In general, businesses take a corporate form, although a foreign legal entity can also operate in Chile through a branch. There are different types of entities with different characteristics; the most commonly used are as follows.
In general, all these vehicles have formal requirements for their incorporation, such as being formed through a public deed signed before a notary public, registration in the Commerce Register and publication in the Official Gazette, with some particularities for each corporate form.
Chilean law also allows other forms of business entities with no corporate form, such as sole proprietorships and silent partnerships.
For tax purposes, companies and branches are treated as separate entities from their shareholders, partners, or head office abroad.
Chilean-domiciled legal entities are subject to income tax on their worldwide income. A branch of a foreign company is subject to income tax in Chile based on the results attributable to the branch. Branch profit attribution rules provide that only profits earned by activities conducted through the branch or from assets allocated or used by the branch are attributable. Additionally, a branch is treated as if it were a separate legal entity for transfer pricing purposes.
Business entities and branches are generally required to keep full tax accounting records for determining their effective net income subject to tax. Such taxpayers may be subject to income tax under two different tax regimes: the Attributed Profit System (APS), where the final taxpayer pays taxes on its share of the annual net taxable income earned by the business entity on a flow-through basis, irrespective of actual distributions; or the Semi-Integrated System (SIS), where final taxpayers are only subject to tax upon distributions. Local entities whose owners are exclusively individual residents or non-resident (individuals or entities) as well as branches can elect to be subject to tax under either of these two systems. If no election is made, the default rule in most cases is that SIS applies. Corporations are always subject to tax under SIS, as well as any other type of legal entity that has an owner or shareholder that is another resident legal entity.
For purposes of the taxation described above, a final taxpayer is a Chilean resident individual, a non-resident individual or the non-resident entity owners or shareholders of a Chilean business entity, including the non-resident head office of a branch.
For more details on the SIS and APS, see 1.4 Tax Rates.
Nonetheless, it is important to point out that during August 2018 the Chilean government submitted to Congress a Tax Modernisation Bill initiative that proposes a single business income tax system like the current SIS. This legal initiative is under revision, and probably will not succeed, due to new social demands. In fact, in November 2019, the Chilean government announced a package of changes to the tax law. One of the main points is the ratification of the SIS as the single system for large businesses, jointly with the elimination of the APS system, to be replaced with two systems for small and medium-sized enterprises.
Note that this package was recently announced. Its details are still unclear; further, it is not yet known what will happen with the measures proposed in the Tax Modernisation Bill, which has been in discussion in Congress since 2018.
All Chilean legal entities are treated as separate entities for tax purposes and no transparent entities exist under Chilean tax legislation. Certain types of collective investment vehicles (eg, regulated investment funds) do not have a separate corporate existence but are not strictly transparent from a Chilean tax perspective.
Under Chilean legislation, tax residence follows the legal domicile of the entity, which is based on place of incorporation.
An entity incorporated outside of Chile is treated as non-resident for Chilean tax purposes. For double taxation treaties, the tax residency of an entity in a tax treaty country shall be supported by an official tax residence certificate issued by the competent authority.
As a general consideration, business entities that perform activities subject to the general taxation regime are subject to corporate income tax (CIT) at the entity level. Then, the final taxpayer is subject to tax on the entity's profits attributed to the owner under the APS or on the distribution of profits received under the SIS. The final tax applicable depends on whether the income is attributed or distributed to a resident individual or to a non-resident person.
Attributed Profit System
Under APS, a Chilean resident entity is subject to CIT at a rate of 25%, on its annual net taxable income determined on an accrual basis. In the same year, the net taxable income of the entity is attributed to its final shareholders, and subject to personal income tax applied under a progressive rate schedule with a top marginal rate of 35% or to a flat 35% rate in the case of non-resident persons that is applied by way of withholding. Final taxes are applicable regardless of whether the income is effectively distributed. Final taxpayers are entitled to deduct from their tax liability an imputation credit equal to the CIT paid at the entity level.
As a result of this imputation credit mechanism, the total combined effective tax rate payable on business profits would be 35% for non-residents.
Under SIS, the Chilean entity is subject to CIT at a rate of 27% on its annual net taxable income determined on an accrual basis. Final shareholders will only be subject to personal income taxes (resident individuals) or a flat 35% tax applied by way of withholding (non-resident persons) upon receipt of a taxable distribution. An imputation credit may also be deductible in computing the final tax liability.
For distributions out of profits earned starting on 1 January 2017, the imputation credit is equal to the lesser of (i) credit calculated using a 27% rate on the distribution and (ii) the balance recorded in the tax credit pool as of January 1st of the year of the distribution.
For distributions paid out of profits earned before 1 January 2017, an imputation credit calculated as the average of all the accumulated credits on 31 December 2016 over all taxable profits accumulated on that date would also have to be considered.
The final taxpayer has the obligation to repay to the government 35% of the amount of the imputation credit. As a result of this imputation mechanism and the obligation to repay part of the imputation credit, the combined effective rate of tax on business profits distributed to a non-resident shareholder would be 44.45%. But if the shareholder is a resident in a tax treaty country and beneficiary of the dividend income, a full imputation credit is allowed, limiting the combined effective tax rate at 35%.
There are no other income taxes payable by business entities in Chile, except for mining companies that extract and sell mineral products, which are additionally subject to a specific income tax on mining activities payable on their net operational mining income at progressive rates applicable depending on the operating margin they earn on their mining activities.
The general rule is that taxable profits are determined under full accounting records on an accrual basis. An item of income received before its accrual shall be included in the year of its receipt. Taxable profits are based on accounting profits with certain adjustments to reflect certain temporary and permanent book-to-tax differences. Under Chilean tax legislation, income is defined as gross income, generally received or accrued by the taxpayer, minus direct costs and expenses as long as they comply with deductibility requirements (generally, expenses must be related to the entity's business activity, necessary to produce taxable income, not deducted as part of the direct cost of goods or services, actually incurred in the relevant taxable period, whether paid or accrued, and adequately supported by appropriate documentation).
Some of the most relevant book-to-tax adjustments that should be made include inflation and foreign exchange adjustments (unless the taxpayer has an authorisation to keep accounting records in foreign currency), differences in depreciation/amortisation rates and values at which investments are held.
Chile does not have a patent box or a similar incentive scheme for technology investment.
In general, expenses incurred in scientific and technological research in the interest of the business are deductible by the entity on the determination of its taxable income. One of the general requirements for deducting expenses is that they must be necessary to produce income in the tax year in which they are being deducted. Nonetheless, in the case of R&D expenses, they can be deducted in the year they were incurred (whether they were paid or accrued), even if they do not generate an immediate profit for the entity; or at the taxpayer’s option, for up to six consecutive business years.
In addition, an R&D tax credit exists, where taxpayers may use 35% of the investment in R&D as a tax credit against corporate income tax, capped at approximately USD1 million, with certain conditions. Additionally, they may deduct as a tax expense 65% of the payments incurred in developing an R&D project. At least 50% of the expenses must correspond to activities performed in Chile.
Generally, fixed assets are depreciated on a straight-line basis, with the possibility to accelerate the depreciation expense up to one third regarding new fixed assets acquired locally, or new or used fixed assets that are imported. The useful life is provided by the Chilean tax authorities.
Immediate expensing of 50% of the value of capital assets acquired for investment projects to be undertaken within the country until 31 December 2021 is being proposed for congressional approval.
Withholding Tax on Interest Payments
Interest paid abroad is subject to a 35% withholding tax rate, and reduced to 4% in the case of interest paid to and on loans issued by non-Chilean banks, financial institutions, insurance companies and certain institutional investors.
Capital Gains Tax Exemption
Capital gains derived from the sale of shares in publicly traded companies that meet a "regularly and substantially traded" test are exempt from tax provided they are acquired and sold under specific circumstances (eg, through a local stock market authorised by the Chilean Securities Commission).
Regulated Investment Funds
Regulated investment funds, defined as collective investment vehicles that are managed by a Chilean fund administrator and have a minimum of 50 investors or at least one institutional investor, and are subject to specific investment policy and diversification requirements, are not subject to corporate tax. Distributions out of the fund and capital gain on disposition of quotas are subject to a 10% tax when the investor is not a Chilean resident.
Simplified Regime for Small and Medium-sized Businesses
A special regime applies for certain taxpayers that comply with specific requirements and give notice to the Chilean tax authorities between January 1st and April 30th of the year they will enter the regime, or together with the initiation of activities. Further, they must remain under the same regime for at least three years, and for a voluntary withdrawal from it, they should also give notice to the tax authorities within such period.
Taxpayers subject to this regime do not have to keep full accounting records for tax purposes, complete inventories, depreciate, keep certain records and apply inflation adjustments, although they must keep records of income and expenditures, and cash journals if they do not have sale and purchase records.
Incentives for Companies Located in Certain Geographic Regions
Specific zones, usually near an airport or port, benefit from a customs extraterritoriality. This benefit consists of a fiction that considers goods in determined zones or deposits as located abroad, with the purpose of exempting them from paying taxes and other duties charged by customs, including value added tax (VAT) on the sale of goods and rendering of services. Entities are also exempt from corporate income tax on the income they generate in these locations.
These zones are the “Zona Libre de Iquique” (ZOFRI) and the “Zona Libre de Punta Arenas” (PARENAZON), located at the farthest north and south of the country, respectively.
Losses can only be deducted from current-year earnings. Any balance can be carried forward indefinitely. The carrying back of tax losses is not allowed. The transfer of tax losses from one taxpayer to another is not allowed.
The carrying forward of tax losses may be limited in the case of a change in control (see 5.4 Change of Control Provisions).
Also, although local intercompany dividends are generally exempt from corporate tax, tax losses in the recipient can be used against such dividends and a cash refund equivalent to the imputation credit associated with a dividend offset by tax losses would be available. However, with the recent package announced by the government, this refund would be progressively eliminated to end up being fully repealed from 2024.
Interest is generally deductible for corporate income tax purposes on an accrual basis, unless interest is incurred on loans directly or indirectly associated with the purchase, maintenance or use of assets to produce exempt or non-taxable income.
Interest and other charges made by a non-Chilean resident related party are not deductible upon accrual, but in the year when payment is remitted and the withholding tax, when applicable, has been declared and paid.
Chile also has thin capitalisation rules with respect to the amount of debt that a Chilean entity can take. Under these rules, interest paid to non-Chilean resident related parties on the portion of the debt that exceeds a 3:1 debt-to-equity ratio is subject to a 35% tax borne by the debtor, minus a credit for any withholding tax paid by the creditor. This tax applies in lieu of denying a deduction on those interests.
No tax consolidation or grouping is allowed under Chilean tax law. As described above, separate company losses may be used against dividend income received from subsidiaries (see 2.4 Basic Rules on Loss Relief).
Generally, capital gains are subject to tax as ordinary income. Nonetheless, the Chilean legislation establishes exemptions and reliefs for capital gains from the disposition of certain assets.
Regarding shares and participations in other entities, the tax basis corresponds to the acquisition value or amount of share capital contributions, increased or decreased by the amount of subsequent contributions or withdrawals of capital performed by the seller, adjusted by inflation.
Because capital gains are treated as ordinary income, deductible business expenses and carry-over losses, as well as losses from the sale of shares or other capital assets, can be deducted by Chilean entities from capital gains.
There are also certain specific capital gains that are tax-exempt:
Generally, there are no transactional taxes in Chile except for VAT, as described below.
A flat 19% tax rate applies to the prices charged in recurrent sales of tangible personal property and certain types of real estate, certain services (commercial, industrial and intermediation services), whether or not recurrent, and imports. Chilean VAT works on the basis of an input VAT (VAT credit) against output VAT (VAT debit) system. VAT credit excess can be carried forward indefinitely.
Nonetheless, VAT incurred by non-Chilean residents cannot be recovered as a tax credit. With very few exceptions (eg, VAT incurred by exporters or VAT incurred in the acquisition or construction of capital assets), there is no cash refund of VAT credit.
VAT is paid monthly. However, there are special situations when the payment opportunity differs (ie, in the case of imports the tax is paid upon customs clearance).
As part of the Tax Modernisation Bill to be approved by Congress, non-resident remote vendors/service providers of digital services may be required to register, file and pay VAT in Chile under a simplified system.
Money credit operations such as loans, promissory notes and commercial paper reflected in written agreements are subject to stamp tax.
Stamp tax applies over the principal amount of the loan at a rate equal to the lesser of (a) 0.066% multiplied by each month until maturity and (b) 0.8%. Loans without a maturity date or payable on demand are subject to a stamp tax at a rate of 0.332%.
In the case of foreign loans, stamp tax applies even if a written loan document does not exist. The Chilean borrower would be responsible for paying stamp tax when the funds are remitted to Chile, when the loan is accounted in the borrower’s accounting records or when a loan agreement is registered before a notary public, whichever happens the earliest.
Chilean entities performing industrial or commercial activities must pay an annual municipal tax to the municipality in which they are domiciled.
The municipal tax rate ranges between 0.25% and 0.5% of the entity's tax net equity, with a minimum annual tax of approximately USD70, and with a maximum annual tax of approximately USD550,000.
Small and local businesses in Chile usually operate in a non-corporate form. However, in order to protect local businesses and their owners, Chilean legislation incentivises the incorporation of legal entities. This allows them to limit the liability of the owners and, if they operate under SIS, they only pay corporate income tax on their earnings and defer the payment of final taxes if they do not distribute dividends or make withdrawals.
No specific rule prevents individual professionals from earning income at corporate rates. Until recently, it was a feature of the Chilean tax system that professionals had incentives to earn income under a corporate form and defer personal taxation until when such income was effectively personally consumed. This was limited by significant changes introduced by a tax reform passed in 2014. One way in which these changes limited this possibility was to establish the APS system, whereby corporate income is attributed to individual owners and subject to tax in the same year. SIS also discourages this by imposing a greater corporate tax rate (27% v 25%) and then allowing only a partial deduction of the imputation credit, which can result in an effective marginal tax rate as high as 44.45% instead of the top personal marginal tax rate of 35%.
The 2014 tax reform also introduced specific anti-avoidance rules that would impose personal-level taxation on undistributed profits of corporate entities invested in assets that produce passive income for avoiding or inappropriately deferring the payment of personal income taxes.
A general anti-avoidance rule was also introduced by the 2014 tax reform. This rule may be used in cases where the tax authority shows that earning professional income under a corporate form was achieved as a result of an abusive or simulated transaction.
Under Chilean legislation, there are no rules that prohibit any corporation from accumulating earnings. As described above, however, undistributed profits invested in assets that produce passive income may be taxed as distributions to the extent that it is determined that such accumulation of earnings was abusive.
Dividends from closely held corporations distributed to their Chilean resident individual shareholders are subject to individual income tax applicable at progressive rates on the individual’s total taxable income. Non-Chilean resident individuals are subject to a flat 35% tax on dividends applied by way of withholding.
In both cases an imputation credit deductible against the personal income tax liability may be available as a general rule but limited to 65% of the credit otherwise available. The limitation of the imputation credit is not applicable if the shareholder is a resident in a tax treaty jurisdiction.
Capital gains realised on the sale of shares in closely held corporations are subject to tax at personal income tax rates. The gain is calculated by deducting from the sale price the historic acquisition value of the shares adjusted for local inflation. In addition, for shares in companies taxed under APS, undistributed profits previously taxed at the shareholder level also form part of the basis in the shares.
The taxpayer can elect to pay tax based on receipt of the purchase price or when accrued. In the latter case, the gain will be treated as earned over the number of years during which the shares were held, with a maximum of ten years. The portion of the gain allocated to each year is subject to the personal income tax rate applicable to the individual in such year.
Individuals are taxed on dividends distributed from publicly traded corporations in the same manner as dividends from closely held corporations.
Also, generally, gains realised on the sale of publicly traded shares are subject to the same taxation, unless the requirements and conditions for the exemption available on gains from the sale of regularly and substantially traded shares are met (see 2.3 Other Special Incentives).
Dividends and profit distributions paid to a non-resident taxpayer are generally subject to a 35% tax applied by way of withholding, unless paid out of income specifically exempt from tax. Taxable dividends generally carry an imputation credit deductible against the dividend tax liability, as explained before (see 1.4 Tax Rates for additional details).
Royalties and licences paid for the use of or right to use intellectual property in general are subject to a 30% withholding tax. The tax rate is imposed at 15% on licences for copyrights, certain types of technology and on software payments made to a beneficiary not resident in a low-tax jurisdiction. End-user licence payments for shrink-wrapped software are exempt.
Generally, interest paid to a non-resident lender is subject to a 35% withholding tax.
A reduced 4% withholding tax is available for interest paid to and on loans issued by non-Chilean or international banks or financial institutions, foreign insurance companies and certain pension funds. The reduced 4% tax rate is also available for interest on vendor credit for imports into Chile; interest on bonds and debentures issued by Chilean corporations, the Chilean State or the Chilean Central Bank; and interest on deposits made in foreign or local currency with any Chilean institution that is authorised to receive them by the Chilean Central Bank.
See 2.5 Imposed Limits on Deduction of Interest for thin capitalisation rules.
In general, service fees paid to a non-resident for services provided either in or outside of Chile are subject to a 35% withholding tax. Payments for technical assistance or technical services, as well as payments for engineering and professional services whether rendered in Chile or abroad, are subject to a reduced 15% tax rate, increased to 20% if the payment is made to a person resident in a low-tax jurisdiction. Some specific services provided abroad are exempt from tax (commercial commission services, freight, sampling and product analysis, etc).
Chile has income tax treaties with numerous countries: Argentina, Australia, Austria, Belgium, Brazil, Canada, China, Colombia, Croatia, Czech Republic, Denmark, Ecuador, France, Ireland, Italy, Japan, Malaysia, Mexico, New Zealand, Norway, Paraguay, Peru, Poland, Portugal, Russia, South Africa, South Korea, Spain, Sweden, Switzerland, Thailand, Uruguay and the United Kingdom.
Chile has also signed a treaty with the USA, which has not been ratified yet.
The prominence of the use of a specific treaty largely depends on where foreign investors are based. Among treaty countries, prominent tax treaties are those with Brazil, Canada, France, Ireland, Mexico, Norway, Spain, Switzerland and the United Kingdom.
The Chilean tax authorities, aligned with Organisation for Economic Co-operation and Development (OECD) standards, has issued instructions to prevent treaty shopping through the use of conduit companies or arrangements. Additionally, treaties that have been recently signed contain a principal purpose test and/or a limitation on benefits clause.
As part of the OECD’s base erosion and profit shifting (BEPS) project, Chile has signed, but not yet ratified, the OECD’s Multilateral Instrument (MLI), which operates to implement several changes to bilateral tax treaties between the signatory countries. Upon signing the MLI convention, Chile notified the OECD that it intended to apply the Principal Purpose Test (PPT) as an interim measure and that it intends where possible to adopt a Simplified Limitation Of Benefits (SLOB) provision through bilateral negotiation as anti-treaty abuse provisions.
Formally, any non-resident taxpayer claiming treaty benefits must provide the local payer with a residence certificate and a sworn declaration stating that it is the effective beneficiary of that income or is a qualified resident for treaty purposes, when the specific treaty requires it to do so.
The main issue for transfer pricing matters in Chile is that since an important amount of the foreign investments are in the mining industry (either metallic or non-metallic), there are many associated political matters and complexities since it is a very sensitive industry in the economic agenda of the country. This results in important challenges for multinationals’ transfer pricing models, since there is a very thin line regarding the profit split between intangibles provided from abroad (technology and risks of exploration and extraction, among others) and tangible property of the country (metals and mineral resources). Another matter to bear in mind is that base erosion peripheral transactions such as royalties, management services and cash pooling systems are sensitive transactions for the Chilean tax authority, so taxpayers need to have properly documented not only the arm's-length value of those transactions, but the economic substance of those transactions.
The Chilean tax authority usually accepts limited risk distribution models (especially for tangible products) as far as the functions, assets and risks involved correspond to the ones assumed by limited risk distributors. As a result, it is unlikely that the Chilean tax authorities will accept losses incurred by a limited risk distributor. Multinationals must be particularly careful with limited risk distribution models for services and financial assets since in the past, due to the functions and risks borne by this type of entity, they had been reclassified as commissioners, business development entities or entities that are routine service providers. It must be well grounded that these services are limited routine services and not high value-added services.
Chile has been a permanent member of the OECD since January 2010. Chilean transfer pricing rules largely follow the OECD transfer pricing guidelines.
It is possible to perform, with the Chilean tax authorities’ authorisation, transfer pricing adjustment on the basis that transfer pricing adjustments have been made in another treaty country and if that country does not prohibit such adjustments.
Nevertheless, it is important to mention that transfer pricing compensating adjustments are not a common practice in Chile; in fact, during the last informed period (2018), only one case of a mutual agreement procedure (MAP) before the tax authorities was closed, and one other is pending resolution.
Local branches of non-Chilean corporations are taxed equally to subsidiaries of non-local corporations and they are subject to income tax in Chile based on the results attributable to it.
Capital gains realised by non-residents on the sale of stock in local corporations are taxed in Chile with a 35% tax, while some treaties limit the tax rate (generally 16%) when certain requirements are met. The exemption for regularly and substantially traded shares also applies to non-residents.
Additionally, there are indirect sale rules, which levy the gain generated in the sale of a foreign entity when it directly or indirectly derives its value from Chilean assets, provided certain requirements are met. Capital gains tax on indirect sales does not apply when the transfer is made in the context of a corporate group reorganisation as long as no gain is generated in such transfer.
Besides the indirect sale rules mentioned above, there are no change of control provisions. There is, however, an Anti-Loss Trading Rule to prevent the use of carry-forward tax losses registered by an entity that undergoes a change of ownership (more than 50%) and to the extent other specific requirements are met. This Anti-Loss Trading Rule, though, does not apply to the change of ownership within a corporate group.
There are no particular rules applicable to determine the income of foreign-owned affiliates selling goods or providing services.
However, if the net taxable income of any company in Chile cannot be clearly determined because there are no clear records or other special circumstances, the law presumes the minimum net taxable income to be equal to 10% of the capital that is effectively invested in the company or to a percentage of its sales made during the taxable year, based on a comparative analysis in the market. Similar rules apply to Chilean companies engaged in import and/or export activities, allowing the Chilean tax authorities to presume a net taxable income. The presumed net taxable income in any of these cases is subject to a tax of 40% in lieu of any other income taxes.
Besides the general requirements on expense deductibility, and compliance with transfer pricing rules, fees paid to a related party abroad are deductible only in the year that they have been effectively paid and the applicable withholding tax declared and paid.
Other than agreeing the interest on an arm's-length basis following transfer pricing standards, there are no specific constraints. However, thin capitalisation rules apply on related-party debt.
Local corporations are subject to tax in Chile on their worldwide income; foreign income is not exempt and is taxed generally upon receipt, while income earned through branches or permanent establishments outside of Chile is taxed currently. A credit for foreign taxes paid is deductible from the Chilean tax liability to reduce or eliminate international double taxation. The foreign tax credit is deductible against the corporate income tax of the Chilean corporate income taxpayer and in some cases also against final taxes.
Local expenses incurred in connection with the production of foreign-source income are generally deductible. Expense attribution rules exist for purposes of calculating certain foreign tax credit limitations.
Dividends from foreign subsidiaries of local corporations are taxed as ordinary income upon receipt, and thus are subject to corporate income tax and final taxes but with a foreign tax credit for taxes paid directly on the dividend income and an indirect foreign tax credit for the corporate tax paid by the foreign affiliate, subject to specific conditions and limitations.
Intangibles can be used by their non-local subsidiaries but transfer pricing rules require that an arm’s-length consideration for such use is earned by the local corporation that developed the intangible. The transfer of the ownership rights in intangibles developed in Chile should also be made in exchange for arm’s-length consideration under transfer pricing rules if transferred to a non-Chilean affiliate.
Local taxpayers, under domestic controlled foreign corporation (CFC) rules, are subject to tax on passive income derived by controlled non-local entities, whether such control is direct or indirect, and includes legal, economic and de facto control tests. Passive income includes interest, dividends, capital gains, royalties and rents, with certain specific exceptions. Net passive income is accrued by the local taxpayer and it is calculated by reference to local tax law. Underlying foreign income and withholding taxes may be deducted as a foreign tax credit against the Chilean tax liability.
Dividends received out of passive income previously taxed under CFC rules are not subject to tax.
There are no specific rules relating to the substance of non-local affiliates, other than transfer pricing rules.
Gains derived from the sale of shares in non-local affiliates are subject to tax as ordinary income under general rules. A foreign tax credit may be available for capital gains taxes imposed in the jurisdiction of the affiliate if there is a tax treaty between Chile and that country.
A General Anti-Avoidance Rule (GAAR) was introduced by the tax reform passed in 2014 and applies prospectively for transactions executed on or after 30 September 2015. Under GAAR, the general rule is that the form of a transaction will be respected unless the existence of avoidance can be shown by the tax administration. Avoidance exists if the transaction or series of transactions involves the abuse of legal form or the simulation of legal acts. Abuse exists when the acts executed do not produce relevant economic or legal effects, and such acts are only intended to (i) avoid the realisation of the taxable event, (ii) reduce the taxable amount, (iii) reduce the amount of the tax obligation, or (iv) defer the tax obligation. There is simulation when the acts executed conceal or hide (i) the realisation of the tax event, (ii) the nature of the elements of the tax obligation, or (iii) the amount or the date of origin of the tax obligation.
In any case, GAAR explicitly provides that taxpayers can opt or elect to execute a transaction among different forms or alternatives contemplated by the law. Consequently, the rule explicitly states that no abuse would exist merely because the same economic or legal result might be achieved through alternative forms that would result in a greater tax burden.
Chilean law does not establish a specific audit cycle.
Several BEPS recommendations have been incorporated into the Chilean tax system over the past few years as a consequence of legislative amendments (eg, Law No 20,780 of 2014, Law No 20,899 of 2016 and others), as well as from administrative regulations issued by the Chilean tax authority. Note that the Tax Modernisation Bill contained several additional changes. These changes are expected to be passed into law by the end of the first quarter of 2020 at the latest.
Below is a summary of some of the more relevant BEPS recommendations that have been implemented in Chile.
Action 1: Digital Economy
No specific measures in connection with the tax challenges of the digital economy have been implemented yet.
The Tax Modernisation Bill proposes to tax digital services provided by non-resident persons directly to Chilean resident end consumers with a VAT flat rate of 19% in the following cases: (i) intermediation services that result in an import of goods to Chile; (ii) supply or delivery of entertaining services through any means; (iii) supply of software, cloud storage, platforms or informatic infrastructure; and (iv) advertising, regardless of the medium through which it is provided.
Action 2: Hybrid Mismatch Arrangements
Almost no changes have been made in connection with BEPS Action 2, probably due to the fact that Chile's civil and commercial legislation barely recognises hybrid instruments or arrangements, or the division between legal and beneficial ownership. However, some advancements have been made, such as the need to submit a tax return if they are part of a foreign trust or a similar structure, or the inclusion of provisions regarding hybrid entities in recent tax treaties (eg, Chile–Japan tax treaty).
Action 3: Controlled Foreign Company Rules
CFC rules were introduced into the Chilean legislation in 2014, in line with BEPS Action 3 recommendations.
Action 4: Base Erosion Involving Interest Deductions
Chile does not strictly follow BEPS Action 4 recommendations in this area. The reason is likely the result of certain competitive tax objectives of the Chilean tax system. However, Chile’s tax legislation contains specific rules addressed at limiting base erosion resulting from cross-border related-party interest payments and other financial charges.
Thin capitalisation rules exist in Chile going back to 2001, but their scope was expanded considerably by Law 20,780 in 2014. Currently, thin capitalisation rules apply to related-party interest payments in the proportion they are derived from debt that is in excess of a 3:1 debt-to-equity ratio. The 2014 changes broadened the concept of related party, as well as the manner in which excess debt is determined, by requiring that all local and foreign loans granted by either related or non-related entities are included in the debt-to-equity calculation. Also, the rules now refer not only to interest charges, but also to financial commissions and any other surcharge paid to a foreign creditor. Additionally, the 3:1 ratio limit is tested annually, unlike the previous one-time test. Another significant change is that now the law allows deduction of interest in payments made to overseas related parties only in cases where the applicable withholding tax is declared and paid.
From a compliance perspective, taxpayers have the obligation to provide an annual declaration to the Chilean tax authorities with detailed information about their external debts, foreign deposits, creditor balance of commercial current accounts, and any other passive income from foreign entities, including any assurance granted by a third person for such obligation.
Action 5: Harmful Tax Practices
In general terms, Chile does not have IP or other preferential tax regimes that may be considered harmful tax practices under chapter 4 of Action 5. However, in response to certain observations made by the OECD, Chile has repealed the so-called business platform regime. This regime allowed non-Chilean investors to establish a company in Chile subject to tax on a purely territorial basis. Existing companies under this regime are grandfathered until 2021.
Chile has also introduced an amendment to the concept of preferential tax regime, considering a jurisdiction as a tax haven only when its effective tax rate is less than 30%. Jurisdictions that have a tax information exchange agreement with Chile would not be considered tax havens.
Action 6: Prevent the Granting of Treaty Benefits in Inappropriate Circumstances
Chile is actively implementing the recommendations of Action 6. A GAAR was introduced in 2014 by Law No 20,780. The Chilean GAAR provides a substance-over-form rule and an anti-avoidance rule based on the concepts of abuse of law and simulation of legal forms.
In relation to treaty-based measures, Chile has already established a number of anti-avoidance rules in its tax treaties. Most treaties executed prior to the BEPS project have a principal purpose test or limitation on benefits clause. Also, many treaties signed by Chile contain a provision that requires that contracting countries enter into negotiations if a party detects situations where benefits not intended in the treaty are granted. In tax treaties negotiated during and after the BEPS project, Chile has included most of the recommendations of this action that were previously not part of Chilean tax treaty policy.
Action 7: Artificial Avoidance of Permanent Establishment Status
On 7 December 2017, the Chilean tax authorities published a Circular Letter with instructions regarding the concept of a “permanent establishment” (PE), aligning its content with the BEPS project. Moreover, the Tax Modernisation Bill proposes to include the PE definition within the law, providing more certainty and fulfilling the BEPS standard. Finally, it is also worth mentioning that Chile has already included in its tax treaties a number of recommended anti-avoidance provisions regarding PEs prior to the BEPS project.
Actions 8-10 and 13: Transfer Pricing
In 2012, Law No 20,630 provided a significant amendment to the transfer pricing regulations to adjust them to the OECD guidelines. Further changes have been made to expand these rules and comply with BEPS standards. Local transfer pricing information is collected by the Chilean tax authorities through a transfer pricing declaration that taxpayers are required to file annually (Form No 1907).
Country-by-country reporting (CbCR), based on the OECD’s recommendations under BEPS Action 13, was implemented in this jurisdiction in December 2016 through administrative regulations. CbCR applies to multinational enterprises (MNEs) headquartered in Chile with annual consolidated group revenue equal to or exceeding EUR750 million in the previous year. The CbCR information must be provided on Sworn Statement Form No 1937, which the Resolution states shall be understood as forming part of the affidavit contained in Form No 1907.
In January 2016, Chile signed the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbCR.
Failure to file Form Nos 1907 and 1937 may be subject to penalties of between ten and 50 annual tax units (USD8,500 and USD42,000), subject to an upper limit of 15% of the reporting taxpayer’s share capital as calculated under Article 41 of the Income Tax Law, or 5% of the reporting taxpayer’s effective capital.
Action 15: Multilateral Instrument
Chile signed the Multilateral Instrument to Modify Bilateral Tax Treaties (MLI) in 2016. Congressional approval of the MLI is still pending. Such approval is required before the MLI can enter into effect.
As an OECD member, Chile has been and is actively participating in the BEPS project. In the past years, several BEPS action measures have been incorporated into Chilean legislation and there is a general feeling that the Chilean government plans to implement most of the recommendations that are not currently part of its international tax law. As legal provisions must be passed to implement these actions, a challenge is the political willingness to modify the current tax law.
The BEPS initiative has also been mentioned as a background source of all recent major tax reforms (eg, Presidential Message for Law No 20,712 in 2014, Law No 20,899 in 2016 and the Tax Modernisation Bill recently sent to Congress). Also, BEPS is also mentioned as the background to the “Catalogue of Abusive Tax Transactions” published by the Chilean tax administration, which contains a relevant number of international aggressive tax planning transactions based on BEPS criteria.
The Tax Modernisation Bill that is being discussed in Congress also considers BEPS actions as the reason for certain legislative amendments, particularly in relation to taxation of digital services and transparency measures regarding outbound investments. Chile, as an OECD member, sees its participation in the BEPS initiative and other OECD projects as a signal of its commitment to standards being adopted by the international community and its reputation.
Historically, Chile has made efforts to attract and maintain foreign direct investment (FDI), being – in general terms – successful in such purpose, in comparison with other comparable countries in the region. While tax is not the only driver for FDI, it is a component of Chilean strategy and, in such terms, the international tax discussion has always been present in this jurisdiction. However, during the last few years, pressure for government spending focused on social demands has increased and greater tax revenues are needed to fund it. This tension increased around the same time that the BEPS project began, and, as such, several BEPS measures have been incorporated together with major tax reforms, adding the international tax area to the discussion and giving the required background and international support to implement changes regarding national and international taxation.
This scenario has also affected the approach that the Chilean tax administration is taking towards tax inspections and audits. Companies operating in Chile should expect to face thorough and comprehensive tax audits, with a specific focus on understanding what are the reasons, other than tax, that the taxpayer has considered for implementing certain structures or tax plans.
Chile is a developing country that has historically made efforts to attract FDI and have a competitive economy. However, in the past years, the competitive tax policy objectives have been balanced both by internal (ie, social demands) and external motives (ie, BEPS project and the desire of the Chilean government to comply with OECD standards).
As stated, the current Chilean tax debate is focused on the finding of the right balance between attracting FDI and providing incentives to the competitiveness of the economy versus having appropriate standards of protection of the tax base. In this arena, the debate on debt funding is a more vulnerable area to BEPS pressures.
Chile has a longstanding policy of accepting related-party debt funding up to the limits set by reasonable and relatively flexible thin capitalisation rules. However, BEPS and general perceptions regarding the appropriate level of taxation imposed on large corporations have resulted in changes to thin capitalisation rules and, in general, an aggressive audit approach by the Chilean tax administration.
Proposals for dealing with hybrid instruments have not given rise to a high-profile discussion in Chile, given that hybrid instruments are not a relevant part of the Chilean legal system.
Chile does not have a territorial tax regime. Because Chilean residents are subject to tax on their worldwide income, no deductibility restrictions for interest generally exist.
Stricter thin capitalisation rules are having an impact on the ability to raise third-party debt. For example, given the specific character of debt of the project finance type, where lenders require enhanced guarantees from the assets as well as project sponsors, such type of debt may end up being deemed as related under these rules, which has a material impact on the cost of borrowing.
Chile does not have a territorial tax regime. Recently adopted CFC rules generally follow BEPS recommendations, and include a “sweeper CFC-like” rule: entities located in a low-tax jurisdiction are automatically considered as CFCs unless proven otherwise.
According to the broad definition of controlled entities, entities located in a low-tax jurisdiction (domestically referred to as preferential tax regimes) would be automatically considered a CFC, unless proven otherwise. Also, there is a presumption that all income earned though a CFC located in a low-tax jurisdiction is viewed as passive income. In this sense, the only effect of Chile's limited sweeper CFC rule is to change the burden of proof, which this firm considers reasonable.
Targeted anti-avoidance rules (TAAR) have a long tradition in Chilean legislation, but only in 2014 did Chile introduce a GAAR, which has been in force since 2015. While it is possible to see the BEPS project as one of the background sources of GAAR's incorporation into domestic legislation, it was a long-awaited ambition of the Chilean tax authorities that became possible to introduce due to political turmoil regarding social expenditure and the taxation of large companies.
The impact of Chilean GAAR has not been from a “material” point of view (because the faculties granted to the Chilean tax authorities remain unused), but it has had a large “preventative” impact in this jurisdiction. It is worth noting that the impact is amplified by the fact that there is still uncertainty about the scope and interpretation of the rule, leaving taxpayers with hesitation about the tax position to be adopted by the Chilean tax authorities, particularly bearing in mind that after GAAR's introduction there has been a change in the attitude of the tax authority, having a more aggressive approach in its instructions and tax audits, challenging tax interpretations that have been long held by the tax authority if they seem purely tax-driven.
Double taxation convention (DTC) limitation rules have also been included in tax treaties and Chile is a signatory to the MLI.
Because of changes in anti-avoidance legislation and DTC limitation, taxpayers, including both inbound and outbound investors, today have a different approach towards tax matters and, in general terms, are far more cautious towards aggressive tax manoeuvres or purely tax-driven actions.
Transfer pricing rules existed in Chile before the BEPS initiative in line with previous OECD work in the field. Therefore, this firm would not argue that BEPS transfer pricing rules have radically changed things in this country, although the project has brought about the modernisation of rules and adjustments to meet BEPS's higher standards, particularly regarding the international sharing of uniform information.
The taxation of profits from intellectual property is not viewed as a source of difficulty in this regime as generally no highly valuable intangibles are developed within the country.
In general terms, this firm is in favour of proposals for transparency when they would not add unnecessary costs or when those costs would be outweighed by the benefits. Regarding country-by-country reporting, this firm is, in general terms, in favour, since it provides valuable comparative information for the authorities, providing information on the correlation of functions performed within a country, financial income and taxable income that can be shared with the host country on the benefits of FDI.
The Chilean government has declared digital transformation to be a specific designated national priority. In this context, in the past years, the Chilean government has conducted efforts to digitalise the relationship between the authority and the taxpayer and, more recently, to directly tax digital services.
While digital services are currently taxed in Chile under general rules, in practice, compliance with tax obligations has been difficult to administer, especially when dealing with local individual users.
The Tax Modernisation Bill introduces changes in the taxation of digital services, although not in line with the work made in the framework of the BEPS project.
As explained above, the proposal indicates that certain digital services shall be subject to VAT in Chile when the supplier of the service is domiciled or resident abroad. When services are subject to VAT under such provision, a special exemption from withholding tax (WHT) is applicable.
None of the discussed proposals of the BEPS project regarding digital taxation has been applied in Chile.
The Tax Modernisation Bill originally included a special tax similar to the “digital service tax” (DST), but, considering the OECD recommendations, the DST proposal has been replaced by VAT on remote digital services.
The more recent developments on the matter (ie, the public consultations and programme of work issued by the Task Force on the Digital Economy) have not been introduced in the Tax Modernisation Bill, nor has the government indicated the willingness to do so; it is likely that once the international community reaches a broader consensus on the matter, the Chilean government will attempt to include such solution in the domestic legislation.
Royalty payments abroad for intellectual property used in Chile are subject to WHT, the rate of which varies depending on the nature and the jurisdiction to which it is paid. For example, when paid to a tax haven as defined by the Income Tax Law, the WHT rate goes up to 30%.
Further, the Income Tax Law limits the expenses that a local taxpayer may deduct for payments of royalties abroad. In general, such deduction cannot be greater than 4% of the income for sales or supply of services, within their line of business. This limit does not apply if (i) the taxpayer and the beneficiary are not directly or indirectly related, or (ii) if in the jurisdiction where the beneficiary is domiciled, the effective income tax rate applicable to such royalty is equal to or greater than 30%.
There are no other general comments in this jurisdiction.