Chile is one of Latin America’s strongest economies and is high on investor’s radars when considering places in the region to start a business. The legalities for running a business in Chile are similar to other Latin American countries across the board. However, there are a few differences concerning taxes, documentation, and licensing that are important to note in your research of Chilean business practices. These differences may lead to penalties or fines when they are not taken into account.
Chilean companies do not require a fiscal auditor by law. However, a yearly audit of your company, in the case of mergers or acquisitions, is required by law. Moreover, companies often set this standard as a company policy. Read on to learn about the requirements and important considerations regarding taxation in Chile.
Direct and indirect taxes
The Chilean tax authorities, Servicio de Impuestos Internos (SII), divides tax declarations into two groups. These groups are:
- Direct tax: this tax is an income tax
- Indirect taxes: this tax is the Value Added Tax (VAT). VAT is a consumption tax incorporated into the value of goods and services whenever a value is added at any stage of the supply chain.
Direct taxes are divided into two types of taxes. These two taxes are made up of:
- A corporate tax.
- An employment tax.
These taxes are paid monthly but are made up of totally different considerations. However, a comparison can be made in the need to pay. Both taxes need to be paid every month in the same affidavit. This payment needs to be made online at the website of the SII. Paying both at the same time does simplify efforts for businesses.
Corporate tax is based on a yearly income of the company; however, this tax is paid monthly. Consequently, the monthly payments are based on presumed income. These monthly payments are called Pagos Provisorios Mensuales (PPM). Moreover, this payment is based on the monthly flow of revenue and is not subject to any deductions.
The tax percentage for this monthly payment is 1%. The reason for these monthly payments is that the authorities desire a monthly flow of income instead of annual cash flow.
Varying corporate tax regimes in Chile
Chilean authorities recognize different types of tax regimes. These regimes depend on the total capital of a company. Companies are therefore placed into these stratified regimes based on their capital. Each regime has its own advantages or benefits.
When opening up a new company the firm is obliged to categorize themselves into one of the four tax regimes. In the first year the company can choose which tax regime it will fall in. After the first year of operating, the SII will put your company in the regime suitable to its total capital. However, SII will not scale your company down; it will only scale your company up in the tax regimes. This happens whenever your company has more capital than the restricted amount under its current regime.
Corporate tax regime advantages
As mentioned above each regime offers its own advantages. These advantages reach further than the actual tax percentage. Each regime offers its own deduction options and these options are based on numerous different specifications. Some of these specifications include:
- The size of the company: categories are divided into Micro and Small, Medium Enterprises, and any other segment
- The amount of income: different business segments have different restrictions. For example; agriculture, transportation, and mining all have different restrictions on the company size
- The type of legal person: different types of entities are allowed to different deductions
- The year of company formation: when a company is existing for longer than for example three years, it is subdued to different deductions.
The first three segments are subject to a tax percentage of 25%. But, the percentage in the last segment varies within a range of 25% up to 27%.
Consequently, any type of deduction is made at the end of the year. A company could be entitled to several kinds of deductions as permitted by Chilean authorities. For example, a form of deduction could be a business expenditure. This deduction is based upon the total amount of cash flow and not on the general tax percentage. In other words, the total amount of business expenditure will be deducted from the total amount of taxed income.
Tax and large companies
When analyzing the different segments, it becomes clear the largest companies can access the best advantages. This is because Chile’s desire for foreign investment rewards higher levels of foreign investment. As the Chilean government chases economic growth, it aims to create as many beneficial situations for large companies as possible.
The secondary direct tax is an employment tax. This tax is paid for employee services for the company, and therefore applies to any company that employs staff. This tax is divided into seven categories. These categories range from 0% to 35.5%. The applicable rate for your company is based on the gross employee salary.
Other comparable taxes are the ‘impuesto global complementario’ and the additional tax. The impuesto global complementario is a personal income tax that is automatically declared by companies when handing out salaries. The additional tax is a tax specifically for people working in Chile without a Chilean residence.
The indirect tax is the VAT. The VAT is a tax that applies to the sale of goods. Moreover, the VAT rate in Chile is 19%. However, companies usually push this tax on to the customer by rising the price of the product. In other words, whenever a company buys and sells the same product, the VAT balance is often 0. This means the last company in the line of supply will typically be the one affected most by VAT-related price-hikes.
As companies often find themselves in different parts of a supply chain, a monthly balance needs to be made regarding the VAT. At the end of the month, a company will have either debit or credit regarding the VAT payment. If in the unlikely event that the SII owes the company money due to miscalculation, the company can take the owed money to the next month and deduct it from their tax payment of that month.
Find a local partner
Tax requirements in the Chilean government can become quite difficult. To ensure your company complies with all regulations, it is recommended to join forces with a local partner. Having a partner that is knowledgeable about tax requirements keeps your business compliant and saves you money.
Biz Latin Hub has a group of experts that offer personalized taxation and accounting advice. We also provide professional company formation and incorporation, legal, and financial services tailored to you and your company’s needs. Contact Allan at [email protected] for help on getting your business set up in Chile.
Find out why Chile is an ideal location to form a company -and how we can help make it happen – by watching our short video below.