Chile

Corporate - Significant developments

Last reviewed - 21 July 2022

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The attribution regime of taxation is repealed.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, 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:

1. Actively traded exemption - stocks listed in the Chilean stock exchange:

10% single tax rate on capital gains:

It is modified 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, so they will not be subject to taxes. This exemption benefits all types of investors. Now, the capital gain obtained from the transfer of securities that have a stock market presence will be taxed with a single tax of 10% rate over the capital gain.

This tax will apply to all transfers taking place after 6 months from the first day of the month following the law is effective (i.e., when published in Chilean Official Gazette). Nonetheless, the actively traded capital gain exemption remains in place for institutional investors. 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 December 31 of the year of its acquisition; or (ii) the tax basis - acquisition cost determined following Chilean general principles.

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

2. Exemptions related to the real estate market:

a) 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) a 65% of the VAT debit they must determine on the sale of real estate for housing. Properties the value of which does not exceed UF 2,000 (USD 76,272 appx.) are benefited, with a cap of up to UF 225 (USD 8,580 appx.) 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 21,420, this special credit is eliminated for real estate construction contracts signed and sales performed from January 1, 2025, and also it is gradually reduce the amount to be deducted from the CIT monthly provisional payments to a 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 January 1, 2023.

b) Repeal of rental income tax exemption:

Among other tax benefits for individuals who own affordable homes, it is the so called DFL2 tax exemption on rental income with the cap of 2 homes per individual. Note that under Chilean previous tax reform, homes acquired prior to 2010 are not subject to the 2 homes cap, so currently there are individuals and entities benefiting from this regime.

This new law limits the benefits only to individuals having a maximum of 2 real estate, as of January 1st, 2023, regardless of the acquisition date. Accordingly, the DFL2 rental income regime is restricted to scenario where the aforementioned requirements are met.

3. Provision of services subject to VAT:

Under the current VAT provisions, the 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 Income Tax Law (e.g., commercial and industrial activities, extractive activities, advertisement, among others). Professional and technical assistance services are generally not subject to Chilean VAT, as they do not fall within the mentioned.

Law 21,420 repeals the reference to article 20 of Chilean ITL, thus that 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 taxation on services will apply to services provided from January 1, 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 N ° 2 of the ITL, even when they have chosen to declare their income according to the first category regulations.

4. 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, it is repeal the inheritance tax exemption 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. The foregoing in order to reduce elusion spaces. 

5. 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), that is, about 400 millions Chilean pesos (USD 483,170 appx.) 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 $900 million Chilean pesos (USD 1,086,000.00 appx.), going from the current rate of 0.275% to 0.425%.

6. Modernization of Mining Concessions:

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

a. Exploratory Concessions: focused on the development of activities that lead to the discovery, characterization, 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 2 years, renewable for 2 more years if 50% of the surface is returned (in practice it is because 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.)

b. Exploitation Concession: 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 license), and its cost depends on whether the ore is metallic or not.

Specifically, as a first measure, Law 21,420 increases the duration of the exploration license to 4 years, but eliminates the possibility of renewal. Additionally, the amount of the license would be increased from 1/50 UTM to 3/50 UTM per hectare.

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

Finally, another modification is on the values of the exploitation licenses. 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 5 years, up to 12 UTM per hectare for licenses from year 31.

7. New tax treatment of leasing contracts:

The tax treatment of leasing differs from its financial treatment. For financial purposes, it is recognized 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, but for tax purposes it is considered an expense.

With this new law, this divergence will end and therefore, the tax treatment of leasing would be equivalent to its financial treatment, since it recognizes the economic reality of the operation. The new treatment would operate for those contracts entered into as of January 1, 2023.

8. 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, it is the elimination of this credit as of January 1, 2023 for those companies with average annual sales of over 100,000 UF (large companies). (USD 3,780,000.00 appx.). Therefore, the exemption that benefits taxpayers in relation to the physical fixed assets, which mainly belong to the large company sector, is eliminated.