International taxation is based on residence as the point of connection of a subject with a given territory. However, today's world is characterized by open economies competing to attract many companies and governed by technology. Apart from the tax connection point represented by the tax domicile in a given country, another element relevant when taxing the income is the existence of a permanent establishment of a non-resident in that territory. The ongoing growth of the internet has diminished the need for physical establishments to conduct business in another country. The tax connection point represented by a permanent establishment (PE) is undergoing mutations and expansions, making analysis increasingly complex.
This article will review the provisions currently applicable in Chile concerning PE and look at the previous rules to understand the significant changes that have recently occurred in Chile in this area of tax rules governing cross-border transactions.
a) PE regime until December 2017
The Chilean Internal Revenue Service (SII) had consistently interpreted through various tax rulings that the activities of a foreign company implied the constitution of a PE when the following requirements were met:
- Establishment of an office or branch in Chile;
- Said office or branch assumed full representation of the foreign company, and
- Such representation allows it to enter into business on the terms indicated by the foreign company.
Consequently, if one of these requirements was missing, a PE was not considered to have been established.
b) PE regime from 2017 to 2020
On December 7, 2017, the SII issued Circular Ruling No. 57, which established a broader concept of PE. This ruling distinguished two different events when a PE is constituted. First, the concept of PE described above (see letter a) implies assuming full representation of the foreign company in Chile. Second, the case in which an agent or representative acts in Chile on behalf or for the benefit of a foreign entity, carrying out all or part of its activities (i.e., closing deals with clients or playing the primary role leading to their conclusion). As can be seen, this ruling broadened the concept of PE to include cases where there is a lack of full representation. This broader concept of PE was influenced by some aspects of the post-BEPS idea of Agent-PE, contained in Article 5(5) of the OECD and UN Model (2017) and Article 12 of the MLI.
c) PE regime as of 2020
In February 2020, the Chilean government enacted a tax modernization bill that was a relevant milestone concerning the concept of domestic PE. As a result, a detailed definition of PE is included in Chilean law for the first time.
This new regulation is innovative with respect to the provisions of circular 57. It introduces a new alternative requirement to the concept of PE, which is the existence of a "permanent" or "habitual" activity carried out in Chile.
However, unlike the concept contained in the OECD and UN Model Tax Treaty, the Chilean provisions do not expressly state that the place of business must be "fixed" to constitute a PE in Chile.
It is relevant to note that some elements of the new definition of PE still need to be clarified by the SII, such as "leading role", "permanent", "habitual", among others. However, considering the historical pronouncements of the tax authority, it is expected that these concepts will be interpreted broadly.
Companies wishing to do business with counterparts residing in Chile should pay attention to the analysis of their operations to verify whether or not they are affected by the new PE rules. This considers the traditional concept of physical presence and other modalities more aligned to operations with high geographical mobility of its parties and the novelties of the digital economy.