This Bill is good news for taxpayers doing business in Chile as it simplifies the new income tax regimes enacted by the Tax Reform Law. It also extends, up to year 2020, the full utilization of the corporate income tax credit in the semi-integrated regime to shareholders domiciled in countries that have signed a Tax Treaty with Chile before January 1, 2017.

On January 27, 2016, the Chilean National Congress approved a bill (Bill) simplifying the new income tax system enacted under the Tax Reform Law published in September 2014 (Law N° 20.780).

Election of new regimes

Under the Bill, the attribution regime could only be chosen by branches and companies other than Anonymous Companies and Companies Limited by Shares (in Spanish, Sociedades Anónimas and Sociedades en Comandita por Acciones), that have exclusively (and at all times) partners/shareholders that are Chilean individuals or taxpayers without residence/domicile in Chile. All other entities would be taxed under the semi-integrated regime.

The obligation to return 35% of the first category tax (corporate) credit used in a distribution made abroad under the semi-integrated regime (when the foreign shareholder is not a resident of a Tax Treaty country) would remain unaltered. A provisional regime would be established, however, by virtue of which residents of countries that have signed a Tax Treaty before January 1, 2017, which is not in force, would be exempt from the obligation to return the percentage referred to earlier. By January 1, 2020, the general rule would apply once again.

Modification of imputation orders

The Bill would modify the imputation order for the distribution/withdrawal of profits from Chilean entities in both new regimes (attribution and semi-integrated regime). First, distributions/withdrawals would be imputed to own attributed profits (attribution regime) or profits subject to tax (semi-integrated regime), then to the difference between normal and accelerated depreciation for book purposes, and subsequently to exempt income or non-taxable profits. Finally, distributions/withdrawals would be imputed to book profits in excess of the aforementioned profits.

In relation to the semi-integrated regime, the Bill would establish that "profits subject to tax" shall be determined by taking into account only the tax profits that are part of the entity's tax equity, not those included in the entity's book equity (notwithstanding, the latter should be considered when a distribution/ withdrawal is effectively made).

Taxable base of the tax applicable under thin capitalization rules

Under the bill, the taxable base would include interest paid during the relevant year (plus the rest of the items described in Article 41F of the Income Tax Bill — ITL) that was subject to a 4% withholding tax or to any rate lower than 35% (or not subject to withholding tax at all) due to a reduction, deduction or exemption established by local law or a Tax Treaty (as is the case of interest payments remitted to a Tax Treaty country at a 15% withholding tax rate). As a result, the current text of the Law that entered into force on January 1, 2015 would be modified.

The Bill would also exclude from the calculation of thin capitalization non-related loans maturing in a period of less than 90 days, and financial-type debtors would not be included in the scope of the thin capitalization rules.

Withholding tax exemption for commissions and other provisions of Article 59

For purposes of applying the exemption of Article 59 N°2 of the ITL, the Bill would no longer require the filing of the relevant transaction (the transaction and its characteristics still have to be reported although no longer as a requirement for the exemption to apply). The Bill would also grant this tax exemption to transactions not reported between years 2010 and 2014, provided that they were reported on or before June 30, 2016.

Reporting of investments abroad

For the purpose of applying the new reporting obligation for investments abroad established in Article 14 letter E) of the ITL, the Bill would consider unreported investments abroad rejected expenses subject to the penalty tax established in Article 21 of the ITL. Before applying this presumption, the IRS would have to summon the taxpayer through the formal administrative procedure established in Article 63 of the Tax Code. Under this procedure, the taxpayer may prove that the income derived from such investment, if any, has been subject to taxes in Chile.

Crediting of foreign taxes indirectly paid

The Bill would modify the foreign tax credit (FTC) rules to allow Chilean companies to recognize the indirect tax credit when the relevant subsidiary is domiciled in a third country, insofar as that country has a tax treaty with Chile or allows the exchange of tax information.

Substitute tax at a rate of 32%

The Bill would maintain the possibility of paying a substitute tax (instead of the Global Aggregate Tax or withholding tax applicable upon distributions/withdrawals of cumulative tax profits), with certain modifications: a) the entities entitled to this benefit: (1) would be those composed of Chilean individuals (only) or foreign shareholders/partners as of January 1, 2015; and (2) would maintain FUT (i.e., a retained taxable profit fund) during calendar years 2015/2016; b) the substitute tax would be allowed until April 2017; c) once the tax was paid, the relevant amounts could be distributed or withdrawn at any time without further taxation (even if residual FUT were kept in the entity); d) the rate would be 32% for foreign shareholders/partners, or the average proportion of interests and marginal rates during 2014, 2015 and 2016 for Chilean individuals; e) the substitute tax would apply partially or totally over FUT and would no longer be limited to the excess of average distributions/withdrawals of the last three years; f) if shares/rights in the appropriate entity were transferred after January 1, 2015, the substitute tax rate would be 32%.

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.

Cease activities of transferring assets at tax basis

Under the Bill, entities that are liquidated during 2016 could return assets to their partners/shareholders at tax basis value (rather than fair market value) without triggering capital gains.

Controlled foreign corporation (CFC) rules

The Bill would enhance the meaning of the term "relationship" for purposes of determining control. Also, the Bill would establish that passive income does not include dividends derived from a controlled Chilean operative company. The FTC rules in this regard would be simplified.

Additionally, the Bill would establish that an entity shall not recognize passive income in Chile if: i) the value of assets likely to produce passive income in a CFC 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.

Presumptive income taxation regime

The Bill 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."

Attributed income

Under the Bill, 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 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 and 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 Bill

The Bill would modify Article 74 No. 4 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.

Applicability of new General Anti-Abuse Rules (GAAR)

The Bill 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 or series of them) carried out or concluded after September 30, 2015. For these purposes, the act, business or transaction (or groups 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 Bill would also establish that the GAAR would not apply to the effects generated after September 30, 2015, unless the characteristics or elements determining the tax consequences of the act, business or transaction (or group or series of them) were modified after that date, in which case the GAAR may apply, but only to these effects.

VAT exemption on the sale of real property

The Bill would exempt from VAT the sale of real property completed, or for which a promise to sell/purchase has been entered, before January 1, 2016. This exemption would also apply to transfers of real property through a lease agreement with a purchase option and to any lease payments made.

Exemption to lease agreements with a purchase option

Under the Bill, 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 were executed before January 1, 2016.

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