The tax reform enacted on September 2014 introduced new rules for controlled foreign corporations (CFCs) that will come into force on January 1 2016.
The tax reform introduced Article 41(G) of the Income Tax Act. The general principle is that Chilean residents, taxpayers or estates linked to a specific purpose incorporated or established in Chile, which directly or indirectly control entities not domiciled or resident in Chile, should consider passive income received or accrued by controlled entities as accrued or realised.
The types of CFC that the rules cover are broad and include entities of any nature, with or without legal personality, such as corporations, funds, communities, estates or trusts.
An entity is considered a CFC if it meets a three-prong test:
- The tested entity is not the permanent establishment of a Chilean entity;
- The controller is a Chilean resident – it is considered as such if, at the closing of a financial year or in the previous 12 months, that person or those companies or individuals that are considered related to the controller, directly or indirectly, had at least 50% of the equity, voting power or participation in the tested entity's profits (or an option to purchase or acquire an interest or right that would have such effect). This control is presumed to exist when:
- the Chilean taxpayer is entitled to elect the majority of the entity's directors or managers or amend the bylaws without the consent of others, or to change or remove the majority of its directors or managers; and
- the entity is incorporated, domiciled or resident in a low or no-tax jurisdiction (as defined in the Income Tax Act, as amended – for further information please see "New rules on low or no-tax jurisdictions").
- The tested entity generates passive income.
The tax laws do not define 'active income', but they do provide a list of what is considered 'passive income'. Unless expressly included in this list, any other type of income should be considered as active income for the purpose of defining whether the tested entity is a CFC. Thus, passive income is limited to income derived from the following:
- dividends, withdrawals and any other distribution or accrual of profits derived from the participation in other entities, even when they have been capitalised abroad. However, income is not considered passive if its distribution is derived from a subsidiary not domiciled or resident in the country where the entity resides, provided that that business or activity of the subsidiary is not generated by passive income;
- interest – unless the entity is a bank or financial institution regulated as such by the authorities of the country in which it resides, provided that the country of residence is not a low or no-tax jurisdiction;
- royalties – income derived from the transfer of use, enjoyment or exploitation of trademarks, patents, formulas, computer programs and other similar services, whether they consist of royalties or any other form of remuneration;
- capital gains ??from the transfer of property or rights that generate passive income as defined above;
- income from the lease or temporary transfer of real estate, unless the entity is in the real estate business in the country in which it is established, domiciled or resident;
- capital gains from the transfer of real estate, unless used or exploited in an activity which does not qualify as the generation of passive income;
- revenue from the sale of rights to use or enjoy any of the assets or rights which are considered to generate passive income as defined above; or
- income that the tested entities receive as a result of transactions with Chilean taxpayers, provided that:
- they are 'related parties' as defined in Article 41(E) of the Income Tax Act;
- this income is a deductible expense for taxpayers domiciled, established or resident in Chile for the purpose of calculating their income tax in Chile, or are part of goods subject to depreciation or amortisation in Chile; and
- this income is not generated in Chile or if it comes from a Chilean source is subject to a tax rate in Chile of lower than 35%.
If passive income, as defined above, represents 80% or more of the tested entity's total revenue, all of its income will be deemed passive income.
Unless proven otherwise, it is presumed that:
- all income received by a company incorporated controlled entity, domiciled or resident in a low or no-tax jurisdiction generates passive income; and
- a CFC established or resident in a low or no-tax jurisdiction generates income each fiscal year that is equal to the result of multiplying the average interest rate charged by financial companies from that country or territory by the acquisition value of the participation or equity value (whichever is greater) of the direct or indirect Chilean resident owners. This deemed income applies only when the tested entity's passive income exceeds 10% of total revenue in the applicable fiscal year.
Passive income received or accrued by the tested entity will be deemed to have been realised or accrued in Chile by the controllers of that entity at the end of the respective year and added to the company's taxable income base, unless the Chilean taxpayer is at a loss, in which case it will not be recognised in Chile.
Passive income generated by a tested entity which does not exceed approximately $90,000 calculated at the end of the fiscal year will not be taxed in Chile.
Chilean taxpayers are entitled to deduct taxes paid abroad from taxes paid in Chile.
Chilean taxpayers are required to maintain detailed and up-to-date records of passive income generated by CFCs as well as taxes paid or owed abroad on such income, and to report investments in such entities to the tax authorities.
Failure to provide this information or erroneous, incomplete or late filing is punishable by a fine.
For further information on this topic please contact Omar Morales at Montt y Cia SA by telephone (+56 22 233 8266) or email (firstname.lastname@example.org). The Montt y Cia SA website can be accessed at www.monttcia.cl.
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