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 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 therefore is automatically dissolved. In this case, the goodwill (ie, the difference between the price of the investment made by the acquiring company and the books 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?
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 recently 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 residents in Chile) or withholding tax (for non-residents). 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 in 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.
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, fix 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 fix 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 0.332 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 in 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 businesses at the moment of change in property. The above-mentioned limitations only apply 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 acquisition or reorganisation of insolvent companies.
Does an acquisition company get interest relief for borrowings to acquire the target? Are there restrictions on deductibility where the lender is foreign, a related party, or both? Can withholding taxes on interest payments be easily avoided? Is debt pushdown easily achieved? In particular, are there capitalisation rules that prevent the pushdown of excessive debt?
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 the borrowings 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 interests 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 would not be interest relief for the target company. It won’t 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?
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.
Considering the nature of these protections, the payment usually repairs the damage derived from the infringement of the contract’s obligations. Thus, they do not generate tax effects.
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 were the reason to acquire 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.
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?
Under the provisions of the Income Tax Law, 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 to 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.
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 may be fully used as credit.
As to the payment of interest, the withholding tax rate is 35 per cent. 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.
However, if the payment is made to financial institutions, the Income Tax Law reduces the rate of this tax to 4 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 interests 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, the 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.
Disposals (from the seller’s perspective)
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 reforms, these transactions were subject to a special and more favourable tax treatment.
With the exception of disposal of companies whose shares are traded in the Chilean stock market, under which the capital gain is tax exempt, 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 the 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 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?
According to the Income Tax Law, the disposal of stock in local companies may be exempt from income tax insofar as certain conditions are met. In general, the company’s shares must have been acquired and sold on the Chilean stock market. 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 obtains a taxable income from such transaction and 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 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 the indirect sale (the sale of a non-resident holding company of a local company). In these cases, it is the purchaser who is the party obliged to withhold the tax applicable to the transaction if the seller is not resident in Chile.