In this updated version of our second newsletter on the tax reform bill of 2022, along with some relevant aspects of the new Wealth Tax, the Exit Tax, the National Registry of Final Beneficiaries (Registro Nacional de Beneficiarios Finales), and the amendments to the investment funds regulation, we report on relevant changes that would be made to the VAT Law.A. Wealth Tax
I. Taxpayer and tax rates. Affects taxpayers that reside or are domiciled for tax purposes in Chile. The tax is levied on their net worth as of December 31 of the preceding year, at a 1% rate on the portion equal to or greater than UTA 6,000 (approx. USD 4.5 million), and 1.8% on the portion exceeding UTA 18,000 (approx. USD 13.5 million).
II. Tax Base: corresponds to the taxpayer’s equity, in the following sense:
- All types of assets are added, including (i) goods, shares, rights, quotas, securities, and benefits directly or indirectly owned; (ii) equity of trusts, private interest foundations, and other fiduciary structures, or entities of any kind; (iii) inheritance quotas; and (iv) goods acquired by donation. Parents exercising parental authority over unemancipated children must also include their children’s assets (50% if the parents exercise it jointly).
The only assets expressly excluded are (a) assets inherited or acquired by donation, but only in the year in which the corresponding inheritance or donation taxes are paid; (ii) balances of individual capitalization accounts of mandatory pension contributions, and of individual accounts for severance pay.
- Liabilities are deducted, considering their unpaid balance as of December 31 of the immediately preceding year, provided that:
(i) the creditor is not a related party; and(ii) they have been incurred to finance:- all or part of one or more assets, or- the expansion or repair of such assets, provided that they increase their value.
Therefore, debts incurred to contract services (e.g., medical services, etc.) would not be considered liabilities for this purpose.
III. Valuation rules. Taxpayers may appraise the goods using any method they prefer as long as it reflects the economic value of the goods and can be demonstrated. Alternatively, the tax reform bill contemplates rules for achieving such purpose, including the option or obligation, as the case may be, of accompanying an appraisal report made by an independent agent, following requisites that would be established by the IRS.
IV. Tax credit. The amount resulting from the following operation may be used as credit:
- Total Equity: sum of assets minus liabilities, as indicated in II.
- Exemptions: assets expressly excluded from the tax base as referred to in II.
- Tax Credit: sum of the following taxes:
– Property tax and surtax, to the extent that they have not been deducted from the taxable base of the Global Complementary Tax paid in the previous fiscal year.
– 2% tax on the price of luxury goods of Article 9 of Law 21,420, paid in the same fiscal year.
– New tax for deferral of final taxes (1.8% rate), paid in the same year.*
*(the latter does not apply to amounts noted in the REX registry, recorded, for example, over profits subject to a tax substitute for final taxes and which have not been distributed. Thus, in the event of paying a tax substitute for final taxes without having distributed the corresponding profits, the tax for deferral of final taxes would not be paid, but eventually will the 1.8% – 2% equity tax. This makes the substitute tax established in the bill unattractive for certain taxpayers).
V. Effectiveness of the norms: the Wealth Tax (as well as the Exit Tax) will become effective on January 1, 2024, but during the first year will only levy taxpayers’ equity exceeding UTA 18,000 (approx. USD 13.5 million), with a 1.8% tax rate, and taxpayers won’t be entitled to credit the tax for deferral of final taxes.B. Exit Tax
Individuals domiciled or resident in Chile may apply for a certificate of loss of tax residency but will have to pay a 5% tax on the portion of their net worth over UTA 6,000 (approx. USD 4.5 million). Once paid, the IRS will issue a resolution accrediting the loss of domicile or residence for tax purposes.
*(Related to this matter, the IRS recently stated in Ruling N° 2038/2022 , that the change of permanent residency does not imply the loss of domicile in Chile for tax purposes, if the taxpayer goes to live with his family in another country, but maintains an employment contract in force with a Chilean employer).C. National Registry of Final Beneficiaries Law
For tax transparency reasons, a National Registry of Beneficial Owners is created. Managed by the IRS, this registry will record the information stated next about individuals considered “final beneficiaries”.
All State bodies will have full access to this information within the framework of their legal attributions, in order to comply with their functions.
I. Final Beneficiaries: Chilean or foreign individuals, domiciled or not in Chile for tax purposes, which, in a legal entity, investment fund, or any other entity without legal personality, incorporated or domiciled in Chile, or with any type of permanent establishment in Chile:
a) Own, directly or indirectly, 10% or more of their capital, rights to profits, or have voting or veto rights; or
b) May elect, directly or through others, the majority of the members of the board, or administrators of the entity; or
c) Have effective control over the entity, meaning any power or authority that allows them to make -or cause others to make- decisions about the entities.
If it cannot be determined who the final beneficiary is by the above, it shall be considered as such the individual who directly or indirectly exercises management or administrative functions in the reporting entity.
II. Reporting party:
a) Those who perform management or administration tasks in legal entities, investment funds, or any other entity without legal personality, incorporated or domiciled in Chile, or with any type of permanent establishment in Chile
b) Individuals required by the Chilean IRS, according to the characteristics previously indicated.
III. Reporting term: the information must be submitted in March of each year, by submitting a declaration to the IRS. Any change to the ownership and/or final beneficiaries’ information must be reported within 60 days from its occurrence.
IV. Information to be reported:
a) Personal data: name, date of birth, ID card, tax ID, nationality, domicile.
b) Background of the reporting entity: management and ownership structure, list of shareholders or owners and participants.
c) Date and manner in which they met the requirements to be a final beneficiary.
V. Sanctions: depending on whether the reporting party is an individual or a legal entity, and in the latter case, whether they are considered small, medium, or large companies, sanctions range from UTM 1 (approx. USD 33) to a maximum of UTA 100 (approx. USD 75,000). Concerning non-profit legal entities, the maximum applicable is UTA 20 (approx. USD 15,000) for each beneficiary not reported.
VI. Effectiveness of the norms: in general, they would start to be effective as of 2025, except for large companies and investment funds, for which they will begin to be effective in 2024.
The tax reform bill includes several modifications to the LUF, among which can be highlighted the following:
I. New Tax Records. The new registries to be kept by funds are the following: (i) Register of accumulated profits subject to final taxes – Registro de utilidades acumuladas afectas a impuestos finales (“RUA”), which includes net profits received; (ii) Register of temporary differences – Registro de diferencias temporales (“RDT”), in which any other income received or accrued and remaining from the previous year is recorded; and (iii) Register of exempt income and non-taxable income – Registro de rentas exentas e ingresos no constitutivos de renta (“REX”). Form the current tax law is maintained the Special Register of Foreign Source Income – Registro Especial de Rentas de Fuente Extranjera.
II. Tax Penalty of Article 21. The tax penalty of Article 21 of Income Tax Law will be applied to fund managers for the interests received or accrued by funds, generated in loans made with all or part of its resources to parties related to any of the fund’s contributors, in the part that exceeds what would be agreed under fair market conditions. The IRS must justify the part of the interests that considers excessive, which will never be an interest rate lower than the current market interest rate in force for the period and type of operation, increased by 10%.
III. Fund Divisions. The bill establishes that the amounts resulting from the division will be allocated to each fund in proportion to their tax equity (capital propio tributario). However, funds may request the IRS for authorization to make the allocation based on their financial equity.
IV. IRS’s power of appraisal. Mergers and divisions are no longer excluded from the IRS’s appraisal power, which may be exercised according to the new version of Article 64 of the Tax Code.
V. Tax treatment for dividends to contributors. Funds rules are harmonized with the other changes made to the Income Tax Law:
a) If the fund’s contributors are subject to final taxes, with domicile and residence in Chile, they will be taxed with a 22% capital income tax on the distributed profits or earnings.
b) If the contributors are First Category taxpayers with complete or simplified accounting, or private investment funds that receive profits or benefits that are charged to the RDT registry, they will be subject to First Category tax. Institutional investors are exempted from this tax.
c) If the contributor is a foreign taxpayer, they will be taxed with the 22% capital income tax, unless there is a double taxation treaty in force between both countries that enables to credit the First Category tax.
VI. Termination of a fund. It is established that the rules of Article 38 bis of the Income Tax Law shall apply.
VII. Private Investment Funds will be generally taxed with First Category Tax. Private Investment Funds will be taxed with First Category Tax unless they maintain 100% of the value of their asset invested in venture capital for at least 330 continuous or discontinuous days (CORFO will certify this). In the latter case, they will stay in the current beneficial tax regime. These investments cannot be made to related parties.
VIII. Effectiveness of the norms. As a general rule, they would be effective from January 1, 2025. However, there is a transitory rule that allows funds that, at the end of business years 2022, 2023, or 2024, maintain a balance of taxable profits accumulated in the RAI registry -which includes taxable profits generated as of December 31, 2016-, may opt to pay a substitute tax to final taxes at a rate of 32%, on part or all of the balance, with a First Category tax credit assigned to the same amount.E. VAT Law
I. Leasing of furnished real estate: Leasing of furnished real estate is eliminated as a taxable event subject to VAT.
II. Change of concepts from “Digital” to “Remote”: Concerning services rendered by non-domiciled or non-residents in Chile, the VAT territoriality rule is modified by replacing the word “digital” for the broader concept of “remote”.
III. Anti-avoidance rule in the sale of fixed assets: the Chilean IRS will be able to reclassify as the sale of fixed assets, the sale of shares, rights, quotas, bonds, securities convertible into shares, or social rights, when at least 50% of their total value comes from the market value of the fixed assets directly or indirectly owned by the same company selling its shares, quotas or rights, to avoid the VAT that would have accrued when selling its fixed assets directly.
IV. Limitation on VAT reimbursement on exportations: The amount of VAT reimbursement is limited, which may not exceed the amount of the percentage established in article 14 of the VAT Law (19%) on the value of the exported goods and services.
V. Early recovery of VAT on exports: During a business reorganization, where under an investment project has been requested the authorization to obtain an anticipated reimbursement of VAT, this benefit will remain in the new company that is created or continues in the reorganization process.
Luz María Calvo