Private Wealth 2021

Last Updated August 12, 2021

Chile

Law and Practice

Authors



Torretti & Cía. specialises in tax issues, with a strong international outlook and a body of work balanced between corporate tax and private wealth matters. The firm was born as a reaction to the “Biglaw” model, deliberately seeking to differentiate itself from larger competitors by having the partners directly involved from start to finish in all the matters handled by the firm. Their experience, coupled with the support of a cohesive team of lawyers, results in clear advice that effectively solves their client’s complex needs. Torretti & Cía. aims to provide personalised strategies for each client’s unique situation and interests. The partners of Torretti & Cia. are professors of tax law. Their academic background allows them to translate technical matters into simple, understandable concepts.

Income Tax

Chilean-resident individuals are taxed on their worldwide income with personal income tax at a progressive rate ranging from 0% to 40%, while non-residents are taxed only on their Chilean source income with 35% withholding tax (WHT), unless a reduced rate is applicable (eg, those applying to technical or engineering services, software or commissions) or a double tax treaty is in place.

Some small deductions from the taxable income are available to Chilean-resident individuals, but they are usually not relevant for high net worth individuals.   

Chilean-resident companies are subject to a flat 27% corporate tax. Small and medium -sized enterprises (SMEs) are subject to a flat 25% corporate tax, currently reduced to 10% as a COVID-19 measure. Investment companies do not qualify as SMEs, regardless of their income amount.

Dividends

Dividends obtained by a Chilean-resident individual are taxed with general personal income tax at the 0–40% rate, but 65% of the corporate tax paid by the company is creditable against the former. Nonetheless, the total tax burden (corporate tax plus personal income tax) is capped at 44.45%. If the company paying the dividend is an SME, 100% of the corporate tax is creditable against personal income tax, so the maximum tax burden would be 40% (the maximum tax rate of personal income tax).

Dividends obtained by a Chilean-resident company, such as an investment company, are tax exempted. This is why it is usual for Chilean investors to keep their income retained in investment companies, rather than at an individual level.

Dividends obtained by a non-resident from a Chilean company are taxed at a fixed rate of 35% WHT, with the same corporate tax credit that applies to Chilean residents. Double tax treaties do not provide for a reduced rate, but allow 100% of corporate tax credit even if the payer is not an SME.

Capital Gain: Stock

In the case of stock, there is a small tax exemption for global capital gains not exceeding roughly USD8,500. Nonetheless, there is a full tax exemption on capital gains obtained in the sale of stock with high trading volume if some requirements are met (this exemption is under review), and of the stock of a corporation if it was acquired before 31 January 1984 and the seller is not deemed as a recurrent trader nor the purchaser as a related party.

Individuals selling stock to a non-related party will be able to choose between taxation on a cash basis (upon payment) or an accrual basis, in which case the income can be distributed up to ten years or the same amount of years as it was in the possession of the owner of the stock before the sale, whichever is lower. This is useful for lowering the tax rate because of its progressive character.

Non-residents will be affected by the 35% WHT rate, unless reduced by a double treaty convention. Considering that this is a flat rate, there would be no rate reduction derived from distributing income in several years.

Capital Gain: Real Estate

In the case of real estate, individuals selling to a non-related party have a lifetime capital gain exemption of roughly USD330,000, which can be used in several sales until its consumption. The remaining capital gain is subject to a reduced 10% flat rate. The seller is required to wait one year between the acquisition and the sale; or four years in the case of land division or buildings built by the seller.

In the case of real estate acquired before 1 January 2004, the full capital gain would be exempted. 

Considering the above-mentioned exemptions, from a capital gain perspective it is highly efficient to hold real estate as an individual and not through a company. However, as dividends are taxable with personal income tax at the individual’s level, it is usual to find real estate in investment companies rather than at the individual’s level (profits are usually retained at the company’s level in order to avoid personal income tax upon dividends). This makes it important to plan ahead when acquiring real estate for capital gain.

CFC Rules

As a general rule, foreign source income is taxable in Chile on a cash basis. However, controlled foreign corporation (CFC) rules result in Chilean taxpayers recognising income obtained by foreign controlled companies of passive nature.

In general terms, Chilean CFC rules follow the OECD structure. Special features to be mentioned are that these rules are not triggered if the CFC obtains passive income below roughly USD99,000, and that family members are not deemed as related for control purposes.

Thus, if a foreign company is owned by a father, a mother, and the children, and none of them hold 50% or more of the shares nor some specific political powers, the company would not be a CFC. 

Estate and Gift Tax

Gift and estate taxes are dealt with together in the same law, and have the same progressive rates of tax, from 1% to 25%, levied upon them. As a difference, the exempted bracket is significantly higher in the estate tax (roughly USD43,000 in estate tax versus roughly USD4,300 in gift tax, both in the case of spouses, ascendants or descendants).

Estate tax is applicable on Chilean and foreign situs assets, as long as there is a personal nexus to Chile. Foreign estate taxes applied on foreign situs assets can be creditable against Chilean estate tax, with some limitations.

If the deceased is a foreigner, Chilean estate tax will be applicable on their foreign situs assets only if they were acquired with Chilean source income.

As a general rule, the taxable amount for gift and estate tax is determined as the market value of the assets. However, for real estate and some real estate companies, the taxable amount will be the tax valuation of the properties, which is usually lower than the market value. This difference can be enormous, and the stability of this valuation mechanism is not clear, so some families are advancing gifts of real estate instead of waiting for a future inheritance, when this valuation rule could no longer exist.

The gift and estate tax progressive rates are applicable when the grantor and the grantee are the same persons, but restart from 0% once any of these persons is changed. Considering this, a gift to a son would be taxed at a higher rate than a gift of the same amount to the son and grandsons, since each grandson would start the progression from scratch. Likewise, if a child receives certain amount of money from one parent, the tax rate would be higher if the same amount were received from both parents.

Recently, in order to avoid double taxation, a new exemption was introduced to inheritance law regarding assets left by a spouse who had been predeceased by their partner where those assets were acquired as an inheritance from the predeceased spouse, if the death of both spouses occurs within a span of five years.

New social demands and public expenses have created a need for increased revenue. With income tax rates for high earners already high, gift and estate tax is becoming a new target for tax experts and politicians.

Proposals range from just raising the rates, to repealing gifts and estate tax. The consequence of the latter would be that gifts or inheritances would be deemed as a plain income, subject to personal income tax. This would raise the taxation rate from 25% to 40%.

Considering that gift tax and estate tax lead to almost the same level of taxation (some differences exist in the exempted bracket, see 1.1 Tax Regimes for further detail), many families are advancing their succession decisions and making gifts instead of waiting till death. This allows them to use the current law instead of waiting for an uncertain change.

Internal Measures

Chile has several special anti-avoidance rules in its legislation, including those relating to income, estate and gifts taxes. Chile also has transfer pricing rules, CFC rules, and several reporting liabilities.

Furthermore, Chile has a general anti-avoidance rule (GAAR) aimed at making substance prevail over form. This rule is not applicable if there is proof of economic justification for a given transaction other than avoiding or lowering taxation. The GAAR is not enforced by the Chilean tax authority (Servicio de Impuestos Internos, or SII), but it is tried before the Tax Courts.

International Agreements

Chile is involved in the US Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS), both of which lead to Chilean financial institutions reporting non-Chilean residents’ financial assets.

The CRS also means that the SII receives information about Chilean residents' financial assets abroad. Nonetheless, under FATCA, Chile does not receive information from the USA.

Finally, Chile has already deposited its instrument of ratification for the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI).

An emerging trend among Chilean families is increasing internationalisation. It is now quite common to have family members with tax residence in other jurisdictions and, since the most recent bout of social and political instability, to move assets abroad.

This brings other legal systems into the mix, making it vital to have excellent understanding of international taxation and a close relationship with foreign advisers.

The willingness of older generations to turn over wealth and control to younger generations depends ultimately on each family group, and we do not see a specific trend within the jurisdiction. This is especially true in operative companies. 

Nonetheless, family offices are becoming an increasing trend and we are seeing a greater willingness among older generations to incorporate younger generations into these structures. We are also seeing a greater willingness among older generations to incorporate younger generations into offshore passive income companies.

Currently, it is quite common to find Chilean families with foreign resident members or assets, which makes it necessary to involve creative advisors from different jurisdictions to reach efficient solutions.

Structures from the past are no longer effective and every family or jurisdiction has its own characteristics, so advisors need to work together in a collaborative way in order to find new alternatives.

The broad treaty network of Chile does provide with some advantages when designing structures for international families.

On the estate and gift tax side, Chilean nexus to a deceased person or an asset (or the income used to purchase this asset) would lead to Chilean estate or gift taxation. This, in turn, could lead to double taxation if there is also nexus to a second jurisdiction willing to tax the gift or heirship.

Recent modifications to the gift and estate law have allowed the use of foreign taxes as a credit against Chilean ones, with some limits.

Chile has a forced heirship law, according to which the children have rights in equal shares while the surviving spouse has right to two shares, unless the deceased has only one, or more than six, children. If the deceased was married in conjugal community, only half of the assets will be deemed as heirship (with some special rules).

In the absence of children and a spouse, parents and siblings can become forced heirs.

However, through a will, the testator can freely dispose of a quarter of their estate, and dispose of another quarter with the limitation of only favouring an ancestor or descendant. The outstanding half will have to follow the forced heirship rules.

Heirs can be disinherited, but only in very specific and limited situations. 

Chilean law has three marital regimes, which are the economic statutes dealing with property relations between spouses and between spouses and third parties.

These regimes are conjugal community, separation of property and accrued gains.

Conjugal Community

Under this regime a single common estate is formed with some of the assets belonging to the spouses before the marriage (eg, real estate is excluded) and those acquired during the marriage. As a general rule, the husband holds administration, though for some acts he requires the authorisation of the wife (eg, to dispose of a real estate).

The wife can form a “reserved patrimony” with the income derived from the exercise of a lucrative activity. She has the sole administration of this patrimony.

Separation of Property

Under this regime each spouse keeps their patrimony separated, as well as the administration of that patrimony before and during the validity of the marriage.

Accrued Gains

Under this regime the assets of the spouses are kept separate, as well as their administration during the term of the marriage, but in the case of termination the spouse who recorded higher profits must compensate the other spouse.

Chilean legislation recognises prenuptial agreements as long as they are contained in a public deed.

In transfer of property by gift or inheritance, donees/heirs will not carry forward the historical cost basis.

Instead, their new cost basis will be the taxable value over which the estate or gift tax was applied.

There are no specific vehicles available for transferring assets to the younger generations. The Chilean law does not consider trust arrangements.

Trust arrangements formed under foreign law are respected by the Chilean law, but their tax effects are standardised to the Chilean law, which creates uncertainty. This does not mean that trusts should be dropped as an alternative, but they should be structured with care.

A typical planning would not consist in a single swift operation, but rather it would be comprised by several decisions involving exemptions, selection of assets with low taxable value, reduced rates (due to the progressive rate of the estate and gifts tax), donations, contracts, and even corporate reorganisations. Some planning does also include retaining the usufruct of the transferred assets.

A well-structured will is also a powerful tool, and could prevent double taxation on the same assets (eg, when an asset is inherited by the surviving spouse and then by the common children, unless less than five years have lapsed between both deaths).

This is why estate planning should be started at an early stage. This also prevents the generation of new wealth at the testator’s hands, for instance in assets that are deemed to have appreciated.

The Chilean successions legal system does not contain any considerations for digital assets. Nonetheless, they would still be part of the patrimony and thus subject to gift and estate taxation, and valuated at fair market value.

Special care has to be taken regarding cryptocurrency, because the loss of the keys to the digital wallet could lead to losing the asset.

The Chilean civil law system does not consider trusts, so these kinds of arrangements are not an estate planning vehicle to be used in Chile.

Foreign trusts can be used for certain goals, but their tax treatment is not fully regulated and can lead to risks. As mentioned in 2.6 Transfer of Assets: Vehicle and Planning Mechanisms, trust arrangements formed under foreign law are respected by Chilean law, but their tax effects are standardised to the Chilean law, which creates uncertainty.

A Chilean alternative is the fideicomiso, though it is not widely used.

Trust are not included in domestic law, but Chilean law does recognise the effects of foreign law as long as they do not violate domestic law.

In order to determine the tax consequences that derive from the existence of a trust, either as a fiduciary or as a beneficiary, it will be necessary to analogise the trust to other acts, contracts or legal arrangements recognised under Chilean law.

For instance, a revocable trust in which the settlor retains control could be simply analogised to an investment account. Thus, the settlor would still be deemed as the owner of the assets and of any income to be generated.

On the opposite side, a non-revocable trust could be deemed as a gift from the settlor to the trustee, triggering gift taxation.

Subsequent transference to the beneficiaries could again be deemed as a gift, triggering gift taxation; or as a plain income, triggering personal income tax.

Unfortunately, this has not been deeply dealt with from a legal nor regulatory perspective in Chile, so trust arrangements are used only for limited specific purposes.

Chile has not taken steps in these areas since trusts are not regulated by local law.

Social unrest and political instabilities have led many Chileans to seek asset protection in foreign jurisdictions, specially the USA and Switzerland.

Nonetheless, for US estate tax purposes, tax efficiency, and family governance purposes, it is usual to group the family members in an intermediate offshore company, located in a third jurisdiction other than the USA.

A typical asset protection structure would avoid Chilean entities in order to eliminate geopolitical risk. Thus, the offshore intermediate company would hopefully be held directly by the individuals.

This will create a challenge for individuals seeking to obtain funds to finance an offshore structure in an efficient way. This is because, as mentioned in the Dividends section of 1.1 Tax Regimes, income is usually kept at an investment company level, and paying dividends to individuals would trigger personal income tax.

CFC rules are a key element to bear in mind. A special feature of Chilean CFC rules is that family members are not deemed as related for determining if the company is controlled or not, as further explained in the CFC Rules section of 1.1 Tax Regimes.

When financing through debt, transfer pricing, the GAAR and stamp tax should be carefully considered. 

As mentioned in 2.6 Transfer of Assets: Vehicle and Planning Mechanisms, planning would not typically consist in a single swift operation, but rather it would be comprised by several decisions involving exemptions, selection of assets with low taxable value, reduced rates (due to the progressive rate of the estate and gifts tax), donations, contracts, and even corporate reorganisations. Some planning does also include retaining the usufruct of the transferred assets.

A well-structured will is also a powerful tool, and could prevent double taxation on the same assets (eg, when an asset is inherited by the surviving spouse and then by the common children, unless less than five years have lapsed between both deaths).

This is why estate planning should be started at an early stage. This also prevents the generation of new wealth at the testator’s hands, for instance in assets that are deemed to have appreciated.

Methods for avoiding conflict differ from family to family. In some cases, it is advisable to involve all the family members in the planning, so everybody feels included in the decisions. Other families tend to obey the parent’s decisions, in which case it is preferable to have clear instructions from them. In all cases, clear wills, by-laws and family protocols are always useful.

Chilean law demands that any transfer has to be made at market value, considering the circumstances of the operation. As such, lack of marketability and control could be argued as reasons for a discount.

However, these kind of adjustments to the price are not legally regulated and they would be a matter of evidence to be demonstrated before the SII.

In the case of the widely used sociedad de responsabilidad limitada (the Chilean limited liability company), there is a special valuation rule for gift and inheritance purposes, according to which the company will be valued considering the individual valuation of its assets and liabilities. This being the case, lack of marketability and control could not be considered for discount purposes.

Depending on how an estate is structured, there may be relevant contracts potentially subject to arbitration. This is highly advisable since ordinary courts do not have the speed or technical capacity in these matters that competent arbitrators do.

Some disputes can arise when the estate is regulated through a foreign trust arrangement. Sometimes, trust arrangements are made that assign the estate in breach of the Chilean legal restrictions described in 2.3 Forced Heirship Laws, leading to disputes among the heirs.

Considering that trusts are regulated by foreign law, it is even more important to have an international arbitration clause, hopefully in a common law jurisdiction or another one with experience in trust arrangements.

Nonetheless, the Chilean law does provide heirs with several protections, such as the action to ask for the modification of a will in breach of the forced assignments and the action to void donations in excess (also where these breach the forced assignment), among others.

There is no special compensation mechanism for this matter.

The use of corporate fiduciaries is not prevalent in Chile.

Fiduciary liabilities are not regulated in Chile in the context of a trust arrangement, though for tax purposes these arrangements could be disregarded or, on the contrary, be deemed as involving a gift, triggering gift taxation liabilities for the fiduciary.

This would depend on the characteristics of the arrangement. For instance, a revocable trust in which the settlor retains control would be a case in which the SII could "pierce the veil" and consider the settlor as obtaining any income of the trust. Alternatively, a non-revocable trust could be deemed as a taxable gift for the fiduciary.

Fiduciary property is regulated in Chile not as an arrangement, but as a limitation on property (property subject to the obligation of being transferred to a third party if some conditions are met). Though it retains some features common to a trust arrangement, its nature and legal effect are quite different, so it is mainly used in other contexts. 

There is no fiduciary regulation as understood in common law.

There is no fiduciary regulation as understood in common law.

Tax residence is obtained in Chile by continuous or discontinuous permanence in the country for more than 183 days within a 12-month period.

Citizenship can be obtained by meeting one of the following conditions:

  • being born in Chile, with the exception of children of foreigners present in Chile on service for their governments or foreign passers-by (nonetheless, they can choose Chilean citizenship);
  • being children of a Chilean father or mother, when born abroad (one of the parents or grandparents will be required to obtain Chilean nationality);
  • obtaining a nationalisation letter; and
  • obtaining special nationalisation by law (usually through merit).

There are no standard expeditious means for an individual to obtain citizenship in Chile, though some exemptions could be made by decision of the President.

Gift and estate tax have special provisions aimed at reducing the tax liability of people with disabilities.

Usually, a will would try to allocate a minimum income (through preferred shares, usufruct or another mechanism) rather than specific assets, in order to ensure a means of survival. 

In some cases, fiduciaries could be appointed. Foreign trust arrangements can also be a good option for protecting minors or adults with disabilities though, as mentioned in 2.6 Transfer of Assets: Vehicle and Planning Mechanisms, they have to be carefully structured in order to avoid triggering tax derived from the mismatch between the foreign law regulating the trust and Chilean tax law.

The appointment of a guardian, conservator or similar party always requires a court proceeding.

A guardian can be appointed to represent a minor, a disabled person, a person who has legally been declared insane or a person who has legally been proven likely to squander their assets.

The current pensions system has been severely damaged by allowing a series of withdrawals from the savings held by each individual in their personal account.

The country is currently debating the design of a new pension system, ranging from some modifications to a complete redesign from scratch. At this moment (July 2021), it is not possible to foresee the outcome of these debates. 

The Chilean legal system does not establish any difference between children, all having the same rights. Surrogate pregnancy is not specifically regulated.

Chile does not recognise same-sex marriage, though a bill to recognise it is being discussed.

The Civil Union Agreement is established as a mechanism for same-sex couples, which is a contract entered into between two people who share a home, with the purpose of regulating the legal effects derived from their common and permanent affective life.

As a general rule, donations from Chilean companies (ie, corporate taxpayers) are considered as rejected expenses, and subject to a single penalty tax. However, if donations are made under certain specific incentive programmes established in special laws, the amounts donated can either be used as a tax credit or deducted as a necessary expense.

For this purpose, the amounts donated cannot exceed the thresholds contained in each of the above-mentioned special laws. Additionally, the amounts donated cannot exceed a general threshold provided in Article 10 of Law No 19,885, which applies to donations made under any of the special laws (with certain exceptions, as explained below). If the sums donated exceed the specific thresholds provided in each special law or the general threshold, the excess would be subject to a 40% single penalty tax.

The general threshold provided in Article 10 of Law No 19,885 establishes that the value of the donations, in order to be subject to any of the tax benefits provided in the special incentive programmes, cannot exceed 5% of the taxable income obtained by the donor company in one year. For companies that generate annual tax losses, this threshold would be exceeded regardless of the amount of the donations made during the year. Accordingly, all the donations made by companies in a tax loss position would be considered rejected expenses and subject to the single penalty tax of 40%.

Incentive Programmes

Notwithstanding the above, it should be noted that certain incentive programmes provide special rules that limit the application of the general threshold, allowing companies in a tax loss position to take advantage tax benefits in the case of certain donations. These incentive statutes are the following.

Law No 20,444 that regulates donations made to National Public Funds created after natural disasters. The tax benefits established in this Law apply when the amounts donated do not exceed either the general threshold explained above or an amount equivalent to 0.16% of the tax equity of the donor company. Accordingly, if a donor company determines a tax loss in the year of the donation but the value of the donation is lower than 0.16% of its tax equity, the donation can be subject to the tax benefits of this Law. If the amount donated exceed both thresholds, the single penalty tax of 40% would apply on the part of the donation that exceeds the higher of such thresholds.

Law No 19,885 that regulates long term donations made in cash to non-profit corporations or foundations or to a National Welfare Public Fund (Fondo Mixto de Apoyo Social). The same thresholds that apply to Law No 20,444 apply to donations made under this Law, to the extent that the amounts donated do not exceed 14,000 UTM (Unidad Tributaria Mensual, an inflation-proof unit of account used in Chile). This is equivalent to approximately USD1 million. Accordingly, donations made by companies that determine a tax loss in the year of the donations would be subject to the tax benefits of this law provided that their value is lower than 0.16% of the tax equity of the donor company and is also lower than 14,000 UTM.

Law No 18,985 that regulates donations in cash for cultural purposes made to Chilean universities, professional institutes, public libraries, non-profit corporations or foundations, neighbourhood committees, public museums, and other public organisations. The same thresholds that apply to Law No 20,444 also apply to these donations.

As stated in 10.1 Charitable Giving, there are more than 20 legal provisions that allow individuals and companies to make donations of all kinds and obtain a tax reduction in return.

The idea is to promote donations by means of incentives such as a reduction in the corporate tax rate in the case of companies, and of the labour tax or personal income tax in the case of individuals. Thus, when a taxpayer funds a project or organisation with part of their resources, the Chilean treasury co-operates with this donation by returning taxes or reducing the taxable base.

Currently, the most widely used law by both companies and individuals in Chile is Law 19,985, amended by Law 20,316. This law seeks to promote donations to non-governmental organisations for social aid purposes, or to a Joint Social Support Fund (Fondo Mixto de Apoyo Social, or FMAS), whose resources are distributed according to the criteria of a board of directors based in the Ministry of Planning. The incentives for this Law are outlined in 10.1 Charitable Giving.

Torretti & Cía.

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Chile

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Recabarren & Asociados specialises in the provision of tax consultancy services, based on the delivery of high-quality legal and tax services to clients seeking expert advice. The firm consists of 30 experts in tax matters, working in highly specialised teams which are able to respond to the needs of clients that include domestic and international companies as well as individuals. Its professional services focus exclusively on tax matters, such as tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, advice for family businesses and high net worth individuals, tax examination processes, and tax defence and litigation. The firm's clients come from areas such as retail, mining, real estate, infrastructure and technology.

It is common knowledge that in recent times the worldwide political and economic context has been quite unstable and has undergone a series of changes, to which Chile is no exception.

Despite the fact that our country has sustained immense economic progress in recent decades, the existing political framework has been insufficient to continue promoting productivity growth and economic diversification, improve labour market outcomes, and address inequality in greater depth. This became very apparent at the end of 2019 when these failings led to a social and economic crisis, which Chile is facing right now. All this will result in changes in the political and social direction of the country.

In this same context, the COVID-19 pandemic has caused the economy to fall further than has been seen in decades, which generated a strong contraction in the gross domestic product (GDP), falling by approximately 6% in 2020, notwithstanding that deconfinement measures allowed a partial recovery towards the end of that year.

With all the measures adopted by the authorities, Chilean public debt increased by approximately 5% in 2020, as indicated by The World Bank, which is generating a series of economic and tax measures to reverse this situation, whose main objective would be to affect both high net worth individuals and large companies.

Another major issue that is being discussed in relation to measures to generate greater tax collection and so overcome this economic and socio-political situation, is the deletion of certain tax exemptions established by law.

As a consequence of these debates , advice on tax matters for high net worth families and individuals and foreign companies with investments in Chile is currently (July 2021) of particular importance.

Additionally, last year there was a reform which aimed to modernise and simplify certain aspects of the Chilean tax system, which brought about a series of changes in different areas of tax legislation.

Main Changes to the Tax Modernisation Law

The beginning of 2020 saw Law 21,210 come into force, which aimed to modernise tax legislation and which introduced a series of changes with the main objectives of a progressive increase in tax collection, the defence of taxpayers, benefits for the elderly and incentives for entrepreneurship and growth of small and medium-sized enterprises (SMEs).

The main modifications introduced are set out below.

Tax regime

The partially integrated regime is established as a general regime, which is assigned by default whenever the requirements to access the other regimes are not met. In this system, the corporate tax rate is 27% with partial allocation of the credit to final taxes of 65%.

Additionally, a fully integrated special SMEs regime is introduced with a corporate tax rate of 25% and the right for partners or shareholders to impute 100% of the amount paid in corporate tax against final taxes. To opt for this fully integrated system taxpayers must fulfil certain requirements – ie, have a maximum effective capital of up to USD3.5 million at the time of starting activities, have annual gross sales that do not exceed USD3.1 million, and have passive income that does not exceed 35% of their annual income (for these purposes, the income from real estate, capital securities, contracts for participation accounts and social rights, shares or investment fund quotas will be considered to be passive).

A new marginal limit for the complementary global tax (final personal taxes) and the second category single tax (employment income tax) of 40% was also established.

Digital tax (VAT)

A new digital tax was established which considers the application of VAT to digital platforms or services. In this sense, the intermediation of services provided in Chile or sales made in Chile or abroad, provided that the latter give rise to an import; the supply or delivery of digital entertainment content, such as videos, music, games or other analogues, through downloading, streaming or other technology, including for these purposes, texts, magazines, newspapers and books; the provision of computer software, storage, platforms or infrastructure; and advertising, regardless of the medium or medium through which it is delivered, materialised or executed, are subject to a 19% VAT rate.

Article 27 bis of the VAT Law

According to Article 27 bis of the Chilean VAT legislation, taxpayers who maintain VAT tax credit remnants, may obtain their refund, as long as they correspond to purchases made in relation to the acquisition of goods or services that are meant to be part of the fixed assets of a company, as it would be, for example, in the case of the acquisition of plants for a farmer.

With the entry into force of the tax reform and the situation created by the pandemic, the use of this tool was facilitated through certain modifications, such as the possibility to file the request online; the reduction of the number of tax periods in which the remnant must be accumulated to two periods, and also shortening to 20 days the term that the Chilean Internal Revenue Service (IRS) has to resolve the request.

In this sense, it is remarkable what the local IRS has achieved regarding the requests for the return of the remaining tax credit, which today are carried out through a completely digital process, eliminating the need to carry out this procedure in person through unclear forms, opening the possibility for many more taxpayers to benefit from this tool.

Further modifications

Corporate taxpayers, who, as of the publication of the Tax Modernisation Law, initiate new investment projects and/or extensions of existing projects, which imply an investment of USD10 million in the acquisition, construction or import of physical goods destined to be part of their fixed assets and that must undergo the Environmental Impact Assessment System, must pay a one-time contribution for regional development equivalent to 1% of the total acquisition value of the physical assets that exceeds USD10 million.

As of the entry into force of the Tax Modernisation Law, all investment companies are expressly subject to municipal tax.

Finally, the reform created the Public Taxpayer Advocate Service (PTAS), which is a new public body whose main objective is to protect taxpayers' rights, guide them in matters of their competence and represent them before the local IRS.

Transitory Tax Measures Related to COVID-19

After a series of debates between the government and the opposition, a number of transitory measures were announced to offset the negative financial effects that the COVID-19 health crisis had on families and companies.

The first package of measures mobilised initial fiscal resources of USD11.75 billion dollars, which is an unprecedented package of economic-social measures for Chile, and has subsequently increased. The measures focused on four areas: (i) strengthening the health system budget, (ii) protecting family income; (iii) protecting jobs and the companies that generate them; and (iv) other measures aimed at injecting liquidity.

The main tax measures that were adopted are set out below.

Suspension of the monthly provisional payment (MPP) of corporate income tax for the months between April and September 2020. This measure allowed 700,000 companies to have more resources in their cash flow.

The postponement of the payment of value added tax (VAT) for the months of April, May and June of the year 2020 was allowed for all companies with sales of less than USD14 million, making it possible to pay it in six or 12 monthly instalments at a rate of zero real interest, which will allow the injection of liquidity of up to USD1.5 billion to 240,000 companies during the second trimester.

Anticipation of the refund of income tax that applied to SMEs during the month of April. This made it possible to provide greater liquidity to more than 500,000 SMEs for USD770 million.

Postponement until July 2020 of the payment of income tax for SMEs, which resulted in the release of cash resources for USD600 million to 140,000 SMEs.

Postponement of the payment of April contributions for companies with sales of less than USD14 million and for people with properties with a tax value of less than USD180,000, which was postponed to be paid in three quotas, along with the following three contribution quotas, with a real interest rate of 0%.

Extension of the transitory regime of instant depreciation for corporate taxpayers who declare their effective income according to complete accounting, and who acquire new or imported physical assets destined to be part of their fixed assets between 1 June 2020 and 31 December 2022, which assets are valued at USD1, for tax registration purposes. In addition, a 100% instant amortisation regime was incorporated for certain intangible assets (such as industrial property, copyrights and new plant varieties), which will apply in a similar way to the of fixed assets regime.

Chile's Economic and Fiscal Policy

As noted above, during the last two years, and as a result of various events, the Chilean political, economic and social model has been questioned. Combined with the current health crisis this has generated a need to increase the sources of tax collection in order to address increased government spending.

As a consequence of the above, a debate over common minimums between the government and the opposition has been opened, including a series of matters that would point towards the re-evaluation of a large number of tax exemptions that exist today in Chilean legislation and the application of new specific taxes, such as a mining royalty, a wealth tax, and VAT segmentation, among others.

Capital gains in the stock market

Under the current tax system, there is a tax exemption for capital gains obtained from the sale of shares that are traded on the local stock exchange; however, this exemption does not apply to dividends generated by shares which are subject to final taxes. This exemption was created in 2001 with the objective of attracting investment to this area from both local and foreign investors. It should be noted that this benefit is the widest among OECD countries.

Although this measure may generate higher tax collection in the short term it is important to establish a reasonable tax rate in order to avoid a disincentive to investment in the stock market and long term adverse macroeconomic effects.

Presumed income

This is a taxation regime that is based on an the estimated profit that a company in the transport, mining or agricultural sector would have made, and not with respect to the income that they actually generate, as long as they comply with a maximum income limit. The purpose of this regime is to facilitate the payment of taxes from people or entrepreneurs who have few administrative resources, little or no access to advisers and who generally do not keep accounting books.

According to the local IRS, currently around 1,000 companies that use this regime should not be taxed under this system, either because they exceed the income limits or because they are not transport, agricultural or mining companies. If this exemption were eliminated, an additional USD300 million would be collected per year.

Fuel tax

The diesel tax was created in order to rebuild the country's roads and is a benefit for national cargo transportation companies. Transportation from Chile abroad and from abroad to our country, that use diesel oil in trucks have the right to recover the diesel tax paid, according to a percentage that varies between 31% and 80% depending on the income that the company has.

There has been a lot of debate regarding the elimination of this tax exemption due to the fact that it focused on a pollutant, hence, no recovery should be allowed and some even maintain that some type of penalty should be established regarding the generation of pollution. If this exemption is eliminated, it is estimated that an additional USD600 million per year could be collected.

Special VAT credit for construction companies

Construction companies have the right to deduct from the amount of their mandatory monthly provisional payment (MPP) the 65% of VAT debit that they must sustain in the sale of real estate destined for housing whose value is under USD80,000, this deduction has a cap of up to USD9,000 per dwelling. In the event that the construction company does not make monthly provisional payments or the amount of tax paid is higher than the corresponding monthly provisional payment, it may allocate the benefit to other taxes or use it in subsequent tax years.

The benefit also 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 value of the sale and is deducted from the monthly provisional payments in the manner indicated previously and with the same cap.

Once the debate was opened, the Chilean Chamber of Construction (CChC) ruled on the matter and argued that the special credit for construction is a benefit for people who buy a home and not for construction companies.

However, it was verified that real estate investment companies acquire about 25% of this type of property. Therefore, if the benefit is intended to help people to buy a home, a subsidy should be revised for this, in order to avoid the abuse of the exemption and thus, according to the Treasury, collect an additional of USD700 million in taxes.

Wealth tax

As a result of social discontent and the inequality that exists in our country, a debate has been opened regarding the application of a private wealth tax on the great fortunes of Chile.

Mining royalties

As a consequence of the search for higher tax collection by the state, the possibility of applying a mining royalty has been raised.

Currently, in Chile there is a specific tax on mining activity (STMA), which is progressive with nominal rates between 5% and 14%, and which is applied on the operating taxable income of the mining operator.

In this context, the proposed legislation presented in 2018 and which is currently being reviewed in Congress, proposes to establish, in parallel to the existing STMA, the obligation to pay an ad valorem royalty (charge based on a percentage that is applied on the market value of the extracted mineral) by the exploitation of the mining, equivalent to 3% of the nominal value of the extracted minerals.

VAT segmentation

In Chile, the largest source of tax revenue collection is VAT, which has a uniform rate of 19%.

Given the current situation, the possibility of reducing the VAT rate for certain goods and services during the years 2021 and 2022 has been discussed in order to alleviate the tax burden on the middle and lower social class.

According to the proposal, VAT would be lowered to 10% for food, fuel, health products, hotels, funeral services and flowers, among other things, and to 4% regarding basic supplies (flour, milk, eggs, etc), books, medicines, prosthetics and telecare services.

Final Observation

Currently we are at a defining moment in the political-economic history of Chile, we are at the beginning of a presidential race and candidates are releasing their government programmes, within which the tax measures of each are central in order to increase funding for social measures.

Within the different proposals that have been raised and the debate that has followed, experts have argued and recommended that within this context, changes must be aimed at seeking stability and legal certainty for taxpayers, in order to have clear rules when investing in Chile.

Recabarren & Asociados

Isidora Goyenechea #3162, 5th floor
Las Condes
Santiago

+56 2 2594 0550

contacto@recabarrenasociados.com www.recabarrenasociados.com
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Law and Practice

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Torretti & Cía. specialises in tax issues, with a strong international outlook and a body of work balanced between corporate tax and private wealth matters. The firm was born as a reaction to the “Biglaw” model, deliberately seeking to differentiate itself from larger competitors by having the partners directly involved from start to finish in all the matters handled by the firm. Their experience, coupled with the support of a cohesive team of lawyers, results in clear advice that effectively solves their client’s complex needs. Torretti & Cía. aims to provide personalised strategies for each client’s unique situation and interests. The partners of Torretti & Cia. are professors of tax law. Their academic background allows them to translate technical matters into simple, understandable concepts.

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Recabarren & Asociados specialises in the provision of tax consultancy services, based on the delivery of high-quality legal and tax services to clients seeking expert advice. The firm consists of 30 experts in tax matters, working in highly specialised teams which are able to respond to the needs of clients that include domestic and international companies as well as individuals. Its professional services focus exclusively on tax matters, such as tax planning for companies and individuals, business restructuring, consultancy for large and medium-sized companies, advice for family businesses and high net worth individuals, tax examination processes, and tax defence and litigation. The firm's clients come from areas such as retail, mining, real estate, infrastructure and technology.

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