Manuel José Garcés Contador
Carey, Santiago
mgarces@carey.cl

Alan Blanche Pupkin
Carey, Santiago
ablanche@carey.cl

Introduction

This article examines key aspects of the Chilean tax treatment applicable to the assignment of monetary credits in cross-border transactions. The analysis is anchored in a critical assessment of an interpretation issued by the Chilean Internal Revenue Service (Servicio de Impuestos Internos or SII) in Ruling No 801, dated 24 April 2024 (‘Ruling 801’).

Ruling 801 provides a useful framework to explore three core issues that typically arise during these transactions: (1) the withholding tax (WHT) treatment of interest accrued but unpaid before the assignment; (2) the tax implications arising from the assignment itself; and (3) the applicable tax treatment for a Chilean assignee acquiring the credit.

Chilean tax rules on monetary credit assignments

The tax implications of credit assignments are not comprehensively regulated under Chilean tax law. The SII relies on general civil law principles and defines credit assignments broadly as the transfer of a right. Accordingly, the relevant tax analysis has traditionally focused on the treatment of the interest associated with the assigned credit.

As a general rule, interest payments to foreign taxpayers are subject to a 35 per cent WHT, unless a reduced rate applies under a double taxation treaty (typically ten per cent or 15 per cent), or under domestic law, which provides for a four per cent preferential rate for qualifying foreign banks and financial institutions.

The obligation to withhold arises according to specific legally defined events. Chilean tax law outlines both the events that trigger the accrual of WHT and the events that generate an obligation to withhold and remit tax.

Triggering events include: (1) payment, (2) credit to the creditor’s account, (3) recognition of interest as an expense in the debtor’s accounting, (4) distribution, (5) withdrawal, (6) remittance or (7) making funds available. The first of these to occur determines the accrual of the WHT.

Of these, all but number (3) also constitute withholding events, which means the obligation to actually remit the tax is suspended until a withholding event occurs.

Ruling 801

In Ruling 801, the SII analysed the tax implications of a cross-border loan assignment. A French company had extended a loan to a Chilean special purpose vehicle (SPV) and later assigned the credit to its Chilean holding subsidiary.

The key conclusions in the ruling are as follows:

• accrued but unpaid interest: since no triggering event had occurred, WHT had not yet accrued;
• effect of the assignment: the credit assignment did not itself trigger WHT; and
• Chilean assignee treatment: the Chilean assignee must recognise taxable income on the interest component upon accrual or receipt, depending on the applicable tax regime.

When does WHT really accrue? A critical review

The SII’s conclusion that WHT had not accrued overlooks a key point: the recognition of interest as an expense in the debtor’s accounting is a triggering event, even if it is not a withholding event. If such recognition had occurred, WHT should have accrued.

This omission raises concerns, particularly in regard to tax treaty scenarios. The SII has held that amounts recorded as expenses before a treaty enters into force are not eligible for treaty benefits if paid afterwards (Ruling No 1672 of 2005). This is consistent with our interpretation: the tax obligation arises upon the triggering event, and its attributes, including the rate, become fixed.

This leads to another question: what happens if the debtor records interest as an expense triggering WHT at a preferential rate (eg, four per cent) due to the original lender’s qualification, but the credit is later assigned to an unqualified lender? The SII (Ruling No 1777 of 2002) holds that each creditor must independently meet the requirements for a reduced rate to apply.

We argue that this interpretation is incorrect. Once the obligation arises and the rate is determined, subsequent changes in regard to the creditor’s identity should not alter its attributes. This view is supported by Chilean tax scholarship, distinguishing between enforceability (the withholding event) and existence (the triggering event) of a tax obligation (Baraona, 1987).

Thus, the assignee inherits the tax treatment of the accrued interest. Requiring new qualification disregards the binding effect of the original triggering event.

The SII’s flexibility depending on the fiscal impact undermines legal certainty.

The effects of credit assignment

The SII correctly affirms that credit assignments do not extinguish the relevant obligations or alter their nature. Accordingly, assignments do not trigger WHT on their own. However, this does not mean that WHT may not have already accrued. If a triggering event occurred before the assignment, WHT is due, even if withholding is delayed.

The ruling misses this nuance, weakening the coherence of WHT rules application in regard to credit assignments.

Tax treatment for the Chilean assignee

Ruling 801’s position that the Chilean assignee must recognise taxable income on the accrued interest component, regardless of the acquisition price, is flawed. In many cases, the assignee may have paid an amount equal to, or even exceeding, the sum of the credit’s face value and the accrued interest. In such situations, no actual income arises that could justify taxation in Chile.

Moreover, this interpretation ignores the rules introduced by Law No 21,210 (2020) known as the Tax Modernisation Law, which provide that income from acquiring a credit at a discount is recognised only upon actual receipt. This replaced the previous rule requiring accrual-based recognition, aligning taxation with economic substance. Under this new regime, risk is a core element: the assignee is only taxed when a gain materialises.

Thus, in Ruling 801’s case, the Chilean assignee should not be required to recognise any income at the time of the credit assignment. Taxation should only apply if the credit was acquired for less than its face value and only to the extent of the positive spread, on a cash basis.

Conclusion

Ruling 801 provides an opportunity to reevaluate the Chilean tax framework on credit assignments in cross-border settings. While correct in regard to some legal assessments, the SII overlooks important technical and economic elements.

Most notably, the ruling ignores the legal effect of accounting the recognition of interest as a WHT triggering event and fails to incorporate updated rules on income recognition for discount acquisitions. A more accurate interpretation, grounded in legal certainty and economic reality, would better serve taxpayers and the Chilean tax administration alike.

Should the SII adopt the interpretation set forth in Ruling 801 in the context of future tax audits? It is likely that taxpayers will seek to challenge such position based on the legal and technical arguments developed in this article. In that event, judicial interpretation of the applicable rules will play a decisive role in clarifying the tax treatment of cross-border credit assignments and ensuring legal certainty moving forwards.