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Chile: Amended tax reform bill approved by Senate

Monday, 25 August 2014   (0 Comments)
Posted by: Author: Deloitte - International Tax
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Author: Deloitte - International Tax

On 9 August 2014, the Chilean government presented to Congress a 235-page document containing modifications to the 2014 tax reform bill initially presented in April of this year (for prior coverage, see the alert dated 17 April 2014). On 19 August, the Senate approved the modified reform bill, which now will be voted on by the House of Representatives, with a view to obtaining legislative approval before the end of September. 

The modifications to the reform bill are intended to implement a compromise reached on 8 July between the governing coalition and the opposition parties, under which the government agreed to submit certain changes to the bill to achieve full political support and obtain legislative approval before the end of September 2014. However, the revised bill contains some measures that were not included in the original bill or in the July compromise. The modifications are in line with the reform bill’s original purpose of collecting an additional 3% of GDP, establishing a more equitable tax system and new incentives for investment and savings and reducing tax evasion and avoidance. 

Dual tax system

According to the revised bill, Chile would have a dual tax system starting from 2017.

Under the existing rules, business income derived by an enterprise in Chile is subject to a 20% First Category Income Tax (FCIT), but such income also is subject to income tax on a cash basis when distributed to the shareholders/partners of the enterprise, at rates that vary depending on whether the shareholder/partner is resident or nonresident. Nonresident shareholders are subject to a 35% withholding tax on dividends. The tax paid by the enterprise may be used as a credit against the liability of the shareholders/partners, resulting in an overall income tax rate of 35% on distributed profits for nonresident shareholders.

Under the revised bill, shareholders would be able to opt to be subject to one of the following systems: 

  • Attributed income system: Shareholders would be taxed on an accrual basis, with a FCIT rate of 25% imposed at the level of the operating entity, plus global complementary tax at progressive rates for resident individuals or an additional withholding income tax (AWIT) of 35% for Contacts nonresident shareholders (the FCIT being 100% creditable), resulting in an overall income tax charge of 35% for nonresidents. Under this system, profits would be required to be attributed to the owners or shareholders, irrespective of whether a distribution actually is made.
  • Semi-integrated system: Shareholders would be taxed on a cash basis (when profits are distributed), but at a FCIT rate of 25.5% for 2017 (and 27% as from 2018). The FCIT still would be creditable against the 35% AWIT under that system, but 35% of the credit would have to be paid to the Treasury, so, in practice, only 65% of the FCIT would be creditable. Thus, taxpayers would pay for the ability to defer shareholder taxation until profits actually are distributed with a higher overall income tax rate than under the attributed income system.
The way in which a decision on the election between the two systems would be made would depend on the type of entity. A unanimous decision of the owners would be required for limited liability companies and companies divided by shares. For stock corporations, the determination would be made in an extraordinary shareholder meeting, by approval of owners of a majority of at least two-thirds of the issued voting stock. 

New entities would be required to notify the Chilean tax authorities of their election at the time the entities register to commence activities. Existing taxpayers wishing to make or change an election would be required to give notice during the last three months of the year preceding the year in which the taxpayer intends to operate under the new system.

Once an election is made to use a particular system, the taxpayer would be required to remain under that system for at least five years; at the end of this time, the taxpayer would be free to opt into another system. If a taxpayer opts into another system, any item pending taxation at that time would be subject to tax. 

By virtue of a provision known as the "Chile clause,” Chilean tax treaties do not limit the application of Chilean AWIT on dividends paid by Chilean companies, provided the FCIT is creditable against the AWIT. Depending on the treaty, the semi-integrated system (under which only 65% of the FCIT would be creditable) could trigger application of treaty caps. To prevent this result, the amended bill proposes that investors from countries with treaties containing the Chile clause would be entitled to 100% of the FCIT credit, even if they have opted into the semi-integrated system. Thus, investors from such treaty countries would enjoy the advantage of deferring shareholder taxation until profits are distributed, and yet retain the benefit of the overall 35% income tax charge. This could lead to a shift in the jurisdictions commonly used to make investments into Chile.

Gradual increase of FCIT

The current FCIT rate of 20% would be increased gradually to 25% under the attributed income system, as described below. In the case of the semi-integrated system, the rate would increase to 27%.

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