Core Rules (Original Reform)
The proposed tax overhaul contemplates a gradual implementation of reforms, with complete effectiveness as of January 1, 2017. This description omits reforms to tax regimes of small and mid-size companies, and interim rules effective through January 1, 2017.
The proposed bill significantly increases the corporate-tax burden of Chilean companies.
The corporate income-tax rate will effectively increase to 35%. This results from (i) a direct increase of the corporate tax to 25% over 4 years, starting in 2014 (21%, 22.5%, 24%, 25%), and (ii) an indirect increase in the form of a 10% mandatory withholding of taxable income on account of shareholder taxes. This new rules will enter into effect from commercial year 2017.
Additionally, the taxable basis of the corporate income tax is broadened by way of, among others, (i) new CFC rules, (ii) modified thin capitalization rules, (iii) disallowance and limitation of certain deductions (notably interest on loans used to finance corporate acquisitions would not be tax deductible), (iv) ensuing limitation on the use of tax losses, and (v) limitation of preferential capital gains regimes and tax-free investment fund vehicles.
From 2017, the penalty tax on rejected expenses is increased to 40%, and is now applicable to all expenses, whether or not paid.
As a consequence of the hike to 35% of the corporate income tax, dividends paid to non-resident shareholders will be de facto exempt from withholding tax.
The proposed bill reduces the top marginal rate of the personal income tax (and payroll tax) for Chilean-resident individuals from 40% to 35%, ignoring conforming reductions in other tranches. The reduction of the rate of the payroll tax will be effective on the month following the publication of the law, while the reduction of the personal income tax rate will take effect in 2017.
The reform de facto exempts received dividends from the personal income tax, yet preserves a tax-credit towards the personal income tax in the amount of the taxpayer’s indirect share of corporate taxes borne by its shareholdings. This tax credit is better understood as a rebate to shareholders for corporate taxes paid by the entities in which they invest, in excess of their marginal personal income tax rate. It is an attempt to turn the corporate-tax burden progressive at the individual shareholder level.
This credit or rebate system encompasses weighty compliance obligations and significant complexity, and is thus prone to involuntary errors, contingencies and opportunities for abuse.
The tax-rate reduction of the personal income tax is counterbalanced by a major expansion of the tax basis: (i) the tax exemption on the disposition of real property is severely narrowed, (ii) the reduced-rate on capital gains is eliminated, (iii) presumptive income regimes are abrogated or limited, and (iv) new income attribution rules potentially allocate a greater share of income to higher-earning taxpayers.
Capital gains realized by resident individuals or non-resident taxpayers on the disposition of shares in Chilean companies may presently qualify for a sole capital-gains tax of 20%.
The proposed bill eliminates this reduced tax, and levies the capital gain with personal taxes from 2017. In the case of resident individuals, the personal income-tax rate would be equal to the taxpayer’s average marginal rate over the investment holding-period, and in the case of non-residents, a 35% withholding tax.
The Tax Reform proposal severely restrict the ability to fund investments in Chile with shareholder-loan structures that currently qualify for a reduced 4% (v. 35%) withholding tax on interest payments:
- The 3:1 debt-to-equity limit would be tested on the aggregated of related-party and third-party debt. Currently, only related-party debt is counted.
- The 3:1 debt-to-equity limit would be tested annually, in lieu of the one-time test that is currently applied upon disbursement of each loan.
- A second prong would be added to the thin-capitalization test that would disqualify interest paid in excess of 50% of taxable income.
- The 35% surtax is levied, in addition to interest, on all charges and fees linked to excessive-indebtedness.
The new thin-capitalization rules would enter into force in 2015.
** Equity financing of corporate acquisitions could be superior to shareholder-debt financing. Neither interest nor dividends will be tax deductible, yet unlike dividends, interest payments will be subject to withholding tax.
** For the same reason, the proposed rules could encourage asset deals, in which case interest could be deductible.
From the month following the publication of the law, bonds and other debt instruments issues in Chile by Chilean companies will be deemed to be located in Chile, and thus subject to tax on capital gains. Also, interest on debt securities issued through offshore permanent establishment is sourced in Chile.
The maximum stamp-tax rate, which had been gradually reduced on good-policy grounds since 2009, would increase from 0.4% to 0.8% from 2016.
Stamp tax levies the principal amount of debt instruments or documents evidencing indebtedness for borrowed money.
Rather than a closed list of jurisdictions, the bill defines tax havens as a jurisdiction that (i) taxes foreign source income with less than 17.5%, (ii) has not entered into an information exchange agreement with Chile, (iii) does not have relevant transfer pricing rules, (iv) is identified as a preferential tax regime by the OECD, or (v) only taxes local source income. This rules would be effective from 2015.
International reorganizations or structures that imply an export of assets or activities would be subject to Transfer Pricing. This rules would be effective in the month following the publication of the law.
From 2015, passive income of a foreign entity would be recognized on accrual by the Chilean resident controlling shareholder.
Passive income includes dividends, interest (except to banking or financing entities), royalties, certain capital gains, income for lease of real estate (except to entities to which the real estate lease is its main business) and income generated in specific operations with Chilean related parties.
It would be deemed that a foreign entity is controlled by a shareholder with a 50% or more interest in the equity, results or voting rights. Additionally, entities located in a tax haven jurisdiction would be deemed controlled, unless it could be proved otherwise.
The bill proposes an overreaching general anti-avoidance rule. The tax administration would have the ability to re-characterize any transaction which legal form or sequence is deemed abusive, artificial or inconsistent with its substance.
Attorneys, accountants and other tax advisors may be penalized for participating in “elusive” tax planning. The penalty may be up-to 100% of the “eluded” taxes.
This regulation would become effective one year after the publication of the law.
The bill contains several tax increases on investments and dealings in real-estate:
- VAT (19%) levies the sale of real estate only if made by its builders. The tax reform bill would also apply VAT to sales made by real-estate dealers from 2016.
- The existing VAT credit against PPMS available to builders would be halved from 2016;
- From 2017, the capital-gains tax exemption applicable to the sale of real estate would be capped at UF 8,000 and limited to a single housing property;
- From 2015, the territorial tax credit that may be claimed against the income tax of real estate investors in non-agricultural property would be abrogated.
References to corporations, shares and shareholders include limited liability companies, equity quotas and members or partners.