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.
What post-acquisition restructuring, if any, is typically carried out and why?
In Chile, after the acquisition process it is quite common to amend the bylaws of the company to the acquirer’s standards.
Sometimes the acquisition process is followed by an increase of the company’s capital or the provision of a loan from the acquirer aimed at funding its current activities or investing in new projects, which was the reason for acquiring the target company in the first place. Usually, new contributions or loans are materialised in accordance with the ratio established by the thin capitalisation rules.
Other restructuring operations may be the deletion or creation of divisions of the company, which will usually imply the termination of employees’ contracts and new hiring.Spin-offs
Can tax-neutral spin-offs of businesses be executed and, if so, can the net operating losses of the spun-off business be preserved? Is it possible to achieve a spin-off without triggering transfer taxes?
Spin-offs can be executed in the form of company division or constitution of a subsidiary without triggering transfer taxes insofar as the tax or financial value of the assets and liabilities transferred to the new company are maintained.
However, spin-offs are not entirely tax-neutral. As mentioned in question 7, the use of losses, tax credits and other benefits is restricted to the taxpayer that produced them. Therefore, they cannot be transferred to the new entity.Migration of residence
Is it possible to migrate the residence of the acquisition company or target company from your jurisdiction without tax consequences?
Chilean company law does not authorise the migration of incorporated companies abroad regardless of whether the foreign jurisdiction accepts the migration or not. From a Chilean perspective, companies are considered as Chilean residents if they are incorporated in Chile (incorporation theory).
Thus, the only option to move or allocate part or the entire business activity of a company abroad is to incorporate a foreign subsidiary or liquidate the company and transfer its assets abroad. In the first scenario, the transfer of assets to the subsidiary may generate taxable income.
In the second scenario, the dissolution and liquidation of the company may imply the application of income taxes in respect of the taxable income earned in the current fiscal year, and also in respect of the undistributed profits of the company. The subsequent transfer of assets entails the same treatment explained for the first scenario.Interest and dividend payments
Are interest and dividend payments made out of your jurisdiction subject to withholding taxes and, if so, at what rates? Are there domestic exemptions from these withholdings or are they treaty-dependent?
The Chilean tax system is an integrated system. Under the general rules of the Income Tax Law, dividends and profit distributions paid to non-residents are subject to withholding tax at a rate of 35 per cent. The corporate income tax paid by the company making the distribution may be credited to the withholding tax in full when a double tax convention is applicable or up to 65 per cent in all other cases.
Double tax conventions signed by Chile do not reduce the withholding tax in respect of dividends insofar as the corporate income tax continues to be fully imputed as credit.
As for the payment of interest, the Income Tax Law provides a withholding tax rate of 35 per cent. Exceptionally, when the beneficiary of the income is a foreign financial institution, the tax rate may be reduced to 4 per cent.
Regardless of the above, if a double tax convention is applicable, this tax is reduced to the rate established in the treaty, which is usually 5 per cent, 10 per cent or 15 per cent.Tax-efficient extraction of profits
What other tax-efficient means are adopted for extracting profits from your jurisdiction?
As in many jurisdictions, the most efficient manner to extract profits from Chile is by way of using the benefits provided in double tax conventions. With the exception of dividends, which are a type of income in which Chile does not limit its taxation rights due to the integration system, the application of reduced taxes in respect of interest and royalties along with the possible non-application of taxes in respect of business profits (article 7 of the OECD Model) constitute a major advantage. The existence of a permanent establishment in Chile eliminates these benefits.
In the absence of double tax conventions, payment of interest may be subject to a reduced rate of 4 per cent when the beneficiary of the income is a foreign financial institution. In addition, depending on the nature of the service, payment of fees may also be exempt from income tax according to the Income Tax Law.
Another tax-efficient mechanism is to invest in Chilean investment funds, which are regulated by Law No. 20,712. Distribution of profits to non-residents is subject to a single tax of 10 per cent.
Disposals (from the seller’s perspective)Disposals
How are disposals most commonly carried out - a disposal of the business assets, the stock in the local company or stock in the foreign holding company?
The most common form of disposal utilised in Chile has been the disposal of stock in the local company. Before the modifications introduced to the Income Tax Law by the 2014 Tax Reform, these transactions were subject to a special and more favourable tax treatment.
With the exception of the disposal of companies whose shares are traded in the Chilean stock market, under which the capital gain is tax-exempt, and the disposal of participation rights in investment funds, the special tax treatments for the disposal of all other type of shares were significantly reduced. Therefore, as of 2017, the income derived from most other transactions is subject to general tax rules.
Finally, another type of disposal is an indirect sale. This usually occurs when the object of the sale is the non-resident holding or parent company of the local company. Despite the fact that the transaction may be between non-resident parties under contracts not subject to Chilean law, the application of income tax is not avoided. Article 10 of the Income Tax Law provides that if the underlying asset (ie, the local company) is situated in Chile, the income derived from the transaction is sourced in Chile and therefore taxable under the Income Tax Law.Disposals of stock
Where the disposal is of stock in the local company by a non-resident company, will gains on disposal be exempt from tax? Are there special rules dealing with the disposal of stock in real-property, energy and natural-resource companies?
In general, capital gains derived from the disposal of stock and other assets by non-residents are subject to non-resident withholding tax at a rate of 35 per cent. However, according to the Income Tax Law, the disposal of stock in local companies may be exempt from income tax provided that certain conditions are met. In general, the company’s shares must have been acquired and sold on the Chilean stock market.
Law No. 20,712 provides that capital gains derived from the disposal of participation rights in Chilean investment funds by non-residents are subject to a single tax of 10 per cent.
In addition, a reduced non-resident withholding tax may be applicable if the buyer is a Chilean resident and a double tax convention is applicable.
There are no tax benefits for the disposal of stock in real property, energy and natural resource companies other than the abovementioned treatment.Avoiding and deferring tax
If a gain is taxable on the disposal either of the shares in the local company or of the business assets by the local company, are there any methods for deferring or avoiding the tax?
If the seller is an individual resident in Chile, under certain circumstances the Income Tax Law permits him or her to choose between declaring the income on an accrued or perceived basis. If the price is paid in instalments and the seller has chosen to declare the income on a perceived basis, he or she will be able to defer the income tax.
If, on the other hand, the seller is a company or other entity (resident or non-resident), there is no method for deferring or avoiding tax. Under general rules, the resident seller of either shares in the local company or business assets that obtains a taxable income from such transaction must comply with all tax obligations no later than 30 April of the year following the year in which the income was accrued or perceived, whichever occurs earlier.
In transactions where the seller is not resident in Chile and the purchaser is a resident in Chile, the Income Tax Law provides that the latter must withhold a 35 per cent tax over the price or over the capital gain (if it is known). The non-resident withholding tax rate may be lower in cases where a double tax convention is applicable. Regardless of the application of withholding tax, the seller is obliged to file a tax return according to general rules.
Finally, in transactions where both the seller and the purchaser are not resident in Chile, the Income Tax Law provides that the obligation to declare and pay income tax corresponds to the seller. This situation does not include an indirect sale (the sale of a non-resident holding company of a local company). In these cases, it is the purchaser who is obliged to withhold the tax applicable to the transaction if the seller is not resident in Chile.
Update and trendsKey developments of the past year
Are there any emerging trends or hot topics in the law of tax on inbound investment?Key developments of the past year18 Are there any emerging trends or hot topics in the law of tax on inbound investment?
This year the government submitted to Congress a Bill of Tax Reform, which is currently under discussion for approval. The core of this Reform Bill resides in the reinstatement of a fully tax-integrated system. Currently, both fully and partially integrated systems coexist, the latter being the general rule. It is expected that this Bill, and its reinstated system, will be approved by the end of 2019.
For shareholders residing in countries that do not have double tax conventions with Chile, the approval and reinstatement of the fully tax-integrated system will mean that corporate income tax charged to the distributing company will be considered a credit imputable in full against the non-resident withholding tax applied to the distribution of dividends. As a consequence of this change, the effective tax rate charged to the dividends and profit distributions made to non-residents in cases where a tax treaty is not applicable will be reduced from 44.45 per cent to 35 per cent.