DF Tax |  Impacts of a tax disintegration

Juan Ignacio Rivas, lawyer at Recabarren & Asociados.

John Ignatius Rivas

The tax reform promoted by the government would have as its main change the disintegration of the tax system of income tax for large companies and investment companies. This has been raised a few years ago, also motivated by the sidelong glance at the OECD countries, where the disintegrated system predominates.

The disintegration would reformulate the central axis of the income tax tax system through the separation between the First Category Tax and the final taxes that affect business owners – the Global Complementary, for residents or domiciled in Chile and that only affects natural persons, and the Additional Tax, for non-residents or not domiciled in Chile.

Disintegrating the system would imply that, in the event of withdrawals or dividends, the owners of large companies or investment companies would lose the right to use as a credit or deduction what was paid by the company at the corporate tax level. The foregoing has already been implemented to some extent with the inclusion of the partial credit imputation system, which allows the owners of non-SME companies to deduct only 65% ​​of the corporate tax from final taxes. Along with the above, it would also put an end to the possibility that people with a Global Complementary charge less than the corporate tax paid by the company obtain tax refunds in April of each year.

It is relevant to know how the disintegration would be implemented, mainly in terms of what tax would affect dividends, with what rate and if the First Category Tax will change for large companies -27%- that would be disintegrated. In addition, to quantify the universe of application of disintegration, it will be essential to know if the current categorization of SMEs will be maintained. Today they are those companies that, including those of their related parties, have gross income below 75,000 UF and passive income that does not exceed 35% of their income.

At the level of partners or shareholders who are natural persons residing or domiciled in Chile, currently the Complementary Global Tax rate cannot exceed 44.45%, therefore, if this limit is not maintained, the disintegration would have relevant implications for them.

In the case of non-residents or non-residents in Chile, currently subject to the Additional Tax, the dividend rate set when the system disintegrates will define the effective burden of their taxation, but the aim would be to increase it. In any case, the effective rate will largely depend on whether there is a double taxation agreement between Chile and the recipient’s country of residence or domicile. Likewise, the disintegration could imply the need to review some double taxation treaties or the application of the articles on dividends of the agreements, whose rates range between 0% and 15%. At the level of the dividend payer, there could be effects on mandatory withholdings and changes in cash flows, all of which will have to be determined in the face of a specific project.

Therefore, although the tax reform project is not yet known, the disintegration would constitute a structural change in our tax system. Its impact will surely provoke reviews of the organizational structures of the owners and of the companies that do not qualify as SMEs for tax purposes.

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