In this newsletter prepared by PRIETO’s tax team, we present certain matters that the Government has included in the tax reform proposal submitted to Congress on July 7th, which may not have been in the headlines, but that we consider of great relevance to our clients.
Due to its length and number of topics, in a future newsletter we will follow up on other relevant issues of the reform such as wealth tax, etc.
PRIETO’s tax team is fully available to provide its clients with further information on any of the matters pointed out here, as well as on any other matter they may need concerning this significant tax reform:
1.- New control mechanisms and powers of the Chilean IRS (“IRS”).
- Possible increase and renewal of statute of limitations in tax proceedings.
When taxpayers that belong to a Corporate Group (Grupo Empresarial) or have revenues over UF 2,500 (UF or “Unidad de Fomento” is an inflation-indexed unit controlled by the Chilean Central Bank, which currently amounts to USD 33 approx.) do not communicate to the IRS within the legal term, any modification to the information reported in their declaration of commencement of activities, the statute of limitations of the IRS’s audit action is increased or renewed by 12 months. However, the reform establishes a total limitation period of up to 10 years, including such increases or renewals.
Consequently, the failure to update on time the corporate or personal information before the IRS could have relevant effects on the statute of limitations, increasing it up to 10 years.
- New regulations regarding related parties.
In addition to considering spouses and siblings as related parties, the Chilean IRS is now empowered to consider as related parties corporations, people, funds, or other entities on which is presumed the existence of joint action or economic unity due to kinship, patrimonial situation, unity of administration and/or management, or economic dependence. The latter has a direct effect on the regulation of foreign corporations controlled by Chilean residents (“CFC”), the tax penalty for rejected expenses, the inheritance tax, and the new wealth tax, among others.
- Changes to the General Anti-elusive Rule (Norma General Antielusiva or “NGCA”).
The NGA would be declared administratively by an IRS auditor and not by judicial ruling as it is currently established.
- A legitimate business reason for mergers and divisions of companies.
The reform proposes to be accredited a “legitimate business reason” as a requirement for any type of corporate reorganization, including mergers and divisions of companies, both of which are currently exempted from complying with this requisite.
Additionally, the reform empowers the IRS to charge VAT on the selling of fixed assets when the corporate reorganization aimed to avoid the payment of such tax.
- Legal Notification.
E-mail becomes the main form of legal notification by the IRS to taxpayers, while the other types of notification -simple letters, registered letters, personal notifications- become exceptional. Currently, taxpayers have to expressly accept the alternative of being notified by e-mail for it to be valid and effective as a form of notification.
- The Anonymous Complainant.
The reform establishes the institution of the Anonymous Complainant, a person or legal entity that will be able to choose between a penalty reduction of up to two degrees, or a 10% fine deduction, in case such person or entity cooperates effectively in providing information and data that allow clarifying tax crimes or identify those responsible. The complainant’s identity will be safeguarded by the police, who will adopt the pertinent protection measures for the case.
2.- First Category Tax (Impuesto de Primera Categoría or “IDPC”).
Companies subject to the general tax regime of Article 14 A) of Income Tax Law will have, from January 2025, a 2% reduction in their IDPC rate, decreasing from the current 27% rate to a 25% rate. However, such reduction would only be effective to the extent that the company allocates at least 2% of its net taxable income to expenses or investments in R&D (“Development Tax”). Such Development Tax will be paid as follows:
- In full, if the company has no R&D expenses or investments; or
- With a reduced charge, if the company accredits R&D expenses or investments, but for less than 2% of its net taxable income.
The Development Tax would also not be paid if the company records a negative net taxable income in the corresponding year.
Given that the net taxable income can be better predicted during the second half of the fiscal year, R&D spending decisions will be probably made during such time. The reform also includes other tax incentives for R&D expenditures).
(ii) Tax levied on the deferral of Final Tax Payments.
Companies that can be classified as “non-operating companies” in a certain year (i.e., those that in a given year have 50% or more of their gross income coming from passive income), the following fiscal year they will be charged with a tax for deferring the payment of Final Taxes (which include Personal Taxes and taxes paid by foreign partners or shareholders of Chilean companies once they make withdrawals or distribution of profits in a fiscal year):
- Tax rate: 1.8%.
- Tax basis: income taxable with Final Taxes (pre- and post- 2017), accumulated at the end of the previous fiscal year. Income recorded in the companies’ REX registers would not be taxed.
- Frequency: will depend on the ratio of passive vs. active income of each year. It could happen, among other possible scenarios, that (i) operating companies distribute fewer dividends to their holding companies; and/or (ii) chains of holding companies and intermediate sub-holding companies merge and centralize the generation of “active” income; and/or (iii) retained earnings are saved in other jurisdictions; and/or (iv) is used the substitute tax on retained earnings discussed in the following point; etc.
- Transitory Substitute Tax (“ISUA”) on retained earnings.
To reduce companies’ retained earnings levied with Final Taxes, starting on 2023 and until 2027 they will be able to pay a substitute tax on such earnings according to the following:
- 10% between January 1, 2023, to December 31, 2025 (prepaying 5.5 years of the tax charged for deferring the payment of Final Taxes mentioned above).
- 12% between January 1, 2026, to December 31, 2027 (prepaying 6.6 years of the tax charged for deferring the payment of Final Taxes previously mentioned).
Tax basis: all or part of accumulated earnings (pre- and post-2017) determined in the companies’ Records of Income Affected by Tax at the end of the immediately preceding fiscal year, discounting distributions made during the year.
Tax credit: concerning the IDPC credits registered in the companies’ Accumulated Credit Balances (Saldo Acumulado de Créditos or “SAC”):
- There is no right to charge them against the ISUA; and
- Such IDPC credits are eliminated from the SAC in the part related to the earnings that served as the tax basis.
Effects: Among others:
- Profits currently recorded in the companies’ RAI registries will now be recorded in the REX registries.
- Distributions made by both the company that paid the ISUA and those that receive the profits levied with such tax, follow the normal allocation order established in Article 14 of Income Tax Law.
- Reduces the tax base of the tax charged for the deferral of the payment of Final Taxes.
- New requirements for expense deduction and limits on loss deduction.
The reform establishes that expenses directly related to the generation of income for more than one fiscal year must be deducted considering a correlation with the periods in which the income will be generated. This may mean important challenges for taxpayers that will have to incur expenses accrued and/or paid during a fiscal year and that are related to several fiscal years.
In contrast, the deduction of accumulated losses from previous years (a set of expenses most likely associated with past income), is limited to 50% of the net taxable income of the year in which they are deducted (even if they have no connection with the loss carried forward).
3.- International Taxation.
In relation to passive income obtained by a Chilean resident that controls foreign entities (“CFC”), they are affected by the new rules about related parties previously mentioned. Additionally, if the controller obtains more than UF 2,400 of passive income, it is taxed and contaminates its related parties, who must also consider as accrued the total passive income obtained by the controller.
4.- Final Taxes.
Distributions of profits made to payers of Final Taxes will be taxed with a 22% rate unless such taxpayers are residents of a country with which Chile has a Double Taxation Agreement, that enables them to fully deduct the paid IDPC as a credit against such Final Taxes, or unless the distributed profits are considered income not taxed with Final Taxes. PYME companies will keep the possibility of crediting the tax paid by the company.
Likewise, the preferential tax treatment of capital gains on instruments with stock market presence is eliminated and homologated to that of the rest of capital income, taxing such capital gains at a single rate of 22%.
5.- Personal Taxes.
Limitations are established for taxpayers to deduct expenses, exempt income, or credits from their income taxed with Personal Taxes (Impuesto Global Complementario or Global Complementary Tax). In the case of deductible expenses, the upper limit would be UTA 23 (USD 16,000 approx.). Regarding exempt income and credits, the limit would be UTA 2.3 (USD 1,600 approx.). This last limit would be without prejudice to other provisions of Income Tax Law and other regulations containing tax benefits. Also, the credit for the IDPC paid, when applicable, would not be included within such limit.
Luz María Calvo