Selected modifications to Chilean Tax Code

General anti-avoidance rule (GAAR)

The Tax Reform modifies the definition of ‘abuse’ and ‘simulation’ currently included in Chilean GAAR, emphasizing that the key feature of an ‘abuse’ is obtaining tax benefits in an ‘improper’ way, i.e., when the legal form of a transaction does not align with the economic effect sought by the taxpayer when entering into the transaction. 

One of the most significant highlights is that the Tax Reform’s initial proposal of replacing the current judicial procedure with a purely administrative procedure was not approved by the Chilean Congress. Accordingly, the current procedure rules remain applicable, meaning that the Chilean tax authority will still need to initiate a judicial procedure before the Chilean tax courts to pursue a GAAR case.  

Chilean tax authority assessment power  

As a general principle, the Chilean Tax Code allows the Chilean tax authority to challenge transactions executed at a value that significantly differs from ‘normal market value.’  

The Tax Reform defines ‘normal market value’ as the value that third parties would have agreed in comparable transactions and circumstances, considering the relevant characteristics of the industry, sectors, functions, assets and risks, etc.  

Under the original wording of the Tax Reform, taxpayers would have been required to follow specific valuation methods to support that a relevant transaction had ‘normal market value.' However, this valuation methodology requirement was not approved by the Chilean Congress, and under the approved wording taxpayers may submit, upon request of the Chilean tax authorities, a valuation report that supports the ‘normal market value’ without any obligation of applying a specific valuation method.  

Business reorganizations

Under the Tax Reform, mergers and de-mergers, whether domestic or international, will be tax neutral provided that (1) the tax basis in the transferred assets carries forward to the receiving entity and (2) there is no cash consideration. 

It is worth noting that in the initial wording of the Tax Reform it was suggested that mergers and de-mergers would need to have a legitimate business reason to qualify as tax neutral. However, such a requirement was not included in the approved Tax Reform.  

Finally, the Tax Reform rules that an international reorganization (different from a merger and de-merger) that produces effects in goods, shares, or rights located in Chile will be tax neutral provided that the following requirements are met:  

• It has a legitimate business reason; 
• The transaction does not entail a cash consideration for the transferor entity; 
• The tax basis in the transferred, assigned, or contributed assets is carried over to the acquiring entity;
• Legal requirements of other jurisdictions involved in the transaction have been met; and 
• Chile’s taxing rights are kept or not impacted (i.e., Chile is still able to impose taxes in a subsequent transfer of the reorganized assets).  

Selected modifications to Chilean VAT law  

VAT on the transfer of assets located abroad 

Under current VAT law, generally the sale of goods located outside of Chilean territory is not subject to VAT. The Tax Reform provides that goods located abroad will be deemed to be located in Chile, and therefore their sale will be subject to VAT, when such goods are remotely acquired from a non-Chilean resident, by a person that is not considered a VAT taxpayer for Chilean purposes, provided that the goods are destined to Chilean territory and the sales price does not exceed USD 500.  

Broadly speaking, the tax compliance procedure currently in place for digital services would apply in these cases, and thus, the operator of a digital platform would be considered the VAT taxpayer. The Tax Reform applies the simplified registration procedure (simplified registration process that allows foreign taxpayers to register in Chile to comply with VAT filings and payments) currently in place for digital services to the case of these transfers of assets (simplified registration process that allows foreign taxpayers to register in Chile to comply with VAT filings and payments for specific digital transactions). Alternatively, credit card issuers or payment processors could be appointed as withholding agents.  

VAT anti-avoidance rules 

The Tax Reform includes two special anti-avoidance rules regarding assets and real estate. 

Currently, the transfer of fixed assets and real estate is subject to VAT, but when the transfer occurs as part of a business reorganization VAT is generally not applicable. Pursuant to the Tax Reform VAT would be levied on those transfers even if they take place as part of a business reorganization if the main purpose of the reorganization is to avoid VAT.