• Service: Tax, International Tax
  • Type: Regulatory update
  • Date: 8/23/2013

Latin America - Tax consequences of indirect share transfers 

August 23:  Multinational entities that are contemplating selling shares of a Latin American holding company or transferring shares in a reorganization involving Latin American subsidiaries must carefully evaluate the tax consequences of indirect share transfers—particularly if the indirect share transfers occur in transaction involving Chile, Peru, Panama, and/or the Dominican Republic.

Perceived share transfer abuses

Governments around the globe have heightened their scrutiny of offshore transactions in an attempt to curb “perceived abuses” by multinationals.

Similarly, Latin American jurisdictions have introduced (or are contemplating introducing) indirect share transfer legislation aimed at closing perceived deficiencies in existing tax rules and to increase tax revenues.

In general, it was understood and accepted that indirect share transfers would not be taxed in the local jurisdiction because there was no taxable or triggering event.

As briefly described below, new rules may apply to a foreign investor. This report, however, does not provide a detailed discussion of capital gains subject to local tax, compliance requirements, joint tax liability, how to implement the rules or certain other issues. Prudent taxpayers would need to consider the effect of the rules and changes in these areas.


In 2012, after Chile’s President Piñera announced plans for significant tax reform, new provisions were enacted to address certain perceived imperfections in the tax law—including one relating to the indirect (and direct transfer) of shares in Chilean entities.

In general, non-Chilean entities are only subject to Chilean tax on their Chilean-source income. Under the prior law, an indirect transfer by a non-Chilean seller was treated as generating Chilean source income only if the buyer was a Chilean resident (either an individual or entity). Thus, taxpayers could, in effect, indirectly transfer shares of Chilean entities without any Chilean tax (provided the buyer was not Chilean).

Now the concept of Chilean-source income has been broadened to include situations when at least 10% of the non-Chilean entity (e.g., the foreign holding company) is directly transferred, the indirect share/quotas transferred in a Chilean entity may be subject to Chilean tax (generally at a corporate income tax rate of 35% but lower rate may apply), regardless of the location of the residence of either the seller or the buyer.

Indirect share transfers, ownership interests, bonds or other titles convertible into shares or ownership interests or any right that represent an interest in the capital of a foreign company, are subject to Chilean tax when:

  • 20% or more of the fair value of the share or ownership interest transferred is derived from any of the following: (1) shares, ownership interest or other ownership rights in the property, control or profits of a Chilean entity; (2) a Chilean branch or permanent establishment of a foreign taxpayer; and (3) any type of movable or immovable property located in Chile or right with respect to such property when owned by a non Chilean entity
  • At the time of the transfer or within the previous 12-month period, the fair market value of the underlying assets described in any of the three situations (listed immediately above) in the corresponding proportion, is equal or greater than approximately U.S. 200 million
  • The foreign entity being transferred is domiciled or incorporated in a listed “tax haven” jurisdiction, without regard to whether the proportion of the fair value of the shares in such entity is represented by the assets (listed above) and regardless of the interest in the foreign entity that is being transferred, unless certain specific requirements are met

In general, a limited exception to application of this rule is provided in situations when the transfer or transfers have occurred within the context of a business reorganization of the corporate group.


Effective early in 2011, indirect share transfers of, or participating interests in, a Peruvian legal entity fall within the scope of Peruvian income tax and will be taxed at the general corporate income tax rate of 30%.

The indirect share transfer rules apply when:

  • At least 10% the shares of (or participating interests in) a non-resident entity (e.g., the foreign holding company) that, in turn, owns directly or indirectly shares of (or participating interests in) a Peruvian entity is directly transferred during the relevant 12-month period; and
  • The fair market value of the shares (or participating interests) of the Peruvian company, owned directly or indirectly by the non-resident entity, is equal to 50% or more of the market value of all the shares or participating interests representing the equity capital of the nonresident for the 12-month period before the transfer.

Indirect share transfer rules also apply when the nonresident entity is a resident in a tax haven or low tax jurisdiction for Peruvian tax purposes, unless it can be demonstrated that the condition for application of the rules is not satisfied.

Note that the regulation includes an anti-avoidance measure that will deem an indirect share transfer or transfer of participating interests in a Peruvian legal entity to occur when the nonresident (directly or indirectly) issues new shares or participating interests as a consequence of a capital increase (generated by a new capital contribution, capitalization of credits, or a reorganization), and assigns such shares a value below their market value. In such instances, the nonresident will be deemed to have transferred the shares or participating interests issued as a result of the capital increase. This “deeming provision” will only apply, however, if at least one of the above criteria is present.

With respect to indirect share transfers, the taxable base is determined by deducting the face value (i.e., the amount paid by the acquirer) of the shares or participating interests from the fair market value deriving from the capital increase.


Early in 2012, a decree was published to regulate the transfer of bonds, shares, interests, and other securities. As a consequence, the concept of Panamanian-source income is broadened to include the sale or alienation of bonds, shares, interests, or any other securities or stock issued by a natural or legal person without domicile in Panama, that directly or indirectly own shares of an entity that accrues Panamanian-source income that is in turn subject to tax in Panama.

For these purposes, the corporate income tax rate on capital gains is 10%.

A special 5% income tax on the gross sales purchase price is withheld by the acquirer. The 5% withholding tax on the gross sales purchase price may be considered the final capital gains tax by the seller.

If the withholding tax (5% of the gross sales price) exceeds the tax on the capital gain (10% on the actual gain), the seller may request a refund that may be granted in cash or as a tax credit.

Dominican Republic

The indirect transfer rules are much broader in the Dominican Republic and are not limited to the indirect transfers of shares, interest, bonds, and/or securities.

For these purposes, goods or rights located, placed or used in the Dominican Republic are deemed to be disposed of, if at any time, the shares of the foreign entity are transferred. The corporate income tax rate applicable to capital gains is 29% for 2013, but will decrease to 28% in 2014, and to 27% in 2015 and thereafter.

In order to determine the capital gain, the tax basis of the Dominican Republic shares (i.e., the entity that owns the goods or rights in the Dominican Republic) is computed by obtaining the original acquisition price and adjusting it for inflation, existing reserves, undistributed profits, etc.

In addition and for tax purposes only, the Dominican Republic tax authority estimates the value taking into account the proportional fair market value of the shares and to whom the shares were transferred.

KPMG observation

Multinational corporations contemplating indirect share transfers in Latin America must carefully evaluate the possible tax implications; examine situations of potential double taxation; and keep in mind situations that may give rise to other tax inefficiencies—especially for transactions involving Chile, Peru, Panama, and Dominican Republic.

For more information, contact a tax professional with a KPMG member firm in Latin America:

KPMG Americas Center - Marco Banuelos

+1 305 341 6424

KPMG in Chile - Rodrigo Stein


KPMG in Peru - Rocio Bances


KPMG in Panama - Luis Laguerre


KPMG in Dominican Republic - Jose Manuel Romero

+1 809 566 9161

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