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Stamp Tax Duty On Foreign Loans

Author:Mr Miguel Guerrero Fuentealba
Profession:Harris Gomez Group

An important choice that companies funding their Chilean entities need to make is the form in which they do this— by debt or equity. In many cases, a good tax strategy is to use debt because at some point when the local entity is creating profit, this allows the debt to be repaid without any withholdings taxes.

What many do not know is that loan agreements often have taxes associated with them. It is very common for companies to fund their local entity without properly recording the operation or paying the associated taxes. The risk is that if audited, the entity is then subject to fines.

The statute of limitation is 3 or 6 years depending on the good faith of the taxpayer. Only once this time has passed by, counted from the date of birth of the obligation, the taxpayer may write of this tax liability.

Below we have provided a high-level overview of taxes associated with financial transactions, in this case, mainly related to loans:

What is Stamp Tax?

The Stamp Tax is an indirect tax that is levied on all financial transactions, technically known as "credit operations".

Law No.18,010, article 1, defines "credit operations" as those in which one of the parties delivers to, or commits to deliver, an amount of money and the other party commits to repay it at a moment other than the one in which the convention is set forth. Following the provision of the law, the Chilean IRS has indicated that a credit operation must be set forth in a written document for it to be subject to Stamp Tax. This means that the document must be issued and signed by the two parties that take part in the operation.

While some expert may say that the Stamp Tax (ST) replaces the Value Added-Tax (VAT), in reality the taxes have very different functions. In Chile, these kinds of operations are not within the scope of the VAT, substituting it with a lower tax burden.

How much is Stamp Tax?

The normal tax rate of VAT in Chile is a flat 19% made on the sale of goods or services, however, credit operations are subject to a much lower rate of 0.066% on the amount of the operation for each month or fraction of month between disbursement and maturity, capped at 0.8%. For documented credit operations payable on demand or with no maturity date, the applicable rate is 0.332%.

This tax is applied directly on the amount of the debt or money lent and must be withheld and paid by the debtor.

The stamp tax rate has fluctuated up and down depending on the current administrations' position...

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