Sandra Benedetto, Santiago López
A particularity of the tax reform was that not all its provisions entered into force at once, instead they have entered into force progressively throughout the past few years. In fact, as we have reported in the past, the major changes will become wholly available during years 2017 and 2018.
The tax reform has generated a lot of discussion among tax specialists, especially about concerns to the complexity of the amendments introduced by the tax reform. Within this context, Chilean Congress passed a new tax reform (Law 20,899) and its main purpose, as the Government sustained, was to simplify the 2014 Tax Reform.
Nonetheless, this newly-passed reform went beyond that premise by introducing major changes on some of the most prominent tax subjects, mainly the provisions on the new income tax regimes to be in force as of January 1 2017.
During 2016, the Chilean IRS has focused its efforts on issuing new administrative regulations (circular letters), with the aim of providing guidelines on the amendments introduced by Law 20,899.
This article's intention is to highlight the main amendments put forward by Laws 20,780 and 20,899, which may be of interest for foreign investors carrying out business in Chile.
The Chilean income tax regime, in force until December 31 2016, works as an integrated system. Taxation occurs on two different levels, where local companies must pay the First Category Tax (24%) over its net taxable profits, and foreign shareholders must pay Additional Tax at 35% when such profits are distributed to them. It is known as an integrated system, as the First Category Tax paid at the level of the Chilean entity is creditable against the Additional Tax, this implies that in case of foreign investors, total tax burden on tax profits amounts to 35%.
According to the tax reforms referred to above, as of January 1 2017, the integrated system will be replaced with two alternative regimes called the Attributed Income Regime (Regime A) and the Partially Integrated Regime (Regime B).
Although Law 20,780 considered that both regimes would be available for any kind of Chilean company, Law 20,899 introduced amendments to this limiting the application of Regime A to certain Chilean companies.
In this sense, Regime A will only be available for Chilean companies (excluding stock corporations) exclusively held by individuals resident in Chile or by foreign taxpayers (either individuals or entities). Additionally, Law 20,899 establishes that Regime A will apply as a default regime regarding Chilean companies exclusively held by Chilean individuals. In all other cases, Regime B will apply as default regime.
As for the characteristics of each regime, although both maintain an integrated system concept (as described above), important changes have been introduced.
Regime A will imply that both the Chilean company and its foreign shareholders are taxed on a yearly basis, regardless of the fact that no effective distribution of profits is performed abroad. Therefore, First Category Tax will be applied at the level of Chilean entity over its net taxable income, and such taxable profits will be then "attributed" to the foreign shareholders, triggering Additional Tax at the level of the foreign shareholders. Under this regime, a full credit for the First Category Tax paid at the level of the Chilean entity will be available.
Although Regime A implies that total tax burden will be triggered annually, First Category Tax will remain fully creditable, meaning that the maximum total tax burden on profits will remain as it is today at 35%.
Regime B in turn works similarly to the regime currently in force, meaning that Additional Tax will only be triggered upon effective distribution of profits to abroad. However, the First Category Tax credit will be limited to 65%, implying that in case of foreign investors, total tax burden would be increased to a 44.45% (assuming year 2018 scenario). Note, however, that the First Category Tax will remain fully creditable in case the foreign shareholder resides in a country with which Chile has a double tax treaty in force (DTT), therefore leaving the total tax burden at 35%.
Similar to the above, Law 20,899 introduced a transitory regime which will also allow a full First Category Tax credit for Regime B, in case the foreign shareholder resides in a country with which Chile has a signed but not yet in force DTT. For this transitory regime to apply the relevant treaty must have been signed before January 1 2017. So far this regime will benefit foreign shareholders resident in the US, Italy, South Africa, Argentina, China, Japan, Uruguay, the Czech Republic and South Africa. This transitory regime will remain in place until December 31 2019.
The tax reform gradually increases the First Category Tax rate to 21% by commercial year 2014, 22.5% by commercial year 2015 and 24% by commercial year 2016. Regarding Regime A, First Category Tax will be set for commercial year 2017 and onwards at a 25% rate. As for Regime B, First Category Tax will be set at 25.5% for commercial year 2017 and at 27% for commercial year 2018 and onwards.
The tax reform introduced CFC rules to Chilean Income Tax Law, which entered into force on January 1st 2016. In a broad sense, passive income accrued or perceived by an entity considered as a controlled foreign company (CFC) will be taxed in Chile at the level of the controlling company, regardless of the fact that no profits have been effectively distributed to Chile. It is important to note that the dividends paid by a CFC will not be subject to taxation in Chile if they can be allocated to income already taxed as passive income.
Although CFC rules introduced by Law 20,780 considered a credit mechanism (mainly regarding corporate taxes paid at the level of the controlled entity), Law 20,899 allows as well to credit foreign withholding taxes applied upon the effective distribution of profits into Chile.
Before the tax reform the concept of a tax haven in Chile was limited to a list of countries. However, from January 1 2015, the concept has been broadened to include countries that are not only considered as tax havens but also as preferential tax regimes, referring to those defined by the OECD as such and those that meet the requirements established in Chilean Income Tax Law.
It is important to note that Law 20,899 introduced changes to criteria to determine a preferential tax regime, especially about countries that do not comply with OECD standards.
From January 1 2015, the rule about excess of indebtedness will suffer different modifications, especially in reference to the point at which the excess of indebtedness must be assessed and how it must be calculated.
Law 20,899, introduced some changes to this provision by clearly including interest that has benefited from reduced rates by the application of a double tax treaty.
With the tax reform, payments made to related parties will only be deductible exclusively on a cash basis, and provided that the relevant Additional Tax (withholding tax) has been effectively withheld and paid.
As of September 30 2015, a general anti-avoidance rule entered into force. By means of this rule, tax obligations arise in consideration of the legal nature of the acts or businesses actually being conducted, whatever form or name is given by the parties.
Thus, this rule envisages two different forms of avoidance, i.e. abuse and simulation, the existence of which must be proved by the Chilean IRS. In particular, its qualification is to fall under the competence of the Tax and Customs Court at the IRS Director's request, following the established procedure.
The Tax Reform also provides that a fine in respect of any person who is confirmed as having designed or planned transactions herein covered may be sanctioned.
The Tax Reform considered a grandfathering provision that broadly stated that this general anti-avoidance rule would only apply in respect of acts or business, or a set or series of them, which have been performed or concluded as from September 30 2015. Although it was the spirit of the law that this provision was not to be applied on a retroactive basis, the Chilean IRS, on the basis of the wording, construed an argument under which the general anti-avoidance rule could be applied to acts, business or series of them that were executed before September 30 2015, based on its effects.
Law 20,899 addresses this issue and instead of focusing on the effects, it has centered its attention on further modifications over the acts performed before September 30 2015. It is likely that this new provision will be subject to discussions among tax specialists as the proposed wording still raises a certain level of uncertainty. This is a matter to be closely monitored.
In this respect the stamp tax rate is going to be doubled, going from a 0.033% for month or fraction of month of indebtedness, with a maximum of 0.4% over the loan's amount, to 0.066% and 0.8% respectively.
Stamp tax rate on loans payable upon demand will be doubled from 0.166% to 0.332%.
Chile is one of many countries in Latin America suffering the consequences of weak commodity prices, lack of consumer confidence and the global economic slowdown. Depressed prices for the country's key export, copper, have also contributed to Chile's subdued economy. As a result, the government wants to raise revenue through reforming the tax system.
In February 2016, Chile enacted significant amendments to the tax reform from September 2014. Tax practitioners had long called for amendments to the law, as the original reform created a lot of headaches due to complicated systems and many loopholes. Deloitte reports that the main objectives of the new law are to simplify the income tax system, which enters into force in 2017, and make adjustments to VAT, mainly on real estate. Other changes include general anti-avoidance rule clarifications, amendments to controlled foreign company (CFC) rules, broader application of thin capitalisation rules, and broader foreign tax credit rules.
From next year, companies subject to tax on income will be subject to one of the two systems that enter into force in 2017. The 2014 tax reform, which came into effect on October 1 2014, increased the rate of corporate income tax from 20% to 25% for those subject to the attributed profits system, and from 20% to 27% for those subject to the partially integrated system.
"A lot of the changes that are coming into the market need more sophisticated advice," said Jaime Carey, managing partner and co-head of tax at Carey. "The tax authorities are becoming a lot more aggressive and they are taking the amendments to the tax law very strongly. Although it's bad in one sense, it's good in the other – the market is becoming a lot more effective. The standards have increased substantially and we have to give another level of tax advice today than we did two years ago," he added.
The motive behind the increased tax rates is clear; the government needs more money, and as a consequence the tax authorities have also increased the audit rate. "Chile is under economic pressure, mainly due to the fall of copper prices," said Juan Pablo Guerrero, partner at KPMG. "There is an increased likelihood of an increment in the number of transfer pricing audits over many multinational and large companies, particularly, in the context of ongoing tax reforms affecting both individuals and corporations," he added.
Guerrero said that despite recent changes in the taxation system, Chile remains an attractive destination for foreign capital and multinational operations. Carey agreed, saying: "Chile's tax rules are still fairly straight-forward, and the country attracts a lot of strategic investors and hedge funds that are willing to take risks."
Chile, as the only South American OECD country, has also been committed to get closer to international standards by applying the principles of the OECD's BEPS Project. The country has already implemented recommendations from many of the BEPS action points including VAT measures to address the digital economy, updates to transfer pricing regulations and country-by-country reporting, among others. Many practitioners are hopeful that complying with the OECD's standards will provide investors with an extended sense of security that will lead to the economic boost Chile needs.
EY Consulting Ltda.
Presidente Riesco 5435, 4th Floor
Tel: +56 2 676 1000
South America Tax Managing Partner
Tel: +51 1 411 4440
Country Tax Managing Partner
Tel: +56 2 676 1372
Tel: + 56 22676 1832
Business Tax Services
Tel: +56 2 676 1141
Global Reporting and Compliance
Carlos Muñoz Saravia
Tel: +56 2 676 1791
Tel: +56 2 676 1372
International Tax Services
Tel: +56 2 676 1141
Tel: +56 2 676 1679
Tel: +56 2 26761334
Av. Andrés Bello 2711, pisos 1, 2, 3, 4 y 5
Tel: +562 2940 0101
Fax: +562 2940 0503
Contact: Francisco Selamé
Firm Profile as a leading company:
PwC has been present in Chile since 1914. During 100 years we have rendered professional services to the most prestigious local and global companies doing business in Chile and abroad.
Our main objective is to help our clients be successful and assist them into making correct and efficient business decisions. For that purpose, we provide them timely consultancy services regarding relevant tax and legal issues for their businesses, considering applicable legislation and business structuring, adding value via proposing innovative solutions in an efficient manner.
Being already a leading tax and legal adviser, PwC Chile has undertaken a comprehensive approach towards its clients, being able to support them over various service areas, including, Legal and Tax Advisory Services; Domestic and International Corporate Tax Planning; M&A; Transfer Pricing; Tax Compliance; Legal and Corporate Counseling; Labor Consultancy Services; Individual Consultancy Services and Expatriate Global Solutions; Tax Risk Minimization; Tax Accounting; Tax Proceeding, Defense and Dispute Resolutions. PwC Chile is prepared to become every client's "one-stop-shop" solution provider.
Our Tax and Legal Services Department counts with a staff of excellence formed by approximately 290 professionals, most of which are lawyers and certified accountants, located in our offices at Santiago, Viña del Mar, Concepción, and Puerto Montt.
Our clients include important businesses, individuals and organizations, both national and international. We are capable of and have the experience to address matters arising from diverse industry sectors and from different economic arenas, such as mining, communication, retail, manufacturing, fishing, public and private concessions, and information technology, among others.
Combining its industry insights with the technical skills of its professionals, PwC Chile has become the main professional service provider for its clients, playing an important role into their success.
|Corporate Income Tax||24%|
|Capital Gains Tax||24%||35%|
|Other fees and compensation for services rendered abroad||35%||A|
|Net Operating Losses (years)|
|Royalties from, for example, patents, know-how||0%||15%||20%||30||A D|
|Branch Remittance Tax||35%||F|
Baker & McKenzie's tax department has one partner and four other tax professionals. Alberto Maturana leads the practice, while Ronnie Alvear was hired as a senior tax associate in May 2016. The tax group is best known for its wide experience in assisting with multijurisdictional M&A processes and structuring, and also has a recognised international practice. The firm is experienced in serving companies in the mining, pharmaceutical, entertainment and IT sectors.
The firm advised a large multinational on the tax aspects of its acquisition of an aquaculture nutrition supplier. The firm assisted the client on the various strategies applicable to the acquisition.
A client who is using the firm for tax advice on acquisitions and general matters, said: "Baker provides very reliable tax advice, they are very responsive."
Baraona Abogados counsels local and international companies on structuring their businesses and investments. Its professionals are also specialists in tax disputes before the Chilean tax authorities and the courts. The firm's other expertise are personal tax and estate planning. Carolina Collantes is a partner in the firm. She specialises in tax planning and litigation, accounting regulations, corporate restructuring, and M&A.
Full-service firm Barros & Errázuriz Abogados, Taxand Chile provides corporate and personal tax planning services, and implements national and international planning strategies for its clients. Founding partner and head of tax Fernando Barros specialises in tax, arbitration, antitrust, M&A, securities and real estate.
Bofill Mir & Álvarez Jana Abogados is recognised for its tax services across a range of industries. The team specialises in cross-border and transactional tax, local tax planning and withholding tax issues, M&A, interpretation and application of tax treaties, corporate financings and restructurings, and managing of tax controversies. Alejandro Álvarez and Guillermo Fonseca are among the firm's key partners. Álvarez focuses on corporate law, tax law, M&A, corporate finance, regulation, contracts, construction and licences, and Fonseca focuses on tax legislation.
Cabello, Letonja & Cía offers tax advisory services, reviews tax procedures, provides representation and defence before the IRS and tax courts, and issues legal rulings on tax matters. Juan Pablo Cabello, who is experienced in analysis and tax planning, is a partner in the firm. Alexander Letonja is another partner. He previously worked in the tax and legal department at EY, and is experienced in tax litigation. Juan Levenier is in charge of the tax audit department and Luis Seguel advises on local and international tax consulting, corporate reorganisations, and defence and tax judgements.
Carey's tax practice is led by Jaime Carey and Jessica Power, who oversee a team of 24 tax professionals. The team advises clients in a number of industries, including finance and insurance, energy, infrastructure and technology, as well as the government. Their specialties include structuring of complex national and international transactions, litigation, planning and due diligence
Carey specialises in corporate law, M&A and financing. Power advises both domestic and foreign clients in personal and corporate tax planning, local and international tax consulting, M&A, and foreign investment transactions.
In the past year, Carey has strengthened its private clients practice by advising more than 100 taxpayers, mainly wealthy families, on a tax amnesty programme that allows taxpayers to declare their unreported assets.
In December 2015, Power and Alejandra Risso assisted a client in all tax matters regarding the sale of a 50% interest in a copper mine.
"Our experience has been very positive from both a tax and corporate law perspective," one client said.
José Luis Letelier is managing partner at Cariola Díez Pérez-Cotapos & Cía. The practice specialises in international tax consulting, cross-border transactions, M&A, double taxation treaties, transfer pricing and litigation. Letelier has more than 25 years of experience as a lawyer in business, corporate and commercial law, M&A, antitrust and foreign investment. He leads the corporate and M&A groups, and provides corporate and commercial assistance to local subsidiaries of transnational entities in different activities, from power generation infrastructure to consumer products. Pedro Deutsch is another key partner. He has worked as a lawyer for more than 40 years in taxation, mining, project financing and foreign investment, and has advised on important mining investments in the country for companies such as BHP Billiton, ExxonMobil, Rio Tinto, St Joe Minerals and Meridian.
Jorge Carraha leads the tax department of seven tax professionals at Claro & Cía. Four new associates have been hired since August 2015: Javier Pérez Marchant, Rafael Cruzat Donoso, Cristóbal Garí Neef and Rafael Schmidt Hernández. The firm is a member of Lex Mundi, which gives the firm's clients access to lawyers worldwide.
"We have worked with them for 15 years and have had a very good experience," one client said.
The firm's tax group advises foreign and domestic clients in all tax-related matters. Its lawyers work closely with clients on complex transactions and corporate structures, as well as financial products. This includes tax planning, creation of tax-efficient structures and use of double taxation treaties mechanisms. Most of the firm's client's work in financial services, energy and utilities, transport and manufacturing, but the firm also serves numerous other industries.
In February 2016, the firm advised a major global beverage company on the tax implications of a new product in accordance with Chilean VAT law. In September 2015, the firm also advised a client on restructurings of its subsidiaries.
Deloitte Chile is led by Pablo Albertini. The practice has 16 partners and 552 other tax professionals who provide advice to international investors, global, regional, and local corporations and wealthy individuals on tax consulting, M&A, foreign investment transactions, and tax controversies. The firm has had a presence in Chile since 1923, offerings clients a broad range of audit, consulting, financial, outsourcing, risk, tax, and legal advisory services.
Deloitte is helping the Chilean division of a manufacturer headquartered in Europe with its accounting group located in a third jurisdiction to comply with corporate accounting requirements in line with Chile's indirect tax laws.
Deloitte is one of the biggest consulting firms in Chile in in the mining, retail, financial services (insurance and banking), and public sector industries. In April 2015, Deloitte Chile and Deloitte Canada combined operations to provide a more seamless service to clients in North and South America.
Pablo Greiber leads the tax practice at EY, which has 20 partners and 387 other tax professionals. EY has a strong reputation in tax matters related to controversy, personal advisory services, international tax services, transfer pricing, transactions, tax compliance and tax consulting services. The team is experienced in advising the mining, financial, shipping, retail, forestry and energy industries, among others.
Greiber has 10 years of experience advising clients on all aspects of taxation, including planning for corporate reorganisations and international investments.
KPMG is a full-service firm, and offers services including general tax advisory, domestic and international taxation, tax disputes, labour tax, transfer pricing, capital markets, tax planning and transactions. The firm has a strong presence in various sectors, such as banking, mining, forestry, manufacturing, vessel transport, technology, energy and communications. KPMG also provides tax controversy services to large mining groups. Francisco Lyon leads the tax department. A client described the firm as "very competent and professional".
Mario Silva Poblete heads the tax department at Philippi Prietocarrizosa Ferrero DU & Uría. The practice comprises two partners and 14 other tax professionals. The firm is the result of the merger of Chilean firm Philippi with Colombian law firm Prietocarrizosa and an alliance with Spanish law firm Uría Menéndez on January 1 2015. In 2016, Ferrero Abogados and Delmar Ugarte, two Peruvian law firms, joined the firm. The team's expertise includes local and offshore tax planning, international reorganisations, transfer pricing, tax litigation and tax proceedings, and customs and international trade
The firm is assisting a TV channels company with tax advice and tax analysis on the applicable taxation levied on the payments made between the Chilean subsidiary and the American holding company. The advice has included preparation of a VAT and withholding-tax efficient structure.
"Not only is the partner in charge very good, but the whole team has deep legal and accounting knowledge, which sets them apart from other firms. Their answers are prompt on question, and their solutions are very good," one client said.
Porte & Canales Abogados y Consultores's team of lawyers work within tax consulting, financial and tax accounting, audit, and also provide representation and defence before the administrative and judicial courts. Key partners include Rodolfo Porte and Octavio Canales. Porte is experienced in advising on domestic and international tax, and the tax planning of companies and individuals. Canales specialises in financial and tax audits, and advises on domestic and international tax as well as corporate and individual tax planning.
PwC's tax team provides legal and tax advisory, domestic and international corporate tax planning, M&A, tax compliance, tax accounting, tax proceedings, defence and dispute resolution services. The firm's approach to litigation is characterised by a focus on alternative dispute resolution mediation, helping clients to deal with tax authorities in a smooth manner. Francisco Selamé is the leader of the tax practice, which comprises 12 partners and 278 other tax professionals.
The firm is currently performing a tax analysis on the sale of a foreign entity to allow the entity to acquire a Chilean mining project. In June 2016, partner Loreto Pelegrí and senior manager Rodrigo Winter assisted in the acquisition of a 50% equity interest in a Chilean company by a German entity.
"My experience with them was good. We only use PwC," said one client.
Salcedo & Cía performs tax analysis, advisory, transfer pricing and defence work. The team consists of attorneys, economists, auditors and accountants and is led by partners Marcos Bravo, Claudio Salcedo and Marcelo Muñoz.
Sergio Sapag Pérez and Pablo Rodrigo González Suau founded Sapag & González Abogados in 2010. The firm provides tax advisory services to the public and private sectors. Sapag Pérez is a professor of international tax and tax law at Universidad de Chile and Universidad Adolfo Ibáñez. González Suau also teaches international tax and tax justice at Universidad de Chile Law School.
Tax Advisors assists its clients with tax planning, legal reports, legal and administrative defence, and consultation. Christian Blanche and Benjamin Bernstein are co-heads of the practice. Blanche is a specialist in corporate tax, developing strategies for reorganisations and M&A. He is a founding partner and serves as director of corporate planning. Bernstein has strong experience in tax planning with a focus on economic safeguards, labour planning and inheritance taxes and donations. He is also a specialist in buying and selling companies, and income strategies and capital outflows to domestic and international investors.
|Tier 1 - Chile|
|Tier 2 - Chile|
|Barros y Errázuriz Abogados, Taxand Chile|
|Philippi, Prietocarrizosa Ferrero DU & Uría|
|Tier 3 - Chile|
|Baker & McKenzie|
|Cabello, Letonja & Cía|
|Cariola Díez Pérez-Cotapos & Cía|
|Claro & Cia|
|Tier 4 - Chile|
|Bofill Mir & Álvarez Jana Abogados|
|Porte & Canales Abogados y Consultores|
|Salcedo & Cía|
|Sapag & González Abogados|