The amortization of intangible assets is of great concern to the vast majority of taxpayers. The rules for amortization in Chile, at least until September 2020, seemed to leave no doubt that intangible assets do not need to be amortized in Chile. This is clear when Chilean income tax law only provides for the depreciation of physical assets and intangible assets are anything but physical. However, recent legal changes due to COVID-19 economic measures, as well as recent administrative case law from the Chilean Internal Revenue Service (IRS), appear to be changing this stiff payback landscape that has lasted for so long.
From an economic and financial point of view, tax depreciation of intangible assets is of great relevance for companies that generally carry out research, development and innovation activities. Investing in research and development (R&D) is crucial for the so-called start-up environment. When COVID-19 hit the global economy, small businesses and entrepreneurs hardest, the idea of reconsidering the amortization of intangible assets was reintroduced into the legislative debate in Chile.
When the Chilean government tabled the draft law to encourage economic reactivation and employment in the medium term through a series of tax measures, it sought an explicit reference to the amortization of some intangible assets. The message that the Chilean government sent the bill to Congress with said that this measure to amortize certain intangible assets was included in the bill as it needed to recognize the various forms of investment in technological development in an economy day more digitized.
That law was passed and became Law No. 21,256, which granted a temporary benefit to all taxpayers who purchase certain types of intangible assets between June 1, 2020 and December 31, 2022. With this in mind, taxpayers can instantly amortize their acquisition of: (i) industrial property rights; (ii) intellectual property; and (iii) new types of vegetables protected under Law No. 19.342.
The temporary benefit mentioned above, while considering a time limit, apparently implies the conclusion that the amortization of intangible assets was not included in Chilean income tax law as a specific legal change was required to make it possible.
However, in a recent statement, the Chilean IRS allowed a taxpayer to amortize software that was contributed as capital to a business. In its analysis, the Chilean IRS found that the value of software contributed as capital can be depreciated in one or up to six consecutive tax years. The reason for this would be that the Chilean IRS believes that this software is being contributed as an organizational and set-up cost that can be amortized up to six years under the provisions of the Chilean Income Tax Act.
Interestingly, the reasoning of the Chilean IRS is not to handle the matter according to the provisions of the new transitional regime that allows for the immediate amortization of intangible assets, but rather to amortize the said software in accordance with the applicable rules of Chilean income tax law.
As mentioned earlier, intangible asset depreciation is of great concern to the vast majority of taxpayers as almost every company is now forced to get involved in a highly digitized environment and actually invest heavily in various intangible assets to innovate and promote R&D, but also keep your business going in general. Chile seemed out of date in its approach, however the recent legislative changes introduced by Law No. 21.256 and the new Chilean IRS criteria should be closely monitored as they may mark the beginning of a deeper – and much needed – change .
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