Historically, in Chile, there was a generic tax regulation on the contract ‘association or accounts on participation’, which is similar to a ‘consortium’, in which the participant delivers its resources so that a manager can negotiate and gain common profits.
The tax legislation is very brief on this matter and the instructions of the internal revenue service (IRS) indicated that to the extent that the conditions of the contract could be accredited, each party independently recognised their income, costs and expenses. On the other hand, the IRS had not systematically regulated other fiduciary contracts, except for mandates.
As shown in recently issued Circular No. 40 of 2021, Law No. 21,210 does not substantially change the applicable rules of such contracts. However, the announcement expands and unifies its regulation to any kind of fiduciary agreement.
The IRS states that fiduciary agreements:
- Confirm the right of the participants to use ‘corporate tax’ credit paid by themselves or by the manager. In turn, the Circular clarifies that the contribution made by the participant will not affect the manager's tax equity.
- The Circular clarifies that the income from this type of contract is an income from capital, and, therefore, resembles its tax treatment on the distribution of dividends or distribution of profits.
When the participant is a resident abroad (subject to withholding tax), the participation will be included for the application of the final taxes at the corresponding tax rate. However, it is necessary to make a distinction:
- To the extent that the conditions and participation from the contract could be proven in the same year of the benefits, together with final taxation and given that the income in question comes from the capital, it must first comply with the corporate tax at the general rate of 25%, which can be fully credited against the final taxes in the terms of Articles 56 No. 3 and 63 of the Income Tax Law.
In this case, the income is taxed under Article 14(B) of the Income Tax Law, which applies to companies that pay corporate tax without obligation to have balance sheets.
- On the other hand, the Circular letter indicates that, if the proof of the fiduciary agreement and the accounting is done in the coming years, the corporate tax is paid by the fiduciary agent, and then it will transfer the corresponding tax credit to the participant, who will not be obliged to pay corporate tax.
However, the IRS did not indicate if the credit will be transferred totally or partially, which is relevant due to the Chilean two-level income tax on business profits. In other words, as it is not expressly mentioned, the tax burden may increase from 35% to 44.45%.
Please note that companies willing to invest from abroad or already have businesses under any kind of fiduciary agreement, should assess if they are willing to comply or are in compliance with the several regulations that a ‘capital investment’ implies and the eventual administrative costs associated.
As expressed in the regulation, foreign entities may still be obligated to pay both corporate tax and withholding tax in the same period. In this case, there are other regulations that should be fulfilled and are not expressly mentioned in the instructions.
- The foreign company must submit and pay the corresponding tax return and obtain a RUT number (Tax-ID);
- In order to obtain a Tax-ID, the company shall appoint a tax representative, which should be an individual with residence or domicile within Chile; and
- Finally, as is required by the new regulations, the foreign entity may pay, in the same year, corporate and final taxes by filling the corresponding tax return by its own, which is contrary to the general rule for foreign investors and the withholding principle.
According to the above, what would the difference be between a direct investment in a Chilean company and a fiduciary trust agreement? In terms of the administrative tax burden, it is difficult to find a difference.
Investing in a Chilean company may be easier than signing a fiduciary agreement to carry out a business on behalf of the foreigner, and the outcome would be the same. However, the difference may be given by the treatment of the corporate tax credit that may be used by the participant, which is not clear in the Instructions.
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