Legal regulation of Chilean non-recognition regimes is scarce. Further details of their requirements are often derived from regulations and rulings of the Chilean Internal Revenue Service (IRS), on which taxpayers can rely. This is also true in the case of cross-border mergers.

Article 64 of the Chilean Tax Code (Código Tributario, CTC) provides that the IRS is prevented from reassessing any taxes on a merger, if the surviving company keeps registered the same tax basis on the assets and liabilities that the contributing company used to have. Because of that provision and other rulings from the Chilean Financial Market Commission, the IRS has formed the view that mergers complying with this requirement do not trigger taxes and are thus neutral, both for the merging companies and their shareholders.

Foreign and cross-border mergers

Since the CTC does not draw a distinction based on the country in which the merging companies are located, the IRS has accepted that this treatment is also applicable to mergers agreed between foreign companies with underlying Chilean assets (foreign mergers), and to those that take place between a foreign and, at least, one Chilean company (cross-border mergers). In such cases, in addition to the above-mentioned carry-over of the tax basis of assets and liabilities, the IRS also requires that the merger has effects analogous to those of a merger under the Chilean Corporations Law (Ley sobre Sociedades Anónimas) and is carried out under a tax neutrality regime.

While the situation for cross-border mergers is relatively straightforward where the surviving company is a Chilean entity, the situation is not as clear where the surviving company is foreign since a taxpayer taxable in Chile on their worldwide income ceases to exist, and thus, Chilean tax jurisdiction may be limited. In addition to potential transfer pricing considerations, under the Chilean integrated corporate tax system (where corporate tax paid by a company may be used as a total or partial credit against personal income taxes and dividend withholding tax), in this type of merger, there would be no Chilean corporate taxpayer that could receive and keep control of the taxable profits and credits for their future imputation.

The rulings

In this context, the IRS has recently issued two rulings which will have to be considered in relation to cross-border mergers in which one or more Chilean entities are dissolved:

In Ruling Nº 1511/2020, the IRS analyzed a reverse merger under which a Chilean parent company that was wholly owned by Chilean shareholders was absorbed by its foreign subsidiary. The IRS implicitly recognized that neutrality is applicable to this type of cross-border merger but, since the surviving company will not be a Chilean corporate taxpayer, all accumulated profits will be deemed to be distributed to the dissolving company’s shareholders and the dissolving company must give a business termination notice to the IRS within 2 months of the merger and pay the resulting taxes so as to enable the IRS to carry out a complete audit to review and potentially collect taxes owed by the company. Therefore, in cross-border mergers in which a Chilean company is absorbed, accumulated taxable profits may not be carried over to the foreign surviving company as they will be deemed to be distributed and the company shall be subject to a complete business termination audit without being able to apply for the simplified business termination regime that would otherwise be applicable.

The more recent Ruling Nº 2592/2021 addresses the situation where a foreign-owned Chilean company was merged by way of a non-statutory merger (which refers to the dissolution without liquidation of a company that legally requires at least two shareholders to survive which is generally assumed to be covered by the tax regime of statutory or common mergers) into its foreign parent company and transferred all its assets to the latter, including shares in a foreign subsidiary. The IRS considered that the assets could not be transferred from the Chilean dissolving company to the foreign surviving parent on a tax-neutral basis given that the transaction constituted a reorganization in which a Chilean company contributed assets to a foreign company and, as such, the effects of that transaction were neither generated nor exhausted in Chile. This meant that the IRS could reassess the value of the dissolving company’s assets and impose a tax if such values differ from their fair market value.

Whilst some of these conclusions may appear inconsistent in legal or tax terms, it is clear that, under the IRS’s opinion, certain circumstances around a given merger (e.g. whether the shareholders are Chilean or foreign, or whether the merger is statutory or non-statutory) may determine whether or not the application of the tax-neutral treatment is applicable or denied on the transfer of assets from a Chilean company to the surviving foreign entity. In addition, elements such as the treatment of the dissolving entity’s accumulated taxable profits and the requirement of a full business termination audit should be considered.

In a context where cross-border mergers are becoming increasingly common, Chile urgently needs to update the merger tax regime in order to provide certainty to the taxpayers and to avoid leaving the relevant requirements to IRS interpretation. In the meantime, our advice is that every cross-border merger in which a Chilean company is dissolved should be carefully structured and reviewed to confirm whether non-recognition requirements are fulfilled and to assess the treatment of the company’s accumulated taxable profits.