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Tax regimes for Funds provided for by Law No. 20,780 dated September 29, 2014

9 December, 2014

Law No. 20,712, known as the Single Funds Act, which came into force on January 7, 2014, consolidated in a single bill the tax regulation both of the funds and their participants. This regime has been recently amended by as part of a major tax reform bill (the Tax Reform Bill or Law No. 20,780), which provides for a definitive regime effective as of January 1, 2017 and a transitory regime, which will be effective up to December 31, 2016.

Principles of the Single Funds Act that were not amended by the Tax Reform Bill – Law 20,780:

1.- Tax treatment for Closed End  Funds (CFs)

  • The CFs and their management companies shall be subject solely to the tax regime set forth in this law, regarding profits, income and amounts earned from the CFund’s investments, which means that CFs are transparent entities, i.e. non-taxpaying entities.
  • There is a sole income tax of 35% by way of rejected expenses that is levied on the following disbursements, transactions or quantities:
    1. Those which are not necessary for the development of the business of the CF.
    2. Loans that the CF grant to its participants.
    3. The use of any assets of the CF for the benefit of one or more participants.
    4. Granting of collateral over the CF’s assets to guarantee obligations.
    5. Differences in value determined by the exercise of the appraisal powers of the Chilean tax authorities.
  • There is an obligation to withhold and pay the relevant withholding tax regarding the transactions of the CF.

2.- Tax treatment for Mutual Funds (MFs)

  • The MFs and their management companies shall be subject solely to the tax regime set forth in this law, regarding profits, income and amounts earned from MF’s investments, which also means that MFs are transparent entities, i.e. non-taxpaying entities. There is also an obligation to withhold and pay the relevant withholding tax regarding the transactions of the MF.
  • In cases of merger or transformation of MF, net profits and dividends shall be deemed reinvested in the absorbing/surviving fund, even when this is a CF, and the record of dividends must continue to be kept.

3.- Taxation of participants of an CF

  1. Participants domiciled or resident in Chile
    1. Dividends distributed by the CF
      The tax treatment is the same as that of dividends of Chilean stockholding corporations, where the participants that are individuals are subject to a progressive tax with marginal rates ranging from 0 to 40%. If the participant is a legal entity, it shall be exempt. The total or partial repayment of contributed capital and its adjustments, or its redemption due to the liquidation of the investment fund, shall not be levied by such taxation, except for undistributed profits of the CF.
    2. Assignment, transfer or redemption of shares of the CF will have an equivalent treatment to that of the assignment of shares of Chilean stockholding corporations.
  2. Taxpayers not domiciled or resident in Chile.
    1. Dividends will be subject to a sole income tax of 10% (without right to any credit) except for distributions of non-taxable income or income exempt from withholding tax.
    2. The capital gains on the assignment, transfer or redemption of shares of CFs (other than when the CF is being liquidated) shall also be subject to a sole tax of 10%.There will be no tax on the assignment of transfer of shares if: a) at least during 330 continuous or discontinuous days, 80% or more of total assets of the CF is comprised of investments in certain foreign assets; b) the investment policy set out in its internal rules is consistent with the item a) above; and c) its internal rules set forth the obligation to distribute all dividends and other income from securities and capital gains received or gained by the CF that are not exempt from withholding tax.

4.- Taxation of Participants of a Mutual Fund

  1. Taxpayers domiciled or resident in Chile.
    Dividends distributed by a mutual fund are treated as dividends of Chilean stockholding corporations, and are subject to personal income tax.
  2. Taxpayers not domiciled or resident in Chile.
    Dividends distributed by the MF will be taxed with a sole income tax of 10%, without right to any credit towards the Corporate Income Tax.

5.- Rules on VAT

The compensation obtained by the management company because of the management of the Funds (i.e. management fee) is exempt from VAT in relation to the portion corresponding pro rata to shares owned by non-domiciled or non-resident investors. At the same time, the management companies have the right to use as a tax credit the VAT on the management fee without having to deduct from such credit the pro rata portion that is exempt from VAT.

Changes incorporated by the Tax Reform Bill – Law 20,780 to rules relating to Funds, which will become effective as from January 1, 2017.

  1. Tax treatment for MFs and CFs.
    The distribution of any amount from the profits generated by the fund shall be subject to the personal income tax (progressive income tax with marginal rates ranging from 0 to 35%) or withholding tax (general sole rate of 35%), as appropriate. The fund is not considered a taxpayer of Corporate Income Tax.
    The fund shall include taxes paid abroad as part of the accumulated credit balance.
  2. Tax treatment for Participants of MF and CFs.
    The distribution of any amount shall be deemed to be a dividend of shares of a Chilean stockholding corporations governed by section B), Article 14 of the Law on Income Tax, subject to Corporate Income Tax at 21% in 2014, 22.5% in 2015, 24% in 2016, 25.5% in 2017 and 27% as of 2018.

    1. Taxpayers domiciled or resident in Chile.
      1. Income attributed by the fund to the participants are taxed with Personal Income Tax, entitled to a credit pursuant to general rules.
      2. Distributed income charged to exempt income, non-taxable income or received income would not pay any tax.
      3. 3. Capital gains on the on shares of funds shall have the same tax treatment provided by the Law on Income Tax for the capital gains on the assignment of shares of Chilean stockholding corporations.
    2. Taxpayers not domiciled or resident in Chile.
      1. Dividends: these are subject to a sole income tax of 10% without any right to credit towards the Withholding Tax.
      2. The capital gains on the assignment or redemption of shares of the fund (except when the fund is being liquidated) will also be subject to the abovementioned 10% sole tax.

The abovementioned rules regarding the exemption from the sole tax on the assignment or transfer of shares shall apply.

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