Chile

6 Chapter Tax Law

    • Overview of Tax Law.

        

      1.    Overview of Tax Law.

      Foreign and local businesses in Chile are subject to the same tax regime.

      The Chilean income tax system regulates the following:

      -First Category Tax "FCT" (Business income)

      -Second Category Tax "SCT" (Salaries and remuneration)

      -Complementary Global Tax "CGT" (Other personal income)

      -Additional tax "AT" (Income obtained by non-residents)


      The main sources of tax revenue are the corporate and personal income taxes (as explained above), Value-added tax VAT, Custom Duties, Stamp tax. The institution that controls taxes is the Internal Revenue Service, SII in Spanish. Income taxes are paid annually at tax return submission, the SSI has a limit of 3 years to check, amend or rectify tax returns. For the inclusion of taxes in the tax return the limit is 6 years.


      1.1. Law related tax

      1.1.1.     Direct and Indirect taxes.


      Direct Taxes

      Indirect Taxes

      Income tax of the first category: tax on income from capital by commercial, industrial, mining, service, etc.

      Tax on Sales and Services (VAT) Tax on the sale of goods and services.

      Unique Tax of second category (salaries, salaries and pensions) taxes the income of dependent work.

      Tax on luxury products.

      Complementary Global Tax: is a personal, global, progressive and complementary tax that is paid once a year by natural persons residing in Chile on income with first and second category standards.

      Tax on alcoholic beverages, non-alcoholic and similar products.

      Additional tax: is for natural or legal persons who do not have residence in Chile

      Tax on Tobaccos.
       

      Fuel taxes.
       

      Tax on Legal Acts (Stamps).
       

      Tax to foreign trade.


    • Who is subjected to corporate income tax.

       

      Resident Entities are taxed under a worldwide income and are subject to the first category tax (FCT) this tax is for companies into commerce, mining, fishing and industrial activities, after 2017 the rate is 25% for entities in a system known as AIS and a rate 27% for entities in another system known as PIS.

      In the AIS system companies have to attribute the income to the final owners that are subject to the global complementary tax with a tax range of 0% to 35% or the additional withholding tax at 35%. The final owner is responsible for paying the difference between the FCT and the final tax. This tax system is for taxpayers with partners, owners or co-owners who are exclusively residents.

      In the PIS system, the final income tax is applied upon effective dividend disbursements or profit withdrawals. Stock corporations, limited joint-stock entities, and companies that at least have one shareholder who is not a final taxpayer will be mandatorily subject to this income taxation regime.


    • Non-Taxable Income.

       

      • Indemnity payments for actual material and non-material damages (declared by court), indemnity payments for assets from a business or subject to income tax are excluded

      • Capital contributions by shareholders or partners,

      • Distribution of profits and accumulated reserves by corporations to their shareholders in the form of stock dividends.

      • Any increase in the par value of shares done by capitalization of profits.

      • Dividends paid out of receipts that are not considered for tax purposes.

      • Refund of capital by companies and capital revaluations.

      • Repatriation of capital invested outside the country.

      • Dividends and profits paid between resident companies.

      • Some capital gains from the alienation of shares and bonds.


    • Non-Deductible Expenses.

       

      Non-acceptable expenses are the ones that do not meet the conditions to be considered deductible like effective disbursements in cash or kind in a corporation. In a LLC, this is considered to be deemed drawings by partners. The expenses related to company cars are not deductible and are considered as non-taxable income to the employer. Other examples are:

      -Leasing or maintenance of the company's vehicles not used for regular business activities.  

      -Amounts for acquisition, maintenance or exploitation of property not used for business activities.

      -Gift´s portions for educational purposes, indicated by law.

      - Interest payment for loans used for the company directly or indirectly on the acquisition, maintenance or exploitation of goods to produce income not subject to income tax.

      -capital expenditures.

      -Partnership fees for independent personal services.

      -Expenses at supermarkets or similar markets (unless used for usual business activities).


    • Deductible expenses.

       

        Organization expenses.

      Expenses generated during the beginning of the company have to be capitalized and considered as an asset for tax purpose, and can be amortized over a six-year period. This can be usually deducted when income is generated.

       

          Bad debt loss.

      Bad debt is deductible if for example there are consequences on operations related to business, as well, if it has been cancelled on time in the accounting records, and if the company has exhausted all options for collection (this may vary on the owed amount) A simple estimation of the amount is not enough, it has to be accurate.

       

       

          Travel expenses.

      Travel expenses are exempt from taxation if the expenses were necessary to carry out assigned duties, language training and immigration and visas are exempt as well.


    • Real estate

       

      2.3.1.     Tangible property

      [Depreciation cost]

      Depreciation rates are calculated based on estimated useful life of the assets. Examples of normal depreciation are as follows:

      -heavy machinery, 15 years.

      -trucks, 7 years.

      -factory buildings, 20 years to 40 years.

      Annual depreciation is calculated based on the straight-line method. A method where fixed percentage of the depreciable value may be deducted in each year in accordance with the useful life of the asset, taking into account the residual value. Taxpayers may recover capitalized costs if they use the accelerated depreciation method for up to one-third of the normal useful life regarding new or imported fixed assets, (the normal period of depreciation must be at least of three years) Accelerated depreciation may be used only to reduce the taxable basis of the First Complementary Tax.  (For tax applicable to distributions of dividends, accelerated depreciation is not considered).


      2.3.2.     Intangible property

      [Depreciation cost]

      There is no allowance on amortization of intangible assets (Patents, trademarks, etc.)


      2.4. Calculation

      Income from dividends or withdrawals of profit have rules for calculating taxes, such as, dividends or withdrawals of profits must be attributed to taxable profits, distribution of profits must begin by the oldest retained earnings, FCT from taxable profits are added to the taxable basis and then deducted as a credit from the determined GCT.


      2.5. Filling of Return/Payment and Refund.

      Corporate tax is payable on accrued income on a yearly basis. Most payments must be estimated with the first and Second category taxes, additional tax and complementary tax. The Chilean tax regime is a self-assessment, companies have to make monthly advance payments and file their tax return on April of the following year. There are penalties for underpayment and tax evasion.


    • Definition of resident/non-resident.

       

      To be considered a resident you have to be living in the country for more than 6 months in one calendar year or in two consecutive calendar years. A domiciled person is the one with the intent to remain in the country and has a normal taxation as of the date of entry.  Taxes are supposed to be declared and paid through monthly or annual tax returns on their worldwide income for resident and a non-resident is taxed only on their Chilean source income and withholdings taxes.


    • Taxable Income

       

      As mentioned above, residents or domiciled persons are liable of income tax on their worldwide income tax (business income, employment income and on the total taxable income), non-residents are taxed on their Chilean source income.


    • Non-taxable Income.

      Tax exemptions on income are any allowances deemed necessary to perform work activities, such as food and transportation allowances, immigration processes, training courses, etc.


    • Deductible Income.

       

      The following contributions are deductible:

      -Pension contributions.

      -Compulsory social security contributions are deductible for individual income tax purposes.

      -Voluntary deposits or contributions to the private social security system (up to a certain amount).


      And there is a tax credit of 10% and deductions for interest paid on a mortgage for the construction or acquisition of a property.


    • Calculation.

       

      Tax Rate Calculation of the Global Complementary Tax (annual rates)


      Personal Income tax (ARS)

      Rate

      From 0 up to 11,368.06

      0%

      From 11,368.06 up to 25,262.37

      4%

      From 25,262.37 up to 42,103.94

      8%

      From 42,103.94 up to 58,945.52

      13.5%

      From 58,945.52 up to 75,787.10

      23%

      From 75,787.10 up to 101,049.46

      30.4%

      Beyond 101,049.46

      35.5%

    • Filling of Return/Payment and Refund.

       

      Employees with only one employer and no other income are not required to submit an annual tax return. Only employees with two or more employers must file a tax return.

      Income subject to the individual income tax must file an annual tax return and is computed on a self-assessment basis, individual need a national tax ID. Taxes must be filed in April of the year following the tax year. Chilean law uses a term for the tax year as financial year and for the year of assessment it’s called tax year.


    • Who is subjected to VAT?

       

      VAT is charged on domestic supplies of goods and services and on import of goods. The rate of 19% is for transfers, sales operations and other services.

      This are some examples:

      -Sales and other agreements used to transfer the ownership of tangible goods provided that said operations are customary.

      -Service that are commercial, industrial or financial, services related to mining, construction, insurance, advertising, data processing.

      -Sales of fixed assets (If the taxpayer was entitled to VAT credit for acquisitions, importation or construction).


      Imports have a VAT tax as also, the taxable basis is the customs value or CIF. Certain items are zero-rated or exempt.

      VAT works on a Credit-Debit system. The VAT credit (Input tax) is the one borne by a company or business in the acquisition of goods or services. When VAT is charged on goods and services sold to customers, then it’s called VAT debit (output tax)

      Taxable persons are the ones that carry out activities or transactions subject to VAT, and other that are usually engaged in selling movable property and immovable property (Land is not included). Public institutions, autonomous state institutions, local councils are subject to VAT as well.


    • Goods and services which are not subject to VAT.

       

      The VAT exemptions can be classified as personal and real, and are contained in articles 12 and 13 of the Law on Sales and Services Tax.

      Some of the following are examples:

      -Sales and other types of operations with used motorized vehicles (many exceptions are indicated in the law).

      -Species transferred as a royalty to workers by their employees.

      -Natural raw materials (Indicated by the Internal Revenue Directorate)


      Exports of goods and services is not subject to VAT.

    • Filling of Return/Payment and Refund.

       

      Tax declarations and payment of VAT must be made monthly and the amount is calculated based on the difference between the tax paid and tax credit.

      The balance due when the debit is greater than the credit has to be paid within the first 12 days of the month following the transaction.


    • Other tax

       

      Excise Taxes: There is an excise or sales tax on the sale or importation of some specific goods. The taxable base is the same as for VAT.

      The tax reform increased taxes to alcoholic and some non-alcoholic beverages, and the tax on tobacco. This items and certain luxury items like jewelry, are subject to an additional sales tax from 10% to 50%.

      -Alcoholic and non-alcoholic beverages and similar products 10% to 31.5%

      -Luxury goods (gold, platinum, ivory, jewels, etc.) 15%

      -Tobacco products have different types of rates, cigars 52.6 and cigarettes are taxes from the 0.000103004240 monthly tax unit per cigarette plus 30% on the sale price to the customer, the rate for processed tobacco is 59.7%


      Real property tax: Levied on an annual rate of 1% on rural property and 1.2% on developed non-rural property. The rate is 0.98% annually for non-rural property on the cadastral value.


      Capital Duty:  Companies must pay an annual municipal license fee with a rate between 0.25% to 0.5% on tax equity. Taxpayers that are not required to pay income tax are liable to an annual license fee equal to one monthly tax unit.


      Social Security contributions: Enrollment to the Chilean Social Security is mandatory after start working at a company. The main contributions by individuals are the 7% health insurance and a 10% pension fund contribution. Contributions withheld by the employer to make the following contributions to the Social Security:

      1-Monthly 0.95% premium on remuneration.

      2- Additional contributions vary depending on the type of risk with the maximum rate of 3.4% (2.4% unemployment insurance and 1.41% premium for life and disability insurance)


      Stamp tax: Levied on certain documents used as evidence for money lending, for example foreign loans, rates may vary.  The stamp tax applies at 0.066% per month or fraction of a month, the maximum stamp tax rate is 0.8%. For documents payable on demand or without an expiration date, the tax rate is 0.332%.


      Inheritance tax: Levied on the net value of transfers of property upon death or a living donation at progressive rates.


    • Overview of custom tax.

       

      6.1. Overview of custom tax.

      Chile is member of the World Trade Organization WTO and goods are classified by the Customs Cooperation Council Nomenclature. The rate of custom duty is generally 6%, duties on goods are imposed on the CIF price (are imposed on the cost, insurance, and freight), without deducting special discounts. Some of the FTA agreements signed by Chile are the Mercosur, European Union, P4, Trans Pacific Partnership and the Pacific Alliance.


    • Export tax.

       

      Export incentives

      -There is reimbursement for taxes paid in the importation or acquisition of goods required in exportation activity.

      -No VAT charges on exports.

      -Export services (qualified by the customs authority) are not subject to additional withholding taxes.

      Exports are not subject to custom duties, all goods leaving must be cleared at the customs office, some products are prohibited such as narcotics and illegal drugs, explosives, obscene material, etc.  Some sensitive products require authorization like copper and agricultural products (under seasonal restrictions).

      To comply with international agreements an export license may be required, for some type of goods there is an export permission needed (weapons, narcotics, psychotropics and goods subject to CITIES for endangered species)


    • Import tax.

       

      Imports to Chile are subject to a flat rate tax of 6%, but for persons from countries with Free Trade Agreements there's a lower taxation, in some cases even 0%, like with Canada, Mexico and some countries from the ALADI.
      To know the amount of duty tax for any product, the place of origin needs to be taken into consideration, to probe that the products comes from a country with a free trade agreement with Chile the exporter has to certify that a certain percentage of the product to be exported was made in the country. Rules of origin vary by FTA and by product. Chile applies the Harmonized Customs System and custom duties are calculated Ad Valorem on the CIF value.  The Chilean customs authority has the right to apply some minimum prices for the valuation of imports, some examples are wheat, edible oils and sugar, this will take place in case of concern from the authority. Products that have a higher customs tariff are 59.7% on tobacco; 50% on pyrotechnics such as fireworks, firecrackers, etc. There is a surcharge for luxury goods imports, like new cars, vehicles having an engine capacity exceeding 1,500 cm3 are taxed at the rate of 85% of the CIF value. Other luxury goods like jeweler is taxed at 50%. The payment of taxes on foreign trade must be made to the Customs Service of Chile.


    • Overview of tax related PE.

       

      A permanent establishment exists under double taxation treaties but is not considered under domestic Law. Nonresident’s permanent establishments are treated as separate entities for tax income purposes. Authorities established that a PE can be considered  when an agent in behalf of a foreign has the authority to carry out business in Chile, the taxpayer can choose to be to be considered as a local PE so they can deduct expenses, by being considered local  the company is subject to business income tax, granted as a credit against 35% withholding taxes on remittances from the head office. Income is subject to business income tax under general rules and is credited against the non-resident income tax and a PE is subject to a municipal license. A PE must file an annual income tax return and self-assess their own income tax liability.


    • Overview of withholding tax.

       
       Withholding taxes

      Usually there are no withholding taxes no payments to resident companies, but there should be a monthly business payment. There are reduced rates for countries with tax treaties.


      Dividends: Taxes are different for each tax regime, will depend on the type of entity, the regimes are the fully integrated regime or the partially integrated regime. Companies owned entirely by persons subject to final taxes usually are not eligible for the fully integrated regime. Shareholders subject to the fully integrated regime are taxed when profits are accrued by the Chilean company. An individual resident shareholder is subject to a global complementary income tax with rates between 0% to 35%. Dividends paid to a Non-residents are taxed with an additional withholding tax of 35%.


      Interest:  interest made by non-residents is subject to a withholding tax of 35% at a general rate on the gross amount derived. But if interest fulfils requirement by law the tax will be levied at a reduced rate or exempt from tax. There is a 4% reduced tax rate to interest on loans by foreign banks or international financial institutions, and by insurance companies or pension funds (there are restrictions and requirements needed between lenders and borrowers)


      Royalties:


       

      Rates on the gross amount

      For use or exploitation of trademarks, patents, formulas and other similar assets

      3   0%

      For use of discovery patents, utility models, industrial drawings and designs, sketches or topographies of integrated circuits

      15%

      For use of software (except basic programs for the function of equipment and machinery, shrink wrap software).

      15%

      Payments to foreign producers or distributors for material shown on cinemas or television.

      20%

      Payments for the use of copyright or author's rights.

      15%

      Technical service fee: For payments made to non-residents for technical and engineering works and professional or technical services that a non-resident renders, the rate is 15% of additional withholding tax. The rate increases 20% if the beneficiary is resident.


      Branch remittance tax: Taxes will depend on the regime, if a branch is under the fully integrated regime the 35% rate will apply when branch profits are accrued. a 25% credit is granted for first category income tax paid by the branch.  Under the partially integrated regime there is a 35% tax rate for remittance of profits to the head office with a full or partial credit for first category income tax.





    • Overview of transfer pricing tax

       

      Rules are applicable to:


      Transaction between related parties

      Dealings between Permanent Establishment and head offices or other PEs of the same enterprise

      Business restructuring and reorganization of the company that may involve the transfer of any title assets abroad and activities that could create taxes in Chile.

      The transfer price rules are made according the OECD guidelines, there are different provisions of the Income Tax law that regulate prices between companies in Chile and companies located outside the country. Rules apply to operations between a branch and its head office and between foreign companies and Chilean companies. The methods that can be used are the comparable uncontrolled price, resale price, cost plus, profit split, comparable profit split and residual methods.

      When prices agreed are not adjusted to the applicable in operations between unrelated parties, transfer pricing rules allow the authorities to challenge the prices paid by a Chilean company branch to its head office or to a foreign company. These rules apply as well to prices paid or owed for goods or services provided by the head office or by any branch or related companies, this will be done when processes are not adjusted to the normal market prices in operations between non-related parties. It can be possible as well to take into consideration the sales price to third parties of goods acquired from related companies, less the profit margin seen in similar operations with or between independent companies, if a branch has operations only with related companies the authorities can challenge those prices.