Municipal Tax for Investment Companies

Sentence of the First Chamber of the Supreme Court (Rol 14927-2018)

Quite a commotion caused the sentence dictated on September 25, 2019 by the First Chamber of the Supreme Court in an executive trial, since the highest court again accepted the thesis that passive investment companies are not affected by the payment of municipal tax. The Municipality of Lo Barnechea filed a complaint that was declared inadmissible.

It must be remembered that this thesis, traditionally protected by the Comptroller’s Office and in the past also by the Supreme Court, was abandoned by the latter at the beginning of this decade, when it began to consistently rule that this type of companies were affected by the municipal tax; until the sentence we are commenting here, in which for the first time in a long time, the referred court decided in the opposite direction.

In any case, we consider that there are certain elements of the sentence that make it prudent to wait to see how this issue evolves before considering it an established criterion.  This case was resolved by the First Chamber, with 3 votes in favor and 2 against, being two of the votes in favor issued by integrant attorneys who do not permanently integrate the chamber. Thus, the maintenance of the criterion depends to a great extent on the integration of the chamber.

Another element to consider is that this case, being an executive municipal tax collection lawsuit, was heard by the First Chamber.  But if the Supreme Court is reached by another type of procedure (for example, a claim of illegality), the case would be heard by the Third Chamber, which cannot ensure that it has the same criteria.

Finally, due to the high impact that the new criterion would have on municipal collection, it cannot be ruled out that this matter will be resolved through legislative channels, the Senate Interior Government Committee would be asking the government to present a short law to settle the issue.

Foreign tax credit and currency exchange rate

Ruling No. 2465 of 09.27.2019

In this ruling, which deals with a Chilean company that is authorized to keep its accounting records in US dollars and receives dividends and interest from Brazil, the IRS determines how and when the exchange rate should be established for purposes of determining foreign tax credits tax credits to be used in Chile.

With respect to the manner, the IRS establishes that, in this case, being a company authorized to keep its accounts in US dollars, it may convert directly from Reais to Dollars, without the need to convert to Pesos.

In relation to the time to be considered for the conversion, the IRS establishes that since the income is from a foreign source (which, as a general rule, is recognized on a received basis), the time at which the tax that would be used as a credit in Chile has been paid must be considered. There are exceptions to the general rule, in which the taxpayer must consider the date of accrual of the tax, for example, cases in which foreign income must be recognized when it accrues, as in the case of permanent establishments abroad or controlled companies abroad that obtain passive income.