We have a large intercompany loan to our wholly owned subsidiary in Chile that we are not charging interest on. We would like to bring it back to Australia parent company. Any advice on the
Intercompany debt in Chile
Answers
STAMP DUTY
Earlier, the stamp duty was 0.05%. However, as of 31 January 2013, the stamp tax has been reduced to 0.033% of the loan principal amount per month (or part month, between the granting of the loan and date of repayment), up to a maximum of 0.4% of the principal amount.
INTERCOMPANY DEBT LIMITS AND WITHHOLDING TAX ON INTEREST
In general, a company's debt is considered excessive in circumstances when, in the commercial year in which the debt was incurred, the debt exceeds 3 times the company's net worth (debt equity ratio of 3:1) for tax purposes. Generally, interest paid to non-residents is subject to a 35% withholding tax. However, loan or credit facility interest paid to a foreign bank, foreign financial institution and certain others (unrelated parties) is subject to a reduced 4% withholding tax.
A tax treaty has been signed between Australia and Chile and is effective starting 1 January 2014. Rates under the treaty are as follows:
INTEREST
Withholding tax on interest is 10%. However, in case of interest derived by a financial institution which is unrelated to and dealing wholly independently with the payer, the rate is 5%.
REPATRIATING PROFITS
Profits repatriated to a parent company abroad from Chile fall under the category of “Additional tax”. Dividends, withdrawals and/or remittance of profits from Chile are taxed at the general additional tax rate of 35%. The first category income tax paid at the corporate level may be used as a credit. Currently, corporate tax rate in Chile is 20%.
Is it possible to use the profits we would like to repatriate back to Australia to pay off the intercompany loan? Therefore eradicating the loan and getting profits back without incurring 'additional tax' at 35%?
What is your total I/CO rec to I/CO pay position with the subsidiary? How long has the debt in effect and what is the impact in the current period of interest impound? What is the debt level relative to the profit level?
I disagree with the 'International Representative' above, from a tax law perspective any rec/pay that has been outstanding for a year or more that is repatriated is treated as a dividend. This is a standard treatment under OECD guidelines and a rule of thumb all countries company with.
In terms of settling the debt, I would say look at (1) the rec/pay position (2) what interest is left outstanding after that and book the change in the current period and (3) determine what profits remain relative to the amount of debt that needs to be settled.