Law 20.899 (published in the official gazette on 8 February 2016) introduces changes that are intended to simplify Chile’s “attributed tax regime” and the “partially integrated regime” as enacted in 2014 by Law 20.780 (also known as the “2014 tax reform”).
Law 20.899 provides that taxpayers operating under the “partially integrated regime” and that are residents in a country that has in effect a ratified income tax treaty with Chile will not be subject to a surtax on imputation credits.
The new law provides a transition rule that extends this exemption to tax treaties pending ratification, if the treaty is signed (but not ratified) prior to 1 January 2017. This transition rule is effective until 31 December 2019.
Law 20.899 also modifies Chile’s thin capitalization rules and controlled foreign corporations (CFC) rules, and clarifies the scope of the general anti-avoidance rules (GAAR).
The main objective of Law 20.899 is to reduce the complexity of the income tax regimes and other provisions of the 2014 tax reform, including measures affecting the thin capitalization rules, CFC rules, and GAAR, among others.
Among the changes in Law 20.899 are measures that provide the following:
Simplification of the “attributed tax regime”: Under this regime, a 35% withholding tax tax is assessed on taxable income earned by a corporation for the year, regardless of whether an actual distribution is made. An imputation credit of 25% (starting in 2017) for the corporate tax paid on such attributed taxable income is available. Under Law 20.899, only the following persons may use this regime:
If no regime election is made, individuals, personal holding companies with limited liability, and limited liability companies (except for limited join-stock companies) are taxed by default under the “attributed tax regime,” as long as all the owners or partners of the entity are Chilean-resident individuals. For companies existing before 1 June 2016, the election must be made between June and December 2016.
Generally, the tax treatment of attributed income will be determined at the end of the fiscal year. If during the fiscal year, a non-final taxpayer acquires an interest in the entity, the entity would be taxed under the “partially integrated regime” (beginning on 1 January of the tax year the non-final taxpayer acquires the interest).
Documents, registers required: The entity needs to keep the following, simplified information registers:
The allocation order of withdrawals, remittances, or distributions is simplified, and is to be made according to the order listed under numbers (1), (2), and (3), above. If there are amounts in excess of the items included in the above-listed registers, they are to be included in the corresponding final tax, unless those amounts are attributable to capital returns.
Imputed tax credits are drawn first from those credits earned starting 1 January 2017, and only then from those registered in the “taxable earnings fund” (FUT). FUT credits are to be applied based on an average rate, determined annually by dividing the total accumulated credit amount with the FUT amount.
Simplification of “partially integrated regime”: Under this regime, the company will be subject to tax at a 27% rate, starting in 2018 (a rate of 25.5% applies for 2017). Withholding tax will apply only when the profits are distributed. Complex calculations are necessary to determine the actual credit amount. If the shareholder is a resident in a “tax treaty country,” the full imputation credit is available, resulting in an aggregate effective tax rate of 35%. If the shareholder is resident in a non-tax treaty jurisdiction, a 35% surtax will be imposed on the imputation credit amount, resulting in an aggregate effective tax rate of 44.45%.
Under Law 20.899, the “partially integrated regime” applies to corporations, limited join-stock companies, and any other entity with at least one non-final taxpayer owner.
Documents, registers required: The entity is to keep the following, simplified information registers:
The allocation order of withdrawals, remittances, or distributions is also simplified, and is made in the order mentioned on numbers (1), (2), and (3), above. If there are amounts in excess of those included in the above registers, they are to be included in the corresponding final tax, unless those amounts are attributable to capital returns.
Regarding FUT imputation, the same rules as applied under the “attributed tax regime” are also to apply.
Transition rule: Under the transition rule, once the “partially integrated regime” is in force, the reimbursement of the 35% surtax on the imputation credit amount applies to those taxpayers who are residents in countries with which Chile has signed an income tax treaty, but the treaty is not yet in force—that is, to the extent the treaty has been signed (but not ratified) prior to 1 January 2017. This transition rule is in effect until 31 December 2019.
Applicability of general anti-avoidance rule: The scope of the GAAR that came into effect 30 September 2015, is clarified. A transition rule applies with respect to facts, acts, transactions, a conjunction, or a series of transactions executed or concluded prior to 30 September 2015—that is, the rule applies if the characteristics or elements that determine the legal consequences for tax purposes were agreed before 30 September 2015, even if they continue to produce consequences after that date.
In addition, effects after 30 September 2015 that originate from facts, acts, transactions, a conjunction, or a series of transactions realized or concluded before that date will not be subject to new treatment under the GAAR, unless the characteristics or elements have been modified after 30 September 2015. If there is modification, the rules would only apply to the posterior effects originating from such modification, if they are considered to be abusive.
Thin capitalization rules: Law 20.899 provides that debt between non-related parties with a maturity date of 90 days or less—including renewals or extensions—is excluded from the concept of “annual total indebtedness” for purposes of the thin capitalization rules. The 35% tax on excessive interest payments to non-resident related parties imposed under the thin capitalization rules applies to payments subject to a reduced rate of withholding tax of 4% on interest and also to any payment that may have been subject to withholding tax at a rate lower than 35%, including interest payments that are subject to a reduced tax rate under any applicable tax treaty.
CFC rules: The CFC rules will not apply when the value of the assets of the CFC capable of producing passive income does not exceed 20% of the total assets of the Chilean parent. The ratio is determined by taking into account the permanence of the assets in the operations of the corporation. In addition, the CFC rules would not be applicable when the passive income of the CFC are subject to taxes at an effective rate of at least 30% in the country where the foreign CFC is domiciled, established, or incorporated.
Historic FUT: Law 20.899 broadened the substitute tax regime for the balance of the taxable earning ledger (“historic FUT”). Taxpayers can opt to pay a substitute tax of 32% on the total or a part of the “historic FUT,” subject to final taxes, provided that the taxpayers are subject to corporate tax on the bases of general balance and complete accounting.
At the end of fiscal years 2015 and 2016, as applicable, the taxpayers must keep a balance of the “historic FUT” not withdrawn, remitted, or distributed, pending final taxes.
Law 20.899 also extends the time in which the substitute tax may be declared and/or paid from 2016 through April 2017 (before it could only be declared and/or paid during 2015). In calculating the amount subject to the substituted tax, the taxpayer cannot consider the total annual average of the withdrawals, remittances, or distributions effectuated or received by the partners or shareholders of the company.
The amounts that are subjected to the substituted tax are to be recorded in a non-taxable earning ledger (“FUNT”), duly adjusted in accordance with the consumer price index (“IPC”), and may be withdrawn, remitted, or distributed at-will by the taxpayer, with preference over any other amount and without regard to the ordering rules normally followed to determine the taxation of such amounts.
For more information, contact a tax professional with KPMG’s Latin America Markets Tax practice or with the KPMG member firm in Chile:
Devon M. Bodoh | +1 (202) 533-5681 | firstname.lastname@example.org
Alfonso A-Pallete | +1 (305) 913 2789 | email@example.com
Andres Martinez | +562 2798 1412 | firstname.lastname@example.org
Rodrigo Stein | + 562 2798 1412 | email@example.com
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