Article 41 G of the Chilean Income Tax Law establishes the CFC (Controlled Foreign Corporation) rules in Chile. These rules require Chilean taxpayers-whether individuals or entities domiciled, resident, or incorporated in Chile-who directly or indirectly control foreign entities, to recognize certain types of income earned by those foreign entities as if they had accrued or been received in Chile.

Scope and Definitions

• Controlled Entity: A foreign entity is considered controlled if a Chilean taxpayer holds, directly or indirectly, more than 50% of its capital, profits, or voting rights, or has the ability to appoint or remove a majority of its directors, or unilaterally modify its bylaws. Control is also presumed if the entity is in a jurisdiction with low or no taxation as defined by Article 41 H.
• Passive Income: The law targets “passive income,” which includes dividends, interest, royalties, capital gains, and certain rental income, unless these are related to active business operations.

Taxation Mechanism

• Passive income accrued or received by the controlled foreign entity is deemed to be accrued or received by the Chilean controlling taxpayer in the same fiscal year, in proportion to their participation in the entity.
• The income is determined according to Chilean tax rules and converted into Chilean pesos at the year-end exchange rate.
• Foreign taxes paid on such income may be credited against Chilean tax liability.

Exemptions and Thresholds

• If passive income is less than 10% of the foreign entity’s total income, or if total passive income does not exceed 2,400 UF (approx. USD 85,000), the CFC rules do not apply.
• If passive income exceeds 80% of total income, all income of the foreign entity is treated as passive for these purposes.

Reporting and Compliance

• Chilean taxpayers must include the attributed passive income in their taxable base, even if the income has not been actually distributed by the foreign entity.
• Additional reporting obligations apply for investments in jurisdictions classified as preferential tax regimes under Article 41 H.

Key Points

• Article 41 G is designed to prevent tax deferral through the use of foreign entities that generate passive income.
• The rules apply only to passive income, not to active business income.
• The law provides mechanisms to avoid double taxation through foreign tax credits.

These provisions, effective since January 1, 2016, align Chile with global trends in anti-deferral and anti-tax haven legislation.

Country-by-Country (CbC) Reporting

Article 41 G (CFC rules) and CbC reporting are distinct but complementary components of Chile’s tax compliance framework, both targeting base erosion and profit shifting (BEPS):

1. Article 41 G (CFC Rules)
   • Focuses on taxing passive income generated by foreign entities controlled by Chilean taxpayers, particularly those in low-tax jurisdictions.
   • Presumes control if the foreign entity is domiciled in a jurisdiction classified under Article 41 H as having a preferential tax regime.
2. CbC Reporting
   • Mandated by Chilean Resolution No. 126 (2016), aligning with OECD BEPS Action 13.
   • Requires multinational enterprises (MNEs) with consolidated revenue exceeding €750 million to disclose global income allocation, taxes paid, and economic activities.

Interaction in Compliance

• Data Utilization: CbC reports provide the Chilean IRS (SII) with detailed insights into MNEs’ global operations, which may inform audits related to CFC rules (e.g., identifying passive income streams in low-tax jurisdictions).
• Shared Targets: Both mechanisms address profit shifting, though CbC focuses on transparency, while Article 41 G directly attributes untaxed passive income to Chilean taxpayers.

Regulatory Overlap

• Entities subject to CFC rules under Article 41 G may also fall under CbC reporting obligations if part of a large MNE group.
• Recent legislative updates (e.g., Law 21.713 in 2024) reinforce both frameworks by clarifying jurisdictional lists (Article 41 H) and enhancing reporting requirements.