On August 23, 2018, Chile’s Ministry of Finance (MOF) sent Draft Law No. 107/366 (the “Project of Tax Law Modernization”) to Congress for consideration. The Draft Law contains significant corporate tax reform measures, which are discussed below. The amendments would apply from January 1, 2019, if enacted.
Digital Services Tax (BEPS Action 1)
Article 15 of Draft Law No. 107/366 would introduce a tax on digital services (“ISD”) provided by non-residents to Chilean residents (i.e., online advertising services, streaming, data transmission, digital intermediation), at a rate of 10%. This follows the plan announced by the MOF on June 21, 2018.
CFC Amendments (BEPS Action 3)
Draft Law No. 107/366 would amend the rules in Article 41 H of Chile’s Income Tax Law (ITL) on determining when a territory or jurisdiction is a “preferential regime” for Chilean controlled foreign company (CFC) purposes. A territory or jurisdiction would be a preferential regime only when its effective corporate income tax rate is below 30%, unless it has a tax information exchange agreement in force with Chile.
On September 29, 2014, Chile introduced CFC rules as part of its 2014 tax reform via Law No. 20,780. On February 8, 2016, Chile amended the CFC rules, as part of Law No. 20,899 (Section 5 on CFC amendments), to simplify and clarify certain provisions of the 2014 tax reform.
On December 19, 2017, the Chilean tax authorities (Servicio de Impuestos Internos or SII) issued Resolution No. 124 regarding preferential tax regimes. According to the Resolution, SII will publish a list of countries and jurisdictions that are considered to have a preferential tax regime under Article 41 H of the ITL. According to this article, a territory or jurisdiction is deemed to have a preferential tax regime when it meets at least two of the following criteria:
- Effective tax rate on foreign-source income is less than 50% of the rate of the first section of Article 58 (i.e., Chile’s 35% rate).
- It has not concluded an agreement with Chile for the exchange of tax information.
- Legislation lacks rules that substantially comply with OECD or U.N. recommendations to empower the respective tax authorities to monitor transfer pricing.
- Is not considered compliant or substantially compliant with internationally accepted standards in transparency and exchange of information for fiscal purposes.
- Legislation maintains one or more regimes for tax purposes, which do not comply with international standards according to the OECD.
- Exclusively taxes only income generated, produced, or sourced domestically.
Thin Cap Amendments (BEPS Action 4)
Draft Law No. 107/366 would amend Section 41F of the ITL so that interest payments for “qualified project financing” are not subject to Chile’s thin cap rules, when (1) the financing is for the development, enhancement, or improvement of one or more projects in Chile, (2) most of the participating lenders are not related to the taxpayer, and (3) the financing is structured at arm’s-length.
On September 29, 2014, Chile amended its thin cap rules, via Law No. 20,780, to align with some of the BEPS Action 4 recommendations. While the amendments did not change the existing 3:1 debt-to-equity ratio for related-party loans (and the 35% penalty tax for interest, commissions, service fees, or any other financial payments associated with related-party loans), they did introduce new limitations on deducting expenses in cross-border intercompany transactions.
Codification of Permanent Establishment Rules (BEPS Action 7)
Draft Law No. 107/366 would add new Article 2(12) to the ITL, introducing a domestic permanent establishment (PE) definition that aligns with the 2017 OECD Transfer Pricing Guidelines. The PE definition would address the following issues, among others:
- When an intermediary performs activities in Chile that result in the regular conclusion of contracts on behalf of a foreign enterprise, that enterprise would be considered to have a taxable presence in Chile, unless the Chilean intermediary is performing these activities in the course of an independent business.
- Independent agents acting “in the ordinary course of their business” would not create a Chilean PE.
- A person or entity without a Chilean residence would not create a PE when they exclusively carry out corporate organization and related start-up activities for a non-resident.
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