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New tax developments and outlook in Chile
On January 28, 2020, Congress finally released the Tax Modernization Bill, after it had been discussed for a year and a half in parliament. As a result of the tax reforms contemplated in the bill, many of which will come into force this year, foreign investors will have to review their business structures and decisions. To assist with this task, this report summarizes some of the most important elements.
Corporate income tax regime
The Tax Modernization Bill retains the Partially Integrated Regime for all companies with annual sales equal to or above 75000 UF, which will be subject to 27% corporate income tax. Companies with annual sales below that number, will automatically be placed under the Fully Integrated Regime, where they will taxed at 25%.
Tax on withdrawals of income and distributions of dividends
Regardless of the tax regime of a given company, its partners or shareholders residing abroad will be subject to 35% withholding tax where they make a withdrawal of income or an effective distribution of dividends. Against those withholding taxes, the corporate income tax of the company concerned may be attributed –in full or in part- by way of a tax credit to the shareholders or partners concerned.
For shareholders in companies subject to the Partially Integrated Regime, 65% of the corporate income tax payable may be attributed against the 35% withholding tax on the withdrawal of income or the distribution of dividends. On the other hand, for partners and shareholders in companies placed under the Fully Integrated Regime, the whole amount of corporate income tax is attributable against the same withholding tax.
Having said that, if the foreign investor holds an investment in a company subject to the Partially Integrated Regime, the whole tax burden on received income would stand at 44.45%, a figure that comes from adding the corporate income tax paid by the company (27%) to the applied withholding tax (35%), and subtracting the tax credit for 65% of corporate income tax (17.55%)
However, if the foreign investor holds an investment in a company subject to the Fully Integrated Regime, the total tax burden on received income would stand at 35%, an amount that comes from adding the corporate income tax paid by the company (25%) to the applied withholding tax (35%), and subtracting the tax credit for 100% of corporate income tax (25%).
In addition to this, for foreign investors residing in countries with which Chile has a valid tax treaty, or that have signed a treaty of this type, even if it is not currently valid (e.g., the U.S.), they will always be able to be attributed way of a tax credit against withholdings taxes, 100% of the corporate income tax paid by the company concerned.
As a consequence, for those foreign investors, the total tax burden applicable to the income they receive, either from companies subject to the Partially Integrated Regime or to the Fully Integrated, can never exceed 35% of the total amount of that income.
Substitute tax on "FUT"
As a collection measure, a new option has been provided to elect the substitute tax on “FUT” (undistributed profits) accumulated until December 31, 2016. In this context, the substitute tax will be levied on the profits accumulated at companies until December 31, 2016 and that still remain to be taxed in respect of personal and withholding taxes (because they have remained reinvested at the company concerned).
The substitute tax will be levied at 30%, and against that amount any corporate income tax that has been levied on them and is recorded at the company concerned may be imputed by way of a tax credit. Considering that the total tax burden applicable to profits generated by companies residing in Chile could reach up to 44.45%, the 30% substitute tax appears as an alternative that could generate important tax efficiency.
Investment Projects in Chile
In relation investment projects, the Tax Modernization Bill contains the following important elements:
Tax on finance
For the interest associated with loans by foreign banks and financial institutions to qualify for the reduced 4% withholding, starting January 1, 2020, it will be required for those banks and financial institutions to be final recipients of that interest. This way, the use of back-to-back loans is restricted.
In relation to the rules on excess debt (Thin Capitalization Rules), the Tax Modernization Bill contains a big change consisting of not treating as related entities for the purpose of applying those rules, any foreign entities that provide financing where that financing has been secured by related entities abroad. The amendment in question will mean that the total tax abroad applicable to interest associated with operating projects could be reduced from 35% to 4% as a result of the Tax Modernization Bill.
Many investment projects are currently structured by setting up a holding company that invests in a subsidiary through which the investment project is carried out. It is common practice to use debt-push-down structures in which the holding company acquires debt to finance the operating project carried out by the subsidiary, generating a tax loss.
Given that no consolidated tax system exists in Chile, the only way to use the losses generated by the holding company is a mechanism known as Provisional Payment for Absorbed Profits (PPAU). That way, when the subsidiary distributes dividends or profits to the holding company, the holding company can use them to offset the existing loss and claim a refund of the corporate income tax paid by the subsidiary.
However, the Tax Modernization Bill eliminates these tax refunds under the PPAU mechanism. Their elimination is set to be progressive, ending in 2023. Because of this, either to structure new investment projects or to review the efficiency of the projects currently in place, we will have to take this new change into account.
For fixed assets linked to investment projects and acquired between October 1, 2019 and December 31, 2021, the owners of those assets will be able to apply instant depreciation (in a fiscal year) for 50% of the investment, while for the remaining 50% they will be able to apply standard depreciation rules, including accelerated depreciation (one third of the useful life of the fixed asset).
New contribution to regional development
A special contribution to regional development is required for investment projects that include investments of an amount equal or above USD 10.000.000 and that require permits from the Environmental Impact Evaluation Service. That contribution will be made in a single charge equal to 1% of the cost price of the fixed assets associated with the investment project.
Advance VAT refunds
The current 6 month period in which taxpayers are required to have accumulated VAT credits to be able to request VAT refunds is set to be reduced. The Tax Modernization Bill shortens that period to 2 months. The time limit for the Internal Tax Service to issue a decision on requests for advance VAT refunds will also be reduced, from 60 to 20 days.
This will improve cash flow at the companies used to carry out investment projects in Chile, as well as the credit position of those companies for any VAT facilities that are negotiated and approved in those projects.
Taxation in the digital economy
The Tax Modernization Bill establishes a new tax regime for the digital economy, which levies VAT (19%) on the following services supplied by people and entities residing abroad: (i) intermediation for services provided in Chile, regardless of their nature or for sales performed in Chile or abroad, if in this latter case they create an import; (ii) supplying or delivering digital entertaining content such as videos, music, games or similar others, through downloads, streaming or other technologies, including for this purpose texts, magazines, newspapers and books; (iii) making available software, storage, platforms or computing infrastructure; and (iv) advertising, regardless of the format or media in which it is delivered, materialized or executed.
At the same time, a simplified regime is established for those taxpayers not residing or registered in Chile that provide this type of services, in order to make the reporting and payment of VAT for digital services easier.