Foreign tax credit
In order to avoid double taxation, the Chilean Income Tax Law recognises a tax credit mechanism in which the tax effectively paid abroad may be deducted from the taxes to be paid in Chile.
In order to regulate this matter, the Chilean Income Tax Law distinguishes between those countries with which there is a DTT in force with Chile and those that do not have a DTT in force with Chile.
A foreign tax credit may be used even if the foreign tax was paid by an indirect subsidiary of the company remitting the funds to Chile, provided that all the entities are domiciled in the same country and that the remitting entity directly or indirectly participates in 10% or more of the equity of the company paying the foreign tax; and, as of 1 January 2017, it is possible to use a tax credit in Chile for taxes paid by a subsidiary domiciled in a third country if such subsidiary is domiciled in a country with which Chile has a DTT or an Exchange of Information Convention in force.
The foreign tax credit may be carried over for FCT purposes even if the company is in a tax loss situation or if the FCT is lower than the credit.
The total available foreign tax credit has a 35% cap in respect to income taxes paid in countries with which Chile has a DTT in force. In respect to those countries with which Chile has no DTT, the tax credit cap is 32%.
As of 1 January 2017, the tax credit for taxes paid abroad is allocable against Chilean-source income, as foreign-source income is considered Chilean-source income once it is included in the taxpayer’s net taxable income and levied with Chilean taxes. Previously, as a general rule, the tax credit for taxes paid abroad was allocated only to foreign-source income.
The principal investment incentives are the following:
- Tax benefits and other incentives for companies operating in the northernmost and southernmost parts of the country.
- Tax benefits to forestry companies, contracts for oil operation, and nuclear material operations.
- The Tax Reform introduced a series of tax benefits for micro and small entrepreneurs and companies, which are reinforced by Law N° 20,899.
Inbound investment incentives under Law Decree N° 600 (Foreign Investment Statute)
The principal incentives to encourage foreign capital contributions are statutory guarantees covering the repatriation of capital, remittance of profits, non-discrimination toward foreign investment, and access to the foreign exchange market for remittance purposes. In general, foreign investors are subject to the same legislation as national investors. A guaranteed income tax rate of 42% may be granted for ten years or, provided the capital investment project exceeds 50 million United States dollars (USD), 20 years for the development of industrial or extractive projects, under Law Decree N° 600, which contemplates the execution of a Foreign Investment Agreement between the foreign investor and the Chilean government.
Under Law Decree N° 600 and the corresponding Foreign Investment Agreement, the overall rate is comprised of the corporate tax on profits and WHT on dividend or branch profit distributions. The tax rate on dividend or profit distributions is the difference between 42% and the underlying tax paid at the corporate level. The option to be subject to an overall effective tax rate of 42% without change for ten or 20 years is usually not exercised by foreign investors because the current combined effective tax rate on profits and dividend distribution is 35% under the general tax regime.
Under the Foreign Investment Agreement, a foreign investor may request for tax stability with respect to VAT and customs duty regimes. With respect to customs duties, however, stability is granted only for the importation of certain machinery and equipment not available in Chile.
The Tax Reform established the elimination of Law Decree N° 600 as of 1 January 2016 with respect to new investment projects; however, Law N° 20,848, published in the Official Gazette on 25 June 2015, extended the enforceability of Law Decree N° 600 for four years more, counted as of 1 January 2016.
Foreign investors who have already entered into an investment agreement under Law Decree N° 600 with the Foreign Investment Committee will continue being subject to the laws applicable to such agreements according to current rules. On the contrary, new investments, as of 1 January 2016, will be able to opt between the foreign investment statute under Law Decree N° 600 and the new foreign investment statute established by Law N° 20,848.
Law N° 20,848 establishes the frame for ‘direct foreign investment’ in Chile and creates a Committee of Ministers for the promotion of foreign investment, as wells as an Agency for the promotion of foreign investment.
Please note that it is not mandatory for foreign investors to opt among one of these two foreign investment regimes, as they can freely invest in Chile as long as they do it through the formal exchange market.
The principal incentives for exports can be summarised as follows:
- Taxes paid in the importation or acquisitions of goods required in the export activity are reimbursed.
- VAT on exports is zero-rated.
- The Productivity Law provides that the export of technical or engineering services duly qualified by the Customs Authority as 'export services' are not subject to Additional WHT in Chile.
- The Productivity Law establishes that the export of services rendered completely or partially in Chile are also subject to the corresponding VAT exemption if the services are qualified as 'export services' by the Customs Authority and are used abroad.
Chile has signed FTAs or Economic Association Agreements (EAAs) with Australia, Canada, Central America (i.e. Costa Rica, El Salvador, Guatemala, Honduras, and Nicaragua), China, Colombia, the European Free Trade Association (i.e. Iceland, Liechtenstein, Norway, and Switzerland; EFTA), the European Union (EU), Hong Kong, Japan, Malaysia, Mexico, the Pacific 4 (i.e. with Brunei, New Zealand, and Singapore; P4), Panama, Peru, Republic of South Korea, Thailand, Turkey, the United States, and Vietnam. All these agreements provide for reduced or zero-rate customs duties.