Chile’s Internal Revenue Service (SII) has issued Circular No. 23, providing instructions on the new text of Article 64 of the Tax Code – also known as the Tax Reform.
In Chile, the SII has the legal power to assess the price or value assigned to a transaction when it differs significantly from normal market values. If the SII exercises this power and determines a difference between the fixed price and its normal market value, it will apply a single tax at a rate of 40 percent on the amount of the adjustment. However, the SII cannot exercise the power of appraisal when an asset is transferred in the context of a business reorganization.
Article 64 regulates the SII's power of appraisal and the rules of corporate reorganization, which constitute an exception to this power.
Below, we cover the different types of reorganizations that are affected by the new guidance, along with the SII’s interpretations issued through Circular No. 23:
I. Mergers and national and international divisions, provided that the tax cost of the assets in the absorbing or merging company is maintained by the company or companies created by the division, without originating effective cash flows for the contributor.
In these cases, the following criteria apply:
- In order to determine the existence of a merger or division, the definitions in Law No. 18,046 on corporations must be used.
- The legal effects of international mergers or divisions must be equivalent to those of domestic mergers or divisions; however, the same formalities are not necessarily required.
- No legitimate business purpose is required, notwithstanding the fact that the merger or division may be reviewed through the general anti-circumvention rule.
- The divided or merged companies may transfer assets and liabilities to the new entities at the financial value recorded in their books. However, to avoid application of the appraisal power, receiving entities should maintain a separate record of their tax values.
II. Other forms of business reorganization, such as the conversion of individual entrepreneurs or contributions of assets of any kind, made by natural or legal persons, allocated within the national territory, to the extent that such reorganizations are due to a legitimate business purpose.
- Asset-contributing companies are no longer required to remain in existence.
- Additionally, a contribution of assets is not required to imply a capital increase in a pre-existing company, payment of capital in the incorporation of a company, or that the taxable value of the assets must be recorded at the respective shareholders' meeting.
III. International business reorganizations, other than mergers or divisions, that produce legal effects on assets, shares, or rights located within the country, in which there is a legitimate business purpose and all legal requirements are complied with.
- The standard is broad in that it refers to assets that are transferred, assigned, or contributed in the context of a reorganization.
- One requirement provides that Chile must maintain its taxing power with respect to the assets transferred as a result of the international reorganization. The SII states that Chile does maintain its taxing power in cases of international business reorganization, provided that the assets assigned or contributed during such process may be subsequently taxed within the country in a future sale.
- For example, it would be understood that the taxing power in Chile is affected when a Chilean company transfers an asset located abroad to a nonresident entity.
Legitimate business purpose
Article 64 includes an open definition of legitimate business purpose. Circular No. 23 states that the Article provides certainty to taxpayers regarding the criteria to which they may refer when confirming the existence of a legitimate business reason.
In addition, Article 64 states that it is up to the taxpayer to prove a legitimate business purpose through all relevant means, such as through studies or appraisal reports from companies in the field, comparisons with other taxpayers in the market or public records, and banks’ existing financing documents, among others.
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