Law 20,712 on Management of Third-Party Funds and Individual Portfolios was published on January 7, 2014, also known as the “Consolidated Fund Law” (CFL). It puts all the funds existing in Chilean law into one single statute, namely: public and private investment funds, mutual funds, housing funds and foreign capital funds.
We focus here on an analysis of Private Investment Funds (PIF) since they are an important vehicle for investment in order to do business in Chile.
Private Investment Funds
- The CFL defines PIF as “investment funds in which there are less than 50 participants who are not members of the same family.”
- For purposes of the CFL, “members of one same family” means anyone who has a family relationship out to a third degree of blood relationship or kinship and entities controlled directly or indirectly by any of those individuals.
- Forbidden investments and activities: PIFs cannot invest directly in real estate, mining properties, water rights, industrial or intellectual property rights or vehicles of any kind. They cannot engage directly in industry, commerce, real estate, agriculture, mining, exploration, exploitation or harvesting of any type, in intermediation, insurance or reinsurance or any other undertaking or business that entails the fund engaging directly in a commercial, professional, industrial or construction activity. As a general rule, PIFs cannot engage in any business but investment and complementary activities.
- Dividend policy: By law, PIFs must pay an annual dividend of at least 30% of net profits earned in the fiscal year to investors. The other aspects of dividend policies must be set down in the internal regulations of each PIF.
- The CFL stipulates that PIFs must be managed by fund managers overseen by the Securities and Insurance Commissions or by closed stock corporations registered in the Reporting Entities Registry of the Securities and Insurance Commission (SIC), which will be subject to the disclosure obligations stipulated by the SIC in a general rule.
- Closed stock corporations engaged in managing PIFs must be registered in the above registry. They must also be in compliance with the requirements and fulfill the duties set down in General Rule 364 of the SIC (GR 364).
- The board of directors of a PIF manager is the body in charge of drafting and issuing the internal regulations of the PIF to be managed.
- Disclosure obligation: In compliance with GR 364, PIF managers have the obligation to report the following information on each managed fund to the SIC in the format and by the deadlines indicated in GR 364: (a) name and taxpayer identification number of the PIF; (b) list of participants; and (c) the value of the PIF’s assets and liabilities.
- The CFL imposes upon each manager the obligation to request the inclusion of each of the funds that it manages in the Taxpayer Roll (TR), accompanied by the Internal Regulations of each fund. It must also provide the information required annually by the Internal Revenue Service (IRS), in the manner and at the time stipulated by the IRS in a resolution.
- Dispersion limits and relationship with the manager: Each PIF must have at least four investors who are unrelated, none of whom may hold less than 10% of the paid-up shares in the PIF.
Tax records and other obligations
Although the PIF is not considered a First Category taxpayer under the Income Tax Law, the manager has several obligations that include keeping the following records, required as of January 1, 2017:
- A record of third-party attributed income showing the income or sums that have been attributed to the fund, which must then be attributed to the fund’s investors (with the right to credit for the first category tax (FCT) paid).
- A record of income received that has already been attributed showing the income or sums that have been received by the fund and have already been imputed toward attributed income of a company, jointly owned property or corporation (income for which taxation by income tax is complete).
- A record of exempt or non-taxable income showing the withdrawals or dividends received that are exempt from aggregate complementary tax (ACT) or additional tax (AT) and non-taxable income.
- A record of the cumulative credit balance to keep a control of credits (for the FCT paid and for foreign taxes paid, calculated according to articles 41A and 41C of the Income Tax Law) to which investors are entitled in respect of the gains or profits distributed by the fund that are assessable by ACT or AT.
- A record of distributions made from the fund showing the gains or profits distributed to investors during the fiscal year.
Taxation of investors
Distributions by PIFs of the profits earned will be considered the same as a dividend on shares in stock corporations incorporated in the country, so they will be exempt from FCT but assessable by ACT or AT, as the case may be, unless those distributions correspond to exempt income, non-taxable income or a capital return and any adjustments of the same. The law makes a distinction between:
1. Investors domiciled or resident in Chile:
– Attributed income: This income will be taxed by ACT and the FCT paid can be credited against the ACT according to general rules.
– Gains or profits distributed by the fund: (i) income already attributed, exempt income and non-taxable income will not be assessed by any tax. Regardless, gains or profits considered income exempt from ACT will be included to establish the base for the progressive assessment of ACT; (ii) income not in the above situation will be assessed by ACT and the FCT paid can be credited against it.
– Sale or redemption of shares in the PIF. The gain will be taxed in the same way as the sale of shares in stock corporations incorporated in the country, except when the fund is liquidated, in which case it will be considered a total or partial capital return. Adjustments will not be assessed by the ACT and any surplus will be taxed according to the above rules.
2. Investors not domiciled nor resident in Chile:
– Attributed income: The special 10% tax will be assessed with no right to the FCT credit, which will be also subtracted from the respective record. In any case, it may be agreed in the internal regulations that at the end of each fiscal year, funds will withhold 10% of all income to be attributed by the fund, while retaining the fund’s right to recover or provision for the withholdings.
– Gains or profits distributed by the fund: (i) attributed income, income exempt from additional tax and non-taxable income will not be assessable by any tax; (ii) income not in the above situation will be assessed by the aforesaid special tax.
– Sale or redemption of shares in the fund: The gain will be assessable by the 10% special tax (as things currently stand, the taxation of a fund’s liquidation is not clear and it is possible that if the profit is not previously distributed as a dividend or reduction in the share value, the gain on the share in the redemption can be considered assessable by the additional tax instead of the reduced 10% tax).