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11.06.2019

Chile: Permanent establishment – a modern concept?

The Chilean Government announced a tax modernisation project that includes a legal definition of PE

Key Facts
  • The project repeats the paradigm of physical presence as a requirement for a company to be understood as exercising economic activities in a territory.
  • The legislator is missing the chance to include the permanent digital or virtual establishment, or that of a significant economic presence, or even to solve complex cases of PE linked to the provision of services to the network and other technologies.
  • The rule does not specify which activities are referred to as preparatory or auxiliary, or both.
Author
Jorge Enrique Espinosa Sepúlveda
Managing Partner
Chile
> View Profile

In a global and growing economy, the concept of permanent establishment (PE) is extremely relevant and controversial in terms of international taxation. This parameter is used to determine which states can collect the taxes when multinational companies develop activities or obtain income in multiple countries or territories.

Since the Chilean Income Tax Law does not cover the concept of PE, a few months ago the Chilean Government announced a tax modernisation project that includes a legal definition. However, this project has not yet been discussed in the National Congress of Chile.

The project includes part of what the Servicio de Impuestos Internos (SII; Internal Revenue Service) has established in its administrative interpretations, as well as making changes to define and clarify the concept of PE, taking the OECD guidelines and adapting international concepts to our specific national tax law.

  1. PE is defined from a domestic perspective, for cases in which a double taxation treaty is not applicable.
  2. The definition is extended to facilities and construction projects. 
  3. A representative is divided into two categories: a dependent agent, which is considered a PE if it has an active and main role; and an independent agent, which is not considered a PE if the activity is developed in the regular course of business.
  4. A POA or representation agreement is crucial when considering whether a company is a PE or not. This restricts the current SII concept, which has until now not considered the existence of a POA or agreement, but applies to all kinds of representation or performance.
  5. Organisation and start-up activities are not considered a PE.

It is worth noting that the project repeats the paradigm of physical presence as a requirement for a company to be understood as exercising economic activities in a territory. This is no longer consistent with a globalised world, in which technology has changed ways of conducting business through internet-based markets that no longer require physical presence.

The EU and the OECD have suggested modifying double taxation treaties through the OECD Model Conventions and BEPS Actions. However, the legislator is missing the chance to include the permanent digital or virtual establishment, or that of a significant economic presence, or even to solve complex cases of PE linked to the provision of services to the network and other technologies.

The final point of the project, regarding organisation or start-up activities, is also relevant. The rule does not specify which activities are referred to as preparatory or auxiliary, or both. It does not mention the effects of these activities with respect to subsequent qualification as a PE. There is no doubt that this last case would be defined a PE, but the starting point of developing an organisation or start-up activities is unclear; it may have been developed from a company already established in the country. This is very important in terms of deducting expenses, because only expenses or amortisations incurred as part of a PE’s activities in Chile can be deducted.

To conclude, a better explanation is required than that contained in the project’s message. Foreign taxpayers need to know with certainty when they must or must not pay taxes in Chile, and the digital economy must be included when adopting new concepts that are appropriate to our times. 

Article published in ITP Newsletter #1/2019
Changes in international tax law and country-specific developments with respect to the taxation of permanent establishments in 10 selected countries
View publication
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