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Tax Alert

Framework for Understanding the Tax Reform

From the Framework for Understanding the Tax Reform, which contains measures to adjust the current tax modernisation bill currently in Congress, we highlight the following: 

Mandatory semi-integrated regime. That is, what we know as the "14B regime" is no longer optional but is mandatory for all companies except small and medium-sized enterprises (SMEs).   A 27% corporate tax will be maintained that only entitles partial credit against the final tax, leaving the overall tax burden with 9.45 more points.  The type of company (Ltd, PLC, etc.) no longer plays a role.  It remains to be seen what happens with the current companies under “regime 14A”. 

Gradual elimination of First Category tax return for compensation of dividends received with registered tax losses (“PPUAs”, Pagos Provisionales por Utilidades Absorbidas). As of 2020 (the question remains as to whether this refers to the present commercial year 2019/2020 tax year; what we would consider a covert retroactivity), the return will be only partial. There will be no refund from the year 2024 onwards.   If you have companies operating at a loss it would be advisable to review your situation. 

Tax on real estate assets.  Like the land tax, it is applied on the basis of the tax appraisal of the real estate, without consideration of bank financing (therefore, it is not a wealth tax), but with the following particularities:

  • The rate is progressive: as the total value of the taxpayer's property as a whole increases, the tax rate increases as well.  Over CLP 900 million (approximately EUR 1 million), the rate would be 0.275% (same rate that was used temporarily to finance expenses for the earthquake in February 2010).
  • The type of property to which it applies is not distinguished (residential, agricultural).
  • It is not indicated if it applies to real estate owned by the taxpayer directly or - also - indirectly (i.e. through companies).

New rate of 40% of Complementary Global Tax for income over CLP 15 million (approximately EUR 17,250) per month. Therefore, without prejudice to the announced new study of tranches and rates, the 5% increase in the marginal tax rate would only apply for income exceeding CLP 180 million (approximately EUR 200,000) annually.

Municipal business permits and licences tax investment companies.  A matter that was still uncertain and controversial in court, was clarified by interpretive rule law (i.e. retroactive). 

New requirements for Private Equity Funds (FIP, Fondos de Inversión Privados).  Now at least eight investors will be required, and each must hold less than 20% equity interest.

Special statute for SMEs.  Those companies whose sales do not exceed UF 75,000 annually (unidad de fomento, unit of account used in Chile which is constantly adjusted for inflation) (approximately EUR 2.4 million) will enjoy benefits to reduce the tax burden and facilitate tax compliance.   They can opt for an integrated regime (with a 25% corporate tax rate) or a transparent one, as opposed to the semi-integrated regime; there is instant depreciation and promotion of reinvestment of profits, among others.  This could generate significant savings for these companies.
 

Authors

Cristóbal Groetaers Lawyer CMS LAW
Cristóbal Groetaers
Senior Consultant
Santiago