Address and Residence for tax purposes

by | Nov 15, 2021

Last Tuesday ended the public consultation period of the circular note draft of the Chilean Internal Revenue Service that provides instructions on residence and domicile for tax purposes (the “Project”).

The Project incorporates relevant interpretative changes that modify the doctrine of the Internal Revenue Service regarding the acquisition and loss of domicile in Chile. The domicile is an extremely important factor when establishing the taxation of a person in Chile, as it determines whether he pays taxes in the country on his world income or only on those from the country.

The most relevant aspects of the Project are set out below:

1. About the residence

(i) Acquisition of residence and taxation:

Residence is acquired in the calendar year in which the person completes 184 days of physical presence in the country, interrupted or not, in a period of 12 consecutive and mobile months. Days elapsed in transit are excluded from the computation.

Income obtained during the year in which residence is acquired are subject to taxes in Chile. The foregoing implies a modification to the current interpretative criterion, which considers only the income obtained from the entry of the person to the country as taxable in Chile.

(ii) Loss of residence and taxation:

Residency is lost in the calendar year following the one in which there is at least 184 days of absence in the country, uninterrupted or not, within a period of 12 consecutive and mobile months (the “Period of Absence”). Loss of residence does not necessarily entail that of domicile.

All income obtained in the calendar year in which the residence is lost are subject to tax in Chile. The foregoing means a change to the current interpretative criterion, in which, only the income obtained up to the date on which the Period of Absence is fulfilled were subject to taxation in Chile.

2. About the address

(i) Acquisition of domicile and taxation

If domiciled in Chile is established, the person is considered domiciled from the day of entry into the country, and resident in the calendar year in which the entry was made. In this way, the income obtained during the entire calendar year in which the income occurred will be subject to tax in Chile.

(ii) Loss of domicile and taxation

To qualify the loss of domicile, all the antecedents that allow to prove the intention not to stay in the country and, especially, that the person no longer has its main business seat in Chile, must be submitted to the IRS.

For these purposes, special consideration is given to the sworn statement in which the taxpayer expressly states its will to cease to be domiciled in Chile.

As in the case of loss of residence, the income obtained in the calendar year in which the domicile was lost will be subject to tax in Chile.

(iii) On the elements that determine the domicile

The Project suggests an order of priority of the elements that must be considered to determine the acquisition or loss of domicile, establishing that the economic element will be more relevant, and in those cases in which it is not decisive, other elements such as interest or personal relationships (family or emotional ties) will be used. The above interpretation is contrary to the principles accepted in international law, and in particular, those defined by the OECD, which consider both elements (center of vital interests) equally relevant to determine the relationship that a person has with a State or jurisdiction.

An example of the above is the provisions regarding loss of domicile. The Project indicates that the person must prove that they do not have the main seat of their businesses in Chile, and in those cases in which the person has investments both in Chile and in the country where they acquired residence, they must prove that the amount of income that received in the latter exceeds those received in the former, suggesting the amount of the rents as a determining factor of linkage. Said interpretation ignores that in economic matters the relevant subjective linking element is the actual exercise of an activity in a given jurisdiction, and not the fact of the generation of passive income in which there is no development of an activity itself.

3. Conflicts of residence with countries where there is an Agreement to avoid double taxation.

The Project indicates that the conflicts of residence that exist between Chile and a country with which there is an Agreement to avoid double taxation will be resolved through the tie-breaking rules established therein, without regulating the situation to which those agreements will be subject. Regarding the people who acquire residence in a country with which Chile does not have an Agreement, the person will probably be subject to double taxation (in Chile and in the country of new residence), without prejudice to the application of the credit rules for taxes paid abroad that may be applicable.

If the Project is approved, the modifications that are related to the taxation of the income obtained by people who acquire or lose domicile, will govern for the events that occurred from January 1, 2021.

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