Prospects and tax developments in Chile
On 28 January 2020, Congress finally passed the Tax Modernisation Bill (the “Tax Modernisation Bill”), after a year and a half of parliamentary procedure. As a result of the tax reforms contained therein, many of which will come into effect this year, foreign investors will need to review their business structures and decisions, and we summarise some of the most relevant aspects below.
Corporate taxation regime
The Tax Modernisation maintains the Partially Integrated Regime for all companies with annual sales of 75,000 UF or more, which will be subject to a corporate tax rate of 27%. Companies with annual sales of less than 75,000 UF will automatically be subject to the Fully Integrated Regime, where they will be taxed at a corporate tax rate of 25%.
Taxation of withdrawals of profits and distributions of dividends
Whatever the tax regime of the company, its partners or shareholders resident abroad will only be taxed with withholding taxes (35%) at the time of a withdrawal of profits or an effective distribution of dividends. With respect to the aforementioned withholding taxes, the partners or shareholders will be able to impute – totally or partially – as a tax credit, the corporate tax paid by the respective company.
In the case of partners or shareholders of companies subject to the Partially Integrated Regime, the corporate tax may be set off 65% against the withholding tax (35%) corresponding to withdrawals of profits or distributions of dividends, while in the case of partners or shareholders of companies subject to the Fully Integrated Regime, the corporate tax may be set off 100% against the same withholding tax.
Therefore, if the foreign investor holds an investment in a company subject to the Partially Integrated Regime, the total tax burden on the income received would be 44.45%, which is the sum of the corporate tax paid by the company (27%), plus the withholding tax applied (35%), minus the tax credit for 65% of the corporate tax (17.55%).
In contrast, if the foreign investor holds an investment in a company subject to the Fully Integrated Regime, the total tax burden on the income received would be 35%, which is the sum of the corporate tax paid by the company (25%), plus the withholding tax levied (35%), minus the tax credit for 100% of the corporate tax (25%).
Notwithstanding the foregoing, in the case of foreign investors resident in countries with which Chile has an International Double Taxation Agreement in force, or has signed one of such agreements, even if it is not in force (i.e. the United States of America), they will always be able to impute as a tax credit, against their withholding taxes, 100% of the corporate tax paid by the respective company.
Consequently, with respect to such foreign investors, the total tax burden applicable to the income received by them, whether from companies subject to the Partially Integrated or Fully Integrated Regime, shall never exceed 35% of the total of the same income.
FUT substitute tax
As a tax collection measure, a new possibility is established to benefit from the FUT Substitute Tax accumulated up to 31 December 2016. In this regard, the Substitute Tax will be applicable with respect to the profits accumulated in the companies until 31 December 2016 and which are still pending taxation with personal or withholding taxes (because they have been reinvested in the respective company).
The Substitute Tax will be applied at a rate of 30%, and the corporate tax that has been levied and is registered in the respective company can be imputed as a tax credit against this tax. Considering that the total tax burden applicable on profits generated by Chilean resident companies could be as high as 44.45%, the 30% Substitute Tax appears as an alternative that could generate significant tax efficiencies.
Investment projects in Chile
In relation to investment projects, the Tax Modernisation provides for important aspects, such as the following:
Taxation of financing
In order for interest associated with loans granted by foreign banks and financial institutions to be subject to the reduced 4% withholding tax rate, as of 1 January 2020, such banks and financial institutions will be required to be the beneficial owners of the interest. In this way, the use of structured financing (back-to-back loans) is restricted.
In relation to the Thin Capitalization Rules, the Tax Modernisation contemplates an important modification, which consists in the fact that foreign entities that grant financing, when such financing has been guaranteed by related entities abroad, will no longer be considered as related entities for the purposes of the application of such rules. The amendment in question implies that the total taxation applicable to interest associated with operating projects could be reduced from 35% to 4% as a result of the Tax Modernisation.
Investment structures
Currently, many investment projects are structured through the creation of a holding company, which in turn invests in a subsidiary company through which the investment project is developed. In these cases, it is common to use debt-push-down structures, whereby the holding company takes on debt to finance the operating project developed by the subsidiary, generating a tax loss.
Since there is no tax consolidation in Chile, the only way to use the losses generated by the holding company is through the Provisional Payment for Absorbed Profits (“Pago Provisional por Utilidades Absorbidas” or “PPUA”). In this way, when the subsidiary distributes dividends or profits to the holding company, the latter can impute them to the existing loss and request a refund of the corporate tax paid by the subsidiary.
However, Tax Modernisation eliminates PPUA tax refunds. The elimination will be progressive, ending in 2023. Therefore, whether for structuring new investment projects or reviewing the efficiency of current projects, this should be taken into account.
Instantaneous depreciation
In the case of fixed assets linked to investment projects, which have been acquired in the period between 1 October 2019 and 31 December 2021, the owners of such assets may apply instantaneous depreciation (in one year) for 50% of the investment, while for the remaining 50% they may apply the general depreciation rules, including accelerated depreciation (one third of the useful life of the respective fixed asset).
New regional development contribution
A special regional development contribution is established for investment projects involving investments of USD 10,000,000 or more, which must obtain permits from the Environmental Impact Assessment Service. This contribution will be applied at a rate of 1%, once only, on the acquisition value of the fixed assets associated with the investment project.
Advance VAT refunds
The period within which taxpayers must have accumulated VAT tax credits in order to apply for VAT refunds, which is currently 6 months, is reduced. With the Tax Modernisation, this period will be reduced to 2 months. Likewise, the deadline for the Internal Revenue Service to resolve requests for early VAT refunds is reduced from 60 to 20 days.
This will improve the cash flows of the companies through which investment projects are developed in Chile, as well as improve their credit position in relation to the VAT financing lines that are usually agreed in these projects.
Taxation of the Digital Economy
The Tax Modernisation establishes a new tax regime for the digital economy, taxing with VAT (19%) the following services provided by persons and entities resident abroad: (i) intermediation of services provided in Chile, whatever their nature, or of sales made in Chile or abroad provided that the latter give rise to an import; (ii) the supply or delivery of digital entertainment content, such as videos, music, games or other analogues, through downloading, streaming or other technology, including for these purposes, texts, magazines, newspapers and books; (iii) the provision of software, storage, platforms or IT infrastructure; and (iv) advertising, regardless of the support or medium through which it is delivered, materialised or executed.
It also establishes a simplified regime for taxpayers who are neither domiciled nor resident in Chile and who provide this type of services, in order to make it easier for them to declare and pay VAT on digital services.