Chile increased taxes on foreign investors under new tax reforms signed into law in late September.
Chile taxes companies currently at a 20% rate, and there is a further 35% tax on dividends at the shareholder level. However, the shareholder receives a credit for the corporate-level tax paid, so the net additional tax is 15%.
Under the original version of tax reform proposed by the government, foreign shareholders would have had to pay tax on their shares of income at the corporate level without waiting for the income to be distributed. The business community objected. A compromise was worked out in the Chilean Congress under which shareholders have the option of paying taxes on their shares of corporate earnings as the income accrues, rather than waiting for it to be distributed. However, anyone who waits until actual distribution to pay tax will pay more. The tax at the corporate level will rise to 27% by 2018 and shareholders would be allowed a credit for only 65% of the corporate-level tax. This would bring the total tax to 44.5%, with 17.5% of it paid by the shareholder after crediting the corporate-level tax.
On the other hand, if the shareholder pays tax on an accrual basis, then the combined rate would remain at 35%. The corporate-level tax would rise to 25% in 2018, and the shareholder would pay an additional 10% rather than 15%.
Shareholders in countries with tax treaties with Chile would not be subject to the 65% cap on the corporate-level taxes that could be credited. Chile has 26 tax treaties, including with Canada, Portugal, Spain, Switzerland and the United Kingdom.
The lower house of the Chilean Congress ratified a tax treaty with the United States in late September. The upper house must still act. Ratification of the treaty by the US Senate has been blocked by Senator Rand Paul (R-Kentucky), who objects to provisions in it and four other treaties permitting the sharing of information between tax authorities in the US and the other countries.
The treaty has been awaiting ratification since 2010. It would limit withholding taxes on dividends paid cross border to 5% where the shareholder receiving the dividends owns at least 10% of the stock of the company paying the dividends. Otherwise, the limit would be 15%. Withholding taxes on interest would be capped at 4% if the interest is received by a bank or the interest is on a purchase money note in connection with an installment sale of equipment or machinery.
— contributed by Keith Martin in Washington