THE SIGNIFICANT TAX CHANGES PROPOSED BY THE FINANCE MINISTRY FOR INHERITANCES AND DONATIONS
The bill introduced in Congress on Monday eliminates exemptions for certain transfers and strengthens enforcement to prevent tax avoidance in the transfer of wealth. These proposed changes are drawing close attention from the market.
The tax reform bill focused on small and medium-sized enterprises (SMEs), introduced by the Government in Congress on Monday, addresses several key areas. These include postponing the reassessment of non-agricultural residential properties by one year; introducing new benefits for older adults in the payment of property taxes; increasing personal income taxes on the highest earners; and eliminating certain tax exemptions and benefits.
It is precisely in this last area that the bill proposes significant changes to the tax treatment of a sector that has drawn the attention of the private sector: inheritances and gifts.
The bill submitted to the Chamber of Deputies proposes eliminating the exemptions currently available for revocable gifts, which are transfers made by a donor to beneficiaries that take effect upon the donor’s death but may be revoked during the donor’s lifetime. The proposal also seeks to eliminate the exemption from inheritance and gift tax for transfers between heirs and related parties.
A document prepared by Carlos Aranís, partner at Peralta Sandoval Llaneza & Gutiérrez, explains step by step how the current treatment of these transactions would change.
Chile’s 2020 Tax Modernization Law established that inheritance and gift tax would apply only to irrevocable gifts, meaning those that the donor cannot revoke. The Executive’s recent proposal would subject both types of transactions to the same tax treatment. “This amendment is intended to prevent taxes under the Inheritance and Gift Tax Law from being deferred until the donor’s death,” Aranís said.
Changes to the Valuation of Estate Assets and the Introduction of the “Fair Market Value” Concept
The current rules may not provide sufficient certainty for either the Internal Revenue Service (SII) or the taxpayers involved in these transactions.
One of the issues addressed by the Finance Ministry’s proposal is the amendment of the rules used to value the assets that make up an estate. An estate comprises the assets, rights, and obligations belonging to a deceased person that are transferred to their heirs. The proposed changes aim to provide greater certainty both to the Internal Revenue Service (SII) and to the parties involved in these transactions.
Under current law, assets must be valued for tax purposes based on their value at the time the inheritance or gift becomes effective. Real estate is valued at its current tax-assessed value or, if acquired within the previous three years and the acquisition price is higher, at that price. Shares and securities are valued using the average prices recorded over the preceding six months. For businesses and companies, the accounting equity value is used, with assets valued under the rules described above and liabilities deducted. The prevailing market value applies to assets not covered by the specific rules.
What would change? Shares, equity interests, rights, or any other securities representing interests in companies or entities, as well as bonds and other debt securities traded on regulated markets, would be valued based on the average price recorded on those markets during the six months preceding the date of the gift.
For securities issued by entities without a stock market presence but with audited financial statements, the declared value would be the higher of the company’s tax equity and financial equity as of the relevant date or, where that information is unavailable, the corresponding values reported in the previous year’s audited financial statements.
Any other type of asset not expressly listed would have to be valued at its “fair market value,” defined as the price that unrelated parties would have agreed upon in comparable transactions. The SII would be entitled to reassess the valuation if the declared value differed “significantly” from that amount.
Exemptions Currently Available to Related Parties Would Be Restricted
The bill also introduces the option of paying the tax in three annual installments without interest, unlike the current system.
Under the current rules, individuals may make gifts using funds that have already been subject to taxation, subject to a cap of 20% of their net global income for the preceding year or an annual limit of 250 Monthly Tax Units (UTM), equivalent to approximately CLP 17.1 million. These gifts are exempt from the judicial authorization procedure known as insinuación.
How would the Finance Ministry’s proposal change this? The exemption would be eliminated for gifts made to individuals who qualify as forced heirs or beneficiaries of the donor’s fourth of improvements. The latter refers to the portion of an estate (25%) that a testator may allocate to increase the share received by one or more forced heirs, such as a spouse, civil partner, descendants, or ascendants. In other words, rather than distributing the estate equally among all forced heirs, the testator may use this additional portion to benefit certain heirs.
The exemption would also no longer apply to gifts made to parties related to the donor in the following circumstances: shareholders or controllers holding more than a 50% interest in a company; entities under common control; owners, usufructuaries, or taxpayers who, in any other capacity, hold directly or indirectly, through other individuals or entities, more than 10% of the shares, rights, equity interests, profits, or income; and the manager of a joint venture agreement or other fiduciary arrangement in which that person is entitled to more than 10% of the profits.
“This significantly restricts the scope of the exemption,” Aranís stated.
Regarding the option to pay the tax in up to three annual installments without interest, the bill introduces a new benefit compared with the current system. Under existing rules, the tax must be paid before the court authorizes the gift or, when judicial authorization is not required, within the month following the execution of the agreement. Late payment also triggers inflation adjustments and penalty interest. “This provides taxpayers with a cash-flow benefit,” the lawyer emphasized.
Analysts Closely Examine the Proposed Changes as Debate Emerges Over Anti-Avoidance Rules and Tax Refunds When Gifts Are Revoked
Lawyers have argued that existing SII rules already restrict the use of abusive tax schemes involving inheritance and gift tax benefits.
According to Consuelo Muñoz, partner in the Tax & Legal practice at Forvis Mazars, the main purpose of these adjustments is to increase tax revenue, broaden the tax base, and tighten the tax regime. “However,” she said, “they could have a disproportionate impact on middle-income groups that do not have substantial wealth structures or access to sophisticated tax advice.”
Evelyn Sepúlveda, partner at Lembeye, said that the proposed changes to revocable gifts are “understandable,” since these transactions could result in situations in which no tax was paid or the tax burden was significantly reduced. “Nevertheless, an Anti-Avoidance Rule has been in place for years, allowing the SII to pursue this type of conduct, and it was recently strengthened. The tax authority therefore already has tools to review these cases,” she noted. “Based on our experience advising family offices and corporate governance structures, we see every day how many families choose to transfer their wealth in advance through gifts—not to evade taxes, but to ensure business continuity, establish sound corporate governance, and prevent disputes among heirs,” said Pablo Ramírez, partner at ARH Abogados. He therefore considered that penalizing these gifts by eliminating exemptions for transfers between parents and children or between spouses “fails to recognize this reality.”
Patrick Humphreys, partner at Garnham Abogados, did not believe that the current legislation leaves significant room for tax avoidance schemes, as the Finance Ministry’s legislative proposal appears to suggest.“The 2020 reform, which excluded revocable gifts from taxation, was moving in the right direction. If tax were charged on this type of gift and the gift were subsequently revoked, the State could be considered to have been unjustly enriched, since it would have taxed as permanent a transaction that had only temporary effects,” he said.
Osiel González, partner at Bruzzone & González Abogados, raised a similar point: “With regard to revocable gifts, given their provisional nature—they may be revoked until the donor’s death—it is difficult to tax them if no effective transfer of wealth has taken place.”
“The greatest complexity will arise in cases where gifts are revoked but the tax has nevertheless been paid. The changes to inheritance and gift tax are quite far-reaching, particularly because they significantly amend limitation periods and asset valuation rules, which could increase legal uncertainty and arbitrariness,” he warned.
For Nicolás Alvarado, partner at Alvarado y Cía., the proposed changes fail to address what he considers the underlying problem with this tax. “The SII already has significant tools to combat the abuse of these legal arrangements, including anti-avoidance rules and other specific provisions contained in the Inheritance and Gift Tax Law itself. In my view, these changes are unnecessary and could create more problems and uncertainty for taxpayers than certainty,” he said.
Source:
Sebastián Valdenegro
El Diario Financiero