Background

Interest paid to foreign or international banks and to foreign or international financial institutions is subject to withholding tax at a reduced rate of 4% on the gross amount paid (instead of the normal rate of 35%).

Until 2001, it was necessary for the financial entity to be approved by the Central Bank to enjoy the reduced rate. This requirement was eliminated by Law 19,768 of 2001.

Definition of financial institutions

The tax administration (SII) has defined the concepts of foreign financial institutions and international financial institutions by way of Circular 27 dated 30 April 2008. A foreign financial institution is defined as an entity incorporated abroad whose purpose is to grant loans or finance. An international financial institution is defined as an entity with the same purpose whose capital is made up of contributions from different member countries or contributions from institutions from different countries, provided that the capital and reserves of such institutions amounts to at least one fourth of the minimum amount required for a foreign bank to be established in Chile. This concept is the same as the concept previously established by the Central Bank.

Voluntary registration of financial institutions

In order to facilitate control and provide certainty to withholding agents and borrowers, the SII will keep a voluntary register of eligible institutions. Registration must be requested by a representative with authority to file it. The SII will define the documents necessary to approve the registration. As from the issue of a favourable decision, payments to the registered institution will be taxed at the 4% reduced rate.

Borrowers of funds from non-registered institutions may be required to provide proof of the lender's compliance with the conditions for the application of the reduced rate.

Thin capitalization rules

Interest paid to non-resident related entities or persons on excessive debt is taxed at the normal 35% rate (instead of 4%). For these purposes, debt is deemed to be excessive if the payer's debt/equity ratio exceeds 3:1. Chile does not treat interest paid on excessive debt as a dividend but instead disallows the use of the reduced rate.