TOTAL INTEGRATION OF CORPORATE TAX AND FINAL TAXES

Current tax legislation

The current tax legislation contemplates a semi-integrated tax system with two alternative tax regimes:

Regime A: An “attribution” regime in which the company´s taxable income is subject to a corporate income tax at a 25% tax rate, which is immediately allocated to its partners and shareholders every Fiscal Year, in order to then be subject to a withholding tax or personal income tax (“final taxes”).
Only companies whose partners are individuals or foreign investors can be subject to this regime.
The partners and shareholders may reduce as credit from their final taxes 100% of the tax paid by the company. Therefore, the total rate of the income tax is a maximum of 35%, considering both the company´s and the shareholders´ tax.
The effective distribution of profits and dividends, from previously attributed income (and therefore already taxed with final taxes), is exempt from taxation.

Regime B: A partially integrated regime in which the company´s taxable income is subject to a corporate income tax at a 27% tax rate. Unlike Regime A, the partners´ and shareholders´ final tax is deferred until the effective distribution of profits or dividends occurs.
Any company can be subject to this regime.
However, only 65% of the tax paid by the company may be deducted as credit from final taxes. Exceptionally, partners or shareholders of companies subject to Regimen B as well as residents in a jurisdiction that has entered into a tax treaty with Chile may use 100% of the tax paid by the company as a credit against their withholding tax.
To determine the available credit, the company must maintain a historical record of the taxes paid as well as the credits pending an allocation. Subsequently, every distribution of profits or dividends obtains a credit equivalent to 27%, until the totality of the credits available is exhausted.

To control the taxation and the granting of credits against final taxes, the law establishes different allocation orders for distributions, depending on whether they are subject to Regime A or B, or profits or equity reductions. The following table shows the referred allocation orders:

◼︎ Subject to final taxation (personal income tax and withholding tax) with credit
◼︎ Exempt from Final Taxation (personal income tax and withholding tax)

Tax Reform Proposal

The Tax Reform proposes a fully integrated regime of the corporate income tax at a 27% tax rate for all companies, except those classified as Small and Medium Enterprises (“SMEs”), which will have a special corporate income tax at a 25% tax rate.

The partners or shareholders will pay final taxes exclusively on effective withdrawals or dividends, with a credit of 100% of the corporate income tax paid by the company.

The credit allocated to each distribution corresponds to the average of the taxes or credits registered by the company, with a cap of 27% on the amount distributed, grossed-up by the same credit. The average is calculated in the following manner:

Accumulated Credit Balance

(Retained Earnings + DDAN (Accelerated and Normal Depreciation Difference Registry) -Corporate Income Tax of the exercise)

Therefore, compared to the current regime, the credit will not be limited to 65% of the corporate income tax and will typically be higher than the 17.5% credit under the current system (65%*27% =17.5%). However, this does not mean that the credit will be 27%. The credit will be an average, which for most taxpayers will be less than 27%.

In fact, the accumulated credit balance is composed of historical rates ranging from 10% to 25.5%. Additionally, the denominator of the credit average includes all of the profits that are part of the tax equity (excluding exempt income “REX”) and dividends received from other companies. These dividends might have a 0% credit if originally paid against financial profits. The denominator also includes the difference between accelerated and normal depreciation, which in practice is equivalent to considering such difference as a profit that paid a 0% tax rate. Many taxpayers will be surprised that the “benefit” of integration is much less than expected, or even nonexistent.

In order to control the taxation and the granting of credits against final taxes, the Tax Reform Proposal establishes different allocation orders for distributions, profits or equity reductions. The following table shows the referred allocation orders:

◼︎ Subject to final taxation (personal income tax and withholding tax) with credit
◼︎ Exempt from Final Taxation (personal income tax and withholding tax)

It is important to mention that with the Tax Reform Proposal, companies that do not maintain income or amounts that must be controlled in the REX register, are exempt from keeping a RAI, DDAN and REX records. Therefore, withdrawals, remittances or distributions will be taxed with final taxes with the right to credit accumulated in the SAC (Accumulated Credit Balance)

◼︎ Subject to final taxation (personal income tax and withholding tax) with credit
◼︎ Exempt from Final Taxation (personal income tax and withholding tax)