The tax reform bill was presented to the Chilean Congress in early April 2014. Among other items, the legislation would repeal a mechanism that allows for the deferral of taxation on reinvested profits of foreign shareholders (described below).
Read also TaxNewsFlash-Americas: Chile - Proposed tax changes affecting multinationals, shareholders
Chile's current tax system includes a “taxable profits fund” mechanism (Fondo de Utilidades Tributables or FUT). The FUT is a mechanism that is intended to encourage the reinvestment of profits in Chile, by deferring shareholder-level taxation (effectively 15% to 18%) when the profits are reinvested in Chile—rather than being distributed to shareholders.
Under the current system, a company's taxable profits are subject to corporate income tax at 20% (17% for years prior to 2011). When profits are distributed, shareholders pay tax at 35% on the distribution, subject to a credit for underlying corporate taxes.
Thus, shareholders are generally only be subject to tax at an effective rate of 15% or 18%, depending on whether the underlying profits were subject to tax at 20% or 17%. None of the income tax treaties in Chile’s treaty network allows a reduction of the shareholder-level tax.
The FUT is a “special ledger” that tracks retained profits and the corresponding tax credit.
Proposal to repeal FUT
The FUT regime would be repealed under the proposed tax reforms. Thus, all profits would be immediately taxable at 35% effective 2017.
This proposal, therefore, would reduce the incentive for international groups to make reinvestments of profits in Chile.
It is expected that the elimination of the FUT mechanism, together with the proposed reforms set out below, could affect Chilean companies in one or more of the following ways—decreased cash flow and profitability; heightened pressure on dividend policies; increased working capital needs; potential weakening of debt structure; rising borrowing costs; and discouraging investments in projects.
Read a May 2014 report prepared by the KPMG member firm in Canada: Major Tax Reform Bill in Chile Affects Foreign Investment
Read a 2014 report (Spanish) prepared by the KPMG member firm in Chile on tax reform proposals to repeal the FUT: Eliminación FUT