Acquisitions (from the buyer’s perspective)Tax treatment of different acquisitions
What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
In general, the Income Tax Law does not make distinctions between acquisitions of stock in a Chilean company or its business assets and liabilities. In both cases, the seller must report the income derived from the transaction and pay the corresponding income tax.
Nevertheless, the acquisition of tangible movable assets in a business asset acquisition may be subject to value added tax (VAT), which is 19 per cent of the price or value. The same treatment is provided in an acquisition of going concern.
The tax is economically borne by the purchaser and therefore added to the price. However, it is the seller that must declare and pay the VAT to the Treasury.Step-up in basis
In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
Under the general rules of the Income Tax Law, companies and entities obliged to determine their income under full accounting basis must update the value of their assets and liabilities using an inflation rate adjustment.
Step-up in basis may also occur when the acquiring company acquires all the shares or participation rights in the target company, and the law provides that the latter cannot continue and is therefore automatically dissolved. In this case, the goodwill (ie, the difference between the price of the investment made by the acquiring company and the book value of the target company) will increase the value of non-monetary assets of the target company up to their fair market value. If a difference still remains, the goodwill constitutes an intangible asset that can be amortised at the moment the company ends its activities or it is dissolved.Domicile of acquisition company
Is it preferable for an acquisition to be executed by an acquisition company established in or out of your jurisdiction?
The Chilean Income Tax Law provides the same conditions in respect of acquisitions regardless of the domicile of the purchaser. However, if there is a double tax convention applicable, it may be preferable to make the purchase through a company established abroad.
The rules on dividends and profits distributions, which were amended by the 2014 Tax Reform (in force since January 2016), provide that dividends and profit distributions paid to shareholders are subject to individual income tax (for individuals resident in Chile) or non-resident withholding tax. Residents in Chile may credit 100 per cent or 65 per cent of the corporate income tax paid by the company making the distribution dependent upon the corporate income tax treatment applicable to the latter (full or partial integrated system). The general rule within Chilean borders is partial integration (ie, 65 per cent of credit).
The same rules are applicable to non-residents. However, if the shareholder is resident in a country that has a double tax convention with Chile, the credit provided by the Income Tax Law will be in full regardless of the corporate income tax treatment applicable to the company making the distribution.Company mergers and share exchanges
Are company mergers or share exchanges common forms of acquisition?
No, mergers and share exchanges are not common forms of acquisition in Chile. Although both are legal according to Chilean law, they usually take up a great deal of time and resources until they are fully executed.
From a tax perspective, the acquiring company may not assume the same tax situation as the merged company. Under the Income Tax Law, tax losses may only be used by the company that incurred them and cannot be transferred to another company. The same principle is applicable to VAT credits or rights to refund under the Value Added Tax Law.
Accordingly, the loss of tax benefits usually discourages these kinds of operations. The most common forms of acquisition in Chile are the acquisition of stock or the acquisition of business assets.Tax benefits in issuing stock
Is there a tax benefit to the acquirer in issuing stock as consideration rather than cash?
The Income Tax Law does not make any difference in the tax treatment of the acquisition of a company regardless of the type of consideration.Transaction taxes
Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
There are no documentary taxes applicable to the acquisition of stock in a Chilean company or its business assets. However, as mentioned in question 1, the acquisition of tangible movable business assets, fixed assets or of an ongoing concern may be subject to VAT. The rate of this tax is 19 per cent of the price or value of the corresponding asset, except in the case of fixed assets, where the tax is determined excluding the value of land.
Stamp duties are applicable to loans depending on whether the loan is payable within a determined period or not. The tax rate applicable ranges between 0.066 per cent and 0.8 per cent.Net operating losses, other tax attributes and insolvency proceedings
Are net operating losses, tax credits or other types of deferred tax asset subject to any limitations after a change of control of the target or in any other circumstances? If not, are there techniques for preserving them? Are acquisitions or reorganisations of bankrupt or insolvent companies subject to any special rules or tax regimes?
In general, there are no limitations on the use of net operating losses. In order to prove the origin of these losses to the tax authorities, all legal and commercial documentation supporting them must be kept.
However, if there has been a change in the ownership of the shares, participation rights or rights to profits in the company incurring those losses, their use is subject to the following conditions: the company must continue to carry on its main business activity, and the company must have sufficient capital assets or assets and resources to carry on its business at the moment of change in property. The above-mentioned limitations apply only when the change in the property rights or profit rights exceeds 50 per cent.
As to other tax benefits and credits, there are no limitations insofar as the entity using them is the company that generated them.
Finally, there are no special tax treatments provided in respect of the acquisition or reorganisation of insolvent companies.Interest relief
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility generally or where the lender is foreign, a related party, or both? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
The Income Tax Law does not provide interest relief for borrowings to acquire the target company. However, under general rules, deduction of interest derived from borrowings is allowed insofar as funds are invested in the production of taxable income.
The deduction of interest paid in respect of a loan provided by a non-resident related party may be disallowed or limited under the transfer pricing rules provided in the Income Tax Law. These rules are applicable when the transactions are executed with related parties and they infringe the arm’s-length principle.
In addition, under thin capitalisation rules, interest paid to foreign related parties may be subject to a withholding tax at a rate of 35 per cent if the target company’s debts exceed the ratio 3:1 in respect of its equity.
Withholding taxes on interest payments cannot be avoided, but they may be significantly reduced down to 4 per cent if a loan is granted by a foreign financial institution, or to 5 per cent, 10 per cent or 15 per cent if a double tax convention is applicable.
Debt pushdown is not allowed under Chilean law. If a debt is delegated to the target company, there will not be interest relief for the target company. It will not be considered as an expense related to the production of taxable income.Protections for acquisitions
What forms of protection are generally sought for stock and business asset acquisitions? How are they documented? How are any payments made following a claim under a warranty or indemnity treated from a tax perspective? Are they subject to withholding taxes or taxable in the hands of the recipient? Is tax indemnity insurance common in your jurisdiction?
As in most commercial transactions, warranties and indemnities are the main protections used. These are usually documented in the business asset or in the stock purchase agreement.
In order to determine if a certain compensation must be taxed, it is necessary to determine whether the object of the compensation is to repair property damages or the loss of future utilities, or simply to sanction the breach of the contract (taxable). According to the Income Tax Law, the reparation of property damages is not taxable. Punitive damages may also be non-taxable insofar as they are established by an enforceable judgement.
Finally, insurance companies do not offer insurance in respect of tax contingencies.