20 July 2016 Chile's IRS publishes final instructions on the 2014 Tax Reform and 2015 Simplification Law On July 13 and 14, 2016, Chile's Internal Revenue Service (IRS) published the last set of Circulars with instructions on the amendments introduced by "2015 Simplification Law" (Law 20,899, published in February 2016),1 which simplifies the "2014 Tax Reform" (Law No 20,780). The instructions in Circular No. 40 of 2016 relate to the Controlled Foreign Corporation Rules (the CFC Rules) incorporated into the Income Tax Law under Article 41G. The Circular provides instructions as to the meaning of "Chilean controller entity," "foreign controlled entity" and "passive income." The Circular also addresses how the CFC rules apply to incomes of foreign-controlled entities residing in tax haven jurisdictions (legal presumption) and, in certain circumstances, to non-passive income. In addition, the Circular provides instructions on when the CFC rules do not apply to passive income. The Circular also outlines how and when to recognize passive income, as well as how to calculate and claim foreign tax credits. In addition, the Circular outlines when and how Chilean companies may credit withholding taxes paid in Chile against the corporate income tax (CIT) due on passive income originating in Chile. The instructions in Circular No. 41 of 2016 relate to the General Anti-Avoidance Rules (GAAR) incorporated into the Tax Code. This Circular outlines the procedure for submitting questions to the Chilean IRS on how GAAR would apply to a hypothetical transaction or group of transactions. Under these instructions, any person may submit questions and the Chilean IRS will respond with a general, non-binding answer that cannot be cited as precedent in a future tax audit. This Circular provides instructions as to the procedure established by the 2015 Simplification Law to apply a penalty to the person that elaborated or planned the transaction or transactions considered abusive or simulated for tax purposes. Finally, the Circular outlines the administrative procedure that the IRS must follow to deem transactions as abusive or simulated for tax purposes before initiating a Tax Court proceeding. These instructions replace Chapter VII of Circular No. 65 of 2015. This Circular specifies the transaction, transactions or series thereof to which GAAR applies, based on the interpretative rules in Article 8 of the transitory provisions of the 2015 Simplification Law. This Circular explains the changes introduced by the 2014 Tax Reform and 2015 Simplification Law on incomes not subject to taxes, such as capital contributions, revalorization of tax equity, share premiums and stock dividends. This Circular also discusses the tax treatment under the different tax regimes applicable to the sale of shares or social rights effective January 1, 2017. Companies should recall, however, that the "sole income tax regime" on capital gains derived from the sale of shares or social rights will no longer apply as of January 1, 2017. Circular No. 48 outlines the changes to the foreign tax credit rules introduced by the 2014 Tax Reform and 2015 Simplification Law. Those changes are effective January 1, 2017. This Circular also instructs taxpayers on how to apply the foreign tax credit to passive income recognized in Chile under the CFC Rules. Circular No. 49 explains and provides instructions on the application of the two new alternative income tax regimes that will become effective January 1, 2017: the Attributed Regime and the Partially Integrated Regime. Under the Attributed Regime, Chilean companies will be subject annually to a 25% corporate income tax (CIT) on their profits. The regime will deem the profits to be distributed to foreign shareholders in the same year, and will impose a 35% dividend withholding tax (WHT) on the deemed distributions. The regime will permit shareholders to use 100% of the CIT paid by the company as a credit against the WHT due. Shareholders of a Sociedad Anonima (Chilean Stock Corporation) or Chilean entities either totally or partially owned by other Chilean entities are not eligible to participate in this regime. Under the Partially Integrated Regime, Chilean companies will be subject annually to a 25.5% CIT in 2017 and a 27% CIT starting in 2018. Foreign shareholders, however, will only be subject to the 35% dividend WHT when the Chilean company actually distributes profits to them. Shareholders residing in treaty countries or in countries that have signed a tax treaty with Chile will be allowed to credit 100% of the CIT paid by the Chilean entity against their dividend WHT. Shareholders residing in non-treaty countries, however, will only be allowed to credit 65% of the CIT paid by the company against their dividend WHT. As a result, shareholders residing in non-treaty countries will be subject to a total income tax of 44.45% on dividend distributions from Chile. The countries that have signed tax treaties with Chile that are not yet in force are the US, China, Argentina, Italy, Czech Republic, Japan and Uruguay.
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