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Tax treatment of transactions with derivatives

Francisca Pérez

A bill recently submitted to Congress contains the long-awaited tax regulations for transactions with derivative instruments. The bill contains definitions of transactions covered, exclusions, rules on sourcing of income, rules for income registration and expense deductibility and inclusion of options in the purchase cost of shares in Chilean companies.

The new treatment preserves the non-applicability of withholding taxes to payments originating in derivative transactions with non-resident counterparties, with no physical delivery of shares or participations in Chilean companies, and leaves behind the current criterion held by the Chilean IRS, of distinguishing between transactions with speculative and hedging purposes, where only the latter are fee from Chilean taxation.

In the absence of a legal or regulatory definition of non-hedging or speculative transactions, there has always been a measure of doubt as to whether a payment to a foreign counterparty will be subject to withholding tax or if the Chilean IRS will claim failure to pay taxes and apply penalties within the tax statute of limitations.

There is general consensus as to the need to provide certainty to all agents involved in the financial business and hence we would expect the bill to be enacted within the next few months.

Francisca Pérez

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