Chile

Chilean Congress approves Modernisation Tax Bill

On 29 January 2020, the Chilean Congress approved the so-called 'Modernisation Tax Bill' after a year and a half of discussion. The original bill went through substantial amendments both in the House of Representatives and in the Senate, incorporating the amendments agreed to in December 2019 in the so-called 'Tax Agreement' between the Senate’s Finance Commission and the Government, to finance the new social agenda. Chile published Law No. 21,210 on the modernisation of tax legislation in the Official Gazette on 24 February 2020.

Integration of corporate tax and final taxes

The attribution regime of taxation is repealed.

A full integration regime is introduced for small and medium enterprises (SMEs) (i.e. with sales not exceeding approximately 2.8 million United States dollars [USD] annually) so that the corporate level tax should be fully creditable against final taxes.

For large enterprises, the current partially integrated system (PIS) of taxation is applicable (i.e. 27% corporate income tax [CIT] rate and shareholder’s taxation on a cash basis with full or partial CIT credit depending on whether the non-resident shareholders is resident or not in countries with which Chile has a double tax treaty [DTT] in force).

Accordingly, in a PIS non-tax treaty scenario, the total tax burden will be 44.45%. For Chilean individuals, their total Chilean tax burden could go up to taxation of 44.45% in the top threshold bracket.

For non-resident shareholders who are resident in a tax treaty jurisdiction and beneficiaries of dividend income under the respective tax treaty, the overall taxation under the PIS regime should be capped to 35%, the latter being their total Chilean tax burden.

Expenses

• The concept of tax-deductible expense is redefined, establishing that these will be those "that have the ability to generate income in the same or future commercial years and that are associated with the interest, development, or maintenance of the business …"
• The deduction of specific goods donated to non-profit institutions is allowed.
• Unrelated party bad debts deduction is allowed where unpaid credits last for more than 365 days, or a percentage thereof, following the criteria defined by the Chilean Internal Revenue Service (IRS).
• Tax deduction of a shareholder´s remuneration who actually works for the company is allowed, to the extent is reasonable. In addition, remunerations paid to a shareholder’s spouse or civil partner or children will be accepted as a tax expense under the same terms and conditions.
• Tax deduction of voluntary environmental expenses is allowed, provided they are established by the competent authority and with certain limits. The excess is not accepted as tax expense.
• Disbursements or discounts imposed by the authority to compensate damage to customers or users, in a strict liability scenario, will be considered as expenses.
• Disbursements in judicial or extrajudicial transactions will also be deductible, in an unrelated party scenario. This includes penalty clauses.

Progressive repeal of tax refunds of Payments per Absorbed Profits (PPUA)

The PPUA is repealed as of commercial year 2024 onwards (i.e. the tax refunds received by companies whose losses have absorbed the profits received from their subsidiaries, which in turn have been subject to CIT, regarding withdrawals and dividends received as of that year).

The repeal will not affect the allocation of losses to the companies’ own present or future profits, nor the use of the CIT credit against final taxes, which will be controlled in the tax credit balance ledger (SAC by its acronym in Spanish) of the receiving entity.

Between years 2020 and 2023, the PPUA refund will be reduced gradually as follows: 90% in commercial year 2020, 80% in commercial year 2021, 70% in commercial year 2022, and 50% in commercial year 2023.

Private Investment Funds (FIP) and Investment Funds.

Article 92 from Law No. 20,712 is amended by introducing new incorporation requirements for FIPs (e.g. non-related parties not being able to hold a 20% ownership interest in the fund each; the 20% ownership limitation considers any related party’s interest).

In addition, the amendment states that if, after a year since this Law enters into force, the FIPs do not meet the requirements stated in the proposed provision, the fund would be considered as a corporation for tax purposes during the commercial year in which the FIP failed to comply with the new requirements.

However, the amendment states that if the FIP subsequently complies with the new requirements, it shall be considered again as a fund for tax purposes, for the income obtained from 1 January of the following commercial year to the one that meets the requirements.

International rules

• The definition of permanent establishment (PE) is incorporated in the Income Tax Law (ITL), which was previously regulated only through jurisprudence issued by the Chilean IRS.
• Foreign Tax Credit (FTC) rules are reformulated. The FTC limit for countries without a DTT raises from the current 32% to 35%.
• When a Chilean entity holds shares in another Chilean entity through a foreign company, the withholding tax (WHT) paid by the Chilean entity will be creditable.
• Royalties derived from research and development (R&D) projects under Law No. 20,241 will no longer be considered as passive income for controlled foreign company (CFC) purposes.
• Limitation for the 4% WHT rate in case of back-to-back structures. New requirements are established for the application of the 4% rate. Among these, it is stated that the loan should not be granted through certain types of 'structured agreement'. This rule will apply to the interest paid, transferred into account, or made available to taxpayers not domiciled in Chile, for loans granted as of the effective date of the Law, as well as those granted prior to that date, whenever they have been novated, assigned, or the amount of the credit or interest rate is modified later.
  
  In addition, a new concept and requirements to qualify as a foreign or international financial institution (FFI) are incorporated.
• The deadline for the non-application of the restitution of the 35% of the CIT credit applicable to the PIS regime for countries with which Chile has signed, prior to 1 January 2020, a DTT that is not in force (currently the United States and the United Arab Emirates) is extended until 31 December 2026.

Value-added tax (VAT) on digital services

A new taxable event is incorporated in Article 8 letter (n) of the VAT Law (D.L. 825) in order to tax with VAT the services provided by digital platforms and other tech companies.

Regional development contribution of 1%

A special contribution of 1% over the acquisition value of all fixed assets of one same investment industrial project is incorporated. Requirements for the project are the following:

• Involves an investment equal to or greater than USD 10 million in tangible fixed assets.
• Must pass through the Environmental Impact Assessment System (SEIA).

The tax will be applied to the acquisition value of all physical assets of the fixed assets, but only in the part that exceeds the amount of USD 10 million.

Law No. 21,420 - Reduces or eliminates tax exemptions

In February 2022, the Chilean government approved Law No. 21,420, which, in order to finance a new pension law, contains a series of eliminations and modifications to existing tax exemptions in different regulations. Among the most relevant, the following stand out:

Actively traded exemption - Stocks listed in the Chilean stock exchange

10% single tax rate on capital gains

Article 107 of the ITL, which states that the gains obtained from the disposal of certain instruments on the stock market (actively traded stocks listed in the Chilean stock exchange) will be considered as non-taxable gains and will not be subject to taxes, has been modified. Now, the capital gain obtained from the transfer of securities that have a stock market presence will be taxed with a single tax rate of 10%.

This tax will apply to all transfers taking place after six months from the first day of the month following the date the law is effective (i.e. when published in Chilean Official Gazette).

The gain subject to the 10% single tax will be determined by the difference between the sale price and (i) the official closing price of the security as of 31 December of the year of its acquisition or (ii) the tax basis (i.e. acquisition cost determined following Chilean general principles).

This tax will not affect institutional investors, whether they are residents or domiciled in Chile or abroad.

Exemptions related to the real estate market

VAT credit in construction repeal

Under the current rules, construction companies have the right to deduct from the amount of their monthly provisional payments (CIT advanced payments) 65% of the VAT debit they must determine on the sale of real estate for housing. Properties the value of which does not exceed 2,000 unidades de fomento (UF, which is a determined amount of Chilean pesos duly adjusted for inflation on a daily basis) (approximately USD 76,272) are benefited, with a cap of up to UF 225 (approximately USD 8,580) per house. The same benefit applies to VAT-exempt sales of properties acquired by beneficiaries of housing subsidies. In this case, the benefit is equivalent to 12.35% of the transfer value.

With the approval of the Law No. 21,420, this special credit is eliminated for real estate construction contracts signed and sales performed from 1 January 2025, and it gradually reduces the amount to be deducted from the CIT monthly provisional payments to 32.5% of the VAT debit and 6.175% of the value of the sale, respectively, with respect to sales performed and real estate construction agreements entered into from 1 January 2023.

Repeal of rental income tax exemption

Among other tax benefits for individuals who own affordable homes is the so-called DFL2 tax exemption on rental income, with a cap of two homes per individual. Note that under previous Chilean tax reform, homes acquired prior to 2010 are not subject to the two-homes cap, so there are currently individuals and entities benefiting from this regime.

This new law limits the benefits only to individuals having a maximum of two real estate as of 1 January 2023, regardless of the acquisition date. Accordingly, the DFL2 rental income regime is restricted to scenario where the aforementioned requirements are met.

Provision of services subject to VAT

Under the current VAT provisions, services are subject to Chilean VAT to the extent they fall within the activities listed in Article 20 No. 3 and 4 of the Chilean ITL (e.g. commercial and industrial activities, extractive activities, advertisement). Professional and technical assistance services are generally not subject to Chilean VAT, as they do not fall within the mentioned.

Law No. 21,420 repeals the reference to Article 20 of Chilean ITL, thus all services should be subject to Chilean VAT, unless they are expressly exempted. This implies a radical change in the concept of services levied with Chilean VAT. The VAT on services will apply to services provided from 1 January 2023 onwards. However, the exemption for services provided by individuals (e.g. professional services) is maintained, whether they are provided independently or by virtue of an employment contract.

In addition, health services are expressly VAT exempt, excluding laboratory services. Note that this law maintains the VAT exemptions that currently exist for various services classified as meritorious (e.g. education and passenger transport). Therefore, in general, the exemptions contemplated in Articles 12 and 13 of the VAT Law are not greatly modified. A last novelty in this regard is that the bill maintains as not subject to VAT the remuneration obtained by 'professional associations' referred to in Article 42 No. 2 of the ITL, even when they have chosen to declare their income according to the first category regulations.

Repeal of inheritance tax benefit related to life insurance

Under the current rules, amounts received by beneficiaries derived from life insurance contracts are considered as non-taxable income and not subject to inheritance and gifts tax.

Through the recently approved law, the inheritance tax exemption is repealed for amounts derived from life insurance contracts celebrated after the entry into force of the law, except for the disability and survival insurance of Decree Law No. 3,500, of 1980.

Increase in the land tax surcharge

The Tax Modernization Law (Law No. 21,210) incorporated a new land tax surcharge, applicable to the fiscal assessment of real estate that, as a whole, exceeds 670 Annual Tax Units (UTA), which is about 400 million Chilean pesos (CLP) (approximately USD 483,170). This surcharge is applied in steps ranging from 0.075% to 0.275%.

Now, the new law approved to raise the marginal rate that applies to the top of the scale of tax assessments, with a tax assessment of more than CLP 900 million (approximately USD 1,086,000), going from the current rate of 0.275% to 0.425%.

Modernisation of mining concessions

Today in Chile, mining concessions (the right granted by the Chilean state to mine) are protected by a licences system ('patentes mineras'), and the right to explore and/or exploit is granted based on an annual patent payment. Thus, in Chile there are two types of mining concessions:

• Exploratory concessions focused on the development of activities that lead to the discovery, characterisation, delimitation, and estimation of the potential of a concentration of mineral substances, which could eventually give rise to a mining development project. It has a duration of two years, renewable for two more years if 50% of the surface is returned (in practice it is requested again under another name but without delivering 50%). Its cost is 1/50 Monthly Tax Unit (UTM) per hectare (approximately USD 66 per UTM).
• Exploitation concessions focused on activities that aim to extract a mineral resource from a previously defined mine. It has an indefinite duration (as long as the company pays for the mining licence), and its cost depends on whether the ore is metallic or not.

Specifically, as a first measure, Law No. 21,420 increases the duration of the exploration licence to four years but eliminates the possibility of renewal. Additionally, the amount of the licence would be increased from 1/50 UTM to 3/50 UTM per hectare.

On the other hand, with respect to the exploitation licence, its indefinite duration is maintained. The value of the licences already granted is maintained only for those patents that demonstrate effective work, but the value of the non-metallic licence is increased to the level of the metallic one (1/10 UTM).

Finally, another modification is on the values of the exploitation licences. In this context, it is intended to create a progressive scale over the years for concessions that do not prove their work (regardless of whether it is metallic/non-metallic), starting at 4/10 UTM per hectare for the first five years, up to 12 UTM per hectare for licences from year 31.

Decrease in credit for purchases of fixed assets

As of today, those taxpayers who declare effective income through full accounting are entitled to a credit equivalent to 6% of the value of the fixed asset, acquired new or completed during the year. This percentage can decrease up to 4% depending on the company's sales level and in no case can it exceed 500 UTM (approximately USD 18,130,00). As a last financing measure, this credit is eliminated as of 1 January 2023 for those companies with average annual sales of over 100,000 UF (large companies) (approximately USD 3,780,000). Therefore, the exemption that benefits taxpayers in relation to the physical fixed assets, which mainly belong to the large company sector, is eliminated.

Treatment of leasing contracts

Until December 2022, the tax treatment of leasing differs from its financial treatment. For financial purposes, it is recognised as the existence of financing for the acquisition of an asset; however, from a tax perspective it is treated as a ’lease‘ with the option to buy. This implies that financially the acquirer of the asset becomes its owner and applies depreciation provisions; however, for tax purposes it is considered an expense.

The already mentioned Law No. 21,420 tried to modify this by incorporating a new article 37 bis in the Income Tax Law. With this new article, this divergence would end, and the tax treatment of leasing would be equivalent to its financial treatment since it recognises the economic reality of the operation. The new treatment operates for those contracts entered into as of 1 January 2023.

On 15 February 2023, Law No. 21,540 was published in the Official Gazette, proceeding to repeal and eliminate the aforementioned article 37 bis.

In this regard, Law No. 21,540 does not establish a special validity, so it should be considered effective as of 1 January of the year following its publication, and taxes that must be paid as of that date will be subject to the new Law.

In other words, regarding this matter, everything remains the same as it was on 31 December 2022.

Law No. 21,578 - Minimum wage and support for SMEs

Minimum wage

Law No. 21,578, published in the Official Gazette on 30 May 2023, regulated, among other measures, two quite important aspects.

In the first place, with the approval of the law, the minimum wage in Chile is increased, leaving the amounts that will rise gradually as follows:

• CLP 440,000 as of 1 May 2023 (retroactive).
• CLP 460,000 as of 1 September 2023.
• CLP 500,000 as of 1 July 2024.

The law contemplates the possibility of increasing the minimum wage according to the variation of the Consumer Price Index (CPI). Therefore, in the event that the accumulated CPI during 2023 exceeds 6%, an increase of CLP 10,000 will be made on 1 January 2024, leaving the minimum wage at CLP 470,000 on that date.

In addition, the law contemplates an automatic readjustment of the monthly minimum wage on 1 January 2025, according to the CPI percentage between the months of July and December 2024.

Support for SMEs

In addition, this law reached an agreement that consists of a subsidy of amounts for each of the periods of increase in the minimum wage, which varies according to the size of the company (micro, small, and medium), in order to provide greater coverage and protection to microenterprises.

The main measure was to modify Law No. 21,256 in order to extend the current benefit of the 10% First Category Tax (FCT) rate for companies in the SME regime and establish the rate at 12.5% during 2024, postponing the increase to 25% for the year 2025.

In addition, the agreement for the support of SMEs includes the following:

• Subsidy per worker valid between May 2023 and April 2025.
• Deliver resources according to the size of the company.
• Mechanism to increase the amounts of the subsidy in case of ’deterioration of macroeconomic conditions’.