Bill containing modifications to simplify the Chilean Tax Reform Law
Presented to Congress on December 15th, 2015
The bill’s main objectives are: simplify the income tax system that will enter into force as from 2017 and make adjustments to VAT, as well as to the General Anti Avoidance Rules (“GAARs”).
The following is a summary of the main amendments contained in the bill.
Simplification of the Income Tax System
As from 2017, companies subject to tax on income determined by full accounting records, shall opt between one of the two systems that will enter into force pursuant the Tax Reform. Depending on their legal structure, some taxpayers will be eligible to abide to the fully integrated regime, while others will be taxed under the partially integrated regime.
Fully Integrated Regime
The bill does not modify the rates under this system contained in Law No. 20,780 of September 29th, 2014. That is, the first category income tax (“FCIT”) remains at 25%, with 100% tax credit for taxpayers subject to global complementary tax (“GCT”) and additional withholding income tax (“AWIT”).
Taxpayers eligible to opt for this this system are:
- Sole propietorships (empresa individual or EI)
- Single person limited liability company (empresa individual de responsabilidad limitada or EIRL)
- Partnerships (sociedades de personas) and (comunidades), formed exclusively by individuals subject to GCT or AWIT.
- Companies by shares (sociedad por acciones or SpA), which must also add a clause in their bylaws related to the disposal of its shares.
- Taxpayers subject to Article 58 No.1 (i.e. Branches or permanent establishments of a foreign entity)
The bill allows the abovementioned taxpayers to opt for the partially integrated system instead of the fully integrated regime.
The application of the fully integrated regime is always optional, in the sense that taxpayers has to opt for this system. However, the bill states that EI, EIRL, comunidades and sociedades de personas, mentioned above, will be by default subject to the fully integrated regime, unless they explicitly express their intention to be subject to the partially integrated regime. On the other hand, if a Company by shares (SpA) or a taxpayer subject to article 58 N°1; having the option to opt for the fully integrated regime do not express their choice; they will be subject to the partially integrated regime.
Partially Integrated System - General Tax Regime
Sociedades anónimas, sociedades en comandita por acciones and companies in which at least one of its owners, members, partners or shareholders is not subject to final taxes (CGT or AWIT) will always be subject to this regime. Therefore, this system will be the general taxation system for companies.
The rates established by Law No. 20,780 remain the same, namely:
25.5% in 2017 and 27% in 2018. Similarly, credit against GCT or AWIT will be 65% of the FICT.
For residents of countries with which Chile has an in force double tax treaty (“DTT”), the credit will be 100% of the FCIT.
Additionally, the bill contains a transitional provision, which allows residents of countries with which Chile has signed DTT as of January 1, 2017, to benefit from the full credit, even if at that time the agreement is not yet in force. Under such case the full tax credit will be applicable until December 31st 2019 if at that time the relevant Tax Treaty has not yet entered into force.
Interaction of Tax Systems
With the amendments made by the bill, the interaction between the two tax systems is greatly reduced.
Companies under the fully integrated regime are allowed to hold participation in companies subject to the partially integrated regime. However, companies subject to the partially integrated system will not be able to hold participations in companies subject to the fully integrated regime.
Indeed, as a result of a sale of social rights or shares (in the case of a Sociedad por acciones SpA), the company whose rights or shares were sold, will be subject to the partially integrated system as from the year in which the sale took place.
Simplifications of records and modification of the order of imputation of withdrawals and dividends
The number of records which taxpayers must keep would be reduced for both regimes.
Records in Attributed Income Regime:
- Attributed income generated by the taxpayer
- Financial Profits (difference between linear and accelerated depreciation)
- Exempt and non-taxable income. This record would include the balance of the Non-taxable Income Ledger (FUNT according to its Spanish acronym) existing at January 1st, 2017
- Credit balance: This record would include the First Category Income Tax credits exiting in the Taxable Profits Ledger (FUT according to its Spanish acronym) at December 31st, 2016* and credits against final taxes attached to foreign source income
The imputation of withdrawals or dividends would be made at the end of each year in the order in which the records are mentioned above.
*This credit would be calculated as a percentage of the existing credit balance in proportion to the total FUT existing at the end of each year.
Records in the Partially Integrated System:
- Taxable Income*. This record would include the balance of the taxable profits ledger (FUT) at January 1st, 2017
- Financial Profits (difference between linear and accelerated depreciation)
- Exempt and non-taxable income. This record would include the balance of the Non-taxable Income Ledger (FUNT according to its Spanish acronym) existing at January 1st, 2017.
- Credit balance: This record would include the First Category Income Tax credits exiting in the Taxable Profits Ledger (FUT according to its Spanish acronym) at December 31st, 2016** and credits against final taxes attached to foreign source income
Withdrawals and profit distributions would be imputed first to the balance of previous years and subsequently to the balance existing at each year end. The order of imputation would be the same in which the records are mentioned above.
*The taxable income would be determined starting from the taxable net equity and not starting from the financial equity as the tax reform law Nr. 20,780 provides currently.
This would prevent that components of the equity which are not profits are taxed with final taxes before other concepts such as non-taxable income or income exempt from final taxes are withdrawn.
** This credit would be calculated as a percentage of the existing credit balance in proportion to the total FUT existing at the end of each year.
To enhance the investment benefit established in letter C) of article 14ter of the Income Tax Law for taxpayers subject to the attributed income regime, the deduction would be increased to 50% of the taxable income invested in the company. The deduction cap of 4,000 UF would be maintained (the UF is an inflation adjusted monetary unit).
Extension of the Substitutive Tax on retained taxable profits (FUT) until 2016
The bill includes the possibility to pay the substitutive tax on the FUT in 2016. In addition, the profits that have paid the substitutive tax may be withdrawn free of final taxes at any time the taxpayer choses to do so.
Value Added Tax
Leases of unfurnished real property signed before January 2016 would not be subject to VAT
The bill specifies that lease contracts with purchase option signed before January 1st 2016 on unfurnished real property will be subject to VAT, neither on the lease payments due before or after January 1st 2016 nor on the purchase option.
Special VAT credit for sales of subsidized housing
The special VAT credit provided by article 21 of Decree Law 910 would be extended to housing financed with a subsidy from the Ministry of Housing and Urbanism, in the case of dwellings worth up to 2,200 UF (the UF is an inflation adjusted monetary unit).
Also, construction companies that sell subsidized housing and consequently benefit from a VAT exemption would still be able to use the benefit of Decree Law 910.
Promise to sell Real Estate
An important modification included in the bill is that starting January 1st 2016 deeds containing a promise to sell real estate will no longer be taxable with VAT, whatever the circumstances.
Thus the down payments made on occasion of a promise deed will not be subject to VAT. The VAT will be due only when the actual sales contract is signed.
Extension of the exemption for the sale of real estate with building permits
The exemption established in transitory article 7 of Law 20,780 will be extended to projects that, having obtained a building permit before January 1st 2016, are completed in 2016 on condition that the application for municipal approval of the completion of the building has been submitted in accordance with the Construction Code, irrespective of the date of sale of the property.
VAT treatment of forced sales and repeal of presumption
The bill proposes to exempt from VAT all forced sales, e.g. when real estate is sold by Court order upon request from the Treasury, or from a bank or other financial institution due to unpaid debt.
Also, if the creditor has acquired the property in a forced sale and has a legal obligation to dispose of the property within a certain period, such creditor would not be considered a recurrent seller in this subsequent sale (consequently the sale would not be subject to VAT).
In addition, the bill proposes to repeal the presumption that the seller is a recurrent seller when selling buildings by floors or units. The purpose of the change is to afford greater certainty to taxpayers, given that this hypothesis is already covered by the general definition of “sale” or “seller”.
VAT Exemption for leasing of subsidized housing
Consistent with the proposed modification for sales of subsidized housing, lease contracts with purchase option would be VAT exempt in the case of subsidized housing.
Deduction of interest and land value from the VAT taxable base in the case of real property leasing
In addition to the exclusion, established in article 17 of the VAT Law, of the value of the land from the taxable base, the interest included in each lease payment would be deducted from the taxable base before applying the tax.
Income Tax Effects of the benefit established in transitory article 8 of Law 20.780
This article provides that taxpayers whose operations became taxable with VAT in 2016 will be entitled to a credit for the VAT incurred in the acquisition or construction of the buildings which they sell as of that date.
Only VAT incurred during the three years preceding the sale will give rise to credit. As the legal provision does not establish the income tax effects of this indirect tax benefit, the bill proposes to specify that these credits must be deducted from the tax cost basis of the asset if they were included in this basis.
This modification would revoke the criterion sustained by the Chilean IRS in Circular Ruling 42 of 2015, according to which these credits should be treated as taxable income and considered for the computation of the monthly interim payments.
Improvement of the VAT exemption for import of capital goods
The bill proposes to modify section 10 of article 12 of the VAT Law to establish that the period of exemption is not computed only based on the date of importation of the goods, but also based on the date of the environmental permits or of the authorization to use the land.
In addition, the Treasury Department would no longer be called upon to “certify” that the requirements are satisfied, but only to record the fact in the resolution it issues. The fulfilment of these requirements would be subject to the Chilean IRS´ audit attributions.
Persons that may request advance rulings under article 26 bis
The bill proposes the possibility to broaden the scope of persons that may apply to the tax authority for an advance ruling on general criterions, related to the application of the General Anti-Abuse Rule (GAAR).
As the applicant would not be required have a current affected interest, the ruling would not be binding for the tax authority, neither in general nor in particular.
Clarification of the scope of application of the GAAR
The GAAR would apply to facts, operations or series thereof, occurred or completed as from the entry into force of the GAAR. The GAAR would not apply to situations in which the elements that determine the tax effects of a transaction have been established before such entry into force. However, the proposed modification would include safeguards to prevent that this clarification opens a window for potential elusion.