With only 5 months left for the end of 2016, Chilean taxpayers and foreign investors with interests in Chile are adopting tax and corporate decisions and executing internal reorganizations, in light of the substantial changes to the Chilean tax system that will enter into force on January 1st, 2017.
Among the many issues that require preparation, the most noticeable are the following:
I. Election of a suitable corporate tax system
Subject to eligibility requirements, Chilean corporate taxpayers may be able to elect, until December 31st, 2016 between an integrated or semi integrated corporate tax system. The election is binding for 5 years.
The integrated tax system will imply that the corporate taxpayer will be taxed on accrued basis, at a 25% corporate tax whereas its shareholders will be taxed within the same period, at a capped 35% tax rate on the profits attributable to them. Against the shareholders tax (surtax or withholding tax), 100% of the corporate tax paid by the corporate taxpayer will be creditable, thus resulting in an overall taxation no higher than 35%1.
In opposition to the above, the semi integrated corporate tax system will cause the corporate taxpayer to be taxed at a higher corporate tax (25.5% during 2017 and 27% from 2018 onwards) whereas its shareholders will be taxed on effectively distributed dividends at a capped 35% tax rate. Nevertheless, only 65% of the corporate tax paid by the corporate taxpayer will be creditable against the shareholders tax (surtax or withholding tax, depending on where the shareholder resides), thus resulting in an overall tax burden as high as 44.45%.
Notwithstanding the aforementioned, foreign investors residing in treaty countries2 with interest on a corporate taxpayer subject to the semi integrated corporate tax system will be able to claim a full credit for the corporate tax paid by the corporate taxpayer against their withholding tax on dividends, thus resulting in an overall taxation of 35%. Thus, Chilean enterprises held by foreign treaty resident shareholders and subject to the so called semi integrated corporate tax system, will preserve the full integration of corporate income taxes, and the ability to defer the second tier tax on effective dividend distributions.
II. Election of a suitable holding jurisdiction
Due to the above, foreign investors may wish to consider domiciling holding vehicles of Chilean investments in one of the existing 26 countries with which Chile has a tax treaty in force3. If we add the treaties that are signed although not yet in force4, the number of alternatives increases to 34.
Furthermore, until December 31st, 2016, capital gains arising from the sale of Chilean shares may be subject to corporate tax (24%) as a sole lien if the investment has been held for more than a year.
From 2017 onwards capital gains generated on the sale of Chilean shares will be subject to a 35% withholding on the hands of foreign shareholders, regardless of the holding period of their investment. In certain cases, treaty limits on capital gains may become significant.
Furthermore, given the change in the capital gain taxation regime, it may be worth considering simplifying the ownership on Chilean operating entities by eliminating unnecessary holding tiers.
III. Election of whether or not to pay a reduced tax on accumulated tax profits
Finally, it is worth noting that corporate taxpayers have been given a window of opportunity, until April, 2017, by which they are allowed to pay a reduced 32% tax (instead of the general 35%, applicable today) on all or part of their tax retained earnings, against which they are entitled to use 100% of the corporate tax credit associated to said profits.
Once the tax is paid, tax retained earnings will turn into non taxable profits, which can be distributed to the shareholders at any time regardless of the existing imputation orders as established in the Chilean Income Tax Law. This regime is already being used by local companies to establish (and anticipate the taxation on) their Dividend Policy for the next few years.
Individuals residing in Chile with direct ownership over the corporate taxpayer may even benefit from a lower tax burden.
IV. Vesting of awards during 2016
For the remaining of 2016, awards (stock options, RSUs, etc.) will not be typically subject to employment taxation on vesting or exercise (with the exception of certain RSUs).
However, from 2017 onwards, certain specific awards vested on, or exercised by, executives and/or board members will be subject to taxation assessed on the fair market value of the award
Therefore, multinational groups may wish to consider accelerating the grant or vesting of certain awards during 2016, the review and adoption of possible adjustments to existing Long Term Incentive Plans; and getting tax advice on new awards to be granted from 2017 on.