Legal Alert: Tax-Reform Framework Agreement
TOPICS RELEVANT TO FOREIGN INVESTORS
On Friday, November 8, 2019, the Ministry of Finance released a Tax Reform Framework (the “Framework”), agreed between the Minister of Finance and all five members of the Senate’s Finance Committee. The Finance Committee includes two senators from the governing parties and three senators from opposition parties.
The Framework modifies either existing law or aspects of the tax-reform bill that had been passed by the House of Representatives last August. Of these amendments, those likely relevant to foreign investors are:
• The Framework reverses the tax-reform bill amendments that reduced the aggregate tax-burden to foreign investors in Chile (with no tax treaty) from 44.45% to 35%. Overall, this means that the corporate tax rate will remain at 27%, and dividends paid to foreign investors will be subject to the withholding tax at the current 35% rate, less a credit generally limited to 65% of the corporate-tax paid (total tax burden stays of 44.45%). If the recipient of the dividend is resident in a tax-treaty jurisdiction, the credit will continue to be 100% of the corporate-tax paid (total tax burden of 35%).
• Broadly, dividends or profits paid by a Chilean company carry a tax credit for the recipient that is equal to the proportionate share of corporate taxes borne by the distributing company. These credits are generally used to reduce the withholding tax of the foreign investor. However, if the recipient of the distribution is a Chilean holding company with tax-losses, it may offset its losses against such dividends to claim a refund of the embedded tax-credits (the “PPUA Mechanism”). This PPUA Mechanism will be gradually eliminated through 2024 (90% in 2020, 80% in 2021, 70% in 2022, and 50% in 2023), such that losses may no longer be used to obtain refunds of tax credits embedded in dividend distributions.
• Real-estate assets will bear an additional property tax. For companies with real-estate holdings above USD 1.2 million, the rate will be 0.275% of the value of the assets, as determined by the official valuation (generally equal to 50% to 80% of the fair market value of the asset). This tax will be deductible from the corporate tax.
• Private investment funds (“PRIFs”) will be subject to new dispersion rules to qualify for exempt status. Currently, PRIFs need to have a minimum of four unrelated quota-holders with no less than 10% of the quotas to be eligible. The new rules would require PRIFs to have a minimum of 8 unrelated quota-holders, each with no more than 20% of the fund quotas. The rules for public investment funds are not modified and remain an efficient investment vehicle for foreign institutional investors.
• Several investment-incentives will be established, including:
◦ a new set of tax-benefits for small and medium-sized companies, defined as those with annual revenues of less than USD 3 million (approx.), is likely to bring the effective corporate tax rate of SMEs close to a 0%;
◦ instant depreciation for 50% of the value of investments in fixed assets will be in effect through December 2021; and
◦ in the medium term, analyze to substitute a reduction in the corporate tax rate for existing tax expenses that are deemed inefficient.