The Chilean Internal Revenue Service (SII) is in charge of the inspection and control of taxes in Chile. The SII is also responsible for issuing instructions, rulings and interpretation to the tax laws, and has a special institution unit for large corporate taxpayers.
In the event of a dispute or disagreement between the taxpayer and the SII, the administrative procedure is carried out in the first instance before the regional director of the SII who acts as tax judge. The taxpayer then has the possibility of appealing, first to the Court of Appeals and then finally to the Supreme Court.
The statute of limitations is three years from the due date of the relevant tax payment. In special cases the term is extended to six years.
Income taxation in Chile is based on two factors: the taxpayer’s place of residence and the source of income. All resident taxpayers, individuals and corporations, are subject to taxes on their total income, wherever earned.
The sole exception is the case of foreign individuals, who only pay taxes on Chilean-source income for their first three years in the country, but this period may be lengthened. Non-residents are generally only taxed on Chilean-source income; i.e. income earned from assets located in Chile or from activities carried out in Chile. However, services provided abroad to a Chilean resident are also taxed.
Income from Chilean corporations or partnerships is always considered Chilean-source income.
Law No. 19.840, published in the Official Gazette on November 23rd 2002, defines Chilean-source income as the income arising from the disposal of shares or interests representative of the capital of a legal entity constituted abroad, made to an entity domiciled, resident or constituted in Chile, whose acquisition causes, either directly or indirectly, ownership in the property or income of a company constituted in Chile. However, this does not apply when the directly or indirectly acquired ownership in the Chilean company represents 10% or less of its equity or profits.
Global and Category taxes
Chilean taxes are divided into two types: Category Taxes, which tax income from certain activities, and Global Taxes, which tax all income.
The category taxes are:
- First Category Tax with a proportional rate applied on income from industry, commerce, mining, real estate, and other activities involving the use of capital. The tax is permitted as a credit against due global taxes.
- Second Category Tax with a progressive rate applied on income from personal services, as an employee. Income of self-employed persons and professionals is classified as second category income but is not subject to second category tax.
The Global Taxes are:
- Complementary Tax on the total income from both categories of resident individuals.
- Additional Tax on the total income from both categories of non-resident individuals or non-resident legal entities when they are withdrawn, distributed as dividends, or reunited abroad.
Income tax rates
The current main income tax rates are as follows:
- First Category Tax: 17%
- Second Category Tax:
- Self-employed people - no tax
- Employees - Exempt to 40%
- Complementary Tax (resident individuals): Exempt to 40%
- Additional Tax (non-resident legal entities and individuals): 35%
Payment of income tax
All taxpayers must file an annual income tax return and pay any tax due during the month of April following the year end.
No annual income tax return is necessary for an employee who receives only employment income. In this case, the second category tax is withheld and paid to the Treasury by the employer on a monthly basis.
The First Category Tax or corporate tax is payable on accrued income on a yearly basis.
Taxation of different types of business establishments
In general, differences arising from the choice of business organisation are not hugely significant.
An agency, branch, or permanent establishment of a foreign corporation are only subject to Chilean-source income tax. Taxable income is determined by the actual profits earned in its activities in Chile. When the accounting records do not reflect actual profits, the Internal Revenue Service can determine presumptive net income using either of the following bases:
- By multiplying the agency’s gross income by the parent company’s ratio of net income to gross income.
- By multiplying the agency’s total assets by the parent company’s ratio of net income to total assets.
The tax provisions applicable to limited liability individual enterprises are the same as those applicable to limited liability partnerships.
In a limited liability partnership, if a partner is a Chilean resident, his/her share of income is not subject to the Additional Tax, but is added to that partner’s other income and taxed at the appropriate personal rates (Complementary Tax) with a tax credit equivalent to the First Category Tax paid by the limited liability partnership.
In the case of a Chilean corporation, the corporation pays the First Category Tax, but it is a tax credit for shareholders. Resident individual shareholders receive a credit against their Complementary Tax on dividends received. Resident corporate shareholders are not taxed on the dividend received and transfer the related tax credit to their own shareholders when they distribute dividends. Nonresident shareholders receive a tax credit against the additional tax due on dividends remitted abroad.
Value Added Tax
A 19% Value Added Tax (VAT) is charged on all recurring sales and other customary conventions over material goods. The customary element is presumed on sales that relate to the line of business of the company. VAT has to be paid on services, whether recurrent or not, that activate interest, premiums, commissions or other similar remunerations that are considered of a commercial, industrial or financial nature, or that derive from mining, construction, publicity and computers, amongst others. Professional services rendered by employees or independent consultants are not subject to VAT.
A typical Value Added Tax comes from the process whereby the VAT paid on imports, purchases, and services received (tax credit or input tax) is deducted from the VAT due on sales and services rendered, tax debit or output tax. The vendor or the service provider must file a monthly tax return and pay the next tax debit by the twelfth day of the subsequent month. A net tax credit (increased to reflect the changes in consumer price index) can be forwarded to the subsequent months.
Exports are not subject to VAT, but VAT paid on purchased goods is either deducted from the other VAT due or refunded by the Internal Revenue Service. Incoming and outgoing marine and air transport services are exempt from VAT. Services given to non-resident entities and which are used exclusively outside Chile can be deemed to be exports by the customs service, and are therefore exempt from VAT.
Foreign investors covered by the foreign investment statute are not required to pay VAT on their capital contributions as long as those assets are included in a listing especially set up for that purpose.
Sales tax, as well as VAT, is paid on certain luxury items and beverages at rates that vary according to the type of items sold.
Foreign tax credit
In Chile, taxes are paid on foreign source income on a net paid basis (except for branches that pay on an accrued basis). If investors meet certain conditions established in the Income Tax Law, they are entitled to a credit against the first category tax and final taxes for the income taxes paid or withheld abroad on dividends profit remittances and income deriving from permanent establishments.
The credit is capped at 30% for dividends and 17% in the case of branch profits. In computing taxable income, foreign taxes paid are added to the taxable income. If foreign taxes paid exceed the cap (not to be used as tax credit) are allowed as a deduction from taxable income.
Customs duties are 6% ad valorem for almost all imported imported goods and products. There are some bilateral and regional reductions regarding some products in the context of the ALADI (Latin American Integration Association) Agreement.
Chile has signed free trade agreements with Canada, Mexico, USA, the European association EFTA, the EU, South Korea, Japan and China. Chile has also entered into bilateral and economic complementation agreements with Colombia, Brazil, Ecuador, Peru, Argentina, Cuba and Venezuela in order to reduce or eliminate customs duties.
Chile is an associate member of MERCOSUR and has negotiated immediate and staged reductions or eliminations of customs duties.
A municipal license is an annual fee collected by the municipalities, taxing any activity carried out by a taxpayer in its territory. The fee is calculated on the taxpayer’s equity at a rate which is set by each municipality, with a minimum of 0.25% and a maximum of 0.5%.
The total fee can be no larger than 8,000 monthly tax units (about US$533,000). The fee is allocated among the municipalities in which the taxpayer has an office, factory, warehouse or other establishment.
Law No. 20,280 states that the SII has is obligated to inform the municipalities of the taxpayer’s entity in order to facilitate the collection of the municipal license.