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Tax Reform Bill brings a wealth of change
On 1 April 2014, the Chilean Government presented before Congress a Tax Reform Bill, which was enacted on 26 September 2014, and published in the Official Gazette on 29 September 2014, as Law N° 20.780. Taxand Chile highlights the key corporate tax changes proposed by this new legislation and the consequences for multinationals operating in the jurisdiction.
The main corporate income tax modifications outlined by the new legislation impact the way final taxpayers (individuals resident in Chile or shareholders (individual or entities) resident abroad) should pay taxes on their income. The reform increases the corporate income tax rate, modifies tax treatment on losses and grants corporations the possibility to choose from two tax systems.
Dual tax regime (2017)
Chilean taxpayers may choose from two different tax systems regarding income generated by domestic companies:
Under the attributed income system (AIS):
- Taxpayers will be subject to corporate tax, known as first category income tax (FCIT) at a rate of 25% at the source level
- Local resident shareholders and/or partners are subject to a global complementary tax (GCT) with a progressive rate (maximum 35%)
- Non-residents are subject to an additional withholding tax (AWT) at a 35% rate, applied on an accrual basis, as opposed to the current system where final taxes are applied only on a cash basis
Under the semi-integrated system (SIS):
- Taxpayers will be subject to FCIT at a higher rate than the AIS system (25.5% for 2017 and 27% from 2018)
- Local resident shareholders and/or partners subject to GCT
- Non-resident subject to AWT (hereinafter 'final taxpayers'), will be subject to taxes on a cash basis, when profits are distributed or withdrawn from the entity
- Final taxpayers will only be able to use a 65% of the FCIT paid by the source entity. As a consequence of the above, the overall tax burden may reach 44.45%
This system allows final taxpayers to use full tax credit for the FCIT paid by the source entity. This regime is applied by default to individual entities with limited responsibility, one-person enterprises, and limited liability companies or communities exclusively formed by individuals. Therefore, under this system shareholders will still be able to defer taxation on GCT or AWT applied on profits generated by the source companies until these are distributed, but with the right to use a lower tax credit for the FCIT paid. This system will be applied to all other entities that do not fall under the AIS by default.
Entities may opt to be taxed under fewer than one of the above described systems provided they follow the instructions and conditions set in the new legislation.
Under the law, the corporate income tax rate will gradually increase as follows:
Attributed income system Semi-integrated system
2014 21% 21%
2015 22.5% 22.5%
2016 24% 24%
2017 25% 25.5%
2018 25% 27%
Under the new legislation, losses carryback is no longer available. Tax losses will only be allocated against profits received from withdrawal or distribution affected by GCT or AWT, and after that against attributed profits, with a reimbursement right for the FCIT paid. If said profits are not enough to absorb these losses, they can be deducted against profits from the following fiscal years.
Controlled foreign corporations (2016)
The new legislation incorporates regulations regarding passive income generated by controlled foreign corporations (CFCs). This implies that every taxpayer should include this income in their tax return, whenever a foreign entity in which they participate falls under the definition of CFC.
In order to make this rule effective, the new legislation has provided different criteria to define whether a foreign entity is a CFC or not, such as: capital; profits; right to name directors; or administrators or voting rights. Furthermore, a foreign company would be deemed ‘controlled’ if it is located in a ‘tax haven’ or in a ‘preferential tax jurisdiction’.
Capital gains on the sale of shares or capital rights (2017)
Capital gains on the sale of shares or capital rights subject to taxes is calculated as:
Sale price – [Acquisition cost +/- capital increases or reductions + accumulated profits of AIS entity]
Taxpayers with no accounting: as from year 2017, tax regimes that would affect capital gain obtained in the sale of shares or capital rights sales are the following:
- Sales before one year from acquisition: FCIT + GCT/AWT on a cash or accrual basis, as chosen by the taxpayer
- Sales after one year from acquisition: GCT/AWT on a cash or accrual basis, as chosen by the taxpayer. GCT taxpayers declaring on an accrual basis may opt for the reassessment of GCT for the period while shares were held, up to 10 years. Losses derived from other transactions in the same year may be deducted
Taxpayers that determine their income in accordance with full accounting records will be subject to the following rules as from year 2017:
- Capital Gains will always be considered as income, on a cash or accrual basis
One of the main changes promoted by the new legislation refers to the possibility for taxpayers to report foreign assets and income that have not been declared and taxed in due time, with a tax rate of 8%. Under this scope, ‘assets’ include those located in Chile held indirectly through foreign entities ultimately owned by Chilean taxpayers.
The new law concerning the Tax Reform Bill introduces a wealth of new rules and legislations which may affect how a multinational operates in the jurisdiction. All corporations should investigate these updates further to ascertain the affect they may on their current operational structure.
As a general rule, this new legislation will come into force by 1 January 2017. However, multinationals should note that some of the amendments will be enforceable from 1 October 2014 and others in 2015 or 2016.
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