On February 24 2020, the Tax Modernisation Bill was enacted in Chile, introducing several modifications to, among others, the inheritance and donations tax (IDT) law.
Through the referred bill, IDT law was modified in order to allow donations performed around the world to provide tax credit against the IDT.
Therefore, the provisions of the IDT law establish that all acts or contracts concluded abroad that fall within the definition of “donation”, regardless of the formalities of the respective country, will be considered as a donation for these purposes.
Hence, taxes that were paid for donations abroad will be recognised as credit against the IDT in Chile.
Moreover, the reform has also included several new exemptions and incorporated reduced tax rates.
First, if a spouse or civil partner of a deceased whose assignment has already been made, dies within five years from the date of death of the first deceased, and the corresponding tax has already been paid, the value equivalent to the part of the assets that corresponds to the heirs of both the first deceased and their spouse or civil partner, will be exempt.
Furthermore, donations performed during a tax year by individuals with resources that have already been subject to taxation, will also be exempt of IDT. This donation may not exceed 20% of their global net income or income from dependent work, with a limit of 250 unidad tributaria mensual (UTM) (approximately $15,000).
Additionally, the regulations have also established that people with disabilities will be entitled to a reduction of 30% over their determined IDT, with a ceiling of Chilean Unit of Account (UF) 8,000 per year (approximately $290,000). This reduction will be applicable for both hereditary allocations and donations.
Most of these changes respond to a lack of regulation that have generated double taxation issues. Nonetheless, while these modifications may help, they do not solve the underlying problem.
For instance, before these regulations entered into force, a person that inherited both their mother and father, would have paid twice the IDT. First, the surviving spouse would have paid IDT for the assets inherited from their spouse, and, once they died, their children would have paid IDT again over the same assets.
The new provisions intend to solve this, but, in our opinion, fail to do so. While the double taxation issue is addressed, there is a limit of five years between the death of the first spouse and the death of the surviving spouse to access this benefit.
Considering the time involved only to perform the assignment would already be up to one or two years, it is unlikely that there would be a significant increase of the value of the assets in the remaining three or four years that would justify another taxation.
Finally, it is important to address the fact that a small number of people is subject to IDT at a high rate, and their wealth would probably far exceed the amounts considered as limits.
Regardless of the above, the analysis shall be performed on a case-by-case basis in order to determine if the inheritances or donations will be subject to any of these tax benefits, which, in some cases, may imply a significant reduction of the tax burden.
Also, the reform has modified the regime applicable to the assignations or donations subject to trusts.
In principle, the incorporation of the trust in the will determines that only half of the value of the trust assets will be considered in the tax base of the IDT.
For the beneficiary to own the trust assets, a certain condition established by the trustor must be met.
If the condition is not complied, and the property returns to the trustor, the trustor must add its value and pay IDT over the total value of the asset, to the date of consolidation, deducting the taxes already paid.
On the other hand, if the condition is met and restitution is verified to the beneficiary, the latter must pay IDT for the total liquid value of the asset at the date of restitution, deducting what has already been paid for taxes.
While these changes may reduce the utilisation of trusts for hereditary purposes, IDT is still very relevant in Chile and, therefore, it is advisable for anyone who maintains a relevant heritage in Chile to review its effects in case of death.
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