1. The tax base of the tax to be applied upon deferral of personal taxation has been reduced to 22% of the sum of the balances of the record of accumulated profits (“RUA”) and the record of temporary differences (“RDT”). The tax rate has been increased from 1.8% to 2.5%.
The tax on deferral of personal taxation is applied to profits accumulated in companies that obtain 50% or more of their gross annual income from passive investments.
In the original bill, the tax base was the company’s total retained profits. With the purpose to levy the amount of tax that is actually deferred by the final taxpayers, the tax base was reduced to 22% of the positive balance of the RUA and the RDT.
On the other hand, the tax rate is increased from 1.8% to 2.5%. Additionally, as a result of the reduction in the tax base, the tax paid will no longer be creditable against the wealth tax.
2. Indirect credits for taxes paid by subsidiary companies overseas have been reincorporated, as well as the credit for the withholding tax paid on Chilean sourced income, with the inclusion of traceability requirements.
The original bill eliminated sections c) and d) of article 41 A, which refer to the indirect credit for taxes paid overseas by subsidiary companies and the credit for the withholding tax paid on Chilean sourced income.
The modifications presented by the Executive reincorporate these tax credits in order to mitigate the risk of double taxation that may arise as a result of their elimination. Additionally, the modifications announced also incorporate new accreditation rules affecting both types of credits, according to which the taxpayer will have to demonstrate that the taxes paid or withheld are attributable to them.
3. A maximum tax burden for income and wealth tax has been set at 50% of the profitability of the taxpayer’s assets.
This modification establishes a maximum tax burden to be applied to taxpayers, thus safeguarding the principle of non-confiscatory taxation.
For the calculation of the tax limit in relation to the taxpayer’s financial position, a legal presumption of 6% return on assets is proposed. The taxpayers may contest said presumption by demonstrating that the return on their assets was lower, but the return on assets will not be considered to be less than 2.5% for the calculation of this limit under any circumstances.
4. The applicability of the limitation to the use of carried-forward tax losses has been postponed.In 2025 and 2026 calendar years, it will be possible to deduct carried-forward losses for an amount equivalent to up to 80% and 65%, respectively, of the taxable net income for the immediately preceding calendar year. From 2027, the limit will be 50% of the net taxable income of the period.
Currently, article 31 No. 3 of the Income Tax Law allows the deduction of carried-forward tax losses as an expense without any limitation.
The original reform proposed a limit on the use of carried-forward losses from the 2024 calendar year onwards, permitting a deduction for up to 75% of the company’s net income in that year and 50% from 2025 onwards.
The modifications presented by the Executive postpone the implementation of the limit to the use of carried-forward losses. This limitation will now apply from the 2025 calendar year, to align it with the transitory instantaneous depreciation regime that has been also incorporated in the proposed amendments (see number 11 below), in order to boost investment.
However, the limit amount deductible for the 2025 and 2026 calendar years is determined in relation to the net taxable income for the immediately preceding calendar year, applying a limitation of 80% and 65%, respectively, of said net income for each year. Thus, to determine the amount of the carried-forward tax loss to be deductible in the 2025 calendar year, the net taxable income for the 2024 calendar year will be considered. Hence, if there was a tax loss in that year (for example, due to the application of the accelerated depreciation regime in 2023), no carry forward tax loss could be deducted as expense in 2025.
Starting from the 2027 calendar year, the deduction of carried-forward tax losses as expense will be limited to 50% of the net taxable income of the same period.
5. Some of the benefits contained in decree-law 2 [“DFL 2”, applicable to properties with a surface area of up to 140 m2] have been reincorporated, exclusively for senior citizens and taxpayers who purchased DFL 2 properties between January 2017 and December 2022.
Senior citizens aged over 65 who fall into the exempt bracket or first bracket of personal income tax (maximum of 30 UTA [annual tax units], approx. CLP 22 million or USD 22,000, not including property rental income) are allowed to consider income originating from any form of DFL 2 property rental as exempt income, up to an annual limit of 15.5 UTA (approx. CLP 11.3 million or USD 11,500).
Additionally, taxpayers who purchased a DFL 2 property between January 1st, 2017 and December 31st, 2022 are allowed to maintain the status of said rental income as a non-taxable income. This benefit will remain in effect until December 31, 2026.
6. Taxpayers declaring income obtained from residential property rental may deduct 10% of said income as an expense.
The proposed amendments to the reform specify that taxpayers that declare income originating from property rental will be able to deduct 10% of said income as an expense. As such, the amendments presented by the Executive recognize that individuals who receive this type of income must incur into expenses for the maintenance of the rental property in suitable conditions to be used by the lessee.
7. Regarding the rules allowing the Chilean IRS to reassess the price or value of a transaction, a definition of “legitimate business reasons” has been expressly included, as well as an alternative for taxpayers, who may decide not to use the valuation methods specified in the regulation provided they can substantiate that the transaction was carried out at market value via other supporting documentation.
The definition of “legitimate business reasons” is fairly broad, and includes improving or facilitating business conditions; obtaining competitive advantages, financing, cost or risk mitigation, and commercial objectives; among others. The list provided in the regulation is not exhaustive and includes any similar purposes other than the merely tax-related ones.
Valuation methods have been maintained, but it is expressly stated that taxpayers may prove that the agreed price is in line with market values via other supporting documentation.
Finally, the amendments exclude international business reorganizations from the application of article 64 of the Tax Code. Such reorganizations will be governed exclusively by the transfer pricing rules contained in article 41 E of the Income Tax Law.
8. An adjustment in the calculation of the net taxable income has been incorporated in order to mitigate the risk of double taxation on the distribution of financial profits in excess of taxable profits.
The reform taxes the distribution of profits included in the record of temporary differences (RDT) with corporate tax, which must be paid by the same company distributing the profits in its annual tax return.
This generates a risk of double taxation on the sums included in said record: first when they are distributed, and second when the company is required to reverse the financial depreciation in the calculation of its net taxable income in the following years.
In order to mitigate this double taxation risk, the proposed amendments allow the deduction of an amount equivalent to that on which said tax was paid from the net taxable income of the same the calendar year. Any excess can be deducted in subsequent years until it is fully offset.
9. It is expressly stated that companies subject to the general tax regime must only declare income received from other companies as part of their net taxable income when those companies are subject to the SME regime.
The original tax reform bill required companies subject to article 14 A to incorporate the distribution of profits received from all types of companies in their net taxable income, being subject to corporate tax. The modifications presented by the Executive limit the obligation to add the distributions received only to those coming from companies subject to the tax regime of article 14 D. Hence, profits received from companies subject to the general tax regime do not need to be declared as part of the net taxable income.
10. For companies that are subject to the SME regime, a schedule has been introduced to gradually increase the corporate tax rate applicable to them [“IDPC” according to its Spanish acronym]. In 2023, SMEs will pay a 15% rate IDPC, and a 20% rate in 2024.
Currently, article 20 of the Income Tax Law states that the IDPC rate for companies subject to the regime of article 14 section D) (SMEs) is 25%. However, Law 21,256 temporarily reduced said rate to 10% on income received or accrued during 2020, 2021, and 2022 fiscal years.
The original reform proposal did not include any changes in that regard, with the IDPC rate of 25% being applicable from 2023.
Recognizing that the 15-percentage-point increase in the tax rate could pose a challenge for these companies in the current economic situation, the modifications established a gradual increase in the IDPC rate. In this line, a rate of 15% has been proposed for 2023, increasing to 20% in 2024, and 25% from the 2025 fiscal year onwards.
11. For 2023, a temporary regime has been established for depreciation of fixed assets used for investment purposes, permitting the instantaneous depreciation of 50% of their tax value and an accelerated depreciation for the remaining 50%.
This temporary depreciation regime applies exclusively to new or imported fixed assets that are purchased between January 1 and December 31, 2023, which will be used for new investment projects in certain business activities. In that regard, although the regulation lists certain types of activities, this list is not exhaustive and other activities are also permitted. Likewise, this benefit also covers modifications or supplements to existing investment projects.
It is worth noticing that the wording of this regulation (transitory article 16) is extremely confusing and does not clearly establish the requirements to qualify for this benefit. Probably due to this, the final section states that the Chilean Internal Revenue Service (“SII”, according to its acronym in Spanish) will issue a resolution within two months of the publication of the law to establish “the manner in which the content of this article will be implemented”. This conflicts with the principle of legal reservation applicable to tax legislation [requirement for a tax law to specify essential elements of the tax obligation].