Intercompany Loans

Bringing foreign loans into Chile does not necessitate obtaining prior approval from the Chilean Central Bank. However, information about the transactions must be provided to the FEM entity involved in the process.

This information must then be relayed to the Chilean Central Bank before the funds are released to the borrower. The borrower can choose to receive the foreign currency or its equivalent in Chilean pesos.

Repayments of the loan, including capital, interest, and other associated obligations, must be made through the FEM and the Chilean Central Bank must be informed of these payments through a commercial bank.

The stamp duty on loans is based on the maturity date, with a rate of 0.066% per month or fraction thereof, with a maximum rate of 0.8%. However, for loans without a set maturity date or on-demand loans, the rate is 0.332% of the total amount. In summary, the rate of stamp duty varies depending on the type and time frame of the credit operation among other factors.

An intercompany loan must have an interest due to the price transfer policy of the Organisation for Economic Co-operation and Development (OCDE). The OCDE's Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations require that related party transactions, such as intercompany loans, be conducted on terms that are consistent with those that would be made between independent parties. This means that the terms and conditions of the loan, including the interest rate, should be comparable to those that would be offered by a third-party lender. This is to prevent companies from artificially shifting profits to low-tax jurisdictions through sweetheart deals with related parties, a practice known as transfer pricing. Therefore, the interest rate on an intercompany loan must be set at a market rate to ensure that the loan is conducted on arm's length terms and does not result in tax avoidance.

As a general rule, interest on foreign loans is subject to a 35% tax withheld. However, the tax is lowered to 4% for loans from foreign or international banking or financial institutions, and from certain foreign pension funds and insurance companies. The Chilean Internal Revenue Service must be informed of the terms of the transaction.

This tax must be withheld and paid in the same way as the tax on royalty payments. If the creditor is located in a country with a double taxation agreement with Chile, the 35% tax could be reduced to 15% or 10%.

A recent tax reform restricted the 4% reduced withholding tax rate on loans from foreign or international banking or financial institutions, in the case of structured or successive financing agreements that allow the transfer of interest paid to entities not eligible for the reduced rate if they were the creditor. Loans granted before the reform came into effect will still be governed by the previous provisions. If a loan is considered "related" and eligible for reduced rates through a double taxation agreement or law, thin capitalization rules will apply.

Loans with guarantees from related parties abroad will not be considered related party loans unless the guarantor is the ultimate beneficiary of the interest.

In the case of "excess debt," meaning a debt-to-equity ratio higher than 3:1, thin capitalization rules will apply and interest on the excess debt with related parties will be taxed at the debtor company's level with a 35% single tax, which will be charged to the debtor.

This tax may be considered a deductible expense for the interest payer and can be credited against the Additional Tax withheld and paid at a rate of 4% or reduced due to a double taxation agreement, calculated proportionally.

The thin capitalization rules will not apply if the financing obtained meets the following conditions:

• It is intended to finance the development, expansion, or improvement of one or more projects in Chile.

• The majority of the financing is obtained from entities that are not related to the borrower.

• The lenders or service providers require the creation of common property entities with the borrower or its related entities due to legal, financial, or economic reasons.

• The interest and other amounts, as well as the guarantees, have been agreed at their normal market value.

It was established that loans granted before the modification of the thin capitalization rules in 2015 and 2020 would still be governed by the rules in effect at the time of granting, unless they were modified after that date.