Principal taxes in Chile
All taxes in Chile are levied at the national level. There are no significant municipal, provincial or regional taxes, excepting for the Municipal License.
The principal sources of tax revenue are:
• Corporate and personal income taxes.
• Value-added tax (VAT).
• Customs duties.
• Stamp tax.
In addition, the Chilean tax system includes a real estate tax, inheritance and gift tax, and several other lesser important taxes.
Tax control
The institution in charge of the inspection and control of taxes in Chile is the Chilean Internal Revenue Service (“Servicio de Impuestos Internos or SII in Spanish) . The SII is also in charge of issuing instructions, rulings and interpretation to the tax laws. The SII has a special inspection unit for large corporate taxpayers included in a special list.
In the event of a controversy between the taxpayer and the SII, the administrative procedure is carried out in first instance before the Regional Director of the SII who acts as Tax Judge. The possibility of appealing to the Courts of Appeals and, finally, to the Supreme Court exists.
The statute of limitations is three years from the date in which the payment of the corresponding taxes should have been made. In special cases, the term extends to 6 years.
Law No.20,322 published in the Official Gazette on January 27, 2009, established the Tax and Customs Courts that will solve the controversies between the taxpayer and the SII. These courts are already working in several regions of the country; however they will not open in Santiago until the year 2013.
Income tax
Income taxation in Chile is based on two factors: the taxpayer's place of residence and the source of the income. All resident taxpayers, whether individuals or corporations, are subject to taxes on their total income, wherever earned, with the sole exceptions of foreign individuals who only pay taxes on Chilean source income for their first three years in the country. This period can be extended. In general, nonresident taxpayers are only taxed on Chilean-source income; that is, on income earned from assets located in Chile or from activities carried out in Chile. However, services rendered abroad to a Chilean resident are taxed.
Income from Chilean corporations or Chilean partnerships is always considered to be Chilean-source income.
Law No.19,840, published in the Official Gazette on November 23, 2002, considers as Chilean source income the income arising from the disposal of shares or interests representative of the capital of a legal entity constituted abroad, made to an entity domiciled, resident or constituted in Chile, whose acquisition causes, either directly or indirectly, ownership in the property or income of a company incorporated in Chile. However, this does not apply when the ownership acquired, directly or indirectly in the Chilean company, represents 10% or less of its equity or profits.
Chilean taxes are divided into category taxes, which tax income from certain activities, and global taxes, which tax all income.
The Category Taxes are:
• First Category Tax with a proportional rate applied on income from industry, commerce, mining, real estate, and other activities involving the use of capital. This tax is allowed as a credit against the global taxes due.
• Special Mining Tax.
• • Second Category Tax with a progressive rate applied on income from personal services, as an employee. Income of self-employed persons and professionals is classified as second category income, but is not subject to second category tax. The Global Taxes are:
• Complementary Tax on the total income from both categories of resident individuals.
• Additional Tax on the total income from both categories of non-resident individuals or non-resident legal entities when they are withdrawn, distributed as dividends, or remitted abroad.
Income tax rates
The principal tax rates are the following:
First Category Tax: 20 %
Second Category Tax:
• Self-employed persons (professionals, directors of corporations, professional partnerships, and others) No tax (I)
• Employees (if subject to an employment contract, this is the only tax payable). Exempt to 40% (I)
• Complementary Tax (resident individuals) Exempt to 40%
• Additional Tax (nonresident individuals and nonresident legal entities) 35%
Withholding of Additional Tax:
• Royalties paid abroad, in general 30% (II)
• Computer programs and others 15% (III)
• Royalties paid abroad for film and video 20%
• Royalties paid abroad for authors' and edition rights 15%
• Engineering or technical work 15% (IV)
• Professional or technical services 15% (IV)
• Other services paid abroad 35%
• Interest to foreign corporations 35%
• Interest to foreign banks and registered financial institutions 4% (V)
• Marine freight 5% (VI)
• Insurance premiums to foreign insurers 22%
• Reinsurance premiums to foreign reinsurers 2%
(I) Second category income can be subject to the Global Complementary Tax or to the Second Category Tax. Partnerships formed by professionals can choose to be subject to the First Category Tax regime.
(II) A deductibility limit of 4% of the total amount of the annual sales and services applies when the total or partial payment of the royalties is made to related companies, unless these are taxed with a rate of 30% or more in the beneficiary’s country.
(III) The tax is raised to 30% if rendered by a related party or by an entity in a tax haven.
(IV) The tax is raised to 20% if rendered by a related party or by an entity in a tax haven.
(V) Interest on any excesses indebtedness is taxed with an additional 31%, provided that the borrowing is deemed to be related.
(VI) There are exemptions based on reciprocity.
(VII) The single tax on capital gains applies when the specific requirements of the income tax law are met. In general, capital gains on the sale of publicly traded shares are exempt. The rate will decrease to 18.5% in 2012 and to 17% in 2013 onwards.
Payment of income taxes
Each taxpayer must file an annual income tax return and pay any tax due during the month of April following the year end.
No annual income tax return is required for an employee who receives only employment income. In this case, the Second Category Tax is withheld and paid to the Treasury by the employer on a monthly basis.
The First Category Tax or corporate tax is payable on accrued income on a yearly basis.
In most cases, estimated payments must be made on account of First and Second Category Taxes, Additional Tax and Complementary Tax.
Income taxes applicable to a foreign investment
Normal taxation
The following is a simplified example of the income taxes that generally affect a foreign investment in Chile:
• Income before taxes 100.00
• First Category Tax (20.00)
• - Net distributable 80.00
Witholding tax on distributions or dividends:
• Additional Tax (I) (35.00)
• Less tax credit 20.00
• Net received by a nonresident parent, partner and shareholder 65.00
(I) The tax credit is added to the dividend to compute the tax basis for the Additional Tax.
According to the Decree Law 600, the investor who has opted for the 42% invariable rate can elect at any time to be taxed at the normal rates. This election is irrevocable.
The 42% alternative
Foreign investors that have a DL 600 contract and have chosen the 42% rate are subject to the 20% First Category Tax, payable by the branch or subsidiary and to a 22% Additional Tax on the same tax base, without tax credit, when profits or dividends are remitted. Thus, the total theoretical tax burden is 42% on pretax income instead of the 35% currently payable under normal taxation.
• Income before taxes 100.00
• First Category Tax (20.00)
• - Net distributable 80.00
Witholding tax on distributions or dividends:
• Additional Tax (I) (22.00)
• Net received by a nonresident parent, partner and shareholder 58.00
Taxation of different types of business establishments
In general, differences arising from the choice of business organization are not very significant.
For an agency, branch or permanent establishment of a foreign corporation only Chilean-source income is taxable. Taxable income is determined on the basis of the actual profits earned in its activities in Chile. When the accounting records do not reflect actual profits, the Internal Revenue Service can determine presumptive net income using either of the following bases:
• By multiplying the agency's gross income by the parent company's ratio of net income to gross income.
• By multiplying the agency's total assets by the parent company's ratio of net income to total assets.
In the case of limited liability individual enterprises, the tax provisions applicable to limited liability partnerships apply.
In a limited liability partnership, if any of the partners is a Chilean resident individual, that partner’s share of income is not subject to the Additional Tax, but is added to his or her other income and taxed at the appropriate personal rates (Complementary Tax) with a tax credit equivalent to the First Category Tax paid by the limited liability partnership.
In a Chilean corporation, the First Category Tax is paid by the corporation, but it is a tax credit for the shareholders. Resident individual shareholders receive a credit against their Complementary Tax on dividends received. Resident corporate shareholders are not taxed on the dividend received and transfer the related tax credit to their own shareholders when they distribute dividends. Nonresident shareholders receive a tax credit, against the Additional Tax due on dividends remitted abroad.
Specific tax on mining activities
Since January 1, 2006, Law No.20,026 established a tax on mining activities in addition to normal taxes. This tax is called the Mining Activity Tax which is known as Mining Royalty.
Mining Activity Tax is levied on income deriving from operational income of the metal mining activity obtained by a mining exploiter. A mining exploiter encompasses all individuals or legal entities that extract mineral substances and sell them in any state of production.
Law No.20,469 published in the Official Gazzette on October 21, 2010, introduced amendments to the tax rate and specifically for mining operators with sales higher than 50,000 metric tons of fine copper.
Before the amendment, mining exploiters whose annual sales exceeded the equivalent of 50,000 metric tons of fine copper paid a single 5% tax rate. Now, for those mining operators, the effective tax rates range between 5% and 34.5% depending on the “mining operating margin” as defined in the law.
Those foreign investors that prior to Law No. 20,469 coming into force were covered by a mining tax invariability regime agreed in a D.L. 600 Contracts would not be affected by the referred to amendment.
However, such investors were entitled to choose between continuing to be covered by the regime in force at the time of signing the contract up to the end of the invariability period or being subject to the new mining tax treatment by waiving the mining tax invariability regime existing in their D.L. 600 Contracts entered into with the State of Chile, with which a temporary hike in the tax was offset by an extension of the invariability period.
Mining operators with annual sales between 12,000 and 50,000 metric tons of fine copper pay a progressive tax rate that varies between 0.5%, and 4.5.%, If the annual sales are lower than 12,000 metric tons of fine copper, they do not pay this tax.
The value of a metric ton of fine copper is calculated according to the average value on the London Metal Exchange.
The operational income of the mining activity is calculated following the rules established by the income tax for the First Category Tax, but with certain special additions and deductions.
Value added tax
A 19% Value-Added Tax (VAT) is charged on all recurring sales and other customary conventions over material goods. The customary element is presumed on sales that relate to the line of business of the company. VAT is charged on services, whether recurrent or not, that originate interest, premiums, commissions or other similar remunerations that are considered of a commercial, industrial or financial nature, or that derive from mining, construction, publicity and computers, amongst others. Imports are also subject to VAT, regardless of them being customary or not. Professional services rendered by employees or independent consultants are not subject to VAT.
This is a typical Value-Added tax: the VAT paid on imports, purchases, and services received (tax credit or input tax) is deducted from the VAT due on sales and services rendered (tax debit or output tax). The vendor or the service provider must file a monthly tax return and pay the net tax debit by the twelfth day of the subsequent month. A net tax credit (increased to reflect the changes in the consumer price index) can be carried forward to the subsequent months.
Exports are not subject to VAT, but VAT paid on purchases of goods and services that are necessary to produce the exported goods is either deducted from other VAT due or refunded by the Internal Revenue Service. Incoming and outgoing marine and air transport services are exempt from VAT. Services that are rendered to nonresident entities, and which are used exclusively outside Chile can be deemed to be exports by the Customs Service, fulfilling certain requirements, and therefore exempt from VAT.
Foreign investors covered by the foreign investment statute are not subject to VAT on their capital contributions, as long as those assets are included in a listing specially set up for that purpose.
Certain luxury items and beverages are subject to sales tax in addition to VAT, at rates that vary according to the type of items sold.
Foreign tax credit
Foreign source income pays taxes in Chile on a net paid basis (except for branches that pay on an accrued basis). If certain conditions established in our Income Tax Law are met, the investors are entitled to a credit against the First Category Tax and final taxes for the income taxes paid or withheld abroad on dividends profit remittances and income deriving from permanent establishments. The credit is capped at 30% in the case of dividends and 20% in the case of branch profits. In computing taxable income, foreign taxes paid are added to the taxable income. Foreign taxes paid in excess of the cap, which cannot be used as a tax credit, are allowed as a deduction from taxable income.
Notwithstanding the information above, the cap is 30% for countries that have double taxation treaties with Chile. The foreign taxes up to 20% can be used as a tax credit against the 20% First Category Tax and the balance against the Chilean company’s owners’ Additional or Complementary taxes.
Notwithstanding the above, tax credits are capped at a 30% of net foreign source income
i.e. foreign source income, less expenses incurred in order to generate it.
Treaties to avoid double taxation
Chile has subscribed to several general and specific treaties.
Currently, double taxation treaties are in force with the following countries: Argentina, Belgium, Canada, Colombia, Mexico, Brazil, Norway, Korea, Ecuador, Peru, Spain, France, Poland, United Kingdom, Denmark, Croatia, New Zealand, Ireland, Malasia, Paraguay, Portugal, Thailand, Sweden and Switzerland.
All these treaties are based on the OECD model, except for the one with Argentina.
The double taxation treaty with Argentina is based on the exemption principle, in which income is subject to taxation in the source country. Therefore, for example, Argentinean source income obtained by Chilean residents is only subject to taxation in Argentina; and in computing his or her Complementary Tax, a Chilean resident must include Argentine-source income only for determining the applicable tax rate.
Chile has signed double taxation treaties with, Rusia, the United States and Australia, which are not yet in force; and has concluded negotiations with South Africa (but has still not signed the double taxation treaty with the latter).
There are several treaties with other countries to avoid double taxation on the transport of goods and people by sea or by air.
Article 41D of the Income Tax Law
Law No.19,840, published in the Official Gazette on November 23, 2002, allows foreign investors to establish Chile as a base for their investments into third countries.
This regulation states that instead of the general regulations of the Income Tax Law, only Article 41D of such Law will be applicable (except for specific regulations). This applies to publicly traded corporations and closely held corporations ruled by the regulations of the former incorporated in Chile and in accordance with Chilean laws, incorporated with foreign capital permanently owned by partners or shareholders not domiciled nor resident in Chile, not in countries or territories that are considered tax haven jurisdictions, or harmful preferential tax regimes. The same tax treatment will be applicable to non domiciled nor resident shareholders of said companies, for remittances and distribution of profits or dividends obtained from them, and from partial or total repatriations of capital, as well as for the capital gains obtained from the disposal of shares in companies ruled by the aforementioned Article 41D.
In accordance with Article 41D, the aforementioned companies are not considered as domiciled in Chile, for the purposes of the Chilean Income Tax Law and, therefore, they will only pay taxes in the country on their Chilean source income.
Article 41D allows the participation of shareholders domiciled or resident in Chile in said companies, but limits their possibilities of ownership.
Among other requirements, the aforementioned companies must have as an exclusive line of business, the investment in Chile and abroad in shares or partnership rights or in convertible bonds. The capital contributed by the foreign investor must have a foreign source; and the regulations related to bank secrecy will not be applied to them.
Customs duties
Customs duties are 6% ad valorem for virtually all imported goods and products. There are some bilateral and regional reductions regarding some products, in the context of the ALADI (Latin American Integration Association) Agreement.
Chile has signed free trade agreements (FTAs) with Australia, Canada, Mexico, the United States, the European free trade association (EFTA), Central America, South Korea, Panama, Japan, China and Turkey. FTAs seek to eliminate, within a given period of time, customs duties applied by the contracting States.
Chile has also entered into other agreements with Bolivia, India, Colombia, Brazil, Cuba, Venezuela, Peru, Ecuador, Argentina, among others, in order to reduce or eliminate customs duties.
Chile is an associate member of MERCOSUR, and has negotiated immediate and staged reductions or eliminations of customs duties.
Stamp tax
Issuance of documents containing credit obligations are subject to Stamp Tax at a 0,05% per month or fraction thereof, between disbursement and maturity, with a maximunm of 0.6%. The rate will be of 0.25% on documented credit operations payable on demand or with no fixed maturity.
Foreign loans are also subject to Stamp Tax, regardless if they are documented.
Municipal license
This is an annual fee that is collected by the municipalities. It taxes any activity made by a taxpayer in its territory. The fee is calculated on the taxpayer's equity at a rate which is set by each municipality, with a minimum of 0.25% and a maximum of 0.5%.
The total annual fee cannot exceed 8,000 UTM (US$643,239). The fee is allocated among the municipalities in which the taxpayer has an office, factory, warehouse or other establishment.
Law No.20,280 published in the Official Gazette on July 4, 2008 stated that the Internal Revenue Service has the obligation to inform to the municipalities the equity declared by the taxpayers, in order to facilitate the collection of the municipal license.
Additionally, according to Resolution No.27,477 issued by the Chilean Controller General’s office, on May 2010, companies that hold only passive investments would not be subject to Municipal License Tax. However, this is still being hotly contested by the municipal authorities.
Tax news and other issues
Improving financial conditions
Law No.20,343 published in the Official Gazette on April 28, 2009 modified the tax legislation in order to improve the financial conditions for individuals and companies.
Among the modifications introduced in said law, is a tax benefit for all those taxpayers that acquire or sell publicly-offered debt instruments on a local exchange, either through a broker or a securities dealer.
According to the new article 104 of the Income Tax Law, the capital gain obtained in the sale of the referred instruments will not be considered income, if the following requirements are fulfilled: a) that they are registered in the Securities Register; b) that they are issued by a taxpayer who determines its income based on full accounting records; c) that they are traded on a stock exchange; d) that they are placed at an equal or higher value than the nominal value that appears in the emission contract, or if they are placed at a lower value, that they have paid a 20% tax on the difference between the nominal value and the lower value; and finally, e) that the debt agreement references that it is under this tax regimen.
However, the interest is understood to be accrued in the period of the anticipated payment or rescue, and the losses can only be deducted from the non-income revenues.
Moreover, the instruments issued by the Central Bank or the General Treasury can also use the abovementioned tax benefit, fulfilling special requirements established in the same article.
Financing the reconstruction
As a result of the need to extensively reconstruct the infrastructure damaged by the February 27, 2010 earthquake, Law No.20,455 was published in the Official Gazette on July 31, 2010. The most important tax aspects of the referred Law are the following:
Temporary increase of the Corporate Tax: The First CategoryTax rate was raised up from 17% to 20% and 18.5% for the income perceived or accrued in years 2011 and 2012 respectively. In year 2013, the rate will return to 17%.
Reduction of Stamp Tax: This tax has been permanently reduced by 50% and will have the following tax rates: 0.05% per month or fraction thereof, between the date of the document or disbursement, as the case may be and maturity, with a maximum of 0.6%. The rate will be of 0.25% on documented credit operations or foreign loans payable on deman or with no fixed maturity date.
An exemption of Corporate Tax: Small and medium sized companies whose total annual income does not exceed 28,000 UTM (approximately US$2,251,335) and with tax equity lower than 14,000 UTM (approximately US$1,125,688) will be exempt from paying Corporate Tax up to an amount of 1,440 UTM (approximately US$115,783).
Temporary increase of Property Tax: A surcharge of 0.275% will apply on rates of the Territorial Tax in years 2011 and 2012 on real estate property whose fiscal value is over CLP $96,000,000 (approximately US$202,207)
Limit to housing benefit: There is an amendment which refers to the tax benefits from Decree with Force of Law No.2 regarding the Housing Plan. It eliminates the tax exemption that legal entities used to have when owning real estate that qualifies for this plan. It also limits the number of properties owned by individuals, which will benefit from the exemptions and tax breaks.
Lifting the veil of bank secrecy
Law No.20,406, published in the Official Gazzete on December 5, 2009, establishes new dispositions that allow the Chilean Internal Revenue Service to access banking information. The new law was one of the requirements for our country to enter the OECD.
Indeed, Courts may now authorize the request of information derived from banking operations of individuals or entities that enjoyed bank secrecy when it comes to crime related to processes of their tax obligations. The new Tax and Customs Courts may also apply this faculty.
In addition, the Internal Revenue Service may also require information from individuals or entities, which formerly enjoyed bank secrecy, that result essential to verify the veracity and integrity of tax returns or their omission. Moreover, the Internal Revenue Service may also request this type of information from foreign tax authorities from countries with tax treaties with Chile.
For this purpose, the Internal Revenue Service may notify the bank so that information requested is delivered within a deadline where it should detail the bank account owner, the operations, their date and the reason to request the referred information.
Corporate criminal liability
Law No.20,393 published in the Official Gazzette on December 2, 2009, establishes that criminal liability extends to legal entities in the case of money laundering, terrorist financing and corruption offenses.
Legal entities will be criminally liable, when as consequence of their non-complianace with their management and supervisory duties, the abovementioned crimes are committed in their interest or benefit their owners, controllers, responsible parties, senior executives, representatives or those who perform activities of administration and supervision; and even when these crimes are committed by those who are under the direct management or supervision of any of the referred to individuals.
Notwithstanding the above, if the legal entity has implemented organizational, management and supervisory models to prevent the committement of these crimes, or they were committed by individuals in their own benefit or for a third party benefit, the legal entity will not be criminally liable.
Amendments that accelerates incorporation, modification and dissolution of entities.
Law No.20,494 published in the Official Gazette on January 27, 2011, introduced amendments to accelerate the process to incorporate companies or legal entities.
This Law has a direct effect on the different public entities involved in such process, reducing deadlines for requesting Municipal Licences at the corresponding Municipality or even making more expedite requesting the authorization to issue e-invoices to the Chilean IRS.
In addition, all publications required to be performed in the Official Gazette regarding incorporation, dissolution of private law entities, will now be carried out in the Official Gazette’s web page, and its access will be public and free of any charge