Tax Newsletter April 2019

Older adults’ benefits in real state tax not satisfying all the legal requirements

In court case No. 2765-2019, the Supreme Court confirmed a notable sentence issued by Santiago’s Court of Appeals. Article No. 1 of Law 20.732, grants the vulnerable elderly a reduction on real estate tax, prescribing that they can´t exceed 5% of their income, adding a set of requirements and expressly mentioning that each and all of them must be complied with to obtain the benefit.

These requirements relate to the maximum income that a person can have and the tax appraisal of the properties that he or she possesses. With regard to the last matter, the regulation establishes separately the maximum tax appraisal that a particular real estate may have (No. 5, approximately 89 MM CLP) and the maximum tax appraisal that the sum of all the properties of a person may have (No. 6, approximately 118 MM CLP).

In this case, the lady’s apartment exceeded by far the limit established on No. 5, but the sum of all her real estate (including the cellar and parking space) didn´t surpass the one specified on No. 6.

In this context, Santiago´s Court of Appeals, confirmed by the Supreme Court, invoked the history of the law to say it´s clear that the legislator intention was to benefit economically vulnerable elder adults, overlooking the literal terms of the norm, that command that all the of the requirements must be met at the same time, being sufficient to either accomplish the conditions ordered by No. 5 or by No. 6.

 

Labour compensation for the years worked in another company of the same enterprise group

 

Ruling No. 1370, May 16^th of 2019

Two companies of the same enterprise group agreed to transfer an employee between each other. On the relocation, the worker’s labour contract was terminated by the first company, but at the same time it was settled that if the second company ever dismissed him in the future, the latter would be able to charge the first one with the worker`s compensation matching all the years laboured on the preceding firm.

On Ruling No. 1370, the IRS accepts, in our view with a friendly approach, that both companies may deduct the expense in proportion to the worker’s compensation each of them pays.

Capital gain in the sale of real estate, relevance of “effective income” concept

 

Rulings No.1373 and No. 1377, May 16^th of 2019

One of the main changes made by the last Tax Reform to the treatment of capital gains in real estate was, that in order to access preferential treatment, the seller must be an individual who is not a first category tax payer and that declares his effective income. Examples of preferential treatment are, for real estate acquired before 2004, the application of the law treatment in force upon December 31^st of 2014, in other words, that it may be a non-taxable income; also, that each person has the right to a tax exemption of UF 8,000; or that only a 10% rate single tax is levied. In this context, the IRS published two rulings on the subject.

The first one is Ruling No. 1373, which refers to the case of a taxpayer who had an agricultural property acquired before 2004, that he leased until mid-2017, which made him a first category tax payer upon effective income, losing all the tax benefits he had before. The IRS interpreted that if he sells the property in 2018, during which he wouldn’t have effective profits due to the lease of the property, the sale would be able to benefit from the old regime, so that the capital gain obtained would be a non-taxable income.

The second is Ruling No. 1377, in which the IRS is consulted about the situation of a taxpayer who has assigned an agricultural real estate to its “individual company”, for which he pays tax over effective income, but at the same time has two non-agricultural real estate in his personal equity. The IRS interpreted that goods wich are not included in the accountability of the individual company, i.e., non-agricultural real estate, may be subject to the benefit, being able to benefit from the UF 8,000 exemption.

Interests for delay in the 30-day payment law

 

Ruling No. 1304, May 8^th of 2019, and No. 1510, May 29^th of 2019

The new 30-day payment law establishes a default interest in favour of the creditor, when an invoice payment is delayed for more than 30 days, and a flat fee in the recovery of payments, equivalent to 1% of the owed amount.

Ruling No. 1304, refers to the effects on VAT over these payments, by establishing that the interests are not subject to this tax, but that an exempt invoice must be issued, except by the banks and financial institutions (including factoring companies meeting the requirements), which are exempt from this obligation. With respect to the flat fee for the recovery of payments, this Ruling affirms that it is not levied with VAT and there is no obligation of issuing invoices, being sufficient any internal document that accredits the operation.

On the other side, Ruling No. 1510, deals with the effects of the default interest on Income Tax, indicating that the creditor must recognize them as income when they accrue. Furthermore, this Ruling establishes that if the creditor decides not to charge the default interests, and deduct it as an expense, he will have to comply with the requirements imposed by law to deduct any other uncollectible debt, in other words, the creditor will have to properly register them in his accountability and prudently exhaust all the means of recovery.

Inheritance and Donations Tax on companies with negative equity

 

Ruling No. 1471, May 25^th of 2019

In order to determine the Inheritance and Donations Tax which levies social rights owned by the deceased in limited liability companies, the valuation rules of such tax have to be applied to the assets and liabilities of the company. Now, this Ruling clarifies that this is only to establish the value of the aforementioned social rights and does not imply that such assets and liabilities become part of the estate. Consequently, if the company has a negative equity because it has more liabilities than assets, this not imply a deduction from the taxable base, but rather, the rights are valued at zero.

Application of the general anti-avoidance rule to the sale of a company between relatives, paid with a life annuity

 

Ruling No. 1305, May 8^th of 2019

In this Ruling, a family asks if it could be considered elusive, parents selling their children a percentage of a company that they own, in which the price would be paid with a life annuity in favour of the first, and which in turn, would be paid with the profits that the children would withdraw from the same company. The IRS interpreted that this situation could have elusive elements, so the specific rules contained in the Inheritance and Donations Tax Law (article 63) and, in its absence, the general anti-avoidance rule, could be applied to it.