October 24, 2022
Chile’s Executive Power modifies tax reform bill
On 4 October 2022, the Chilean Executive Power submitted modifications (Modifications Bill) to the tax reform bill recently presented to Congress on 8 July 2022 (the Bill). See EY Global Tax Alert, Chile's Congress to discuss tax reform proposal, dated 11 August 2022.
This Alert summarizes the most relevant modifications.
Corporate income tax
Taxation of dividends attributed to the "Temporary Differences Registry" (RDT)
The Bill initially proposed applying corporate income tax (CIT) to dividends attributed to profits that were not previously subject to CIT (e.g., due to temporary differences). Under the Modifications Bill, an entity could deduct paid CIT from its annual taxable income basis. The goal of this modification is to avoid the double taxation that would be triggered when the temporary differences are reversed.
New 22% sole tax on dividends
The Modification Bill clarifies that individuals domiciled or resident in Chile could claim the excess remaining after withholding the 22% sole tax on dividends (i.e., for distribution of dividends ultimately attributed to non-taxable income) as a credit against their annual personal tax (the Global Complementary Tax).
New "development surtax" and investment incentives
The Modifications Bill would eliminate the reference to the development surtax as a CIT. Consequently, development surtax paid would not be creditable against the dividend withholding tax (WHT), resulting in an increase of the combined tax burden from the current 35% to 36.7% when dividends are paid to shareholders that reside in a jurisdiction with a Double Tax Treaty (DTT) in force with Chile.
Limitations on foreign tax credits
The Modifications Bill would leave intact the indirect foreign tax credits that the Bill proposed to eliminate (i.e., foreign taxes paid by foreign subsidiaries indirectly owned by Chilean entities, whether located in different countries, are still creditable). It would also leave intact the ability to claim as a foreign tax credit (FTC) the dividend withholding tax paid on Chilean-source income by a domestic subsidiary indirectly owned by the Chilean entity.
Rather than decreasing the credit cap on the taxes paid abroad from 35% to 27%, as proposed by the Bill, the Modification Bill would tie the credit cap to "the CIT rate currently in force during the same fiscal year."
The Modification Bill would also require taxpayers claiming FTCs to document their foreign tax payments with the corresponding certificates issued abroad, to ensure traceability of the respective income's taxation across entities.
New tax on retained earnings
The Modifications Bill proposes to increase the annual 1.8% tax on the retained earnings of companies holding passive investments to 2.5%, which would only apply to amounts over 22% of those retained earnings (i.e., while the rate would increase, the taxable base would decrease to 22% of its original determination). The 2.5% tax would not be creditable against the wealth tax imposed on individuals with domicile or residence in Chile who hold a personal estate worth more than 6,000 Annual Tax Units (equivalent to approx. US$5m).
The Modifications Bill also clarifies that income derived from leasing activities would not qualify as passive income for the purposes of assessing entities qualifying for this tax.
Substitute tax applicable to retained earnings
The transitory regime available from 1 January 2026, until 31 December 2027, which would allow paying a 12% substitute tax (ST) instead of the 22% dividend WHT, would be available until the last banking day of each year.
A mandatory 12% sole tax would apply to earnings distributed in excess of an entity's "Accumulated Profits Registry" (RUA) and its RDT if: (i) the entity distributes the earnings during 2026 and 2027; and (ii) the entity also maintains a positive balance of retained taxable profits accumulated in its "Taxable Income Registry" (RAI) at the end of business year 2024. If a 22% WHT was applied instead of the 12% the difference would be refundable.
The Modifications Bill also proposes reducing to 20% the 32% ST established for excess withdrawals registered in companies in respect to certain individuals (i.e., dividend payments that, under past legislation, deferred final taxes). If a taxpayer keeps a balance of excess withdrawals as of 1 January 2026, a 25% ST would apply to the positive balance of excess withdrawals accumulated by the end of business year 2026, to be paid by in up to five business years.
Limitations on the use of tax losses
The Modifications Bill would postpone the limitation on the use of tax losses (as set out in the Bill) from 1 January 2024 to 1 January 2025. In addition, a transitory provision would allow its gradual application:
The Modification Bill would repeal Article 37 bis, which was recently incorporated and expected to be in force since 1 January 2023 by the "PGU Law" (Law No. 21,420), and treated leasing the same for book and tax purposes. The Modification Bill would reinstate the original rule, which deemed the lessor to hold the asset for tax purposes, thereby allowing the lessor to depreciate it.
Transfer pricing regulations
The tax authority could challenge, in accordance with transfer pricing regulations, business reorganizations or restructurings that occur abroad and affect the property of Chilean taxpayers (or take place in Chile with effects abroad). Reorganizations that comply with the arm's-length principle, would not be subject to Article 41 E of the Income Tax Law (transfer pricing principles) or Article 64 of the Tax Code (local restructuring and valuation rules).
Individual taxation: New allowed expenses
The Modifications Bill would establish a new deduction from the taxable base of the "Global Complementary Tax" (GCT) equal to 10% of annual income from leasing non-agricultural, household real estate. The 10% would be based on the positive amount resulting from the deduction of the territorial tax to which the real estate is subject, and the real estate's generated income.
This deduction would not apply to real estate whose income was not included in the taxpayer's global gross income, nor when the territorial tax is a credit against the GCT (if the credit is partial, the deduction only applies to the part that is not a credit).
Reorganizations and M&A
Appraisal faculty and business restructurings
The definition of "market value" would be modified while maintaining the original orientation of the Bill. A taxpayer that decides not to use the valuation methods established in the law could still prove that the respective operation is under market values.
Business reorganizations that occur abroad and have effect in Chile, or began in Chile and have effects abroad, are governed by Article 41 E of the Income Tax Law (transfer pricing rules). The Modifications Bill would add that the tax authority may not appraise international business reorganizations that comply with the arm's-length principle.
The Modifications Bill would also introduce the legal concept of "valid business purpose," which up to date was not in the law but rather in a few rulings from the tax authority and courts in Chile.
Changes to the General Anti Avoidance Rule (GAAR)
Administrative procedure for applying the GAAR
The Bill permitted tax inspectors to administratively apply the GAAR without requiring judicial authorization. The Modifications Bill would create a special administrative procedure for this purpose, under which an Anti-Avoidance Committee (Committee), consisting of deputy directors of the audit, normative and legal departments of the Chilean Tax Administration, would determine whether abuse or simulation existed.
If the Committee determined that the GAAR did not apply to the particular case, the tax office could not apply (in its place) a Special Anti-Avoidance Rule (SAAR).
A special hierarchical appeal would be established to allow the taxpayer to challenge the Committee's decision before the National Director of the tax office.
Fines under the GAAR would be eliminated for taxpayers but not for advisors who design or facilitate tax-avoiding operations.
Expatriate employees or foreign executives
For foreign individuals who acquire residence or domicile in Chile by virtue of an employment contract, the wealth tax would apply to only the part of their wealth acquired with income from Chilean sources during their first three years in the country. Starting in the fourth year, these individuals would have to include the totality of their estate for wealth tax purposes.
The foregoing would not apply to foreigners who have lost Chilean nationality within five years of obtaining residency or domicile.
The "exit tax" would be eliminated from the Bill. A taxpayer that loses its domicile or residence in Chile, however, and has assets over 6,000 UTA (approx. US$4.6m), would have to pay the tax in proportion to the months spent in Chile during that year.
Other relevant changes
New incentive to apply temporary semi-instantaneous depreciation mechanism during 2023
For fixed assets acquired or imported during fiscal year 2023, 50% of the value of the respective asset could be instantly depreciated. The remaining 50% would be subject to accelerated depreciation.
The assets would have to correspond to new investment projects or modified existing projects aimed at the development, exploration, improvement or equipping of mining, industrial, forestry, energy, infrastructure, telecommunications, technological, medical or scientific research or development projects, among others.
Progressive increase in the corporate tax rate for Small and Medium Enterprises (SMEs)
The CIT rate for taxpayers of the SME regime will be 15% for 2023 and 20% for 2024. As of 2025, the rate will return to 25%.
Special rule for DTTs signed before 1 January 2020, but not yet in force
If the treaty allows the deduction of the CIT as an additional tax credit, the integrated system would apply to the country in question until 31 December 2026. This rule would apply to treaties signed by Chile with the United States and The Netherlands. The treaty with India would be excluded because it was signed after the applicable date and the treaty with the United Arab Emirates entered into force on 28 July 2022, and generally applies from 1 January 2023.
Concept of "tax responsibility"
The concept of tax responsibility, which was introduced in the Bill, would be redefined to allow companies to obtain a certification indicating their operations and tax strategies comply with this principle. This certification may be issued only by independent certifying companies that have previously registered with the tax authority.
Prevention of double audits
The Modification Bill would clarify that the tax authority may not reexamine taxes, concepts or items that have been reviewed in an audit process that has been formally concluded.
Procedure for lifting bank secrecy
The Modifications Bill would change the current procedures for lifting bank secrecy, by granting certain additional guarantees to taxpayers. It would, however, maintain the judicial claim opposition in case a taxpayer receives a notification from the tax authority.
The Modifications Bill defines the concept of "anonymous whistle-blower" and clarifies that it excludes, among others, those who have participated in the sanctioned conduct or have an administrative position in the denounced entity. The Modifications Bill maintains the right to obtain 10% of the collected fines and has distribution rules if there is more than one whistleblower. Knowingly making false complaints could result in fines or jail.
For additional information with respect to this Alert, please contact the following:
EY Chile, Santiago
Ernst & Young LLP (United States), Latin American Business Center, New York
Ernst & Young LLP (United Kingdom), Latin American Business Center, London
Ernst & Young Tax Co., Latin American Business Center, Japan & Asia Pacific