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New Tax Regimens in Chile
Even though Chile has been affected by several Tax changes during the last years, without any doubt the change of the Tax regimes applicable according to the tax reform approved by Law N°20.780, as from January 2017 is a game changer. There will be two alternative income tax regimes for companies. The following is a brief explanation of each regime included in the reform:
The first one (“Regime A”) is an income attribution regime, in which corporate profits will be immediately attributed to the company’s shareholders/partners for purposes of triggering their final income taxes, precluding any chance of deferral. The Corporate Tax rate will be 25% and shareholders/partners will have a full tax credit for paid Corporate Tax. This regime will be limited to companies composed exclusively of individuals with residence or domicile in Chile and/or individuals or legal entities without residence or domicile in Chile. Corporations will be excluded from this regime.
In practical terms, for a company owned by a non-resident shareholder, this regime would involve the following taxation:
- Corporate Tax: 25%.
- Effective shareholder tax: 10% (35% - 25%).
- Total Tax: 35%.
The total tax (35%) would be declared and paid on an accrual basis, regardless of whether the profit has been distributed as dividend or not. Under this regime, the taxation of the whole business (company and shareholders) is consolidated each year. Therefore, when the profit that has been subject to tax is actually withdrawn as a dividend by the shareholders, no further taxation is levied.
The second one (“Regime B”) is a partially-integrated regime, much like the one Chile has today, in which corporate profits will be levied with final income taxes only when such profits are effectively distributed to the shareholders or partners. The Corporate Tax rate will be 25.5% in 2017 and 27% from 2018 onwards, and shareholders/partners will have a tax credit for 65% of the paid Corporate Tax, unless they reside in a country with which Chile has a treaty to avoid double taxation.
The main characteristics of this regime is that it reduces the integration between the corporate tax paid by the subsidiary and the withholding tax levied on the shareholders to 65%. This means that shareholders will be entitled to deduct from the 35% withholding tax only 65% of the corporate tax paid by the Chilean company. In practical terms, this aspect will trigger a final overall taxation on the business’ profit (once the dividend is distributed to the shareholders) equivalent to 44.45% (27 + 35 – [27 x 65%]) or, what is the same, an effective withholding tax rate equivalent to 17.45%.
Notwithstanding the above, in the case of shareholders who are resident in a country having a Double Taxation treaty with Chile, the full integration between the corporate tax and the withholding tax will be maintained, which means that those shareholders will be entitled to defer the withholding tax until the dividend is actually distributed, and the overall final taxation will remain 35%.
The decision for the companies what to regimen choose is past (except for the ones to be incorporated in the future), so let the game begin!!
Mr. Erlbaun is a lawyer in charge of the Tax Area at Cuevas Abogados (since 2016). He worked at Ernst & Young as a lawyer in charge of Litigations and Disputes resolution (2011-2016). He also worked at the IRS as a lawyer in the financial group of the Dirección de Grandes Contribuyentes (2009-2011). He final worked at Deloitte as a lawyer in the International Tax department (2007-2009).
Mr. Erlbaun also contributes as Assistant professor in the Pontificia Universidad Católica de Chile, in the course “Defense of the taxpayer” of the “Magister en Derecho UC” program, mention in Tax Law (2012) as well as Updates in tax matters for Tax Courtrooms and Customs offices (2013).