levied with end of business tax are not subject to any other income tax.

Following the above, the end of business tax may be compared with the taxation of profit distributions, if all assets were distributed, but here lays the major difference and opportunity. 

An asset distribution is considered to be an alienation; thus, it needs to be performed at fair market value triggering a corresponding capital gain based in the difference between the tax basis and the fair market value. In the case of end of business, by express disposition of the law, assets are to be assigned to the shareholders at tax basis.

This means that assets may be transferred to the shareholders, local or foreign, at tax basis without triggering any capital gain, disregarding any possible differences between fair market value and tax basis. 

In addition to the above, dormant entities are no longer a viable option in Chile, since the Chilean Internal Revenue Service has, for some time already, had the faculty to close a dormant business and apply the corresponding taxes.

Then, end of business may trigger tax payments, but it also represents a moment of opportunities, that although we are of the opinion that should be considered before performing an investment, it is never too late to review and prepare as a way out of a business.

The ability to transfer the assets at tax basis positions the end of business tax as a relevant alternative compared to profit distributions or sale of the entity/assets, where an analysis of each case would be required to determine the most convenient alternative.

A topic which businesses sometimes forget to analyse when investing in a country are the tax effects associated with closing a business. In Chile, this is a relevant matter given that: (i) taxes are due, (ii) there are advantages to be had, and, (iii) businesses may no longer be left dormant postponing the end of business tax.

In light of this, Chilean tax legislation has been subject to important changes during the last tax reforms, which has generated different tax effects to those which had previously been produced.

When a business is closed, a 35% rate end of business tax is due. This tax is a replacement of final taxes (additional tax or global complementary tax) which would levy any profit distribution.

The end of business tax is determined through a formula that considers the tax equity less profits not subject to taxes less capital contributions. This means that it will not only levy taxable profits, but it may also levy financial profits.

There is a credit to be had for the corporate income tax paid by the entity, which may amount up to 27%. The amounts levied with end of business tax are not subject to any other income tax.

Following the above, the end of business tax may be compared with the taxation of profit distributions, if all assets were distributed, but here lays the major difference and opportunity. 

An asset distribution is considered to be an alienation; thus, it needs to be performed at fair market value triggering a corresponding capital gain based in the difference between the tax basis and the fair market value. In the case of end of business, by express disposition of the law, assets are to be assigned to the shareholders at tax basis.

This means that assets may be transferred to the shareholders, local or foreign, at tax basis without triggering any capital gain, disregarding any possible differences between fair market value and tax basis. 

In addition to the above, dormant entities are no longer a viable option in Chile, since the Chilean Internal Revenue Service has, for some time already, had the faculty to close a dormant business and apply the corresponding taxes.

Then, end of business may trigger tax payments, but it also represents a moment of opportunities, that although we are of the opinion that should be considered before performing an investment, it is never too late to review and prepare as a way out of a business.

The ability to transfer the assets at tax basis positions the end of business tax as a relevant alternative compared to profit distributions or sale of the entity/assets, where an analysis of each case would be required to determine the most convenient alternative.

PwC Chile

T: +56 2 29400633

Fernando Binder: fernando.binder@cl.pwc.com

Gregorio Martinez: gregorio.martinez@cl.pwc.com