A taxpayer resident in Chile with a portfolio investment in the United States recently requested a ruling on whether he was entitled to a refund of certain withholding taxes paid by the portfolio because it included bonds issued in Chile.

Issuer companies that are tax resident in Chile and which place bonds abroad must withhold a 4% tax when paying interest. When preparing tax returns, taxpayers must add the full amount of interest and taxes paid to the taxable base and are not entitled to deduct the withholding tax, thus resulting in double income taxation. The taxpayer argued that withholding tax should be refunded to the beneficiary of the interest if the beneficiary is a Chilean resident.

The Tax Department took a different view. It pointed out that following Law 20,780's amendment of Article 11 of the Income Tax Act, income obtained from the sale of bonds or other debt instruments issued abroad by companies domiciled, resident or established in Chile is not considered to be Chilean source income. In the case of loans, bonds and other debt securities, interest is deemed to be located in the domicile of the debtor or parent or principal office when the loans, bonds or other debt securities are acquired or issued through a permanent establishment abroad. Circular 62 of 2014 provides instructions in this regard.

Considering the statements made by the taxpayer in his application (as he did not provide a copy of the investment contract), the Tax Department understood that the fund manager handling the portfolio had acted in his own name. Therefore, the fund manager was a taxpayer not domiciled or resident in Chile and consequently the 4% withholding tax was appropriately withheld.

Applications for refunds under the Tax Code can be made where taxes, readjustments, interest or penalties which have been erroneously paid are an insufficient reason to make such a claim if the bond issuer is a taxpayer domiciled or resident in Chile.

The Income Tax Act does not authorise a tax credit against corporate income tax or the taxes withheld by bond issuers and thus the Tax Department cannot authorise such a deduction.

In conclusion, taxpayers are not entitled to receive a refund or use taxes withheld by a Chilean issuer as tax credits.

This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.

For further information on this topic please contact Omar Morales at Montt y Cia SA by telephone (+56 22 233 8266) or email (omorales@monttcia.cl). The Montt y Cia SA website can be accessed at www.monttcia.cl.