Chile is a country that offers multiple business opportunities, thus attracting many foreign investors. As a foreign investor, you have various ways to enter the Chilean market. You can decide on incorporation – establishing a legal entity – or alternatively, you can establish a branch office of a foreign entity or manage your business activities from abroad. Before deciding for any of these options, you should be aware that each option brings different tax implications and responsibilities. Mastering the Chilean tax system is imperative to maintain long-term business growth and avoidance of any penalties.
In Chile, all fiscal policy is under the authority of the Ministry of Finance. In addition, there are three governmental agencies with lead roles in tax matters. These are the Internal Revenue Service, the Treasury, and the Customs Agency.
There are some general accounting principles applied in Chile:
- The official currency is Chilean Peso (CLP).
- The fiscal year begins on 1 January and ends on 31 December of the same year.
- Chile has adopted the International Financial Recording Standards (IFRS) as the national accounting standard.
- Companies are obliged to provide annual financial statements to their shareholders. The accounting books must be published in Spanish and use Chilean peso as currency.
The Chilean tax system differentiates the taxable principles based on the residence principle. To put it in different words, a tax treatment is different for companies which have their domicile in Chile (i.e they are incorporated in Chile) or for companies that are not domiciled in Chile. Companies residing in Chile are subject to taxation based on their worldwide income. On the other hand, companies without a residency in Chile are taxed only on their Chilean-source income. Remunerations paid from Chile to non-domiciled persons for services rendered abroad are also a subject to Chilean income tax. Moreover, foreigners which establish their residence in Chile are taxed only on their income from Chilean sources for the first three years after incorporation.
The tax system in Chile recognizes:
- First category income tax
- Second category income tax
First Category Income Tax
The first category income tax is calculated on income from business profits. It applies to both Chilean residents and non-residents. The current law provides four systems of the calculation of first category income tax:
- Attributed Income System (Article 14 A)
- Semi-Integrated System (Article 14 B)
- Simplified Taxation System (Article 14 Ter)
- Presumed Income System (Article 43)
Attributed Income System (Article 14 A)
Companies of all industries can decide on the application of the Attributed Income System. In this case, the basic tax on income for all entities is assessed at a 25%, regardless of whether a dividend was effectively distributed or not. This system is suitable for taxpayers who have partners, owners, or co-owners that are individuals exclusively domiciled or residents in Chile. In the case of a foreign-owned company, the income is a subject to the Additional tax of 35%. However, companies can apply for a credit against the First Category Tax, up to 100% of their distributed amounts.
Example: A foreign entity opts for the attributed income tax system. It will be a subject of the first category income tax of 25%, plus 35% of additional tax payable by the foreign owner. The foreign company is entitled to credit the distributed amounts resulting in 25% against the additional tax of 35%. Thus, the effective tax rate will be 25% + 10% (35%-25%) = 35%.
Profit before taxes: 100
First Category Tax: -25
Profit after corporate tax: 75
Additional Tax for foreigner: -35
Credit against FCT: 25
Additional Tax payable: -10
Total tax burden (25+10): 35
Profit after taxes: 65
Partially/Semi-Integrated System (Article 14 B)
Under the partially or semi-integrated system, the income will be subject to tax only if a dividend distribution or profit withdrawal is made. The basic tax on income for entities which opted for the semi-integrated system is 27% as per the fiscal year 2018. In addition, the companies which are not domiciled in Chile are subject to additional tax of 35%. Both types of companies, local and foreign, are entitled to a credit of maximum 65% of the first category tax.
Profit before taxes: 100
First Category Tax: -27
Profit after corporate tax: 73
Additional Tax for foreigner: -35
Credit against FCT: 17.55
Additional Tax due: 17.45
Total tax burden (27+17.45): 44.45
Profit after taxes: 55.55
Simplified Taxation (Article 14 Ter)
According to its name, it relates to a simplified regime that frees the taxpayer of certain tax obligations. Only micro and small and medium-sized companies can opt for this system. Maximum annual income to apply for this regime is set at around USD$1,800,000 in the first three years.
Presumed Income (Article 43)
The tax calculation in this taxation regime is assessed based on an alleged income. Nevertheless, not all companies can opt for this regime. Only micro and small companies working in the agriculture, transport or mining sectors are eligible to apply for this system.
Second category income tax
Company employees or self-employed individuals are a subject to second category income tax. This is a progressive tax applied to the total amount received by an employee for wages, salaries or profit-sharing. The taxation rate ranges from 0% to 35% of the related income per fiscal year.
Interests on loans obtained abroad are normally subject to a 35% additional withholding tax. However, interest on loans granted by foreign banks or financial institutions is subject to only a 4% WHT under certain conditions.
Payments for royalties, patents, and fees to entities not domiciled in Chile are subject to a 30% withholding tax. Nevertheless, this rate can be reduced to 15% if royalties relate to invention patents, software technology or industrial designs.
The taxation of dividends depends on whether the company opted for attributed income system (AIS) or partially integrated system (PIS). Normally, dividends are subject to a 35% tax rate if the entity is domiciled in Chile or is domiciled in a country with which Chile signed a double tax treaty. In other cases, the rate of 44.45% is applied.
Other corporate taxes and allowances
Other corporate taxes include real property tax, stamp tax or municipal license fee. Real estate is taxed at a rate between 1% and 1.4% annually. The real estate tax is assessed on the fiscal value of the property.
Some expenses are deductible for reasons of depreciation and depletion, net operating losses, payments to foreign affiliates or taxes. Under certain conditions, interest expenses, bad debts, charitable donations, trademark payments, patents, and formulas are deductible too.
Value Added Tax (VAT)
The general VAT in Chile is assessed at 19%. However, there can be additional taxes applied in some cases, such as for luxury goods, alcoholic beverages, non-alcoholic beverages with high levels of sugar or tobacco. In general, the seller of goods and services is responsible for the payment of the VAT. In the case that the seller is not domiciled in Chile, the duty to withhold and pay the VAT can be transferred to the buyer.
The VAT is payable monthly, except for some special situations.
In general terms, the VAT is applied in the following:
- Sales of goods and the rendering of services
- Rental of movable goods and real estate
- Leasing of goods
- Insurance premiums
- Construction contracts
The VAT has an essential impact on the company’s business. The IRS recognizes VAT debit and VAT credit. VAT debit is a VAT charged by a company on sales of goods and services. VAT credit, on the other hand, is borne by a company on purchases of goods and services.
- A company is selling a good for 100 CLP net.
|Debit VAT of 19%||19|
- The same company bought office supplements for the amount of 50 CLP (gross).
|Credit VAT of 19%||7,98|
- The company can credit the input VAT for buying office supplements and thus decrease the amount of payable VAT to the Internal Revenue Services (IRS).
|VAT from Sales of goods||19|
|VAT to be paid to IRS||11,02|
In the Chilean tax system, there are certain exceptions which can be made exempt from the VAT, such as:
- Exportation of Chilean goods
- Interest on loans
- International freight
- Personal services
With the intention of avoiding taxing individuals twice, Chile has signed double-taxation tax treaties with 32 countries, including Spain, United Kingdom, Australia or Argentina. If you want to see the full list of countries with which Chile signed a double-taxation tax treaty, click here.
Need more information?
Chile is a country with a very systematic and complex tax system. Local tax authorities review the tax system on a regular basis and enforce new laws and procedures to make the system more business-friendly. Nevertheless, it can still be very difficult to keep pace with the changing regulations.
For this reason, it is highly recommended to have a local partner in accounting and tax matters. Do not hesitate to get in touch with Biz Latin Hub. Our team of local experts can provide you with professional expertise in accounting and tax services. Contact our bi-lingual Country Manager, Allan, at [email protected] for personalized advice.