New Rules on Foreign Investments

Foreign Investments

• General Rule: Investments held abroad are taxed on the net income received, meaning when the
  income is materially incorporated into the investor’s assets. For example: dividends, withdrawals,
  paid interest, etc.
• Undistributed Earnings: Profits earned by a foreign company or entity are not considered received
  by Chilean resident partners or shareholders until they are distributed.
• Controlled Foreign Company (CFC): However, if the foreign company or entity is controlled by a
  Chilean resident taxpayer, it is classified as a Controlled Foreign Company (CFC). In this case,
  passive income earned by the CFC is deemed received by the Chilean taxpayer, who is then
  required to pay taxes on it.
• Control is defined as direct or indirect ownership of 50% or more of the capital, profit rights, or
  voting rights in the entity.
• Definition of Passive Income: Passive income generally includes financial earnings such as
  dividends, withdrawals, distributions, and any other form of profit sharing from participation in other
  entities, interest, royalties, capital gains, or increases in value from the sale of goods or rights
  generating passive income. It also includes income from leasing or temporary transfer of real estate
  and capital gains from the sale of real estate, among others.

When is a Foreign Entity Considered a CFC?

• When an individual or entity owns 50% or more of the capital, profits, or voting rights in the
  foreign entity.
• When an individual or entity has sufficient authority to elect or influence the election of the
  majority of directors or administrators, or has unilateral powers to amend bylaws or appoint or
  remove the majority of directors or administrators. This applies directly, indirectly, and in conjunction
  with related parties.
• Expanded Definition of “Related” Parties:
  The new rules expand the “relationship” concept under Article 8, paragraph 17, of the Tax Code:
  • Spouses, civil partners, or relatives up to the second degree of kinship are presumed to
    be related.
  • Relatives up to the second degree of kinship are also presumed to be related (unless
    proven otherwise) if they participate in the same entity or estate established in Chile
    through which control is exercised over an entity with no domicile or residence in Chile.

Passive Income Computation Under the New CFC Rules

• Currently, passive income up to 2,400 UF is not considered accrued and is governed by the
  general rules of Article 12 of the Income Tax Law (based on receipt). If this limit of 2,400 UF is
  exceeded, the total passive income must be considered accrued.
• Under the Reform:
  To determine the 2,400 UF limit, the passive income of the taxpayer and all related parties must be
  aggregated. If the total exceeds the limit, both the taxpayer and all related parties must treat the
  entirety of their passive income as accrued.

Effective Date

The amendments to Article 41 G will come into effect on January 1, 2025.