Uncertainties remain under Chile’s new tax assessment provision

On October 24 2024, Chilean Law No. 21,713 was published in the Official Gazette, relating to certain regulations to ensure tax compliance. Among the changes, a new rule replaced Article 64 of the Chilean Tax Code, which dealt with the tax assessment power of the country’s Internal Revenue Service (IRS) and tax-free reorganisations.

The IRS recently issued a draft circular letter interpreting the changes. However, the final version of the circular letter has not been released, so there are still some uncertainties regarding the application.

The following are among the changes of the new tax assessment provision, which entered into effect on November 1 2024.

Under the old rule, a ‘transfer’ required an assessment of the price of the transaction. However, there are some operations that do not imply a transfer, such as a capital increase resulting in dilution, or a spin-off, which entails an assignment. The new wording of the law allows the IRS to assess the price of a transaction even if no transfer has occurred.

The old appraisal powers were only applicable if the transaction price was below the market price. Under the new regulation, the IRS is entitled to assess the price if it is above or below market value.

Under the old standard, the definition of market value was not sufficiently clear. The new provision introduces a definition of market value as that which would have been agreed upon by non-related parties in comparable transactions and circumstances.

Under the old tax-free reorganisation provision, mergers and spin-offs were tax neutral as long as the assets and liabilities preserved the tax basis. Also, in the case of tax-free contributions, the old rule required the following:

• A legitimate business purpose;

• The contributor must continue to exist;

• It must represent an increase of capital of a new or existing company;

• No cash flows are triggered;

• The assets must preserve the tax or accounting basis the previous owner used to register; and

• The contributor must be subject to accounting standards.

The new tax-free reorganisation requirements are:

• There must be a legitimate business purpose;

• The tax basis must be preserved by the recipient; and

• No cash flows are triggered.

The changes imply that, to perform a tax-free capital contribution, formal accounting is no longer needed, and an individual can therefore benefit without the need to present full accounting records.

Furthermore, since the contributor must no longer exist, the conversion of an individual enterprise – subject to corporate tax – into a company will no longer be a taxable operation.

Finally, since the old rule required contributions to be made on a tax or an accounting basis, there were some cases where fair value did not match the accounting or tax value, triggering corporate or accounting problems. Under the new rule, a contribution can be made at a different value provided that the tax basis is preserved in the recipient.

The old regulation did not mention the tax treatment of international reorganisations producing effects in Chile. In some rulings, the IRS interpreted that as long as the effects were similar to Chilean reorganisations, they were captured under the safe harbour.

The new regulation mentions that an international reorganisation is covered by the safe harbour if the following requirements are all met:

• There is a legitimate business purpose;

• No cash flows are triggered and the tax basis is preserved;

• Chilean taxation power is maintained; and

• The recipient is not domiciled in a country named in Article 41H (low-taxation countries) or the recipient is not obliged to maintain accounting records.

The above changes are highly significant, but there are several questions and doubts regarding the application of the regulation. Some of them are expected to be addressed in the circular letter to be published by the IRS.