New Income Taxation Systems
Attributed Income and Partially Integrated Regime
As from January 1, 2017, the Tax Reform will change the taxation of companies. Two parallel taxation regimes have been created that can be freely chosen by the owners, partners, shareholders, joint owners or cooperative members, as the case may be:
Attributed Income Regime: Under this regime, the payers of First Category Tax can pay tax at the end of the fiscal year at a rate of 25% on income received or accrued and income that has been attributed to them from enterprises, companies, jointly owned properties or cooperatives in which they hold a direct or indirect interest.
The income thus determined will be attributed to the owners, partners, shareholders, joint owners or cooperative members in the same proportion as their interest in the enterprise, company, jointly owned property or cooperative. Said persons must include that income for that same fiscal year in their Aggregate Complementary or Additional Tax return, as the case may be (End Taxes), whether or not such income has effectively entered their equity through a profit withdrawal or receipt of a dividend.
The payers of End Taxes will have the right to credit all of the First Category Tax paid by that enterprise, company, jointly owned property or cooperative in the same fiscal year.
The Attributed Income Regime obligates the payers of First Category Tax adopting that regime to keep as many as 8 records, all regulated by the Income Tax Law, in which they must record their own or third-party attributed income, credits, profit withdrawals or the actual payment of dividends, non-taxable or exempt income, etc.
Partially Integrated Regime: The payers of First Category tax may declare their income under a “semi-integrated” or “partially integrated” regime (Partial Imputation Regime). The main feature of this regime is that income received or accrued by the enterprise, company, jointly owned property or cooperative and their owners, shareholders, partners, joint owners or cooperative members is declared and paid, but only the profits or dividends effectively withdrawn or distributed are taxed.
The First Category Tax rate will be 25.5% for 2017 and 27% as from 2018. The payers of end taxes will have the right to credit part of the First Category Tax toward the Aggregate Complementary or Additional Tax that they must pay in that same fiscal year on profits or dividends effectively withdrawn or distributed.
Partial imputation means that taxpayers can use 100% of any credit toward end taxes, but must immediately refund 35% of that credit to the government, which ultimately signifies that they can only use 65% of the credit. The only exception to this rule applies to additional taxpayers, provided they are domiciled or resident in one of the countries with which Chile signed a treaty on double taxation and prevention of tax evasion since the Income Tax Law allows them to use 100% of that credit.
Main Differences Between these Regimes
- The First Category Tax Rate in the Partially Integrated Regime (27%) will be 2 percentage points higher than the tax rate of the Attributed Income Regime (25%).
- Under the Attributed Income Regime, the payers of End Taxes will pay tax on all income received or accrued by the enterprises, companies, jointly owned properties or cooperatives in which they have a direct or indirect interest or the income that has been attributed to them, proportional to their holdings. In the Partially Integrated Regime, they must declare and pay taxes on actual income, meaning on profits withdrawn and/or dividends received.
- The credit may be imputed entirely towards End Taxes under the Attributed Income Regime and partially (65%) under the Partially Integrated Regime
Elimination of the Regimes Under Article 14-BIS and Article 14-QUATER
Effective January 1, 2015, taxpayers could no longer opt for either of the regimes under article 14-bis and article 14-quarter of the Income Tax Law. However, taxpayers who were paying tax on the basis of those regimes as at December 31, 2014 can continue to pay tax under those regimes through December 31, 2016.
New MSMB Regime under Article 14-TER
The taxation based on actual income and simplified accounting is consolidated into one system to boost taxpayers who are classified as micro-small-mid-sized businesses under Law 20,410 (MSMB).
Effective January 1, 2015, taxpayers whose annual sales average no more than 50,000 Unidades de Fomento (UF) can opt for the benefits under Article 14-Ter.A) of the Income Tax Law, consisting on taxation on the basis of actual income (income received and expenses paid).
- They must be natural or juridical persons (organized in any way) that have average annual sales of no more than 50,000 UF in the last three fiscal years, limited annually to 60,000 UF.
- Income earned by individuals with which the taxpayer has a relationship according to broad and demanding standards set down in the Income Tax Law (Broad Relationship Rules) must be included in the calculation of own sales.
- Net taxable income will be calculated as the difference between income received in the fiscal year and disbursements effectively made.
- Taxpayers opting for this regime will not be obligated to keep full accounting for purely tax purposes, to take inventories, prepare balance sheets, depreciate, keep profit records, etc.
The taxpayers under article 14-Ter that have annual sales not exceeding 100,000 UF will be exempt from Additional Tax on remittances of money to abroad for advertising services and the use of, and subscription to, Internet technology platforms provided by foreign companies.
Also as of 2017, mid-size businesses, meaning taxpayers that have annual average sales not exceeding 100,000 UF, may opt to make a deduction from net taxable income assessable by First Category Tax.
MSMBs may choose to postpone the obligation to declare and pay VAT assessable on sales and service transactions forming part of their main business for as many as 2 months, according to the 3rd and 4th subparagraphs of article 64 of that law (now in effect).
As of January 1, 2016, First Category taxpayers meeting certain conditions may opt to adopt or stay in the presumptive income regime if they engage in farming, transport or mining. They will pay tax on the basis of the government appraisal of the farmland or transport vehicle or the percentage of ore extracted, respectively.
Shares and Interests
The following rules on taxation will apply to the sale or assignment of shares or interests made as of January 1, 2017:
- Capital gains will be assessable by Aggregate Complementary Tax or Additional Tax, as applicable, based on income accrued or received, at the taxpayer’s discretion.
- If accrued income is chosen, taxpayers can recalculate Aggregate Complementary Taxes declared and paid during the years when they were owners of the shares or interests that have been transferred, limited to 10 years back.
- In order to determine habituality, the date of purchase and of sale will be the date of the respective contract, instrument or transaction for the sale or assignment.
The following rules on taxation will apply to the sale of real estate made as from January 1, 2017:
- The gain on the sale of real estate acquired prior to January 1, 2004 will not constitute income when it is made by a taxpayer to a person with whom he has no relationship and the taxpayer does not habitually engage in that type of transaction.
- The gain on the sale of real estate made by a taxpayer who has acquired the property in the period from January 1, 2004 to September 29, 2014 to a person with whom there is no relationship will constitute non-taxable income, but only up to an aggregate of 8,000 Unidades de Fomento, provided the person does not engage habitually in this type of transaction. This sum will be the consolidated, total and lifelong limit for that taxpayer.
- After that limit has been exceeded, all gains on the sale of real estate will be assessable by First Category Tax or Aggregate Complementary Tax on the basis of income received or accrued, as chosen by the taxpayer.
- Taxpayers may revalue their purchase cost in the following ways:
– a government appraisal of the real estate,- adding to the purchase cost any disbursements on improvements to increase the value of the property or
– declaring the commercial value of the property as the cost, which must be presented before December 31, 2015.
- The capital gain on properties acquired after September 30, 2014 will not be taxable by income tax only if there is a remainder in the 8,000 UF limit.
The rules on debt overage applicable to loans granted by financial entities related to the borrower, among other loans, were changed. In this case, the interest paid will be taxed at a rate of 4%, unless there is debt overage, meaning the taxpayer maintains a level of debt with related companies that is three times paid-up capital. In that case, the taxation of interest will be 35%.
Rules were introduced on the control and taxation of foreign income earned “passively” by a taxpayer residing and domiciled in Chile. Passive income means investments in shares, interest or other instruments of foreign companies that are the controllers of foreign or Chilean operative companies, meaning they earn profits.
In this case, the passive income earned by the taxpayer will be subject to the general taxation regime when that income accounts for more than 10% of all of the income of the controlling company in which the taxpayer has an interest and simultaneously exceeds approximately 95,000 U.S. Dollars.
Presumptive Relationship and Presumptive Passive Income
The Tax Reform introduces a legal presumption (save proof otherwise) of a “relationship” and of “passive income” in all matters covered by the definition of international taxation if the taxpayer who is domiciled and resident in Chile performs transactions or make investments in companies situated in countries deemed “tax havens” or that have “preferential tax regimes.”
The Tax Reform introduced a system for the voluntary and extraordinary declaration of property, foreign currency and income abroad so that the taxpayers meeting legal requirements can regularize a tax default by paying a single tax at a rate of 8% in substitution for the taxes not declared or paid when required by law.
This system is essentially voluntary and is based on the good faith with which the taxpayer will make the declaration and cure the default on its tax obligations.
By making this declaration, the taxpayer recognizes to the Chilean government that he is a beneficiary of the investment in property and foreign currency abroad and of the profit on the same. After payment of the special substitute tax, any return earned by the taxpayer on the investment abroad will form a part of his annual tax return.
Payment of Tax on Retained Earnings in the Taxable Profits Fund (Fut) And Excess Withdrawals
First Category taxpayers who have a positive balance in the Taxable Profits Fund record (FUT) as at December 31, 2014 can choose to pay a special substitute temporary tax of 32% during the 2015 fiscal year.
This tax will be calculated on the proportion of the retained earnings not distributed or withdrawn in excess of the annual average total withdrawals, distributions or remittances made by the company in 2011, 2012 and 2013. Retained earnings from reinvestments made by the partners in other companies are also excluded from the calculation of the tax base.
A variable rate can be chosen by companies whose owners, partners or shareholders are natural persons who pay aggregate complementary tax. It is calculated on the weighted average of the highest marginal rates for the Aggregate Complementary Tax paid in the 2012, 2013 and 2014 tax years, proportional to the interests of each.
This special substitute tax is paid by a First Category taxpayer (the company) and not by its owners and the effect is that the retained earnings in the company will have been fully taxed.
Most Relevant Changes to Indirect Taxes
Vat on the Sale of Real Estate
Standing Rules: Effective January 1, 2016, the sale of real estate on which there are buildings will be assessable by 19% VAT whenever the seller is considered to engage habitually in this business.
Transitional Rules: There are two exceptions where VAT will not be assessable on the sale of real estate by a habitual seller. This is when:
- A purchase promise was made by or before December 31, 2015.
- The real estate development held a building permit issued by the Department of Building Inspection of the corresponding municipality before January 1, 2016 and the property is sold within 1 year from January 1, 2016.
Law 20,727 made it obligatory for all VAT taxpayers to issue invoices, to settle invoices, credit and debit notes and purchase invoices electronically. Periods were set to migrate to that system, depending on the annual revenue from sales and services and the company’s location (urban or rural).
The stamp tax rates were modified by Law 20,780. Stamp tax is assessable on documents containing cash credit transactions. Effective January 1, 2016, the rate is 0.033% monthly, limited to 0.8% on term transactions and for each of their extensions; and 0.332% on demand or continuing transactions, calculated on the amount of the loan.
General System to Combat Tax Elusion
General rules to avoid elusion were included that aim to penalize and void certain acts or contracts–only in connection with taxes–performed or executed abusively or deceivingly. Monetary penalties were even established for legal, accounting and financial advisors that participate in those transactions.
Abuse is deemed to exist when the taxpayer avoids all or part of the taxable event, reduces the tax base or the tax obligation, or postpones that obligation by entering into legal acts or transactions that are merely intended for evasion.
Deceit will be deemed to exist when legal acts are performed that disguise the taxable event, the nature of the elements comprising the tax obligation or the true amount or date of that obligation.
In both cases, the Internal Revenue Service must inform the competent Tax and Customs Courts so that the judge can rule whether or not the stipulated penalties apply, after hearing the taxpayer. The penalties are limited to a fine of as much as 100 Annual Tax Units, additional to payment of the taxes evaded.