The crazy train of taxes in Chile - The 2018 tax reform in a nutshell (for foreigners).

Had Ozzy Osbourne been present when the Chilean Minister of Finance filed the 2018 Chilean tax reform with the Chilean Congress on 23 August 2018, I am fairly certain he would have shouted: ALL ABOARD!

Is it an exaggeration? Not at all. The 2014 tax reform of President Bachelet was without question the greatest tax revolution Chile had seen in almost 30 years.

Its purpose was noble: to increase tax collections in order to fund an ambitious educational reform. That said, the approach chosen turned our tax system from one in which saving and reinvesting the profits of a business was the most tax-efficient thing to do, into one in which we might as well take that money home and buy wine, a car, travel and maybe even a cigarette if you can afford the outrageous taxes on it.

So, here comes President Pi?era with his business and government expertise determined to fix things, get our decaying economy off life-support and bring it back to what we think it used to be. Will he succeed? Let's see how it impacts foreigners:

Foreign investors

You should be happy. The reform makes sure the tax burden on your Chilean investment will not surpass 35% (down from the existing maximum tax burden of 44.45% that a German shareholder of a stock-corporation has to deal with ). The latter is achieved by making the 27% corporate income tax paid by your Chilean subsidiary fully creditable against the 35% withholding tax you are to pay when receiving dividends.

It also makes sure your Chilean subsidiary is able to heavily invest in fixed assets for the following two years allowing it to immediately depreciate up to 50% of the investment, unless you have operations in the Araucania Region, in which case you can depreciate 100% of the investment. Why only for two years? because they need you to start investing now.

Further, the government has substantially improved the requirements to qualify for a VAT exemption on the importation of capital goods. If by any chance the assets associated to your project were imported already and you paid VAT (set at 19%), do not despair. The package comes with the possibility to recover VAT paid on fixed assets provided it has been accumulated for at least two months (down from the current six months).

Moreover, an amendment to thin capitalization rules allows for project finance of large scale investments not to be disincentivized due to the fact that a lender has demanded to have a direct or indirect stake in the financed project.

What is with all these incentives? President Pi?era is a right-wing guy with a right-wing mind. He wants a lower tax burden and better tax reliefs to promote foreign investment and get the economy going. Will it work? Maybe not, but the message to investors is clear: make it rain.

Foreign providers of digital services

Like religion, politics or sports, a tax position on how to adequately tax foreign providers of digital services is at the very least controversial, yet Chile has taken a stance.

If you provide services to a Chilean resident individual such as digital intermediation, digital entertainment (games, streaming of music or videos, etc.), advertising, data storage or technological platforms, payments made to you by said individual will attract a 10% tax as a sole lien on the gross amount paid. This tax is not an income tax for purposes of our double taxation agreements, so be warned.

How will payment of the tax be secured? By making the credit card operator used by your client the withholding agent.

Wait, but what happened with digital services provided to enterprises? Did they forget about that?

Yes and no. While they did not address income characterization issues associated to digital revenue, they did close an important gap in the taxation of digital services. In a nutshell, a corporate Chilean resident client of digital services rendered or used in Chile has two options:

(a) Make sure that the remuneration for the service is subject to withholding taxes (starting at 15% up to 35%); or,

(b) Pay VAT at a rate of 19%.

If you are thinking about the nice tax treaty you have that would make the remuneration be treated as business profit (thus exempt of taxes in Chile), rest assured that with this amendment to the law, VAT would apply regardless, provided the service is one of those deemed by Chilean law as VATable.

Will this all be an issue? Maybe or maybe not. Chilean corporate clients can live with input VAT as they can offset it against output VAT. For individuals on the other hand, this won't be easy to accept.

Foreigners with a "light" operation in Chile

If your company shares the philosophy of keeping things light in a small country such as Chile, the new permanent establishment definition proposed by the government is something to keep track of.

The assumptions that will trigger one seems to be:

(a) Having a fixed place of business from which you conduct business;

(b) Having an agent operating on your behalf and regularly signing contracts pertaining your business;

(c) Having an agent performing a principal role leading to the conclusion of business or negotiation essential aspects of such, without the latter being modified by the foreign principal.

Explicitly, independent agents will not be deemed as to trigger a permanent establishment and neither will start-up activities.

Is there more? Absolutely, but attention span is limited.

Having said all the above, this is a bill of law sent to a Congress where Government has no majority. The ride of the crazy train will be long, frightening and hard, let's just hope we can all get to the destination safely and in one piece.