New rules which considerably alter the tax treatment of stock options in Chile came into effect on January 1, 2017.
New provisions on stock options, part of a greater legal modification to the Chilean taxation system, were implemented by Laws 20,780 (2014) and 20,899 (2016).1
The new rules create a tax regime significantly different from that which applied previously.
The legal changes concerning stock option mean that the recipient could be subject to Chilean taxes at the following events:
(1) at the date of grant of the option, or possibly, vesting, on the intrinsic value of the option;
(2) in situations where the recipient sells the option and obtains proceeds;
(3) at the exercise – the taxable basis being the market value of the shares at that time less the intrinsic value of the option that was deemed taxable and the purchase price paid by the recipient upon exercise, if any; and,
(4) the eventual capital gain realized, consisting of the sale proceeds of the shares minus the tax cost of such shares, with the latter being equal to the market value of the shares at exercise (updated if any), as per the provisions of the Tax Circular Order (discussed below).
Taxpayers and their tax service providers need to be aware of the new rules – and employers should review their stock option plans – in order to avoid the risk of being non-compliant and potentially being subject to a heavier tax burden than they need be.
Before the legal change, stock option plans in Chile were first taxable when the shares acquired from the exercise of the options were sold (unless the recipient of a stock option was provided with the shares for free, i.e., he/she did not acquire them with his/her own funds). Upon sale of the acquired shares, the gain realized, if any, was taxed as a capital gain. The capital gain was equal to the excess of the sales proceeds over the purchase price of the shares (this value considered at the exercise of the option).
As a result of the new rules, the recipient of a stock option will be deemed to have compensation regardless of whether the option is exercised. In this regard, the Chilean tax authorities (Servicio de Impuestos Internos or SII) issued Circular Order No. 44, dated July 2016.2 The Circular outlined certain aspects of the tax law changes and also defined an “option” as the right to acquire a certain number of shares in the future. Accordingly, the stock option recipient will be subject to Chilean tax upon the acquisition of the option, under the definition outlined in this newsletter. Furthermore, if the option is sold by the recipient, the eventual sales proceeds will also be taxable.
In addition to the above, new rules provide that there will be taxation at the exercise of the option, the taxable basis being the shares’ market value at exercise less the intrinsic value of the options that were deemed taxable (as described above and below), and the price paid by the recipient to purchase the shares upon exercise (if he/she acquired said shares with own funds).
For the taxation events described above, the applicable Chilean taxes will be the Employment Tax (Impuesto Único de Segunda Categoría) in the case of employees and the Surtax (Impuesto Global Complementario) in the case of Board Directors.3 Both taxes apply the same progressive marginal rates ranging from 0 to 35 percent as of February 2017.
Despite the clarifications provided by the SII through the Circular Order mentioned above, there are still some issues that require clarification, including:
Under the new tax scenario, it is recommended that employers review their stock option plans in effect under the former rules, as well as their current plans, to determine the impact of the new provisions on them.
The KPMG International member firm in Chile will continue to monitor the new guidance from the SII on the matter and will keep readers informed of any important developments and clarifications when they occur.
1 Ley N° 20.780, Reforma Tributaria que Modifica el Sistema de Tributación a la Renta e Introduce Diversos Ajustes en el Sistema Tributario.
Ley N° 20,899 Simplifica el Sistema de Tributación a la Renta y Perfecciona Otras Dispociones Legales Tributarias.
2 See Circular No. 44 (in Spanish).
3 This statement only considers the scenario where the recipient of the option is resident or domiciled in Chile for tax purposes.
For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Chile:
Juan Mesias, Director – Tax
Tel. +56 2 2798 1441
Mike Bussa, Leader – Global Incentive Compensation Services
Tel. +1 212-9541811
The information contained in this newsletter was submitted by the KPMG International member firm in Chile.
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