Chilean Executive branch sent new tax bill for discussion in Chilean Congress
The Government has indicated that the tax bill´s main goals is to encourage growth, investment, entrepreneurships, savings, employment, and to provide legal certainty to taxpayers.
The main amendments of the bill are the following:
- Repeal both the attribution and the partially integrated methods and replace them with a single method of taxation.
- Limitation on back-to-back structures, denying the 4% withholding tax (WHT) rate on interest paid abroad where the foreign bank/financial institution is not the final beneficiary of the interest payment.
- Improvement and simplification of Chilean Foreign Tax Credit rules, repealing the distinction between tax treaty and non-tax treaty jurisdictions and providing for a 35% rate to compute domestic thresholds and the ability to use foreign tax in Chile.
- The bill introduces a legal concept for permanent establishment (PE) of foreign entities in Chile. The new legal concept follows previous criterion set forth by the Chilean tax authorities, aligned with Organisation for Economic Co-operation and Development (OECD) criterion.
- The Government decided to eliminate the special Services Digital Tax originally proposed and to charge those services with VAT, by including them as a special taxable event within the Value Added Tax Law, thus increasing the rate to 19%.
- The tax bill repeals the 4% limitation on royalty payments abroad, disbursement that should be, in principle, deductible for tax purposes to the extent general deductibility requirements are met.
Most favoured nation clause on interest
As of 1 January 2019, the general rule on interest will be a 10% WHT due to the applicability of some provisions of the double tax treaties (DTTs) with China and Japan; since those DTTs will trigger several most favoured nation clauses. Note that some DTTs, like the DTT with Argentina, will reduce the rate to just 12%.
Extension of full First Category Tax (FCT) credit
Countries that have signed a DTT that is not yet in force (i.e. United States) will have full FCT credit against their additional WHT on dividends until 31 December 2021. This rule will also be applicable to DTTs signed until 31 December 2018, but whose ratification is pending until 31 December 2021.
New definition of permanent establishment (PE)
The Chilean Internal Revenue Service (IRS) issued a new definition of ‘permanent establishment’, which ‘does not take into consideration only the existence of a mandate agreement with power to conclude or close deals’. In this sense, this new broad definition applies the substance-over-form principle.
Low-tax jurisdiction list
The Chilean IRS issued Resolution N° 124 of 2017, which contains a list of low-tax jurisdiction or preferential tax regimes. These jurisdictions meet the requirements of Article 41 H of the Chilean Income Tax Law.