By Ruling issued on February 12th of 2019, in case No. 3.972-2017, although the Supreme Court makes no pronouncement on the substance of the matter as it estimated it was not a cassation issue, it appears to validate a quite polemic criterion held by the Tax and Customs Court of Valparaíso and the Court of Appeals of the same city.
The controversy of this case relies on the fact that the reductions made by the taxpayer, which corresponded to the monetary correction of the tax equity, were rejected by the IRS upon the criterion that taxpayers with no taxable incomes are not allowed to deduct any expenses from their taxable base, given that the quality of “necessary to generate taxable income” is not complied with in these cases.
This criterion regarding expenses, which is always problematic when applied to holding companies, is especially controversial in this case, because the deductions made by the taxpayers are reductions demanded by law, not expenses, thus, the same requirements should not be applicable.
Merger of a company with tax losses (Ruling 617, 25.02.2019)
Through this Ruling, the IRS solves a series of doubts regarding mergers between companies’ subject to the Partially Integrated System of the Income Tax Law, in which the absorbing company has carried forward tax losses since the times of the “FUT” (until 31.12.2016), and the absorbed one had tax profits and credits prior and subsequent to the FUT.
On this regard, the IRS establishes that, for example, in these cases, the tax to be paid when taxpayers inform the IRS the termination of their business, is not applicable, that the balances of the registers kept by the absorbed company must be recorded in the same registers kept by the absorbing company, and that it is not possible to request reimbursement when the merged company’s profits result absorbed by the losses of the absorbing company.
The IRS did not refer explicitly to the way of calculating the rate of the “FUT” credit, although we believe that the most reasonable interpretation would be not to consider the absorbing company’s negative FUT to calculate the total balance of accumulated taxable profits as of 31.12.2016 (STUT) of the merged company.
Merger where the companies keep acting separately for a period of time (Ruling 516, 08.02.2019)
Through this Ruling, the IRS solves the case of two companies that merged, but that kept issuing invoices and declaring their taxes separately for some time after the merger. The IRS states that, if the operations have been executed with resources of the absorbed company that were not contributed by it to the merger, the company would have acted as a “de facto company”, that should have initiated its activities before the IRS and pay its taxes separately, but if the operations were executed with assets that were included in the merger, the effects would rely on the absorbing company.
Although the IRS does not give further details on this particular case, the applied criterion draws some attention due to the fact that one of the effects established by the Stock Corporations Law in mergers by incorporation, is that the absorbing company acquires all the assets and liabilities of the absorbed company, which is what normally occurs in this kind of operations, being difficult to imagine a case where a “de facto company” could take shape for having executed the operations subsequently to the merger, with resources of the absorbed company, that were not contributed by the latter to the merger.
Tax treatment of the cross-border purchase of virtual gift cards (Ruling 406, 31.01.2019)
This Ruling solves the situation of a taxpayer whose line of business consists of buying virtual gift-cards abroad, which allow to hire services or acquire goods from foreign companies, in order to resell them in Chile. The IRS interprets that the purchase of these gift cards would be an anticipated payment of such goods and services; those which allow to hire services would be levied with the Additional Tax, under the general rate of 35%, being the original purchaser of the gift cards obliged to withhold the tax, and those which allow to acquire goods, would be exempt from such tax.
This Ruling deals with credits for taxes payed abroad. In this case, the IRS states that, if a company with tax losses receives dividends from another Chilean company, with credit for the First Category Tax (Chilean corporate tax) paid by the company with credit for taxes paid abroad, the recipient company – which profits will be absorbed by its losses – will only be allowed to use this credit against other tax obligations, but never to require its reimbursement.
This Ruling refers to the tax treatment given to associations or joint accounts contracts (similar to joint ventures), basically confirming the validity of the instructions previously issued by the IRS. Nevertheless, the Ruling adds something interesting regarding the use of credits for taxes paid abroad, indicating that both the operator and the participants may use such credits in their corresponding proportions, provided that they comply with the requirements set forth in article 41 A or 41 C of the Income Tax Law, which generates certain doubts in respect of the way of fulfilling such requisites, for example, if whether both must register the investment.