Chile proposes significant changes to corporate tax law Tax Insights

Tax Insights
from International Tax Services
Chile proposes significant changes to
corporate tax law
December 18, 2015
In brief
The Executive Branch of the Chilean government on December 15, 2015, presented to the Chilean
Congress a new tax bill that would make significant amendments to Law No. 20.780, enacted on
September 29, 2014 (the 2014 Chile Tax Reform).
The bill amends, among others, provisions related to:
 methods of computing shareholder-level taxation
 creditability of corporate income tax (CIT) in the case of tax treaties signed by Chile, through
transitory provisions
 general anti-avoidance rule (GAAR) clarifications
 thin capitalization rule amendments.
The Chilean Congress will debate the bill and may propose amendments.
In detail
Shareholder-level taxation
mechanisms
The 2014 Chile Tax Reform
introduced two methods of
shareholder-level taxation
beginning in 2017 that Chilean
entities can elect.
Attribution-basis method
available to Chilean entities
with only Chilean-resident
individual or non-resident
shareholders
The attribution method will tax
shareholders on income
attributed to them at the end of
the year in which the income is
generated, regardless of actual
distributions made by the
Chilean entity. The 25% CIT
paid at the entity level will
remain fully creditable against
the final shareholders' tax. The
total income tax burden
effectively will remain at 35%,
but without the shareholderlevel deferral available under
current rules.
The attribution method will be
available to Chilean entities with
exclusively Chilean-resident
individuals or non-residents as
shareholders. However, Chilean
stock corporations (sociedades
anonimas or SAs) will have to
apply the semi-integrated
method (no election is available
to them).
The attribution method will
apply by default, if not elected
otherwise, to Chilean entities
with solely Chilean-resident
individual shareholders. Other
eligible entities, such as Chilean
entities with non-resident
shareholders, will have to elect
the attribution method to
prevent the semi-integrated
method from applying by
default.
www.pwc.com
Tax Insights
Semi-integrated (cash basis)
shareholder taxation method
The semi-integrated method will tax
shareholders on actual profit
distributions made by the Chilean
entity (i.e., on a cash basis). The
semi-integrated method will provide
for a 25.5% CIT rate in 2017 and 27%
in 2018, to be paid at the Chilean
entity level.
Chile’s two-tier tax system applies an
additional 35% non-resident
withholding tax on profits that
Chilean entities distribute abroad.
However, the general rule will credit
65% of the corporate-level CIT paid
against the 35% non-resident
withholding tax. Therefore, the
effective tax rate on distributed profits
will be 44.45% beginning in 2018.
Shareholders residing in jurisdictions
with which Chile maintains a tax
treaty will be able to fully credit the
CIT against the additional 35% tax.
The credit will yield an overall income
tax burden of 35% on distributed
profits, and will allow taxpayers to
defer the shareholder-level tax until
distributions are actually made.
Chilean entities owned exclusively by
non-resident shareholders will default
to the semi-integrated method if they
do not elect otherwise. For Chilean
SAs, the semi-integrated method will
be the only method available.
Transitory Article 4 of the new tax bill
addresses the creditability of the
corporate-level CIT by certain nonresident shareholders against the
Chilean non-resident withholding tax
(35%). The 65%-of-CIT credit limit
2
against the non-resident withholding
tax would not apply to shareholders
resident in jurisdictions with which
Chile has signed a tax treaty before
January 1, 2017, even if the treaty is
not yet in force as of that date. Thus,
the CIT will remain to be fully
creditable for US resident
shareholders against the 35% nonresident withholding tax, as the USChile tax treaty is signed but not yet in
force (still awaiting ratification by the
United States). These transitory
provisions would apply until
December 31, 2019.
General anti-avoidance rules
New Chilean GAARs took effect on
September 30, 2015. The new rules
allow the Chilean tax authorities (IRS)
to disregard the legal form of
transactions in abusive or simulated
tax planning (applying a substanceover-form approach). At the request of
the Chilean IRS, the Tax and Customs
Court must determine if ‘abuse’ or
simulation’ occurred, with the IRS
bearing the burden of proof.
In regards to the grandfathering
provision applicable to transactions
executed or concluded before
September 30, 2015, the new rules
clarify and ensure that transactions
executed before September 30, 2015
will remain outside the scope of the
GAARs.
Thin capitalization, CFC rules
The new tax bill introduces
adjustments, which would take effect
on January 1, 2016, to the current thin
capitalization rules (Article 41 F of the
Chilean Income Tax Law). The bill
would extend the scope of the rules for
determining the taxable basis of the
penalty tax applicable in an excessive
indebtedness scenario. The taxable
basis would not only include interest
and other financing expenses subject
to the preferential 4% withholding tax
established by domestic law, but also
interest and other financing expenses
not subject to withholding tax or
subject to the tax at a rate lower than
35% by reason of domestic or tax
treaty relief.
The amendments also would modify
the excess-indebtedness computation
by excluding certain local short-term
unrelated debt, and adding certain
triangular transactions to the relatedparty debt concept. The bill also would
expand the scope of the exemption of
the thin-capitalization rules applicable
to certain banks, insurance companies
and financial entities.
The bill also would make certain
clarifications and adjustments to the
CFC rules that will take effect on
January 1, 2016 (Article 41 G of the
Chilean Income Tax Law). The bill
also would amend the criteria to
determine when jurisdictions would
be deemed ‘preferential tax regimes’
for Chilean tax purposes (Article 41 H
of them Chilean Income Tax Law).
The takeaway
Multinational companies with Chilean
subsidiaries should consider how the
proposed amendments could affect
their structures, existing operations,
or future transactions in Chile. As the
Chilean Congress debates the
proposals, further amendments could
arise.
pwc
Tax Insights
Let’s talk
For a deeper discussion of how this might affect your business, please contact:
International Tax Services, United States
John A. Salerno (US LATAX leader)
+1 (646) 471-2394
[email protected]
Jose Leiman
+1 (305) 381-7616
[email protected]
María Bel
+1 (646) 471-1268
[email protected]
Lucia Echenique
+1 (646) 471-6294
[email protected]
Daniel Landaluce
+1 (646) 471-7762
[email protected]
Mauricio Valenzuela
+1 (646) 471-7323
[email protected]
German Campos
+56 (2) 29400098
[email protected]
Sandra Benedetto
+56 (2) 29400155
[email protected]
Camila Silva
+1 (646) 471-8794
[email protected]
International Tax Services, Chile
Francisco Selame
+56 (2) 29400150
[email protected]
Loreto Pelegrí
+56 (2) 29400155
[email protected]
Stay current and connected. Our timely news insights, periodicals, thought leadership, and webcasts help you
anticipate and adapt in today's evolving business environment. Subscribe or manage your subscriptions at:
pwc.com/us/subscriptions
© 2015 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to
the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details.
SOLICITATION
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
PwC United States helps organisations and individuals create the value they’re looking for. We’re a member of the PwC network of firms in 157 countries with more than
195,000 people who are committed to delivering quality in assurance, tax and advisory services. Find out more and tell us what matters to you by visiting us at
www.pwc.com/US.
3
pwc