Expiration of the Chilean Tax Relief for American Shareholders

Read more about the expiration of the Chilean Tax Relief for American Shareholders. Possible impacts and changes.

Expiration of the Chilean Tax Relief for American Shareholders

The Chilean tax reform 2014 established two new general tax systems that came into force on January 1st of 2017: System A or “Attributed Regime” and System B “Partially Integrated Regime”. Final taxation for non-resident investors, in both regimes, varies and depends on the existence of a Double Taxation Treaty (hereinafter “DTT”) in force between Chile and the residence country of the foreign investor.

Even tough, the United States of America has no DTT in force with Chile, it has been benefited so far from an exemption which due date is December 31, 2019. What happens after that?

Each taxation’s system can be quickly explained as follows:

  • System A or “Attributed Regime”: it levies 25% corporate income tax on all taxable income on an accrual basis, and allocates in the same tax year such income to the shareholders. As a result, 35% WHT will be applied to non-residents, irrespective of whether the company distributes dividend or not. This system allows 100% corporate tax credit to all shareholders, whether a DTT applies or not
  • System B “Partially Integrated Regime”: it levies corporate income tax at a rate of 25,5% for 2017 and of 27% for 2018, for all taxable income on an accrual basis.  Under this regime, shareholders will still be allowed to defer withholding taxes until profits are effectively distributed, as was before the Tax Reform.

However, corporate tax credit is reduced to 65% and therefore final taxation increases from 35% to 44,45% (from 2018 onwards), unless the foreign shareholder is a resident in a country having a DTT in force with Chile. In this case, the final taxation remains at 35%, same as System A.

A summary is shown below:

System

Corporate tax rate

Criteria for final taxation

Tax credit

Final Taxation

Impact of a DTT

Regime A: Attributed

25% from 2017 on

Accrued basis

100%

35%

None

Regime B: Partially Integrated

25.5% for 2017 and 27% from 2018 on

Cash basis

65%

43.93% for 2017

44.45% from 2018 on

DTT in force reduces final taxation to 35%

 

 

The good news is that even tough United States of America has no DTT in force as off the date, it has been benefiting from a transitory clause in System B, that establishes a 100% of corporate tax credit for countries having a DTT with Chile signed before 1st January 2017, even when it is not in force. The bad news is that this benefit will only last until the end of 2019.

From 2020 on, the general rule would apply again and the only way to access to a final taxation of 35% in System B will be that of being a resident of a country having a DTT in force.

Besides that, it is necessary to bear in mind that Chilean presidential elections are planned for near future-19th November 2017- and another tax reform would not be surprising. Sebastián Piñera, the candidate with better chances, according to surveys, has already mentioned his intention to introduce a new tax reform. Keep updated following us at www.mazars.cl .