The following aspects are noteworthy to foreign investors:
I. Income Taxes
First, between June and December of 2016, corporate taxpayers will be required to make an election among two possible corporate tax systems, based on certain eligibility requirements. The two alternatives are:
(a) A "integrated, transparency tax system" whereby a 25% corporate tax will be paid by the Chilean corporate taxpayer on accrued income. At year end accrued profits will be attributed to its foreign shareholders even if undistributed, thus triggering the top-up 35% tax, against which the corporate tax paid at the corporate level will be fully creditable, thus resulting in a 10% margin to pay.
(b) A so called "semi-integrated tax system" whereby a 27% corporate tax will be paid by the Chilean corporate taxpayer on accrued income (from 2018 onwards, as during 2017 the corporate tax rate will be 25.5%). Upon the Chilean corporate taxpayer distributing profits upstream, a 35% withholding tax will be imposed once said profits reach foreign shareholders. Unlike the integrated system, only 65% of the corporate tax paid at the corporate level will be creditable against the shareholder's tax.
An exception to the above occurs with shareholders residing in treaty countries, whom will be entitled to a full credit against even if electing this system. Furthermore, this benefit is also extended, until December 31st, 2019, to shareholders residing in countries with a tax treaty executed with Chile -even if not yet in force (i.e. USA, Argentina, China, Japan, Italy, Czech Republic and South Africa).
The election is binding for 5 years and will likely prompt local and foreign shareholders to restructure their organizational charts to avoid tax pitfalls. This is because each of the above described systems has eligibility requirements, potential and particular limitations on the use of tax losses and different mechanisms to determine how taxable income is assessed. As example, shareholders may wish to consider the following:
(a) Simplifying overly complex organizational charts in order to avoid different legal entities being subject to different corporate tax systems;
(b) Migrating foreign holding companies from non-treaty to treaty countries; and,
(c) Amending the bylaws of certain legal entities in order to clearly establish how profits are to be attributed or distributed among shareholders, at least for tax purposes.
Second, significant changes were introduced to the Chilean Controlled Foreign Corporation (CFC) Regime, extending the definition of control to underlying assets and changing the mechanisms through which a foreign tax credit may be used against Chilean taxes. A matter of the utmost interest is whether unwinding foreign controlling structures can improve the use of foreign taxes in Chile, depending on the various activities performed by the foreign entities and the jurisdiction in which said entities are desired to reside.
Thirdly, a window of opportunity was created to allow corporate taxpayers to turn all of part of their tax retained earnings into non-taxable profits, by paying a 32% tax as a sole lien. This choice can be made at any time during 2016 and/or until April 30th, 2017. Non-taxable profits generated as a result of this choice can be distributed tax-free at any given time, disregarding any order of imputation that may have applied otherwise. Likely, this choice must be weighted against the possible use of tax retained earnings and its corporate tax credits for future distributions, an analysis which depends on the elected corporate tax system.
Two changes will affect how foreign investors deal with potentially VATable operations.
First, a former VAT exemption on the disposition of fixed assets was removed, thus making asset deals more complex when the buyer is not a VAT taxpayer. Therefore, the structuring of business deals as either stock sales or transfers of a going concern will be a matter of interest.
Secondly, foreign investors holding an investment contract with the Chilean government enjoyed a VAT exemption on the importation of capital goods intended to be used by their Chilean investment vehicles. From January 1st, 2016 there are practical issues concerning this exemption which may drive foreign investors to consider alternative strategies to import capital goods, particularly when participating in the energy, mining, forestry, R&D, telecom and other capital-intensive businesses.
III. Reporting duties
In line with BEPS and international trends on tax transparency, new rules provide for wider reporting obligations on Chilean taxpayers.
As an example, local policy-holders shall be required to disclose, from January 1st, 2016 onward, funds they have transferred to foreign insurance funds as if they were an investment. Same principle will apply from January 1st, 2017 to trustees, beneficiaries, managers or settlors of a trust, all of which will be required to disclose information on foreign trusts, foundations or other type of fiduciary arrangements they may have an interest in. Potentially, not disclosing may lead to the Chilean tax authority disregarding the legal configuration of said foreign structures, thus imposing taxation accordingly.
Moreover, corporate taxpayers will be required to disclose their investments abroad, or else those investments shall be subject to a 40% tax unless the origin of the investment is duly proven to the Chilean tax authority.
Henceforth, local clients of foreign banks and insurance companies might wish to consider how their foreign investments are structured, in order to optimize compliance with Chilean law in an efficient manner.