Under the Constitution of the Republic of Chile, taxes, customs duties and all kinds of public duties must be implemented through the enactment an Act approved by the Congress.
The initiative to legislate in tax matters rests only with the Chilean President. Consequently, taxes may not be changed unless the president acts and Congress approves said initiative.
The main taxes established by Chilean law are:
I. Corporate Income Tax.
II. Value Added Tax (VAT).
III. Stamps Tax.
IV. Real Estate Tax.
Taxpayers domiciled or residing in Chile are subject to taxation on any source income. Non domiciled and non-resident taxpayers are taxed only over income from Chilean sources. As an exception to the above, foreigners who establish their domicile or residence in Chile will only be subject to taxes on income from Chilean sources for the ﬁrst three years (this term may be extended by the IRS National Commissioner).
I. Corporate Income Tax
Taxpayers can be organized into entities as discussed above. The law provides for two options, namely "Attributed Income" or "Semi Integrated Income".
a) First Category Tax:
This tax is paid by company that obtains the beneﬁt. It is payable at a rate of 25% for the taxpayer who has opted for the Assigned Income (Renta Atribuida). To select an Assigned Income regime, the partners or shareholders of the company must correspond exclusively to natural persons with domicile or residence in Chile or by persons without domicile or residence in Chile (the latter may be natural persons or legal persons).
In the case of Semi Integrated Income (Renta Semi Integrada) the rate is 27%.
The taxation of the Attributed Income, the entity must pay a tax of 25% and the owners or investors will pay the maximum rate of 35% by reducing the 25% rate paid by the company as a credit, leaving the tax obligation fully fulﬁlled in the year of obtaining the beneﬁts.
On the other hand, taxation of "Semi Integrated Income", the company will pay the income tax on the proﬁts with a rate of 27% in the year of obtaining, and non-resident owners will be aﬀected with taxes on opportunity and year in which all or part of the proﬁts are remitted, with a rate of 35%, using a credit of 17.55% (65% on the corporate rate of 27%).
This partial credit of 65% operates for all investors residing in countries with which Chile does not have a current double taxation agreement, but when the investor is domiciled in a country with a double taxation treaty, Tax on remittance of proﬁts will be equal to 35% but with the credit of 100% of the corporate rate.
A particular case is the United States, even when the agreement to avoid double taxation is not in force, the remittance of proﬁts to a resident of that country, 100% of the corporate rate may be used as credit. In eﬀect, the refund obligation will not apply to taxpayers of additional tax, residents in countries with which Chile has subscribed, prior to January 1, 2019 a CDT, even if it is not in force, in which has agreed to apply additional tax, provided that the First Category Tax is deductible from said tax or another clause that produces the same eﬀect is contemplated. This will operate until December 31, 2021 (Law Nr. 21.047 / 2017).
b) Secondary Tax:
This tax is a progressive tax applied on the aggregate amount received by an employee on account of wages, salaries, proﬁt-sharing or others. The taxation rate range from 0% to 35%.
II. Value Added Tax (VAT)
The tax rate is 19% assessed on price of transaction. When the price is manifestly below the normal level, the IRS is empowered to assess it.
In general terms, the following transactions are subject to VAT:
Sales and other contracts whereby the title to movable goods is transferred, provided they are executed on a recurrent basis
Services corresponding to commercial, industrial, ﬁnancial, mining, construction, insurance, advertising, data processing and other business activities;
Rental of movable goods, as well as rental of real estate furnished or equipped to carry out industrial or commercial activities; Leasing said goods; Insurance premiums with some exceptions; and, in certain cases, construction activities.
III. Stamp Tax
Bills of exchange, promissory notes, letters of credit and, in general, any kind of documentation referring to a loan or credit transaction for borrowed money are subject to stamp tax.
The rate is 0.066% monthly on document face value, with a maximum rate of 0.8%. Should the document be payable at sight, the rate is 0.332%.
Real Estate Tax
The tax is assessed over a ﬁscal valuation of property. Real estate is taxed at a rate between 1% per annum, on the tax assessment of property.
Fiscal Declaration and General Obligations
Chilean companies must keep accounting records in Spanish and in Chilean Pesos. However, when certain requirements are reach, companies may request the Chilean IRS authorization in order to carry their accounting books in a foreign currency (US Dollar, Euro and Canadian Dollar). In case, IRS authorized the accounting records in a different currency, companies may also request to declare and pay their taxes in the same foreign currency.
Accounting records must be those used in order to elaborate the company´s financial statements or tax reports.
The fiscal year is on twelve months period of calendar year, for legal entities and individuals. However, this present variations in some companies which initiated or ended their activities afterwards and prior to the end of the year calendar. Therefore, the start and closing dates must –initially- be always January 1st and December 31th, respectively.
Taxpayers may deduct from the taxable income, the corresponding direct costs and expenses. Please note that, for expenses to be deducted, they must fulfill all of the following must be related to the entity’s business (“ordinary” expense);
- They must be necessary to produce taxable income by entity, taking into consideration their nature and amount;
- Such expenses could not have been previously deducted as part of the company’s direct cost of goods or services rendered;
- Expenses must be incurred in relevant taxable period, whether paid or accrued; and
- Expenses must be adequately supported with the appropriate documentation.
Among others, Chilean Income Tax Law allows to deduct as a tax expense the following disbursements:
- Certain taxes.
Carry Loss Forward
Losses may be carry forward and be deducted from future tax results without any time limit, as long as the disbursements which originated losses reach the previously mentioned requirements.
Transfer Pricing Regime
Chilean transfer pricing rules grants to Chilean IRS the authority to challenge prices agreed upon between related parties when such prices are not on arm’s length basis (i.e. process which would have agreed independent entities in similar transactions).
Accordingly, prices agreed on intercompany transactions should reflect functions performed, assets used, and risks assumed by the entity rendering the services, as well as the specialization on rendering the services.
Broadly, Chilean transfer pricing rules follow OECD Guidelines. Even though a transfer pricing study is not a formal requirement, taxpayers are required to keep all documentation to support that their intra-group transactions have been agreed on arm’s length basis. Chilean taxpayers must report to tax authorities intragroup transaction through annual affidavits N° 1907 and 1937.
Double Taxation Treaty
Chile has contracted Double tax treaties with various countries in order to avoid Double taxation and tax evasion. As Chile has a policy of free trade, Chile is a top country which has Double tax treaty in South America. In general, the tax treaties include definition of residents, allocation of taxation right of various income, restricted tax rate, elimination of double taxation, limitation of benefit, exchange of information and mutual consultation.
Chile has now concluded bilateral tax treaties with the following countries to avoid double taxation:
- Czech Republic
- New Zealand
- South Africa
- United Kingdom