In the recent Chilean tax reform, which was approved by the Chilean Congress last January and published in the Official Gazette on February 24, a change in the tax environment for start-ups, and small and medium enterprises (SMEs) was included. These changes are meant to boost local entrepreneurship and provide a regime of fiscal transparency. Moreover, there are certain provisions concerning external financing, which have been added to the Chilean Income Tax Law (Chilean ITL).
When the original presidential motion to enact a tax modernisation bill was sent to the Chilean Congress in 2018, its message contained several hints that the conditions for entrepreneurship and innovation needed both an overhaul and a push forward. This was made by abrogating current Article 14-ter of the Chilean ITL which used to establish a simplified tax system for SMEs.
This new regime contains a new definition of what is understood to be a SME based on three limits: (i) maximum statutory capital (ii) maximum annual gross income (iii) a limit on the amount of income derived from real estate, shares or quota rights and income from associative contracts.
The regime for the start-ups and SMEs comprises several benefits such as simplified accounting requirements – as they are not required to apply inflation adjustment – and the instant amortisation of the physical fixed assets, as well as other certain tax expenditure provisions which seek to simplify the tax and compliance burdens for start-ups. This regime will be the default regime for new legal entities that fulfil the requirements.
Besides the above benefits, the new regime also adds the possibility to apply for fiscal transparency for SMEs, for the first time in Chile. Provided that all the owners of the enterprise are subject to final taxes in Chile (either global complementary tax or additional tax taxpayers), the regime means that the enterprise will not be subject to Chilean corporate tax, and the owners will pay the corresponding final taxes directly.
Additionally, the bill includes provisions for the financing of start-ups. The simplified tax system for SMEs in Chile has a history of being used for aggressive tax schemes, and that is why certain limitations to its use were put in place in the 2014-15 tax reform, as well as in this new tax reform bill. In this sense, the limit for annual gross income is calculated by adding the income of related entities.
However, to prevent it from affecting financing, an exception to the related entities is set with the purpose of promoting entrepreneurship and technological innovation. In this sense, entities that participate in start-ups or finance them will not be considered related entities, provided an agreement is signed between the start-up and the financier and such an agreement is certified by Chilean Economic Development Agency (CORFO). The requirements for the agreement and its certification procedure are to be regulated through a joint circular letter to be issued between CORFO and the Chilean Internal Revenue Service (IRS).
The new SMEs tax regime intends to advance Chilean start-ups, angel and seed investors, as well as venture capitalists and private equity firms, who are also considered to be a fundamental part of it. The market awaits the administrative developments of these rules.
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