An important amendment to the Tax Reform would establish that the new general anti-avoidance rules will not apply to transactions carried out or concluded before September 30, 2015.

On January 7, 2016 and January 12, 2016, Chile's Executive Branch submitted amendments to Congress on a bill that would simplify the new income tax system enacted under the Tax Reform law published in September 2014 (Law N° 20,780).

Income tax law (ITL)

Presumptive income taxation regime

The amendments would modify Article 34 of the ITL to require entities wishing to be under the presumptive income taxation regime to be exclusively formed by individuals "at the time they adopt this regime and during the time they maintain such regime."

Legal provisions regulating the recognition of passive income (Article 41 G)

The amendments would add two exceptions to Article 41 G of the ITL. Under the amendments, an entity would not recognize passive income in Chile if: i) the value of assets likely to produce passive income in a controlled foreign corporation does not exceed 20% of the total value of its assets; and ii) the passive income was already taxed at an effective rate equal to or higher than 30% in the country where the entity is established.

Value added tax (VAT) Law

Exemption for homes financed with social benefits

Under the amendments, the VAT exemption for to the sale of real estate granted to recipients of a housing subsidy would apply to general construction contracts.

Law 20,780

Attributed income

Under the amendments, the transfer of social rights or shares in a Company Limited by

Shares (SpA for its Spanish acronym) that is subject to the First Category Tax (corporate) under the attributed income taxation regime would cause: (1) the taxation regime to switch to the semi-integrated regime from January 1 of the following year; and (2) the distribution of income to shareholders. In addition, the income attributed to the shareholders would be subject to the provisions of subparagraph one of Article 21 of the ITL, meaning the income would be subject to a tax rate of 40% (from 2017 thereafter) with a credit for the First Category Tax paid by the transferred entity.

Withholding stated in Article 74, No. 4 of the Income Tax Law

The amendments would modify Article 74 to require the additional tax withholding applicable to profit distributions to partners or shareholders neither resident nor domiciled in Chile of companies under the attributed income taxation regime to be withheld in April of the following year. In addition, this withholding would no longer apply to income under the substitute tax regime.

VAT exemption on the sale of real property

Currently, Article 6 of Law 20,780 exempts from VAT the sale of real property completed, or for which a promise to sell/purchase has been entered, before January 1, 2016. The amendments would extend the exemption to transfers of real property through a lease agreement with a purchase option. The exemption also would apply to any lease payments made.

Transitory provisions of the bill amending the tax reform law

Substitute tax at a rate of 32%

Under the amendments, all sums paid, withdrawn, remitted or credited to an account or placed at the disposal of a foreign beneficiary that were subject to the substitute tax rate of 32% would not be subject to the additional tax withholding in Article 74.

Likewise, under the amendments, companies, communities and partnerships that began operating before December 1, 2015, and are formed exclusively by individuals as of that date would be under the substitute tax system.

Additional tax payment exemption

The amendments would extend the additional tax payment exemption to income derived from unreported transactions abroad that were completed between 2010 and 2014, provided that the transactions are reported by June 30, 2016.

Exemption to lease agreements with a purchase option

In addition, the amendments would add a new transitory article under which VAT would not apply to payments relating to lease agreements with a purchase option of real property or to sales made under those lease agreements, provided they are executed before January 1, 2016.

Applicability of the new general anti-avoidance rules

The amendments would restrict the application of the general anti-abuse rules (GAAR) exclusively to one act, business or transaction (or a group or series of acts, businesses or transactions) carried out or concluded after September 30, 2015. For these purposes, the act, business or transaction (or group or series of them) would be deemed carried out or concluded before September 30, 2015, when their characteristics or elements (determining their tax consequences) have been determined before that date (notwithstanding the fact that they continue generating effects after September 30). The amendments also would establish that the GAAR would not apply to the effects generated after September 30, 2015, unless the characteristics or elements that determine the tax consequences of the act, business or transaction (or group or series of them) are substantially modified after that date, in which case GAAR may apply but only to these effects.

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