Thin capitalization rules apply a 35% tax to interest and other related payments to nonresident related parties, where the payer is in a debt situation in excess of a ratio 3/1 debt-to-equity.

Since withholding tax on interest payments may be decreased to 4% in relation to certain financial instruments, thin capitalization rules would have the effect of returning tax liability back to 35%, but interest deductions would not be disallowed.

Related parties rules:

• The payer and payee are entities of the same Multinational Enterprise Group;

• The payer or the payee participates directly or indirectly in 10% or more of the capital or profits of the other;

• The same person participate directly or indirectly in 10% or more of the capital or profits of both the payer and the payee;

• The payee is resident in a jurisdiction with a preferential tax regime;

• Financing guaranteed by a nonresident related party (back-to-back loans);

• A Party concluding transactions with a third person, where such person concludes similar transactions with another person related to the first party.

Other rules relevant for thin capitalization purposes:

• Tax liability is imposed to the payer, therefore it would not be treated as a withholding tax but rather a thin cap tax. Tax liability is deductible for the payer;

• Ratio 3/1 debt-to-equity includes all debt contracted by the payer, whether in the local or foreign market, from related or nonrelated parties, and also includes debt contracted for the purposes of a permanent establishment situated abroad;

• Thin capitalization tax is calculated only on interest paid abroad to nonresident related parties;

• Withholding tax of interest payments abroad is deductible from thin cap tax liability;

• Thin capitalization rules do not apply to bank, insurance and other finance entities, and the financing of projects in Chile under certain conditions.