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April 27, 2023

Chilean appeals court considers whether Chile can tax Spanish resident's indirect transfer of Chilean company

  • The Chilean Court of Appeals has held that Chile may not tax a Spanish resident's indirect transfer of a Chilean company.
  • The Chilean Internal Revenue Service (IRS) asserts that Chile may tax both direct and indirect transfers under the Double-Tax Treaty between Chile and Spain.
  • It is unclear whether the Chilean IRS will appeal the court's decision.

On 14 April 2023, the Court of Appeals of Santiago, Chile, issued a ruling of special relevance, concluding that, under the terms of the Double-Tax Treaty entered between Chile and Spain, Chile would not have taxing rights under circumstances in which a Spanish resident indirectly transferred a Chilean company. The appellate decision rejected criteria that the Tax Court had applied in the underlying case. The Tax Court's criteria included criteria that the Chilean Internal Revenue Service (IRS) had long sustained regarding how Chilean indirect-transfer domestic taxation applied in cases of Tax Treaties entered by Chile — specifically, under Article 13(4) of the Double-Tax Treaty between Chile and Spain — for capital gains flowing from indirect transfers regulated by Chilean Income Tax Law.

In general terms, the Chilean IRS has contended that the wording of Tax Treaties entered into by Chile that allow the source country to apply tax in a direct transfer of a Chilean underlying company could also allow the source country to apply tax in an indirect transfer. Therefore, the Chilean IRS has concluded, Article 13(4) of the Double-Tax Treaties does not prevent the Chilean State from regulating the taxation of indirect transfers. Provided certain conditions are met, the Chilean tax authority has considered capital gains flowing from indirect transfers to be fully taxable in Chile (a 35% tax), regardless the existence of a Tax Treaty.

However, the Court of Appeals has taken the position that Article 13(4) of the Tax Treaty with Spain applies only in direct transfers — not indirect transfers — to allow taxation in the state of source; and therefore, according to the Article 13(5), indirect transfers could only be taxed in the state of residence of the entity that generates the income (in this case, Spain).

This topic has arisen fairly frequently, and the appellate decision could set an important informal precedent1 for other Tax Treaties currently in force for Chile that bear similarities to the Tax Treaty analyzed by the Court of Appeals. Each situation should be analyzed on a case-by-case basis, depending on the Tax Treaty and facts at issue.

Nonetheless, taxpayers should bear in mind that the Chilean IRS may yet appeal the appellate ruling, and the Chilean Supreme Court would then have the last word on this matter.


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

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor



1 Chile does not follow common law rules, so court rulings are only binding for the parties involved and do not set a legal precedent, but are only a source of interpretation.