30-08-2022
1.What are the differences in tax treatment between an acquisition of stock in a company and the acquisition of business assets and liabilities?
As a general rule, acquisition of stock is the most used method of acquiring a Chilean company, mainly because this method has the following positive taxation effects: the sale of stock is not subject to value added tax (VAT), and the operative losses of the acquired company can continue to be used. Therefore, it is highly recommended to conduct a tax due diligence to assess any tax liability that may arise after the acquisition of the targeted company.
Another alternative allowed by Chilean legislation is acquiring the essential assets and liabilities of the targeted company, which may be recommended if the buyer wants to acquire certain strategic assets rather than the company itself. This alternative from a tax perspective generally triggers the application of VAT at a rate of 19 per cent, which, if the acquiring company is based in Chile, may be used as a fiscal tax credit. Also, income tax will be generated by the seller if a capital gain is obtained in such transaction.
2.In what circumstances does a purchaser get a step-up in basis in the business assets of the target company? Can goodwill and other intangibles be depreciated for tax purposes in the event of the purchase of those assets, and the purchase of stock in a company owning those assets?
The tax basis for the acquisition of the business assets of the target company will be the price effectively paid for it and allocated to each asset itself. A step-up in basis of such acquisitions is not allowed by Chilean legislation.
However, goodwill may arise if the buyer acquires 100 per cent of the stock of the targeted company and the company is then merged with the buyer´s company. In such a case, if the paying price is higher than the tax equity of the acquired company, the difference of those amounts will be treated as goodwill for Chilean tax purposes.
In this case, goodwill will be assigned to non-monetary assets in order to step up the basis of such assets with a cap of their respective fair market value. The new tax basis of the assets subject to the step-up can be depreciated following general rules. However, if a remaining amount still subsists because it was not covered by the fair market value of the assets to which it was allocated, it will be considered as an intangible asset, which can only be depreciated once the company is dissolved.
3.Are company mergers or share exchanges common forms of acquisition?
Both mergers and share exchanges are methods of acquiring companies according to Chilean tax law. From a tax point of view, mergers may be more efficient than share exchanges since they can be tax neutral, although some exceptions may apply. Additionally, it is usual that mergers are not subject to income tax and VAT. Regarding mergers, tax attributes and accumulated operative losses may not be passed on to the surviving company. Such items may be used only if the merging company generated them itself.
A share exchange, on the other hand, may be subject to income tax since it is a sale between two parties and therefore the capital gain will be subject to the correspondent taxation for both parties.
4.Are documentary taxes payable on the acquisition of stock or business assets and, if so, what are the rates and who is accountable? Are any other transaction taxes payable?
There are no documentary taxes such as stamp duties that may affect the acquisition of stock or business assets. The Chilean Stamp Tax only applies to loans at a tax rate that varies between 0.066 per cent and 0.8 per cent of the capital. Notwithstanding, VAT may be applicable to the acquisition of business assets at a tax rate of 19 per cent. The paid VAT can be used as fiscal tax credit if the acquiring company is established within Chile and is a VAT payer.
According to Chilean law, the buyer who acquires the shares or assets will be responsible for any tax liabilities that may have been generated prior to the purchase itself. This applies not only to tax matters, but also to other areas of law such as labour law. Therefore, it is extremely important to include in the negotiation documents and in the final contracts all types of indemnity clauses that seek to minimise these collateral damages. Warranties and indemnity clauses are generally included in the same contract in which the acquisition of stock or business assets is agreed upon.
The aforementioned makes it imperative to perform a tax due diligence to avoid any tax or legal contingencies after the acquisition of the stock or business assets. Payments made in compliance with an indemnity or guarantee clause are subject to taxation in Chile. If the payments are made by an entity with residence in Chile to a non-resident, WHT would apply at rate of 35 per cent. If the payments are made because of the execution of an indemnity or guarantee clause between two non-resident companies, no taxation would accrue in Chile.
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