Law 20.780 of Tax Reform from September 2014 introduced amendments to the Law on Income Tax (LIR) that will apply during 2015 2016, related to the following matters:
1. FUT in partnerships
The substituted article 14 of the LIR will apply in 2015 and 2016, amending the FUT of partnerships in the following:
1.1. Withdrawal of forced companies to keep accounts
A. Taxation until December 31st, 2014.
a) Withdrawals are taxed up to the amount of FUT.
b) Order of allocation of withdrawals, FUT, FUF, accrued FUT and FUNT.
c) Withdrawals in excess.
B. Taxation period 2015-2016
a) Withdrawals are taxed regardless of FUT in any capacity.
b) The tax status of withdrawals is defined in the same year.
c) Order of allocation of withdrawals: FUT, FUF, FUNT, Finantial Utilities retained in excess of taxable and nontaxable, Capital and Capital Gains.
d) No more withdrawals will be generated in excess.
1.2. Taxation of withdrawals in excess
a) From January 1st, 2015, no withdrawals will be generated in excess, because the tax situation of withdrawals is defined in the same year.
b) Until December 31st, 2014, withdrawals were charged to FUT, FUF, accrued FUT or FUNT, or were left as withdrawals in excess, and the assignee of social rights took care of the retirement excess, having to pay the final tax or the single tax of Article 21 of the LIR.
c) During 2015 a flat tax of 32% can be paid, substituting the final taxes (IGC or IA) or the single tax of Article 21, and being debased from the separate register which is kept in the FUT.
d) Withdrawals in excess and balance are considered made on the first subsequent year from FUT, FUF or FUNT; but the first withdrawals to charge are the exercise ones and then the excess ones.
e) The allocation order of withdrawals in excess in the period 2015-2016 is FUT, FUF, FUNT.
f) The partners are taxed proportionally to their withdrawals in excess with respect to the total.
g) The transferee pays the final tax or flat tax of Article 21 of the LIR.
h) In case of transformation of partnership into limited company, the only tax which applies is the Article 21 LIR.
i) In case of merger or division, withdrawals in excess are distributed in proportion to the tax equity.
j) In the event of termination of business, excess withdrawals are added to the tax equity to determine the affected flat tax amounts to Article 38a of the LIR.
k) For withdrawals in excess with taxation pending at December 31st, 2016, to determine their taxation regime, should be distinguished between income attributed regime (RRA) and arrangements for partial integration (RIP).
1.3. Taxation of reinvestments and FUR registration
a) The tax treatment of reinvestment in partnerships and reinvestment in the acquisition of shares for payment of corporations is equal.
b) Companies should record their reinvestments as taxable and non-taxable to a new record called FUR.
c) The possibility of reinvesting the highest value obtained on the disposal of social rights is eliminated.
d) The tax treatment of the reinvestments made in individual companies is unchanged, as it is the only case where there is transfer of FUT, plus in corporate reorganizations (conversion of individual enterprise in society, merger, and division).
e) No transfer of FUT is made when talking about reinvestment in societies, made by capital contribution or by purchase of shares for payment.
f) The reinvestments must comply with the legal requirements of the society in which they are reinvested, and this should be done within 20 calendar days.
g) To operate the suspension of payment of final taxes, the investor is required to report to the receiving society that there is a retreat reinvested, as well as the amount of the credit for the First Category Tax (IDPC), among other data, based on the Certificate No. 15 (provisional) emitted by the source company, subject to the Certificate No. 16, which must be issued by the company with a permanent certificate.
h) In case of social rights transferring or shares which have been reinvested, or one-taxable return of capital, a tax withdrawal occurs, except in reinvestment situations.
i) In case of sale of return of capital, the first complaint is the FUR, and then FUT, FUF and FUNT.
j) The highest value obtained which comes from the sale of rights is affected by the general system; but to determine the greatest value, it must be considered within the tax cost of rights or shares reinvested earnings.
1.4 Business Reorganization
a) Corporate reorganizations are considered as a reinvestment.
b) In corporate reorganizations (conversion of individual enterprise into society, merger and division of companies), there is a FUT transfer and a suspension of payment of final taxes.
c) In societies division, FUR, FUT, FUF and FUNT are distributed proportionally to Tax Equity.
2. Return of Capital
a) Article Nº7 is replaced by Article Nº17 of the LIR by the period 2015-2016.
b) Returns of capital do not constitute income.
c) Amounts that have not paid taxes for the LIR are not considered equity.
d) Are considered returns of capital those effected according to Article 69 of the Tax Code.
e) Point 7 of Article 17 of the LIR provides the following allocation order to determine whether if an operation is actually a return of capital: FUR, FUT, FUF, FUNT, financial profits, capital, and their adjustments, and finally, capital gains unjustified.
f) The imputation is done considering the remnants of the previous year.
g) If the complaint is made to the capital, then the value of the investment decreases; but there is a change of asset for the investor.
h) Financial or balance profits are determined at the end of the previous year or the same period of the return, as in the case of corporations or partnerships.
3. Tax cost of social rights
a) Paragraph 2 of point Nº 8 of Article 17 of the LIR, referred to the tax cost of the rights or remedies, is eliminated. This paragraph does not include utilities that have not paid taxes for the LIR when they are related to a person.
b) Two transitional provisions (Nº 7 and 8 of section I of Article 3 Transitional) are added to Law 20.780. They establish that the utilities which have not paid LIR taxes are part of the tax cost of the social rights and actions in certain cases, if the investment has been made before January 1st 2015 and the sale after this date, including rollovers. The tax treatment is applied regardless of whether the purchaser is a related person.
c) In the case of reinvestment in social rights or shares in the period 2015-2016, the utilities have not paid taxes for the LIR are part of the tax cost, to determine the best value subject to tax, regardless the utilities are retreated and taxed with final tax.
4. Tax loss
Substitutes the 2nd paragraph, Nº3, Article 31 of the LIR, under which trading losses are charged in the following order:
1º Utilities and quantities affected by IGC or IA or recorded in the FUT registration, whether or not affected by the IDPC, starting with the oldest, which can recover the IDPC paid via provisional payment;
2º Where an excess of losses not absorbed by utilities recorded in the FUT, the duly adjusted balance will be allocated as an expense to income for the year immediately following; or
3º If in the immediately following year the complaint could not be done, because of a loss generation, then it is charged to the income recorded in the FUT obtained in the same year.
5. Term Tax money
a) Article 38a of the LIR, to govern during the years 2015 and 2016 is replaced.
b) The article applies to the termination of business of those companies that determine actual income through full accounting.
c) At the date of termination of business, are understood as withdrawn or distributed all the income or amounts accumulated in the company in FUT.
d) Such income or accrued amounts are taxed at a flat tax of 35%; but the owner of the company resident in Chile may choose to pay IGC with an average rate of the highest marginal rates have affected him in the past 6 years.
e) The main legal changes are related to:
• How to determine the affected amounts to tax.
• Amounts that are not taxed.
• Period to be considered in determining the average rate of the IGC.
• Value of tax cost of the assets allocated to the business owners.
f) To determine the affected amounts to tax, you must choose the greater of: a) FUT + FUR; or b) CPT + WITHDRAWALS IN EXCESS – FUNT + CAPITAL.
g) To determine the tax equity, earnings that have not paid taxes in the LIR are not considered.
h) If the company which terminates rotation has owners (partners, community members, etc.) that determine the actual income through full accounting, the amounts due to them are moved to FUT.
i) The period to be considered for calculating the average rate of the highest marginal rates of the IGC is the last 6 years.
j) The assets of the company are given to its owners with the value of tax cost.
6. Tax base of the Complementary Global Tax (IGC)
a) According to the legal changes, they should be included in the tax base of IGC:
• All withdrawals in any capacity that have been made, including the amounts that are not charged to equity as a result of a return of capital (unless they are charged to FUNT)
• The passive income earned from investments abroad, as provided for in Article 41 letter g) of the LIR.
• The alleged income determined in a process of justification of investments, when the origin of the funds are not credited, as provided in Articles 70 and 71 of the LIR.
7. Additional Tax base (IA)
a) Article 62 of the Income Tax Law was amended in order to match this legal provision with the amendments to Article 14 letter A) and Article 17 No. 7, of that law, in the sense that withdrawals in any capacity that have been made, are encumbered with additional tax, even those that are not allocated to capital in a capital reduction, unless they be recognized in income not constitute income (INR).
b) IGC exempt income are taxed with the IA; but they are not taxed with this tax exempt income of the IA.
c) Obviously, they are not taxable and are not included in the taxable base of the IA INR.
8. Additional tax retention (IA)
a) Nº. 4 of Article 74 of the LIR is modified to align it with the provisions of the new Article 14 letter A) of that law and the repeal of Article 14a.
b) Thus, the reference to amending the statute that established the system of reinvestment, which deals with an exception to the obligation to make the retention of IA, in case the recipient of a retirement will declare the taxpayer must retain that it will make a reinvestment of profits.
c) The reference to Article 14a is removed, leaving only the rule it refers to the simplified procedure of Article 14b, which provides that the retention of additional tax-rate is 35%.
d) The retention rate of the AI, on the items mentioned in paragraph 3 of Article 21 of the LIR, is amended by replacing the numeral 35% to 45%. Such modification is to establish the obligation to withhold taxes affecting all taxpayers not domiciled or resident in Chile, in respect of the amounts indicated in paragraphs i) to iv) of paragraph 3 of Article 21 of the LIR, that is, to hold, by the IA of 35% affecting those taxpayers, the 10% additional fee or surcharge that the same rule states.