General Tax Matters

1. What type of taxes are to be considered in the daily operation of a company and in product’s import business in Chile. Which are the specific rates of each tax bracket?

The Chilean tax system has different types of taxes, divided mainly in four categories:

• Income Tax
• Sales and Services Tax
• Specific Taxes, and
• Other Taxes

Furthermore, Income Tax includes the following categories:

• Corporate Tax (Impuesto de Primera Categoría);
• Employment (Impuesto de Segunda Categoría) and,
• Personal (Impuesto Global Complementario),
• Withholding Tax (Additional Tax).

As a general rule, Foreign Investment entities are subject to a same tax payment scheme applicable to resident companies.

These categories will be explained in the following sections:

2. Income Tax

2.1. Who is levied with this tax and under what conditions?

Natural or juridical persons with residence or domicile in Chile regardless of the source of their income.

2.2. Is there an exception for foreigners who do not have residence in the country?

Persons who do not have residence or domicile in Chile, are only subject to Chilean income tax on their Chilean sourced income.

In the event that a person establishes residence or domicile in Chile it will only pay taxes on the revenue originating from Chilean sources during the first three years. After this three-year term has lapsed, the person shall pay taxes over the total amount of its income, regardless of its source.

2.3. “Chilean source” refers to the following

Revenues of “Chilean source” are those originating from activities conducted in Chile or assets located in the country, whichever the residence or domicile of the tax payer.

2.4. How does the corporate tax operate in Chile?

This corporate tax is paid by the business generating the income and is payable, at a rate of 24% for year 2016 and 25% as of 2017.

This corporate tax operates under two differentiated systems: the “attributed income system” and the “semi-integrated income system”.

In the attributed income system the taxpayer must pay tax on the income he is entitled to, whether paid or not.

In the semi-integrated income system, the tax rate will be 27% but personal income taxes or additional tax will only be paid once the profit has been received. In the case of semi-integrated income, the taxpayer will only pay personal income tax or additional tax assessed on partners or shareholders when actually paid.

The amount of this corporate tax is treated as a tax credit against personal taxes -if any-, payable by the owners or shareholders of the company following profit distributions.

In the case of semi-integrated income, the tax credit will be 65% of the First Category Tax, unless the foreign investor is from a country with which Chile has a double taxation arrangement, in which case the tax credit will be 100% of the First Category Tax.

Monthly provisional payments -aggregating 1% of gross income during the first year- must be made by the company (as an advanced payment against the final tax accrued at the end of the respective fiscal year). After the first year, such provisional payments are calculated according to the ratio between the amount paid for First Category Tax and the interim payments.

2.5. How does the Employment Tax operate in Chile?

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 rates range from 0% to 40% of the relevant income per fiscal year. The maximum rate will be reduced to 35% as of 2017.

Second category taxpayers are not subject to any other income taxation, unless they have income from sources other than wages or salaries.

2.6. How does the Personal Tax operate in Chile?

The personal tax or “Complementary Global Tax” is a personal, progressive and complementary tax paid on a yearly basis (in the month of April) on the taxable income of all individuals with residence or domicile in Chile. The rates range progressively between 0% to 40%.

This tax is applied on income of any source, including income originating from foreign sources.

For the purpose of determining the amount of this tax, its taxable base shall include an equivalent of the First Category Tax which encumbered profit withdrawals and distribution of dividends from companies received by the taxpayer. As mentioned earlier, the taxpayer is entitled to deduce as credit the amount of the First Category Tax paid by the company which has been included in said calculation.

For the purpose of calculating this tax it is necessary to also include any income that has not been levied with ‘Category taxes’.

2.7. How does the Withholding Tax operate in Chile?

The Withholding Tax or ´Additional Tax´ is assessed on income from Chilean sources earned by individuals or entities neither domiciled nor residing in Chile.

This tax is also charged on certain payments made by Chilean taxpayers abroad, as analyzed herein.

The general tax rate is 35%, although in some cases it might go down to 2%, as explained below.

As mentioned earlier, the First Category Tax paid may be credited against the Additional Tax but must also be considered as additional taxable income for the Additional Tax.

In the case of semi-integrated income and if the foreign investor is from a country with which Chile does not have a double tax treaty, the credit for the First Category tax is limited to 65% of said tax.

Interests on loans obtained from abroad are subject to a 35% Additional Withholding Tax. However, interests paid to non-Chilean banks or financial institutions are taxed at a reduced 4% rate under certain conditions.

In general, the payments of royalties, patents and fees to entities not domiciled in Chile are subject to a 30% Additional Tax to be withheld by the payer. The rate of this tax is however reduced to 15% for royalties related to invention patents, utility models, industrial designs, designs of integrated circuits or mask work, new vegetable varieties and software, provided that the licensor is neither related to the licensee nor a resident of or incorporated in a tax haven.

Payments of “standard software” are tax exempt. In the case of technical assistance or engineering services, the rate is 15%. However, the tax rate goes up to 20% if these services are rendered by a related party or by a person or entity residing or incorporated in a tax haven.

All these payments are normally deductible as expenses for tax purposes –by the local tax payer-.

In some cases the Additional Tax must be declared annually by the taxpayer, whereas in others it must be withheld by the person or entity making the payment.

3. Value Added Tax (VAT)

3.1. What is the VAT?

The Value Added Tax is essentially a consumption tax. It levies the sales of goods and services rendered or used in the country and originating from activities outlined in the law.

The following transactions are subject to VAT:

• movable goods is transferred, provided that they are executed on a recurrent basis;
• industrial, financial, mining, construction, insurance, advertising, data processing and other business activities;
• rental of real estate furnished or equipped to carry out industrial or commercial activities;
• leasing of said goods;
• Insurance premiums; and,
• Construction activities in some cases.

There are few exemptions in the Chilean VAT law. The main ones are the following:

(a) Exports; Exports are exempted from VAT. Nevertheless the VAT paid for purchase of goods and services which are expenses and costs relating to exported goods shall be reduced from VAT to be paid for local sales or to be reimbursed by the IRS.

(b) Interest on loans and other financial operations. In the case of deferred payment of a sales price, interest charged is subject to VAT;

(c) International freight, both by air and sea;

(d) Personal services; and

(e) Services subjected to Additional Tax, unless the services are provided in Chile and also that those enjoy an specific tax exemption given by the Chilean law or by treaties to avoid double taxation in Chile.

(f) Revenues which are not considered as income.

3.2. How does the VAT operate in Chile?

The general rate applied is a 19%, which is also applied to imports, habitual or otherwise, carried out by individuals or legal entities.

VAT is retained by the seller and for service rendered by the person rendering the service and must be declared on a monthly basis. To calculate the amount to be paid under VAT the difference between the tax debit and the tax credit has to be determined. These are values obtained on one hand from adding the taxes charged on the sales and services made by the taxpayer during the relevant period, and on the other hand the addition equivalent to the tax charged on the purchase invoices and the use of services from the taxpayer to develop his business.

If there is difference resulting from this operation, the system has a mechanism allowing to use of this excess in later periods.

4. Stamp Tax

Documentary credits (i.e. Bills of exchange, promissory notes, letters of credit and credit documents in general) are subject to stamp tax.

The rate is 0.066% monthly on the face value of the document, with a maximum of 0.8%. Should the document be payable at sight, the rate is 0. 332%.

5. Real Estate Taxes

Real estate is taxed at a rate between 1% and 1.4% per annum. The tax is assessed on the fiscal valuation of the property.

6. Has Chile subscribed any type of agreement to avoid double taxation?

In the year 1997 Chile started a negotiation process of bilateral agreements with other countries to avoid double taxation of taxpayers and fiscal evasion.

In general Chile follows the Model Tax Convention of the OECD, which basically levies taxes on income considering the residence of the investor. Nevertheless there are some exceptions, as for example, income levied based on the location of its production source.

In order to eliminate double taxation Chile applies in its domestic legislation and in its Agreements an ordinary credit system. In the case of countries which are not covered by an Agreement, Chile provides a credit of 30% for the tax paid abroad for dividends and remittance of profits, and if payment is less for these concepts, an amount effectively paid for is provided. This credit is deducted in the first place from the First Category Tax, and should there be any unrelieved credits, these may be used as credit to reduce the Global Complementary Tax or Additional Tax.

Income originating from permanent establishments or agencies, trademarks, patents, formulas, technical consultancy and services, shall be applied a credit equivalent to the First Category tax rate, and should it be less, by the amount paid in the foreign country. The credit for this income shall be applied against the First Category Tax.

Chile also grants an ordinary credit of 30% in those cases an Agreement has been reached. But in this case the application is more extensive. Should the tax amount paid be less, said amount will be applied as tax credit effectively paid. This credit will be applied firstly to the First and Second Category Tax and any unrelieved credit may be applied against the Complementary Global Tax or Additional Tax as pertinent.

It should be pointed out that Chile has also signed bilateral treaties to avoid double taxation in international transport services (by air and sea) freight and passengers.