Chile is well ahead of many of its Latin American neighbours, in digitising its financial reporting systems. But its tax framework needs a thorough understanding to avoid compliance penalties.
Although five countries in Latin America are among the top ten most complex globally for accounting and tax compliance, Chile scores reasonably well, thanks to its digital transformation of finance processes.
The country ranks 35th out of 94 countries as assessed by TMF Group in its annual Financial Complexity Index 2018, down one place on the 2017 rankings but still well ahead of many of its regional neighbours, who are in the early, complex stages of digitising their systems.
Chile's current tax framework is competitive and highly computerised, with well-established business procedures. However, a change of government leadership at the end of last year could prompt some changes to the tax regime administered by the Tax Administration "Servicio de Impuestos Internos (SII).
It is likely that any tax reform will simplify the system again and balance the tax burden among different economic agents by reintegrating various tax systems. Whatever the change, Chile will continue to remain transparent on global regulation such as CRS or FATCA, to comply with its OECD obligations and encourage greater openness in foreign trade.
International Financial Reporting Standards (IFRS) apply in Chile and financial statements of publicly traded companies must be filed quarterly.
If your business is registered in Chile, you must pay Chilean income tax on worldwide income. However, foreign individuals are subject to tax on Chilean source income for the first three years. If your company is registered elsewhere, but includes operations in Chile, you pay income tax on only your Chilean-sourced income. Remuneration paid from Chile to non-residents for services rendered abroad is also subject to Chilean income tax.
The key corporate tax is "Impuesto de Primera Categoría" – First Category Tax (FCT) – which is the basic tax on income of a legal entity (corporate level) domiciled or resident in Chile and engaged in commerce, mining, fishing, or industrial activities. This is currently a 25% rate for entities subject to the fully integrated regime, known as the attributed income system (AIS), and 27% for entities subject to the partially integrated system (PIS). Final taxation (i.e. at the Chilean final owner's level or at the foreign owner's level) will depend on which income tax regime the Chilean entity is subject to.
Attributed Income System
Companies whose owners are exclusively final tax payers can choose the AIS system, allocating all the 'attributable income' (mainly the taxable basis for corporate purposes) upwards to the final owners. Final owners are then subject to the Global Complementary Tax (a progressive tax ranging from 0% to 35%) or Additional WHT (at 35%), regardless of whether a dividend was effectively distributed or not, with a 100% tax credit for the FCT paid at the attributing entity's level. The final owner is responsible for paying the difference between the FCT and the corresponding final tax. This means that a foreign entity or individual subject to this regime is subject to a total Chilean tax burden of 35% (the Additional WHT rate), being able to credit the 25% FCT paid by the company.
AIS is the default system for taxpayers who do not expressly choose to be subject to the PIS and who have partners, owners, or co-owners who are exclusively individuals domiciled or resident in Chile or a foreign company (final taxpayers).
Partially Integrated System (PIS)
Under the Partially Integrated System, company owners will only be subject to tax in case a dividend distribution or profit withdrawal is made. Chilean business owners subject to the Global Complementary Tax or foreign owners subject to the 35% Additional WHT are levied with these final taxes on profit distribution and have available only a tax credit of 65% of the FCT paid at the entity level. However, if the business final owner is resident in a country with which Chile has a Double Taxation Treaty (DTT), credit for the FCT paid at the entity level is 100%.
This means that final owners subject to the Additional WHT, residents, or those living in a DTT country will continue having a total Chilean tax burden of 35% (the Additional WHT rate), whilst other foreign investors' total Chilean tax burden will be 44.45%, since the 27% FCT rate became applicable in commercial year 2018.
Prior to the last tax reform, a ledger for taxable profits known as the FUT -"Fondo de Utilidades Tributarias" was required to keep track of retained earnings and their corresponding tax situation. Instead, a Corporate Profits Ledger – "Registro de Rentas Empresariales" indicates the average rate applicable, and taxpayers will need to keep a registry regarding the 'accumulated tax credit balance' to control the available FCT credit.
A voluntary payment of the FCT is established in case the entity attributing or distributing income has no corporate tax credits available for the use of the final owners. These voluntary FCT payments under the AIS will be deductible from net taxable income, whilst under the PIS, they will be considered as a tax credit against the FCT due.
Businesses are subject to either the AIS or the PIS tax regime for at least five years. They may then change from one system to another, provided all FCTs due have been paid.
Chile's tax year is the previous calendar year. Companies are required to make monthly advance payments of tax, against the annual tax return filed in April of the following year. There are penalties for late filing, failure to file, underpayment of tax, and tax evasion.
Business employees or self-employed individuals are subject to second category income tax ("Impuesto Unico de Segunda Categoría" - Second Category Tax - SCT), charged at progressive rates from 0% to 35%.
Foreign loans are subject to Stamp Tax, currently 0.066% for each month or fraction thereof between disbursement and maturity, capped at 0.8%. Loans payable on demand or without a maturity date are subject to a 0.332% tax.
Value Added Tax (VAT) of a 19% rate is charged on domestic supplies of goods and services, and on import of goods. Certain items are zero-rated or exempt. Registration for VAT is mandatory, and a VAT return must be filed monthly, with the relevant tax paid at the time of filing.
Chile's transfer pricing rules are in line with the OECD guidelines. Country-by-country reporting is required for certain multinational groups with a Chilean resident parent, or other Chilean resident group entity.
Knowledge of the law, regulations, local requirements, and processes is vital for companies looking to operate in Chile. TMF Group in Chile has more than 30 years' experience assisting local and international clients. With a team of more than 230 skilled professionals, local knowledge, and expertise complements a global TMF Group network of 125 offices in over 83 jurisdictions, employing more than 7,000 qualified accountants, lawyers, corporate secretaries, HR, and other professionals. Whether you want to establish a business in Chile or just want to streamline your Chilean operations, talk to us.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.