Chilean Tax Reform Overview
On August 23rd, the Chilean government introduced a bill to update the previous tax reform and to simplify its structure and compliance mechanism. It is expected that the modifications will pass in 2019, affecting tax returns lodged in April 2020.
Below we have provided a highlight of some of the most important parts:
Integrated Tax System.
- All companies will be in a single and fully integrated tax system.
- Personal taxation will be based on withdrawals and according to personal tax rates (progressive) that range between 0% and 35%.
- A full imputation credit will be recognized for corporate income tax paid in Chile against any tax liability corresponding to its shareholders.
- The previous tax reform for the partially-integrated system reduced the credit for corporate taxation from 100% to 65% resulting in a maximum aggregate tax burden of 44.45% when distributing profits to shareholders.
- The corporate tax rate of 27% is maintained. Thus, the effective income tax rate for non-residents who distribute profits to shareholders would be 35%.
- Previously, the corporate income tax rates had been set at 27% for the partially-integrated system and 25% for the attributed-income system, with the higher rates designed to penalize companies that chose not to distribute profits, therefore, delaying taxation at the shareholders’ level.
Tax on Small and Medium Enterprises.
- Small and medium enterprises (Pymes) will have a corporate tax rate of 25%.
- They will also have a fully integrated tax regime, in which the partners or owners will be taxed at the time of making withdrawals.
“Expenses” – Enables a larger deduction.
- The current situation is that SII has rejected expenses in the determination of the taxable net income of taxpayers referring to the fact that in order to be deductible they must be considered necessary expenses to produce the income, depriving the taxpayer of the possibility of deducting expenses that are in the interest of the company’s business and that although they do not generate income directly, they are necessary to carry out the business.
- This reform introduces a clearer concept of what is understood by accepted expenses, eliminating the requirement of immediate correlation between expense and income generation. The new concept modifies the general requirements in the sense of allowing the deduction of not only directly related expenses but also those expenses indirectly related to the line of business, whether ordinary or extraordinary, voluntary or obligatory.
Among other aspects regarding the accepted expenses, the following matters are modified:
- It eliminates the cap (which is currently quite low) applicable to the remunerations of partners who are part of a partnership or “employer’s salary”. It will allow partners to expense a reasonable remuneration proportionate to the significance of the company.
- It is allowed the deduction as an expense of legal indemnities destined to compensate patrimonial damages of clients or users.
- It is allowed to deduct the cost of food, hygienic/clean personal products, books and school supplies, clothes, toys, among others, which are given free of charge to non-profit institutions.
- Eliminates the 4% cap on sales, applicable to the deduction of expenses corresponding to royalty payments to related parties abroad.
- It permits the deduction of expenses incurred in environmental measures, for the execution of projects or activities, for the benefit of groups, sectors or interests of the respective local communities.
- It permits the deduction of unpaid credits with unrelated third parties which are more than 365 days from its maturity.
- Finally, we can say that the new concept of an expense that will be incorporated will provide greater certainty of what is considered to be an accepted expense, in addition, expenses will be subject to reasonable measurement in relation to the amount of the same.
- The anti-avoidance rules are improved and clarified with the aim of strengthening them.
Transitory Depreciation Regime.
- Proposal for instant accelerated depreciation equivalent to 50% of the investment made in new or imported fixed assets, once its use begins, deducting it as an expense in one year. This benefit would be extended for the second year.
Creation of the Taxpayer’s Defense Office.
- The Taxpayer’s Defender’s Office or “DEDECON” would be created with the purpose of ensuring the protection and safeguarding of taxpayers’ rights in matters of internal taxation within the competence of the Internal Revenue Service (SII).
- It is contemplated to modernize and improve the green taxes for polluting activities.
Tax Amnesty – Declaration of Goods or Income that are Abroad.
- The reform also introduces a voluntary system for the declaration of undeclared assets or income held abroad, applying a single tax of 10%, applicable to all types of movable, immovable, tangible and intangible property held abroad that have not been subject to Chile’s tax laws.
- This tax amnesty is similar to the one implemented in 2014 and would last for one year.
- Potential applicants will be subject to two limitations.
- The first is that individuals or companies must be domiciled/incorporated/residents as of January 1, 2018, to qualify.
- The second restricts the amnesty to assets that were acquired before January 1, 2018, or income generated from those assets until December 31, 2018.
Tax on Non-Resident Digital Services.
- Digital services provided to individuals in Chile by foreign online platforms, such as Netflix, Airbnb, Spotify, among others, will be taxed at a withholding rate of 10%.
- This new tax is to be withheld by the entity issuing the credit card payment or equivalent when paying for the service.
- If the relevant service is used by a company, withholding rules apply at the standard 15% rate.
The rules on international taxation are modernized and simplified with the aim of encouraging foreign investment and the globalization of the national economy.
Some of the new rules include:
A) Permanent Establishment (PE).
- Previously, there was no specific definition of PE, particularly in domestic tax law. A legal definition of the concept of permanent establishment is introduced proposing the following concept: “Permanent establishment (PE), a place that is used for the permanent or habitual realization of all or part of the business, business, or activity of a person or entity without domicile or residence in Chile, whether or not used exclusively for this purpose, such as offices, agencies, facilities, construction projects and branches.
- PE is also considered to exist when a person or entity without domicile or residence in Chile carries out activities in the country with the powers to conclude contracts in the ordinary course of business, plays a principal role leading to the conclusion of business, or has the powers to negotiate essential elements.
- Finally, the new law specifies the cases in which a PE is not constituted, such as, for example, if the person or entity without domicile or residence in Chile carries out exclusively organizational and/or start-up activities in the country.
- This is particularly important as it allows foreign taxpayers to determine with a certain degree of clarity when there is a PE in Chile and when it would not.
B) International Reorganizations.
- There is no national tax legislation that regulates the tax effects of international reorganizations involving Chilean assets or parts, except in situations of indirect transfers of Chilean assets.
- The new law proposes to include rules to regulate the effects of international reorganizations and to establish the requirements for recognizing that these are tax-neutral processes.
C) Definition of territories or jurisdictions with preferential tax regime.
- A new definition for territories or jurisdiction with preferential tax regime. A preferential tax regime is found if the real effective tax burden on income in said territory or jurisdiction is lower than a rate of 30% or does not tax income from foreign sources.
- If a territory or jurisdiction has any type of agreement signed with Chile that allows the effective exchange of information for tax purposes, it would not be considered a preferential tax regime
D) Rules on credits for input taxes abroad.
- The rules on tax credits paid abroad are consolidated into a single article, simplifying the accreditation of taxes paid abroad and harmonizing the applicable caps.
E) Restricting the preferential rate of 4% with respect to back-to-back financing.
- Currently, a preferential rate of 4% withholding tax is applied to interest paid on loans granted by foreign banks or financial institution.
- The 4% is only applicable if the final or effective beneficiaries of the interest are foreign banks or financial institution. In the event that the final beneficiary or effective beneficiary is not such entities, the applicable rate will be the general rate of 35%. This restricts or limits the use of the preferential rate of 4% in the case of back-to-back financing.
H) Modifications in the matter of taxation of financing via external credits.
- It is contemplated to modify the rule of excess debt restrictions for the financing of large investment projects known as project finance.
- The objective of safeguarding these types of projects is to cover the various financing structures so as not to make it more expensive.
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Karem Duffoo is a Senior Tax and Corporate Lawyer with Harris Gomez Group, an international and multidisciplinary firm specializing in cross-border transactions between common law countries and Latin America.
From 2015 to 2018, she was part of the Corporate Tax and Real State areas at Correa Gubbins Law firm. From 2014 to 2015 she was the Manager of the Legal Tax Area at Deloitte Advisory Chile. From 2011 to 2014 she worked at the Law Department of the Large Taxpayers Unit of the Chilean Tax Authority. From 2003 to 2011 she was Manager of the Legal Area at Círculo Verde SpA. From 2000 to 2003 she was Chief Counsel at Editorial Jurídica de Chile. From 1999 to 2000 she was an associate at Cuadra y Cia. law firm.